Alleged Illegality of the New NAR Rules

By Charles Jones

We examine the legality of two of the new rules implemented by the National Association of Realtors (NAR) following the settlement of the Sitzer v. NAR class action lawsuit. These rules are controversial for potentially infringing on the competitive practices and rights of real estate agents, sellers, and buyers within the real estate market.

We argue that because the NAR has been found guilty of anti-competitive behavior by a jury and has been repeatedly accused of similar practices by the DOJ, the association conspired with the plaintiffs and their attorneys to settle the case strategically. This settlement ensures that the NAR can continue operating and afford the $418 million settlement over time. However, the settlement requires NAR to adopt mandatory rules that perpetuate the same anti-competitive practices, primarily by maintaining control over industry rules and the MLS. These rules were created and agreed upon by NAR and its co-defendants, some of the largest competitors in the industry. They are not grounded in law but instead violate the same legal provisions NAR was accused of breaking initially. In particular, these two new rules likely violate the Sherman Act by restricting both buyers and sellers, thus reducing competition. They also likely infringe on sellers' free speech and coerce buyers into signing agreements prematurely.

Overview of the New NAR Rules at issue:

1. Rule 58(ii) prohibits sellers from advertising seller-paid other agent compensation on the MLS. This limitation is argued to restrict the sellers' ability to communicate incentives to potential buyer agents, thereby impacting the sellers' ability to market their property effectively.

2. Rule 58(iv) requires that agents cannot show homes unless potential buyers sign an agreement. This rule is seen as potentially coercive and discriminatory, imposing undue pressure on buyers to commit to agency relationships prematurely.

Analysis:

Rule 58(ii): Restriction on Advertising Seller-Paid Compensation

Antitrust Concerns:

• Restriction of Trade: By preventing sellers from advertising compensation terms, this rule could be seen as limiting the competitive practices that are essential for a free market. Antitrust laws, particularly the Sherman Act, are designed to prohibit restrictions of free trade and competition.

• Manipulation of Market Conditions: This rule may artificially alter the dynamics of real estate transactions, potentially leading to non-competitive market conditions that favor certain agents or brokers over others.

Violation of Fiduciary Duties:

• Conflict with Agent Obligations: Real estate agents are obligated to act in the best interests of their clients, including promoting the seller's properties as advantageously as possible. By restricting how compensation can be advertised, this rule may force agents to act contrary to their client's best interests.

Rule 58(iv): Mandatory Buyer Agreement Before Showing Properties

Constitutional and Discriminatory Issues:

• Potential Coercion: Requiring a binding agency agreement before showing properties could be interpreted as coercive, potentially violating prospective buyers' rights to choose representation freely. Buyer agency agreements if voluntary are perfectly legal and preferred, but once the "industry" mandates it, it likely becomes coercive and in our mind illegal, anti-competitive, and discriminatory.

• Discrimination Against Unrepresented and Lower-Income Buyers: This rule could disproportionately affect buyers who prefer to view properties without committing to an exclusive agency relationship, particularly lower-income buyers. It may discriminate against them by denying access based on their representation status or financial capacity to commit to an agency relationship.

Legal Jeopardy for Agents/Brokers:

• Risks of Coercion Charges: Brokers and Agents enforcing this rule may face legal challenges, including accusations of coercing buyers into agreements. Such practices can lead to significant legal liabilities and damage to professional reputations.

Potential for Future Litigation

Both rules set by NAR, given their restrictive nature and potential conflict with established legal norms, are likely to face significant legal scrutiny and litigation. Legal challenges could argue that these rules unfairly restrict market competition and impose unreasonable barriers to market entry.

Warning and Recommendation:

Real estate agents should consider avoiding enforcing these rules due to their restrictive nature and the associated legal risks. Compliance could result in lawsuits, accusations of anti-competitive behavior, and reputational damage. Instead, agents should prioritize fair practices that respect market competition, ensure transparency, and uphold ethical standards to avoid potential litigation and maintain trust with clients.

Disclaimer:

Before deciding on whether to comply with or reject these rules, it is crucial to consult with your own legal counsel. Legal advice can provide guidance on navigating these complex issues while minimizing exposure to liability and ensuring adherence to broader legal and ethical standards.

Conclusion

The new rules implemented by NAR post-Sitzer settlement raise significant legal concerns regarding antitrust violations, infringement of fiduciary duties, potential coercive practices, and discrimination. These issues not only pose risks for litigation against NAR but also place its member agents and brokers in precarious legal and ethical positions. Legal precedents and antitrust regulations suggest that these rules might not withstand judicial scrutiny, especially if challenged on the grounds of restricting free trade and competition.