Tue. May 17th, 2022

In a major blow to the National Association of Realtors and major real estate franchisors, hundreds of thousands of homesellers can ask to be reimbursed for more than $1 billion in commissions they paid to buyer agents in the past eight years as a result of a federal court ruling on Friday.

The National Association of Realtors and real estate holding company Realogy on Monday both signaled plans to appeal the ruling.

Just days after hearing oral arguments, Judge Stephen R. Bough of the U.S. District Court in Western Missouri granted class certification in one of two federal commissions lawsuits that could rock the real estate industry and impact how agents are compensated nationwide.

In 2019, homeseller plaintiffs Joshua Sitzer and Amy Winger filed a lawsuit against NAR, Realogy, RE/MAX, Keller Williams, and HomeServices of America and its subsidiaries BHH Affiliates and HSF Affiliates alleging the sharing of commissions between listing and buyer brokers violates the Sherman Antitrust Act by inflating seller costs. Other plaintiffs, including Scott and Ronda Burnett, later joined the case.

The Sitzer/Burnett suit, like a bigger federal case in Illinois brought by homeseller Christopher Moehrl, seeks to have homebuyers pay their broker directly, rather than having listing brokers pay buyer brokers from what the seller pays the listing broker.

Judge Stephen R. Bough

A week ago, the court held oral arguments on the plaintiffs’ motion seeking to have the Sitzer/Burnett suit certified as a class action and Bough rendered his decision Friday.

“Plaintiffs argue that class certification is the superior method because each member has little incentive to control the litigation because the identical claims would result in uniform damages calculation, each class members’ damages will be small compared with the relatively high costs of bringing litigation, separate proceedings would produce duplicative efforts and risk inconsistent verdicts, and class action is the superior method of adjudication because of the size of the case and issues involved,” Bough wrote in his April 22 order.

“[T] he Court agrees with Plaintiffs that a class action is the superior method for fairly and efficiently adjudicating the controversy.”

The order means that the Sitzer/Burnett suit now represents sellers who paid a broker commission in connection with the sale of residential real estate in Missouri listed on one of four MLSs — MARIS, Heartland MLS, Southern Missouri MLS, and the Columbia Board of Realtors MLS — from April 29, 2014 to the present.

Mantill Williams

In an emailed statement, NAR spokesperson Mantill Williams told Inman the 1.5-million member trade group will look to a higher court to reverse the ruling.

“We are disappointed in the decision and plan to appeal,” Williams said.

Referring to multiple listing services, he said,”The pro-competitive, pro-consumer local broker marketplaces serve the best interests of buyers and sellers. Local broker marketplaces ensure equity, transparency, and market-driven pricing options for the benefit of home buyers and sellers. These marketplaces reduce transaction costs by ensuring, among other things, that a buyer broker and their client understand how much the listing broker will pay the buyer broker for procuring a buyer for the listed property.

“Local broker marketplaces also level the playing field among brokerages, allowing small brokerages to compete with large ones, and provide for unprecedented competition among brokers, including different service and pricing models.”

In an unscheduled public filing Monday, Realogy informed its shareholders that it too planned to appeal the judge’s order, but stressed the uncertainty of the case’s outcome.

“The Company intends to promptly petition the United States Court of Appeals for the Eighth Circuit to pursue an interlocutory appeal of the decision on class certification, but there is no assurance such appeal will be granted or result in a stay of the proceedings,” the company told investors.

“The Company disputes the plaintiffs’ allegations against it in the antitrust litigation, believes that it has meritorious defenses, and will vigorously defend these actions. Litigation is inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. Adverse developments or outcomes in current or future litigation, in particular pending antitrust litigation, may materially harm our business and financial condition.”

In an emailed statement, Keller Williams spokesperson Darryl Frost told Inman the company was aware of the ruling, but declined to say whether the company would appeal.

“The court did not decide the merits of the plaintiffs’ claims, which we categorically deny,” he said. “The case is far from over, and we will continue to vigorously defend ourselves in court.”

RE/MAX, HomeServices of America and its subsidiaries BHH Affiliates and HSF Affiliates declined to comment.

The NAR rules they’re fighting over

According to the judge’s order, the plaintiffs allege that the enforcement of certain NAR rules results in price-fixing that artificially inflates residential real estate broker commissions homesellers pay because sellers would not pay buyer brokers without those rules.

One of those rules is a NAR policy, sometimes known as the buyer broker commission rule, that requires listing brokers to offer a blanket, unilateral offer of compensation to buyer brokers in order to submit a listing to a Realtor-affiliated multiple listing service.

The rule prohibits MLSs from publishing listings that don’t include an offer of compensation that is either a percentage of the list price or a definite dollar amount and can’t be a general invitation to discuss terms and conditions of possible cooperation. According to Bough, this rule is “the cornerstone of Plaintiffs’ alleged price-fixing conspiracy” and adds, “Plaintiffs contend this Challenged Rule requires every seller to make a non-negotiable offer of buyer broker compensation.”

The second rule is Standard of Practice 16-15 in NAR’s Code of Ethics, which states that “In cooperative transactions Realtors shall compensate cooperating Realtors” — another rule the plaintiffs contend requires sellers to offer compensation to the buyer broker.

The third rule is the code’s Standard of Practice 16-16, which states: “Realtors, acting as subagents or buyer/tenant representatives or brokers, shall not use the terms of an offer to purchase/lease to attempt to modify the listing broker’s offer of compensation to subagents or buyer/tenant representatives or brokers nor make the submission of an executed offer to purchase/lease contingent on the listing broker’s agreement to modify the offer of compensation.” The plaintiffs allege this rule hinders consumers’ ability to negotiate buyer broker compensation.

The fourth rule is the code’s Standard of Practice 3-2, which says: “Any change in compensation offered for cooperative services must be communicated to the other Realtor prior to the time that Realtor submits an offer to purchase/lease the property. After a Realtor has submitted an offer to purchase or lease property, the listing broker may not attempt to unilaterally modify the offered compensation with respect to that cooperative transaction.” The plaintiffs allege this rule inflates commissions “by eliminating opportunities” for consumers to be able to negotiate the buyer broker commission.

According to the plaintiffs, the real estate franchisor defendants require each of their franchisees, subsidiaries, brokers, and agents to abide by the four rules.

“For example, Plaintiffs point to various Policies and Procedures Manuals and Franchise Disclosure Documents of the Corporate Defendants which require compliance with the NAR Code of Ethics and either require or strongly encourage NAR and local MLS membership,” Bough wrote.

“Plaintiffs argue enforcement of the Challenged Rules is important to the Corporate Defendants because most of their profits are derived from broker commission rates. For example, approximately ‘80% of Realogy’s revenue’ in 2017 came from commissions. Plaintiffs also allege Corporate Defendants provide sales scripts to their brokers and agents with canned responses to prevent sellers from deviating from the standard offer of buyer broker compensation.”

The plaintiffs have specifically called out Keller Williams’ training scripts for allegedly encouraging steering and discouraging sellers from reducing buyer broker commissions. At oral arguments last week, one of the plaintiffs’ lawyers also revealed that the plaintiffs are alleging that KW co-founder Gary Keller heads the alleged conspiracy.

Why the judge granted class certification

In order for a case to qualify for class-action status, it must satisfy four elements under the law: 1. The class is so numerous that it would be impossible to bring them all before the court, 2. There are questions of law or fact common to the class, 3. The claims or defenses of the named plaintiffs are typical of the claims or defenses of the class as a whole, and 4. The named plaintiffs will fairly and adequately protect the interests of the unnamed class members.

According to Bough, the defendants did not dispute that the plaintiffs met the numerosity requirement, given that “hundreds of thousands of class members geographically dispersed throughout the state of Missouri and portions of Kansas and Illinois” would be included.

Bough also agreed with the plaintiffs that there are many questions of law or fact common to the class, including whether the alleged conspiracy was implemented in the areas in which the subject MLSs operate; whether the alleged conspiracy violates the Sherman Antitrust Act; the duration, scope, extent, and effect of the alleged conspiracy; and whether class members are entitled to damages.

He also agreed with the plaintiffs that their claims are typical of all proposed class members because they were all subject to the rules at issue, each class member sold a home through one of the real estate franchisor defendants and listed that home on a subject MLS, each class member paid a buyer broker, and the plaintiffs’ and class members’ claims are based on the same legal theories.

“Each class member seeks damages based on the same theory of harm: Defendants’ conspiracy to implement and enforce the Challenged Rules caused home sellers to pay a buyer broker commission, or at least a fixed, inflated commission, that they would not have otherwise paid as a condition of listing their market on a Subject MLS,” Bough wrote.

The judge also did not buy the defendants’ contention, made during oral arguments, that the plaintiffs are not adequate class representatives because some proposed class members would have actually benefited from the rules at issue if they paid less to a buyer broker as sellers than was paid for them when they themselves bought a home.

Bough pointed to the testimony of Craig T. Schulman, an economics professor at Texas A&M University and expert for the plaintiffs, who said that in a world without the rules at issue, buyer brokers would be either eliminated or rare.

“Accordingly, in Plaintiffs’ alleged but-for world, all class members would benefit from removal of the Challenged Rules even if they did not have to compensate their own buyer broker,” Bough wrote.

“This is because, absent the Challenged Rules, (1) class members would not have used a buyer broker, (2) class members would pay a lesser, more competitive buyer broker commission rate – and thus broker rates would still be free to buyers – or (3) the cost of buyer broker fees would significantly decrease because buyers would be incentivized to negotiate their fee.

“A conflict therefore does not exist among the class members. Each class member has the same interest in establishing the existence of the conspiracy, and the class members were allegedly
injured by Defendants in the same manner and seek substantially identical relief – reimbursement of the overcharged buyer broker commission.”

Moreover, Bough disagreed with the defendants’ contention that the plaintiffs should discount from damages claims the benefits class members got when they themselves were buyers.

“[T]his offset argument fails,” he said. “Under [a previous case], a plaintiff ‘may recover the full amount of the overcharge, even if he is otherwise benefitted, because the antitrust injury occurs and is complete when the defendant sells at the illegally high price.’”

Furthermore, he added, the idea that some class members are “uninjured plaintiffs” misstates the plaintiffs’ theory of the case.

“Dr. Schulman opines that the competitive rate for sellers to pay buyer broker commissions is zero because no class member would have paid a buyer broker but for the Challenged Rules and,
therefore, every class member paid more than that amount by virtue of their inclusion in the class,” Bough said.

While the defendants argued that commissions came down to individual broker decisions, Bough noted that Schulman’s report indicated that commission rates remained uniformly high throughout the class period, regardless of market conditions.

“[B]uyer broker commission rates experienced very little variation, with yearly averages ranging from 2.974% to 2.985%, regardless of how long a house remained on the market,” Bough wrote.

“The Court also finds that the near uniformity of commission rates is common evidence which demonstrates that a seller’s decision to offer buyer broker compensation is not predominated by
individual circumstances,” he added.

At oral arguments, an expert for the defendants pointed to data from Washington-based Northwest MLS, which eliminated the buyer broker commission rule in 2019, to stress that in a market where the rule has been absent, 99.2 percent of listings continue to offer a buyer broker commission (flat from 99.3 percent before the rule was eliminated).

But Bough said that data did not defeat the plaintiffs’ bid for class certification.

Citing Schulman, Bough said that if the rules at issue were eliminated, “The real estate market would take considerable time to change the way people think about how the market works and for the information to disseminate,” similar to travel agencies, stock brokerages, cable television, and hard-wired telephones.

“In each industry, the market adapted to disruption slowly, over the course of several years, and not enough time has passed to see a significant market adjustment in the Northwest MLS,” Bough said.

The classes that are now certified

The judge’s ruling certified three classes:

  1. The “Subject MLS Class,” asserting Count I (Violation of Section 1 of the Sherman Act), defined as: “All persons who, from April 29, 2015 through the present, used a listing broker affiliated with Home Services of America, Inc., Keller Williams Realty, Inc., Realogy Holdings Corp., RE/MAX, LLC, HSF Affiliates, LLC, or BHH Affiliates, LLC, in the sale of a home listed on the Heartland MLS, Columbia Board of Realtors, Mid America Regional Information System, or the Southern Missouri Regional MLS, and who paid a commission to the buyer’s broker in connection with the sale of the home;
  2. The “Missouri Antitrust Law-Subject MLS Class,” asserting Count III (Violation of Missouri Antitrust Law), defined as: “All persons who, from April 29, 2015 through the present, used a listing broker affiliated with Home Services of America, Inc., Keller Williams Realty, Inc., Realogy Holdings Corp., RE/MAX, LLC, HSF Affiliates, LLC, or BHH Affiliates, LLC, in the sale of a home in Missouri listed on the Heartland MLS, Columbia Board of Realtors, Mid America Regional Information System, or the Southern Missouri Regional MLS, and who paid a commission to the buyer’s broker in connection with the sale of the home;” and,
  3. The “MMPA Class,” asserting Count II (Violation of the Missouri Merchandizing Practices Act), defined as: “All persons who, from April 29, 2014 through the present, used a listing broker affiliated with Home Services of America, Inc., Keller Williams Realty, Inc., Realogy Holdings Corp., RE/MAX, LLC, HSF Affiliates, LLC, or BHH Affiliates, LLC, in the sale of a residential home in Missouri listed on the Heartland MLS, Columbia Board of Realtors, Mid America Regional Information System, or the Southern Missouri Regional MLS, and who paid a commission to the buyer’s broker in connection with the sale of the home.”

Read the order:

Email Andrea V. Brambila.

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