The NAR Commission Lawsuit: Creeping Doom, One Step Closer

A couple of weeks ago, Judge Andrea Wood of the United States District Court for the Northern District of Illinois Eastern Division issued a memorandum opinion denying the defendants’ motion to dismiss in the all-important case of Moehrl v. NAR. You can find the opinion here.

As many of you know, I’ve been interested in this from the early days. I wrote about the case when it was filed in March of last year, then have discussed it when there was something new. The last post on this was in August of last year, when I pointed out that there was no chance the case was going to be dismissed and that NAR, the four named Corporate Defendants, as well as the 20 or so local/regional MLSs and their REALTOR Associations, need to start preparing for the hell that will be discovery.

I expected the Motion to Dismiss to be denied earlier than October, but perhaps COVID delayed things. Well, it happened on October 2, 2020.

But, in issuing the denial, Judge Wood took the unusual step of writing a 24 page memorandum opinion. That is unusual, because most of the time, a memorandum opinion is one or two sentences. As Law.com’s legal dictionary puts it, a memorandum is:

a brief statement by a judge announcing his/her ruling without detail or giving extensive reasons, which may or may not be followed by a more comprehensive written decision.

24 pages of detailed analysis and reasoning is not one of these things. This frankly read more like the final opinion we’re going to see after trial than a simple denial of the Motion to Dismiss.

So it’s worth discussing.

NOTE: It’s too bad I have to say this, but based on past experience, I have to say this. My analysis of the legal and business aspects is just that: analysis. That means I am not a lawyer rendering legal advice, nor am I your lawyer. Please consult competent legal counsel for actual legal advice.

Also, analysis does not mean that I want the plaintiffs to win. I am not choosing sides. I work with the industry, and most of my friends (and my wife) do as well. Analysis just means that I’m giving it to you straight, instead of toeing the party propaganda line.

Finally, since I’m not the plaintiff, the plaintiff’s lawyer, or a judge, it really doesn’t make much sense to make legal arguments or rant about how wrong the judge and the plaintiff’s lawyers are. Save those for people actually making those arguments. I am merely presenting my analysis of this opinion and this case and what is and is not important for us to know.

The Judge Seems Convinced

The biggest takeaway for me is that Judge Wood seems to have already made up most of her mind in this case.

I’m not going to go through line by line or paragraph by paragraph, although I read the whole thing because I’m sick like that and find perverse pleasure in reading legal opinions. Instead, let me put it like this….

If this memorandum opinion is not 90% of the opinion we will read when the decision is announced, it constitutes a pretty great roadmap for the Plaintiffs to follow as they continue to build their case.

Because this is about a Motion to Dismiss, which is just about the most biased against the defendant as possible (e.g., assume all facts in the Complaint are true, view everything “in the light most favorable to Plaintiffs”, etc.), there are large sections where Judge Wood simply says, “We don’t need to go there” or “Plaintiff doesn’t need to prove that.” Those silences are where NAR and the Corporate Defendants can and must hang their hopes at trial, but if I’m NAR’s litigator, I’m not filled with hope and optimism.

She goes through each of the elements of an antitrust claim and seems to (a) point out all the ways in which the plaintiff will prevail, and (b) demolish the defendants’ arguments.

For example, under the Conspiracy section (because a conspiracy is a required element of the antitrust claim), the four Corporate Defendants (Realogy, RE/MAX, Keller Williams, and HomeServices of America) argued that they were independently acting in their own interests by requiring all franchisees and their agents to join NAR, because the MLS is a necessary utility and many MLSs require REALTOR membership.

In her opinion, Judge Wood writes:

All parties agree that access to an MLS is a commercial necessity for brokers and realtors. Of course, while an MLS “may create significant competitive advantages both for its members and for the general public, there exists the potential for significant competitive harms when the group, having assumed significant power in the market, also assumes the power to exclude other competitors from access to its pooled resources.” Realty Multi-List, Inc., 629 F.2d at 1370. As discussed above, Plaintiffs’ allegations, show an interlinked market in which the NAR and local realtor associations’ market power to run and regulate MLSs is dependent on the Corporate Defendants’ support. Thus, the Corporate Defendants’ conduct has empowered the MLSs such that access to MLSs is commercially necessary for real estate brokers. Without the Corporate Defendants’ conscious assent to the system, MLSs would be unlikely to have the power to exclude brokerages and realtors that did not abide by the NAR’s Buyer-Broker Commission Rules. [Emphasis added]

Holy crap. I’ve read a lot of antitrust opinions over the years, and I have to tell you, I have never seen a court adopt that particular reasoning.

Basically, the four largest companies in real estate are saying, “We had to join NAR if we wanted to join the MLS.” Judge Wood’s response is, “People have to join the MLS because you four are part of the conspiracy!”

Wow.

Then you get language like this, which to me drips with sarcasm:

Yet the Corporate Defendants contend that it is implausible that they consciously committed to the NAR’s scheme by passively standing by as the NAR annually reissued the Handbook for over twenty years without eliminating or modifying Section 2-G-1. The Court disagrees.

Wow. Judge Wood is not a fan of the four Corporate Defendants….

The Key Issue: Steering

As I have written on this blog previously, and spoken on in multiple presentations since the lawsuit was filed, the key issue in this lawsuit’s outcome will be whether real estate agents steer buyers away from properties that offer lower-than-standard cooperating compensation and how widespread and systemic that practice is.

Now, keep in mind that in a Motion to Dismiss, the court is supposed to give every advantage to the Plaintiff and treat every allegation as true. Even so, this is what Judge Wood writes:

Defendants contend that Section 2-G-1 requires a seller only to make some offer of compensation but does not compel a seller to offer a particular amount. Rather, the seller could offer as little as a penny. Of course, a buyer-broker can view every offer of compensation in the MLS and some MLSs allow the buyer-broker to filter listings based on the value of the buyer-broker commission offer. Common sense suggests that a buyer-broker is highly unlikely to show their client a home when the seller is offering a penny in commission. Nor would a prospective homebuyer necessarily be able to detect that their broker is screening out homes offering insufficient commissions because only brokers and realtors that subscribe to the MLS can view buyer-broker commission offers. That also means a home seller is unable to view the universe of buyer-broker commission offers before agreeing to a commission rate in the listing agreement, thereby putting the seller-broker in a substantial position of influence with respect to that decision. [Emphasis added]

It’s one thing to cite an allegation from the Plaintiff’s complaint and assume it’s true; it’s a whole different thing to me when she talks about “common sense.” That says to me that Judge Wood has already made up her mind that REALTORS routinely steer buyers based on cooperating compensation amounts, and that NAR’s rules encourage and enforce that steering.

NAR is going to have to produce enormous amount of factual evidence to change her mind on this key issue. For example, some kind of academic research study showing that only 4% of REALTORS actually engage in buyer steering based on compensation, so the whole thing is an urban myth.

That’s a tall order when a generation of trainers, coaches, and broker-managers have been teaching listing agents to fight lowering the commission by talking about how buyer agents won’t show your home if you don’t offer enough compensation.

I used to link to a live listing presentation by Randy Ora, a top agent and coach, at a Tom Ferry event in 2015. That video has been made private; I hope it wasn’t because of this lawsuit, or my pointing it out. Because subpoenas are headed your way, Tom Ferry, if that’s true.

But a two minute Google search turned this up, and Randy’s presentation here is identical to what he taught in 2015:

This video might as well be Plaintiff’s Exhibit #1. Randy Ora may as well be prepared to testify at trial.

The judge’s mind is more or less made up, and now the defense will need to change her mind. That takes far more doing than convincing someone in the first place.

Now, Comes Discovery Hell

As I wrote in my August post about discovery, what comes next is going to be… difficult:

If the Moehrl v. NAR lawsuit survives dismissal, and I would be shocked if it did not, because even Mr. Bierig admitted during the panel discussion that getting a motion to dismiss succeed in antitrust lawsuits is difficult, then the lawsuit enters the discovery phase. Lawyers for Moehrl will start sending supoenas and document demands to NAR, the four named defendants, and I’d imagine every single one of the twenty “Covered MLSs”.

Imagine the phone call that the CEO of one of these MLSs has to make:

“Hey, so I know you served on the MLS board four years ago. I need you to collect all of your emails to the Board, to any other Director, to me, to anyone on staff from four years ago and send them to our law firm. Oh, and any meeting notes and text messages from four years ago.”

Read the whole thing if you’re more interested.

And in this context, I found this passage from Judge Wood’s opinion interesting:

Thus, it is entirely reasonable to infer that the Corporate Defendants are involved in the maintenance of the existing pricing system. That inference is bolstered by allegations in the [Class Action Complaint] that the CEO of Corporate Defendant Keller Williams Realty, Inc. informed attendees at an industry event with its competitors that offering a lower buyer-broker commission rate than the industry average amounted to “giving away money” and that “limited service, discount broker, market share in the United States is at an all-time low.”

Obviously, this came from the Plaintiff’s lawyers. They found a quote by Gary Keller at an industry event. That’s a public source of information. And it was enough to sway the judge’s opinion.

Going forward, they will be reading every email Gary Keller sent in the past few years that has anything whatsoever to do with real estate. The same goes for every executive at all four named Corporate Defendants, every executive at the 20 identified MLSs, and of course NAR and all of its executives, volunteer leadership team, committee members, and probably the Board of Directors.

Yes, that’s a LOT of emails, a lot of documents, a lot of evidence to go through. The law firms involved today might have the staff and the resources to request and then go through all of them.

If there’s an email from some MLS Board member complaining about Compass, or Redfin, or eXp, or REX, or Zillow… it will be read out loud in court to a jury. If there’s an email from some CEO of a brokerage talking about how Homie is putting pressure on commissions, that will be in the record at trial.

BUT, if you have served in any kind of a leadership role in a brokerage, franchise, MLS, or REALTOR Association, I strongly urge you to talk to your lawyer before deleting any emails from March of 2015 onwards. Read this handy guide about preserving electronic evidence.

And of course, there will be the hundreds, if not thousands, of hours of depositions coming to anyone who has ever served in a position of leadership and responsibility.

This Shindig Just Got Bigger

Finally, I’ll go out on a limb (it’s a short one, I think) and predict that now that the motion to dismiss was denied, and denied in this manner with the judge laying out a clear roadmap for victory for the plaintiff, I think we’ll see (a) the scope of the lawsuit get bigger, and (b) far more law firms and plaintiffs emerge.

We already know about Sitzer v. NAR, the case out of Missouri, that is substantially similar to this one where the motion to dismiss has already been denied. The two cases might get merged, at least for federal Sherman anti-trust issues, to make it easier on everybody. And then the classes might get larger still, with more than the 20 MLSs named in Moehrl and additional Corporate Defendants.

I mean, at the end of the day, if the lawyers for the plaintiffs want the biggest payday, the plaintiff’s class is everybody who has sold a home since March 6, 2015, as that is the date mentioned in the Complaint, but anywhere in the country. That implies adding more plaintiffs to the class, and that in turn implies adding more lawyers to the case from all around the country, which in turn also means more bodies to wade through all of the discovery materials and conduct depositions.

Additionally, we are likely to see smaller firms bringing smaller class action lawsuits against smaller targets all around the country. Local law firms can reasonably assume that their lawsuit against some local MLS and REALTOR Association somewhere, along with the four or five largest brokerage companies in their area, alleging the exact same things as Moehrl and Sitzer attorneys did, will also not be dismissed. Which means the lawyers can get into discovery, make life miserable for the defendants, and force defendants to spend money on defense lawyers… which often means settlements, which means paydays.

Maybe you get a quick $100K settlement on behalf of a dozen people? The lawyers would get a third of that. It’s just a business for the plaintiff’s bar.

Most lawyers and law firms don’t really want to take the risk of being the first, because they have to do a lot of work with no clear payday precedents. Now, with these dismissals out of the way, and the judge-approved roadmap to victory out there, I think we can expect more lawyers to jump in as the risk-reward ratio has changed.

Think about the tobacco litigation and how that went down; we’ll see similar things here.

Impact?

I’ve already written on this before, so I won’t belabor the point. Suffice to say that should the plaintiffs win, we might be looking at hundreds of billions in damages, especially since anti-trust law provides for treble damages. Every one of the defendants would be bankrupt instantly.

A rough calculation I did shows about $900 billion in damages if the case were to be decided at the end of 2020. Since the case is not likely to be decided before 2022, figure an additional $150 billion per year by the time the dust settles.

Plus, any decision for the Plaintiff is likely to include an injunction against cooperating compensation, i.e., the practice of having the seller pay the buyer agent’s commission, since that was one of the major things asked for by the Plaintiff.

Which is why neither of them will take effect anytime soon.

Should NAR lose (and after this, it looks as if they will) then there will be an immediate appeal along with a seriously ramped up lobbying effort to get legislation passed, or a national settlement fund setup (see, e.g., asbestos, tobacco), or both and plus more. NAR and the four Corporate Defendants have deep pockets, and excellent lawyers, and NAR is one of the most powerful political organizations in the country.

So relax, just a touch. We’ve got time to figure things out. It’s not the end of the world. This is one opinion that was fully expected, because dismissals are so difficult to get, especially in anti-trust cases. NAR and the brokerages might win at Summary Judgment, win at trial, and win after the trial. So don’t hyperventilate just yet. We’ve got time.

That does not mean, however, that we’ve got time to ignore the whole thing and merely cheerlead for victory and make no contingency plans.

So what can you do, if you are a brokerage or MLS leader? Prep. Hope for the best, but prep for the worst (that you are willing to endure). Be optimistic about victory, but also prepare just in case. Hold on, but don’t put this on the back burner.

Now, we wait for discovery to begin.

-rsh