ANTI-TRUST

At the end of this unit, you should be able to:

• Have a good understanding of the Sherman Anti-Trust Act and know why the real estate industry is a likely candidate for violations
• Describe the three most common anti-trust violations as they pertain to real estate and how to avoid each
• Know the penalties involved with Anti-Trust violations

Introduction

Anti-Trust Laws and Unfair Business Practices are designed to promote the policy and practice of competition.

Some symptoms of a lack of competition are higher pricing and diminishing quality of a service or a product.

Real estate brokers compete with one another to obtain listings for sale. At the same time, they often cooperate with one another to secure buyers for those listings. This dual situation of competition and cooperation, unique to the real estate industry, can present many opportunities for Anti-Trust violations.

The foundation for federal Anti-Trust laws is the Sherman Anti-Trust Act of 1890. The Sherman Antitrust Act, commonly referred to as the Sherman Act, is a foundational piece of U.S. antitrust legislation. Its primary objective is to promote economic competition and prevent monopolistic practices. For real estate brokers, understanding the implications of the Sherman Act is crucial as it directly impacts how they conduct business, interact with competitors, and serve clients.

What is the Sherman Act?

At its core, the Sherman Act prohibits business activities that the federal government deems to be anticompetitive or monopolistic. 

The Act is divided into two main sections:

1. Section 1 declares illegal all "contracts, combinations...or conspiracies" that restrain trade or commerce.

2. Section 2 addresses the issue of monopolization, prohibiting any attempts to monopolize or conspire to monopolize trade or commerce.

Implications for Real Estate Brokers:

1. Price Fixing: Real estate brokers cannot collude or agree with other brokers to set fixed commission rates. Each broker or firm must independently determine their commission rates.

2. Market Allocation: Brokers are prohibited from agreeing with other brokers to divide markets among themselves. For instance, two brokers cannot agree to avoid competing with each other by designating certain geographic areas or types of properties to each broker exclusively.

3. Group Boycotting: Brokers cannot conspire to refuse to work with another broker or service provider.

4. Misuse of Market Power: Brokers with significant market power cannot use that power to engage in unfair practices that harm competition.

Real-World Implications:

Violations of the Sherman Act can lead to severe penalties, including criminal charges, fines, and civil damages. It's not just corporations that can be held accountable; individuals, including real estate brokers, can also face penalties. The U.S. Department of Justice is responsible for enforcing the Sherman Act, and they take potential violations very seriously.

Common Violations

The three types of anti-trust violations which are most important in the Real estate industry

• Conspiracy to Fix Prices
• Imbalanced Commission Splits
• Conspiracy to Boycott

Conspiracy to fix prices

It violates both State and Federal Anti-Trust Laws for there to be ANY agreement between competing real estate brokers to fix the prices each will charge to a third party.

Let's look at some examples regarding Conspiracy to Fix Pricing, which is prohibited:

• Brokerages A and B agreed to charge all clients x commission on all listings.
• Brokerages A, B, and C agreed to pay a set amount to outside brokers for any referral.

A licensee tells her clients that her brokerage charges a 6 per cent commission on all their listings and that all other brokers charge the same amount as it is a "standard" in the industry.

Imbalanced Commission Splits

Licensees must be especially careful of imbalanced exploitative splits when cooperating with other licensees on listings. 

An exploitative split is one that:

1. Minimizes the licensee's costs of cooperation with other licensees
2. Maximizes the licensee's commission because they sell their own listings
3. Maximizes the licensee's commission when they sell other licensee's listings

Here's an example of an imbalanced commission split:

A listing broker offers 1 per cent to the buyer's broker who sells his or her listings. Yet the broker seeks 3 per cent of the commission when he or she sells the listing of other brokers with a 6 per cent total commission.

This splitting structure discourages cooperation from other brokers and increases the likelihood that the broker can sell his or her own listing.

Conspiracy to Boycott

The conspiracy to boycott happens when a group of competitors agrees not to deal with another firm or when brokers collectively decide not to deal with a third party to eliminate competition. Here's an important distinction: 

Individuals each have a right to choose who they will and will not do business with. It is the collective action of a group that is prohibited by Anti-Trust Laws.

Let's look at an example:

Over a lunch meeting, Broker A from XYZ Realty and Broker B from ABC Realty agree not to show the listings of ADC Realty. 

They further state that if no other brokers will show the ADC Realty listings, then ADC Realty should be out of business in no time. This is a conspiracy to boycott to eliminate competition.