In case you haven’t already heard, the U.S. Department of Justice has taken the rare step of intervening in a civil case with a Statement of Interest on Behalf of the United States of America. Interesting note: the intervention was in the Sitzer case out of Missouri rather than the Moehrl case in Illinois, which predates Sitzer.

Seeing as how Notorious ROB is the “trade publication” mentioned by the DOJ in the filing that broke the story about the Civil Investigative Demand on CoreLogic, I suppose it’s official now: this blog is a trade publication according to the United States! 🙂

In any event, I just finished reading through the Statement of Interest, which is embedded below for you. And I have some thoughts.

Let’s get into it.

The DOJ Smacks Down NAR Hard

First of all, here’s the actual filing if you haven’t seen it already:

ECF 113 DOJ – State of Inte… by Robert Hahn on Scribd

The big takeaway, of course, is that the DOJ really took NAR to the woodshed for its argument that the United States thinks the MLS is pro-competitive.

In its defense filings and the motions to dismiss, NAR had really stressed that the MLS system, which includes the mandatory cooperation and compensation rules which force the seller to pay for the buyer’s agent, was blessed by the DOJ.

From the filing:

NAR’s Suggestions in Support of its Motion to Dismiss (Doc. #77) contains two references to the 2008 consent decree. First, NAR asserts that the “MLS system” and “the rules upon which it has been based have repeatedly been upheld by the courts. … It was explicitly permitted by the Department of Justice in a consent decree that expressly authorizes NAR to limit membership in an MLS to persons who make offers of cooperation and compensation to other members of the MLS.” Doc. #77 at 1-2 (case citations omitted). Second, NAR asserts in a separate paragraph that:

Other attacks on the rules governing MLSs have been rejected because courts have recognized the efficiency and consumer benefits provided by MLSs. … The Department of Justice, similarly, entered into a consent decree expressly permitting NAR to maintain a rule that provides that MLS membership may be made contingent on a broker’s agreement to “actively endeavor” to “make or accept offers of cooperation and compensation” through the MLS. Plaintiffs have totally ignored the long antitrust scrutiny of MLSs and the repeated judicial conclusion that MLSs and the rules that govern them are procompetitive.

The DOJ flat out says that NAR “inaccurately portrays the 2008 consent decree.” Its point is that the 2008 consent decree is limited and narrow and dealt only with discrimination against online brokerages. In fact, the DOJ sounds kind of pissed off as it more or less accuses NAR of manipulating language to give the impression that the DOJ blessed the MLS system:

NAR attempts to give the decree much broader significance, but it does so through an imprecise reading of the decree. NAR’s first reference to the decree, by using the ambiguous noun “It,” suggests that the United States affirmatively approved an entire “MLS system” and all of its related rules. NAR’s second reference sandwiches the reference to the consent decree between two sentences asserting that court decisions have found MLSs to be procompetitive. Then, by using the word “similarly,” NAR gives the impression that the United States determined that a NAR rule concerning MLS membership was procompetitive, or even that the specific rules challenged by the plaintiffs here are procompetitive. Those impressions are incorrect. [Italics in original.]

After accusing NAR of misrepresentation, The hammer comes down :

The United States did not affirmatively find any NAR rule or policy to be “procompetitive” in the 2008 consent decree. Nor does the prior consent decree in any way “authorize” the system that plaintiffs’ complaint challenges. The consent decree does not mention the NAR Code of Ethics, Standard Practice 16-16 or Case Interpretation #16-15, which are the other NAR provisions challenged by the plaintiffs. [Emphasis added]

And then again:

The language of the decree also makes clear that the United States did not affirmatively endorse any NAR rule or policy regarding “cooperation and compensation.”

Which all lead to the short and powerful conclusion:

The United States did not, in the 2008 consent decree, approve any NAR rule or policy as procompetitive. The specific NAR rules challenged by the plaintiffs were neither scrutinized nor litigated in the United States’ case.

Wow. Wow wow wow.

What Does This Mean?

With this Statement of Interest, the DOJ just chopped the legs out from one of the strongest arguments that NAR (and the corporate defendants in Sitzer and Moehrl) had: that the system of cooperation and compensation and the entire MLS system are procompetitive. A big part of that argument was that all of those had gone through extensive antitrust scrutiny by the DOJ back in the early 2000s and the DOJ blessed the arrangement.

That argument just went up in smoke.

Law360, which reported on this, has a quote from one of the lawyers for the plaintiff in the Sitzer case:

“My understanding is that NAR made the misrepresentation multiple times in our case, and I suspect that is what got the DOJ’s attention,” Brandon Boulware of Boulware Law LLC, which represents the plaintiffs in the Missouri case, told Law360 on Monday. “NAR had a credibility problem before this. That just increased by a factor of 10.” [Emphasis added]

Short of joining the lawsuit, or bringing its own antitrust lawsuit, I don’t think there’s anything that the DOJ could have done to help the plaintiffs in Sitzer and Moehrl more.

Not that anybody expected these cases to be dismissed, but I feel pretty confident that with this intervention by the DOJ, no judge anywhere is going to issue a dismissal now.

Furthermore, I think this move by the DOJ makes things much more difficult for NAR and the corporate defendants at trial. The same arguments brought up in the motions to dismiss will be brought up at trial, but the DOJ just chopped the legs out from one of the key pillars: the MLS is procompetitive. Now, NAR has to show that the MLS is procompetitive without the authority of the United States behind them.

Some of you have heard me present on the commission lawsuits and the possibility of government regulation. I have made the point over and over that should the DOJ come out with some kind of regulation requiring greater disclosure on the part of the MLS, the implication of such a regulation would be that the MLS is not procompetitive in its current incarnation. That, I argued, would be like handing a machine gun to the plaintiff’s lawyers in Moehrl and Sitzer.

Well… filing a Statement of Interest literally specifying that the DOJ has never found the MLS to be procompetitive, and that NAR is misrepresenting the 2008 consent decree, and that the rules being litigated in Moehrl and Sitzer have never been scrutinized or litigated… damn, that’s not a machine gun being handed over… it’s like an airstrike devastating the opposition to help the plaintiff’s lawyers.

Why Might the DOJ Have Done This?

We know from reports that it is very rare for the DOJ to intervene like this in a civil lawsuit. And yet, here they did in the strongest way possible. Why?

My hypothesis is the same as it has been for a while. The DOJ is a government agency. All of the top people live and work in DC. They know better than most of us that NAR is an extremely powerful lobby with influence everywhere on Capitol Hill and in administrative agencies, including themselves. I think DOJ officials know that trying to regulate the MLS directly will be a political battle with one of the most powerful players in DC.

I think the DOJ was excited to see the Moehrl and Sitzer cases filed, because those are private parties filing private lawsuits. They are immune from any political pressure that NAR could bring to Congress or to Administration officials. If the DOJ wanted to see commission splits go away, helping the plaintiffs in those cases is the most politically expedient way of doing that.

That NAR cited the 2008 consent decree in its defense provided an opening for the DOJ to come in and lay waste to the defense’s case while providing a solid assist to the plaintiffs. If that gets the result that the DOJ wants (remove cooperating compensation and force buyers to pay their own agents, which then results in lower overall commission rates for American consumers), then so much the better. If it doesn’t, then the DOJ is insulated from political criticism as they can legitimately say, “We just wanted to correct the record.”

Reading Further Between the Lines

Law360 made quite a big deal of the footnote in which the DOJ admitted to the Civil Investigative Demand (hard to deny it, when I published the actual CID letter) and reported that the inquiry is not limited to a single company:

The U.S. Department of Justice confirmed in a federal class action filing Monday that it has issued a Civil Investigative Demand pertaining to potential residential real estate antitrust violations, and a source familiar with the situation told Law360 the department’s investigation is likely not limited to a single company.

We don’t know who that source is, of course, but it seems reasonable to assume that the DOJ is not going to go through the trouble of issuing a CID, getting all kinds of data from Corelogic, having that data analyzed and crunched, just to go after one company.

I think the DOJ is getting ready to issue a pretty significant regulation to the entire industry forcing disclosure of previous secret MLS data: sold data, WEST data (Withdrawn, Expired, Suspended and Terminated), and cooperating compensation. This is what Canada did, and so I think it will be what the DOJ will do. They will base that regulation on the results from their analysis of Corelogic datasets, which is likely to allow an economist to conclude that due to buyer steering by buyer agents, commissions are kept high. Economists have, after all, concluded exactly that without the benefit of having access to Corelogic’s datasets.

What do I mean by steering? Watch this (start at 34:00 mark):

Would the DOJ go so far as to try and regulate/prohibit the offering of compensation? I doubt it, because again, see above about political pressure.

But would the DOJ maybe take the step of “scrutinizing” the specific NAR rules challenged by the plaintiffs in Moehrl and Sitzer and perhaps issue a formal opinion that such rules tend to lead to buyer steering which keeps commissions high? Quite possibly.

Note: the DOJ doesn’t have to try to regulate buyer steering itself, because that is already against the law (fiduciary duty) and against the Code of Ethics. Doesn’t mean the practice doesn’t happen; it just means that the practice is already unlawful.

Until the DOJ intervened in this case, I didn’t think they would take such an affirmative step; now, I’m not so sure. It seems to me that the DOJ just might do something like that, then leave it to the courts to rule that such rules are a violation of antitrust law.

This Will Still Take Years

One thing to note: the Statement of Interest is not an entry of a judgment. We’re barely out of the first inning here in the long game that is these lawsuits. We have years and years of motion practice, of discovery, depositions, document requests, etc. etc. and then summary judgment motions, and then a trial, a victory by one side or the other, followed by appeals, and so on. We have years before this issue gets settled once and for all.

The wheels of justice do not move fast; they grind slowly, if at all.

Having said that, this move by the DOJ tells me that the United States (or at least a big part of the United States government apparatus) is on the side of the plaintiffs. I suspected that to be the case, but there can be no doubt now.

I think that changes the outcome of these lawsuits. Prior to the DOJ showing its hand, I’d have said that it’s a 50/50 shot as to whether the plaintiffs ultimately prevail. Now, I’m going to move that to more like 80/20 that the plaintiffs ultimately prevail.

It goes without saying, that is not good news for NAR, for the corporate defendants, for the 600 or so MLSs, for the entire brokerage industry, for the five publicly traded companies (Zillow, Redfin, RE/MAX, Realogy and eXp) in real estate, and for much of the 1.3 million REALTORS who rely on buyer agent commissions to make a living.

The only good news, I think, is that we all have several years to start preparing. So, people get ready. There’s a train a-coming.

-rsh

5 Responses

  1. I follow everything you stated except the inclusion of Redfin in your final paragraph. Why would the pro-consumer discount brokerage who refunds a portion of every transaction (where legally allowed) be a loser in this case? Hasn’t GK been standing on his chair pleading with the industry for transparency for the last decade? Isn’t Redfin the first national brokerage to publicly publish commission rates? How about Redfin Direct? I don’t understand. Kindly please explain.

    1. Because Redfin’s revenues come from brokerage commissions. When half of the commission pool disappears, I can’t see how that helps Redfin, which today generates a big chunk of their income from representing buyers. Yes, they give a refund, but they still make a lot of money from buyer commissions which are paid by the seller.

      Now, could Redfin change its business model and strategy in the next 7-10 years? Of course, and if anyone can do it, I’d bet on GK and crew. That doesn’t mean that the evaporation of half the commission pool is going to be good for Redfin as it is today.

      1. Thank you, I think I understand. If the outcome is decoupling of the transaction fees & each party paying for their own representation, all brokerages/agents who represent buyers will lose because this will hurt buy side revenue. Essentially, buyers won’t be willing to pay 3% for representation (which they do unknowingly now). In this scenario, digital representation of buyers will be a major competitive advantage.

      2. Exactly, Ben.

        In this context, I think Redfin’s new Redfin Direct program is potentially HUGE. Allowing buyers to self-represent, with tools and assistance from Redfin, could be a game changer if these lawsuits succeed.

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