Real Estate

DOJ: NAR Commission And Pocket Listing Investigation Should Continue

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The U.S. Department of Justice isn’t backing down from its desire to investigate the National Association of Realtors’ policies regarding buyer broker commissions and pocket listings.

In an appeal brief Friday, the antitrust enforcer says it never agreed not to reopen a probe into those policies and that a lower court made “several serious errors of basic contract law” when it curtailed that investigation.

In January, Judge Timothy J. Kelly of Washington, D.C.’s district court set aside the DOJ’s request for information from NAR on the policies known as the Participation Rule and the Clear Cooperation Policy. The ruling drew a variety of reactions from agents, brokers and other industry players, demonstrating divisions within the real estate industry over the two controversial rules. NAR has 1.5 million members nationwide.

In March, the DOJ formally appealed the ruling to the U.S. Court of Appeals for the District of Columbia Circuit and on Friday submitted its opening brief.

“The Department of Justice’s Antitrust Division brings this appeal to restore its authority to investigate potentially anticompetitive rules, policies, and practices of the National Association of Realtors,” attorneys for the DOJ wrote in the brief.

“Because NAR rules govern most residential home sales across the nation, they can have a significant economic impact on one of the most important transactions in many Americans’ lives.”

The DOJ asked the appeals court to reverse the lower court’s decision so that the agency can “resume its consequential investigation of conduct that affects over $100 billion in broker fees paid by Americans annually.”

The rules at issue in this case are the subject of multiple antitrust lawsuits filed against NAR filed by private parties, some in which the DOJ has intervened. No matter what happens with the DOJ’s investigation, those lawsuits are ongoing.

The DOJ’s letter to NAR

In 2019, the DOJ sent NAR a civil investigative demand (CID) — a type of administrative subpoena — over several of its rules and later sent another CID in 2020. The parties came to a settlement in November 2020 while the DOJ was under the Trump administration but after the Biden administration took over, the agency abruptly withdrew from that proposed settlement agreement on July 1, 2021.

Days later, the agency sent NAR another CID seeking new information on the trade group’s rules, including:

  • The Participation Rule, which requires listing brokers to offer a blanket, unilateral offer of compensation to buyer brokers in order to submit a listing into a Realtor-affiliated MLS.
  • The Clear Cooperation Policy, which requires listing brokers to submit a listing to their Realtor-affiliated MLS within one business day of marketing a property to the public.

In September 2021, NAR filed a petition attempting to quash the DOJ’s demand, contending NAR only agreed to the settlement (also called a “consent decree”) after assurances that it would receive a letter affirming the DOJ had closed its investigations into the Participation Rule and Clear Cooperation Policy. The DOJ had sent NAR a three-sentence letter in November 2020, saying:

This letter is to inform you that the Antitrust Division has closed its investigation into the National Association of REALTORS’ Clear Cooperation Policy and Participation Rule. Accordingly, NAR will have no obligation to respond to CID Nos. 29935 and 30360 issued on April 12, 2019 and June 29, 2020, respectively.

No inference should be drawn, however, from the Division’s decision to close its investigation into these rules, policies or practices not addressed by the consent decree.

In January, Kelly, a Trump appointee, granted NAR’s petition, ruling that the DOJ’s demand violated the “validly executed settlement agreement” between the two parties.

‘Absurd’ and ‘wrong’

In doing so, the DOJ’s appeal contends the lower court “made several serious errors of basic contract law,” including inferring that the DOJ had waived its sovereign right as part of the country’s Executive Branch to investigate and prosecute potentially unlawful conduct — without the DOJ explicitly saying it was waiving that right, which would be required by law.

“First, the District Court brushed aside the plain language of a letter merely reporting that an investigation had been closed and read into the letter an unstated forward-looking commitment not to further investigate NAR,” the brief said.

“This interpretation also improperly implied a waiver of a sovereign power against the United States and ignored several other textual indications that the Division had no intention to limit its investigative authority.”

The brief further maintained that the district court’s ruling lead to an “anomalous” and “absurd” result: that after the DOJ withdrew from the proposed settlement agreement, NAR was released from any continuing obligations under the agreement, but, under the same agreement, the DOJ is barred from investigating the commission and pocket listing policies.

“That cannot be right,” the DOJ’s attorneys wrote.

Moreover, they disagreed with Kelly’s suggestion that the change in presidential administrations can’t justify reopening the investigation.

“The court’s implication that there is something improper about a prosecutor reopening an investigation that had reached no conclusion is wrong,” the brief said. “Whether as a result of changes in leadership, priorities, or other factors, in our constitutional system those decisions are well within the discretion of the Executive Branch.

“The Division insisted on maintaining the right to reopen its investigation precisely to preserve that prosecutorial discretion.”

‘Misinterpreted’

The DOJ’s attorneys said the lower court had “misinterpreted” the settlement agreement and the closing letter.

“The plain text of the November 2020 letter states only that the Division ‘has closed’ its prior investigation; the letter said nothing about future investigations,” the brief said.

“Many things open after having closed, as law enforcement investigations often do. The District Court read a term into the letter — a commitment not to undertake any future investigations —that is not there.”

The brief added that the lower court had ignored a reservation-of-rights clause in the proposed settlement, “which was negotiated along with the November 2020 letter and expressly reserved
the United States’ right to investigate ‘any’ NAR rule.”

According to the DOJ, it closed its investigation into the Participation Rule and the Clear Cooperation Policy more than seven months before issuing a new CID in July 2021.

“[R]esuming the investigation into these rules was warranted and necessary in light of evidence of the continuing threat of anticompetitive effects of NAR’s rules, policies, and practices on the residential real-estate industry,” the brief said.

What the DOJ thinks of the rules

The brief offers some details about the DOJ’s original investigation and why the agency is investigating these particular rules.

“After receiving a complaint from an industry participant in June 2018, the Division opened an antitrust investigation into certain NAR rules and practices,” the brief said.

“An important part of the investigation concerned NAR’s ‘Participation Rule,’ which appeared to raise significant competition concerns. This rule requires listing brokers to offer the same commission to all buyer-brokers when listing a particular property for sale on an MLS.”

That “industry participant” is likely discount brokerage REX Real Estate, which is currently suing NAR and Zillow primarily over a different NAR policy.

The DOJ noted in its brief that the rule does not require a particular amount to be offered in the MLS, but that “industry custom” is to offer buyer brokers 2.5-3 percent and that buyer brokers can “easily check” how much is offered.

“By effectively affording sellers’ brokers control over what buyers pay their brokers, the rule could curtail price competition among buyer-brokers,” the brief said.

“Potentially exacerbating these effects, buyer-brokers could steer customers to higher-commission listings — or discourage sellers’ agents from offering lower commissions.”

The agency’s brief states that the Clear Cooperation Policy was “[p]rompted by competition from upstart listing services” and “restricts the choices available to home sellers and listing brokers who want to market homes outside the NAR-affiliated MLS system and potentially excludes new listing services that seek to compete against MLSs for home listings.”

NAR’s response

NAR’s brief to the appeals court is due on July 21.

Mantill Williams

“Regardless of the DOJ’s appeal, we remain confident in our position and that we will ultimately prevail,” NAR spokesperson Mantill Williams told Inman in an emailed statement.

“NAR has upheld our end of the agreement, and we simply expect the DOJ to do the same. As stated in the court’s original decision ‘…not setting aside the CID at issue would deprive NAR of the benefit for which it bargained: the closure of the Antitrust Division’s investigation into its Participation Rule and Clear Cooperation Policy. The government, like any party, must be held to the terms of its settlement agreements…’

“NAR guidance for local MLS broker marketplaces has long been recognized to promote fair, transparent and competitive real estate markets for consumers and businesses.”

Email Andrea V. Brambila.

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