Mass Law Blog

The NAR Antitrust Case: The Per Se Rule Misapplied?

by | Feb 4, 2024

In October 2023 a Missouri jury awarded class-action plaintiffs $1.8 billion in a federal antitrust suit against the National Association of Realtors (NAR) and several brokerage firms. As I discuss below, the central issue in this case – and what I expect will be the central issue on appeal – is whether the case should have been tried under the “per se” rule or the “rule of reason.” Spoiler: while the NAR may ultimately be found liable for violating the antitrust laws the trial judge erred in trying the case as a “per se” violation. I expect the Eighth Circuit or the Supreme Court to reverse the judgment in this case. 

Per Se or Rule of Reason?

A key issue in any Sherman Act Section 1 case is whether the challenged conduct should be tried under the per se rule or the rule of reason. Some anticompetitive conduct is viewed as so presumptively harmful that it’s treated as a “per se” violation, meaning that no offsetting pro-competitive justification defense is allowed. Classic examples are horizontal price fixing, market division and bid rigging. In a civil case these violations can result in money damages. In a criminal case the corporate employees involved may be facing time in a federal prison. 

Per se antitrust conspiracies usually occur in secret. The classic scenario is the secret meeting where competitors agree to fix prices or divide markets. But this is not always the case. Sometimes the challenged conduct takes place in the open. That’s the situation in Burnett v. NAR (W.D. Miss.), the case that resulted in the $1.8 billion verdict against the NAR. (docket).

The NAR Mandatory Payment Rule

If you’ve ever sold a house in the U.S. it’s likely you hired a realtor to represent you. This person is referred to as the “seller-broker” or the “listing-broker.” You likely knew that a second realtor might be involved – the “buyer-broker” – and that both brokers would receive a commission on sale.

When you retained your broker you agreed to pay a brokerage commission when the house was sold. It was probably between 5% and 6% of the sale price, although you might have negotiated a lower amount. You may also have been aware that this commission would be split 50-50 between the two brokers. You, the seller, would be paying both brokers from the proceeds, a fact that probably was a consideration when you set the selling price for the house. If you expected to sell your house for $1 million, a 5% brokerage fee meant that at closing you’d pay $25,000 to each broker.

Perhaps you told your realtor that while you were OK paying him 2 ½% on sale, you didn’t want to pay the buyer-broker. After all, the buyer-broker represented the buyer – let the buyer negotiate its own brokerage fee and pay it directly. You may have pointed out that many buyer-side brokers play a minimal role in home purchasers today, when buyers can research the housing market online. A buyer-broker’s job might be not much more than providing access to a lock box and communicating an offer. Why, you ask, should the buyer’s broker be paid $25,000, an amount that may be unrelated to the service provided?

If that’s what you were thinking you may have instructed your broker to post your house for sale with “buyer-broker compensation to be determined.” 

If you tried this your broker likely responded that deferring the buyer-broker’s commission until later in the transaction was not an option. Why? Because your broker is almost certainly a member of the NAR, and must comply with the NAR membership rules. Not stating the buyer-broker’s commission up front would run afoul of a long-standing NAR rule that the seller must state the buyer-broker commission on MLS when the property is first listed. If the seller didn’t agree to this the listing-broker would lose access to the NAR-owned MLS. And, your broker adds, even in the age of Zillow and Redfin an MLS listing is essential to advertising a house and finding a buyer. 

If a realtor told you this they would be right. Since the mid-1990s the NAR’s so-called “Mandatory Payment Rule” (the “NAR Rule”) has required that any seller listing on MLS must make an offer to potential buyer brokers when the property is first listed:

In filing property with the multiple listing service, participants make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. (NAR Handbook, Section 5)

In plain English, this rule (along with others not quoted here) requires that a seller broker disclose an offer of compensation to the buyer broker when the house is first listed, despite not having any information about the buyer, the buyer-broker or the services the buyer-broker will perform. Any negotiation of the compensation must occur before the property is shown and cannot be negotiated after that point. As a practical matter, therefore, there rarely if ever is a negotiation over the compensation offered to buyer brokers on the MLS.

The NAR Case

The NAR Rule has been in existence since the mid-1990s, and it has long been the target of criticism and controversy. This finally came to a head when several home sellers filed an antitrust class action in Missouri against the NAR and several large brokerage firms. The NAR and some large realtors refused to settle or back down, and at trial things didn’t go well for the NAR and its broker co-defendants. A jury found that the policy violated the antitrust laws and awarded $1.8 billion in damages. Add to this the possibility of treble damages exceeding $5 billion and attorneys fees. And this is just the beginning of a litigation free-for-all – the verdict has led to similar lawsuits in other jurisdictions and increased government scrutiny of the NAR. 

The Per Se Rule – When Does It Apply?

The per se rule is a draconian rule in the context of antitrust law, and the Supreme Court has been clear that it is to be applied cautiously. In fact, in recent decades the Court has been liberal in recharacterizing per se conduct as rule of reason conduct.

The leading case on this is Leegin v. PSKS (U.S. 2007), where the Court moved resale price maintenance from the “per se” column to the “rule of reason” column. However, the Supreme Court has done this more than once. In Continental v. Sylvania (U.S. 1977), non-price vertical restrictions were moved into the rule of reason column. 

Leegin, Sylvania and similar cases have important implications for the “per se” vs “rule of reason” decision. In these decisions the Supreme Court has made clear that the per se rule should be applied only after the courts have adequate experience with the restraint at issue. See also Arizona v. Maricopa County Medical Society (U.S. 1982)(“Only if it is clear from the record that the agreement is so plainly anticompetitive that no elaborate study of its effects is needed to establish its illegality may a court properly make a per se judgment”).

The Court emphasized this in Leegin:

The accepted standard for testing whether a practice restrains trade in violation of § 1 of the Sherman Act is the rule of reason, which requires the factfinder to weigh “all of the circumstances,” including “specific information about the relevant business” and “the restraint’s history, nature, and effect.” The rule distinguishes between restraints with anticompetitive effects that are harmful to the consumer and those with procompetitive effects that are in the consumer’s best interest. However, when a restraint is deemed “unlawful per se,” the need to study an individual restraint’s reasonableness in light of real market forces is eliminated. Resort to per se rules is confined to restraints “that would always or almost always tend to restrict competition and decrease output.” Thus, a per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue, and only if they can predict with confidence that the restraint would be invalidated in all or almost all instances under the rule of reason. [citations omitted; emphasis added]

In order to obtain the “considerable experience” required make a determination of this sort courts typically receive evidence in the form of lay testimony and expert opinion (from economists and industry experts), review the economic literature and reach a reasoned determination whether the practice at issue “always or almost always” restricts competition and decreases output.

Is The NAR Policy A Per Se Antitrust Case?

In the NAR case the trial judge decided the all-important “per se” vs. “rule of reason” issue at the summary judgment stage: “The Court agrees with Plaintiffs and finds that the per se rule is applicable here . . . The record creates a genuine material fact as to whether Defendants have engaged in a horizontal price-fixing scheme, exactly the situation where applying the per se rule is appropriate.” (Emphasis added). By the time of trial the judge had concluded that there was no longer an issue of material fact on this issue – in his view the case fell under the per se rule, and he instructed the jury accordingly. 

Consequently, the NAR defendants went to trial with one hand tied behind their backs – they were not allowed to argue the economic benefits of the NAR Rule. They were limited to defending against the allegations of a conspiracy and the damages claims.  

However, if you reread the NAR Rule that I quoted above you will notice something unusual about it – it does not “fix” the commissions paid to the listing and buyer’s broker. In other words, it doesn’t say that the brokers will charge (and split) a 5% or 6% commission – the listing broker can set whatever commission he agreed upon with his client, the seller. While listing brokers must make an offer of compensation, the amount of the offer is unrestricted. The commission offered could – at least in theory – be as little as $1. And, the Rule does not affect the amount of the selling broker’s commission – sellers are free to negotiate that amount with their brokers.

In other words, although the judge characterized this Rule as a “horizontal price-fixing scheme,” the NAR Rule does not “fix” prices – it only requires that a non-zero offer must be made, and when. 

The NAR has a strong argument that the courts do not have sufficient experience with a rule of this nature in the residential real estate market, and therefore placing this practice under the per se rule was legal error by the trial judge. If this argument prevails the verdict and any injunction imposed by the district court as part of the final judgment (which has yet to be entered) will be reversed by either the Eighth Circuit or the Supreme Court. The plaintiffs would then have the option of retrying the case under the rule of reason.

The Verdict is In, But the Case is Far From Over

In the meantime, it’s important to bear in mind that this case is still in early innings. The parties are only now filing post-trial briefs, and the defendants are asking the trial court to set aside or reduce the verdict. The plaintiffs will ask the judge to issue an injunction prohibiting the parties from following the NAR Rule, and if he doesn’t reverse the jury verdict he likely will do so, although the precise terms of an injunction are uncertain.  

If the verdict does hold up on appeal what impact will this case have on the U.S. residential real estate market? Will the NAR lose its ownership and control over the MLS? Will home buyers have the option of paying their brokers directly, and if so will this lower the overall cost of home purchases? Or is the “seller pays both brokers” business model so deeply entrenched in the real estate industry that it will continue on its own momentum, without an NAR Rule to compel it? 

It’s also worth noting that the NAR faces significant legal challenges in addition to this suit, not the least of which is a wide ranging Department of Justice antitrust investigation that was pending settlement under the Trump administration, but which has been reopened under the Biden Department of Justice.

The future is always uncertain, but all of these legal issues and uncertainties add up to a challenging future for the real estate brokerage industry.  

Update, June 2024: We will never know whether the trial court properly applied the per se rule in this case. The NAR decided to settle the case. This has been in the works for a while, but in May 2024 the court finally approved the class action settlement. The NAR has agreed to eliminate the mandatory payment rule on REALTOR® multiple listing services nationwide. The specific, detailed terms of the settlement are here. Over $900 million will be paid to the class members.