Real Estate Brokerage

DOJ REJECTS COURT SETTLEMENT AND AFFIRMS IMPORTANCE OF DECOUPLING AGENT COMMISSIONS

NAR President acknowledges “that the way we operate our business is going to change”

 |  Press Release

Washington, D.C. – Late Thursday February 15, the U.S. Department of Justice (DOJ) submitted a strong opinion in a lawsuit (Nosalek v. MLS PIN) against a New England multiple listing service and several major real estate companies, for a system of coupled commissions that allow agents and brokers to charge high, fixed rates.  To participate in the MLS, listing agents (and their seller clients) have been required to offer compensation to buyer agents with no opportunity for buyers to negotiate this compensation.

Citing research from the Consumer Federation of America (CFA) and other sources, the DOJ opinion rejected a proposed settlement, calling the proposal neither fair, reasonable, or adequate.  “It makes insignificant and largely cosmetic changes to the [MLS] Rule, while perpetuating the existing structure that drives supra-competitive commissions.  There is no reason to believe that the settlement will reduce broker commissions for the class.”

“This DOJ opinion virtually guarantees that buyers will eventually be able to negotiate buyer agent commissions that are currently fixed through industry collusion,” said Stephen Brobeck, a CFA senior fellow.  “It is also likely that there will be greater variation of agent compensation depending on factors such as agent experience and time spent on the sale,” he added.

The DOJ opinion represents a major watershed in efforts, over the past 80 years, to introduce more price competition in agent and broker compensation.  These efforts include:

  • DOJ litigation begun in the 1940s against industry adoption of “standard rates of commissions” with a notable U.S. Supreme Court decision in 1950 favoring DOJ.
  • A massive 1983 report by the Federal Trade Commission that explained and documented how the industry uses informal collusion, and coupled rates, to set these rates.
  • A 2006 congressional hearing at which DOJ, FTC, Redfin and CFA criticized industry price-fixing.
  • A 2018 DOJ-FTC public workshop at which several participants, including industry members, criticized industry price-fixing.
  • A 2019 lawsuit (Moehrl v. NAR et al.) filed in Chicago by some of the largest, most successful class action firms in the country, quickly followed by a similar lawsuit (Sitzer v. NAR et al.) filed in Kansas City.
  • An October 2023 jury decision in the Sitzer lawsuit that found the industry guilty of price-fixing and awarded damages that could exceed $5 billion.
  • More than 20 recent class action lawsuits filed representing sellers or buyers that are increasing current and potential legal costs, jeopardizing not only NAR, MLSs, and big companies but also all residential brokers.

“The industry will be foolish if they do not seek to consolidate the lawsuits, agree to pay affordable damages, and decouple seller and buyer agent compensation,” noted CFA’s Brobeck.

DOJ does not envision a compensation system in which buyers must come up with additional cash to pay their agents.  The agency agrees that sellers could provide dollar concessions to be used for this compensation and other buyer expenses.  However, DOJ stressed that buyers must have the ability to negotiate these commissions then decide what, if any, concessions to seek from sellers.  Similarly, sellers would have the ability to decide whether to offer any concessions and, if so, their amount.

Some of the details of this decoupled system need to be worked out.  “It is critically important that buyers negotiate buyer agent commissions before their agents search for properties,” said CFA’s Brobeck.  “Otherwise, buyer agents could steer buyers to properties with the highest dollar concessions and potential agent compensation,” he added.

It is also important that buyer agents be prohibited from being compensated by both buyer and seller, a practice the NAR Code of Ethics disapproves of.  Otherwise, buyer and listing agents could easily collude to maintain existing commission levels.

It appears that the DOJ opinion was influenced by separate proposals made by CFA and by a group of attorneys representing major multiple listing services, both of which are cited in footnotes.  CFA supports the MLS proposal but only as a package deal.  “By eliminating one or two key requirements, the proposal would allow the existing collusive system to continue,” said CFA’s Brobeck.

CFA emphasizes that it is not easy to completely eliminate price-fixing.   “Significant asymmetries between consumers and agents provide opportunities for continued price-fixing within a decoupled system,” said CFA’s Brobeck.  “Agents could tell buyer and seller clients that 2.5-3.0 percent rates [5-6% total] were normal, and agents could refuse to negotiate these rates, as many listing agents currently do [around three-quarters, CFA research has found].”

“To ensure significant price competition, both buyers and sellers would need to discuss and try to negotiate compensation of their agents,” Brobeck said.  “Even then, rates would be unlikely to fall immediately, yet over time could decline to an average of 3-4 percent level, saving consumers an estimated $20-$30 billion annually, with much greater variation in types of compensation and rates charged by different agents.  No longer would inexperienced agents be able to charge the same rates as highly competent agents with years of experience,” he added.