In Sitzer/Burnett v. National Association of Realtors, the core issue revolved around the legality of mandating sellers to provide compensation to buyers’ agents. This analysis draws upon the findings of a December 16, 2022, Order by Judge Stephen R. Bough of the District Court of Missouri, which was issued in response to four motions for summary judgment submitted by the defendants. These motions sought the dismissal of the lawsuit on the grounds that the plaintiffs failed to demonstrate essential legal prerequisites. The objective here is to furnish a brief examination of the relevant arguments and legal principles.

Facts

The case was initiated by plaintiffs Rhonda Burnett, Scott Burnett, Ryan Hendrickson, and others, who filed a class action lawsuit in the United States District Court for the Western District of Missouri. They contended that HomeServices; RE/MAX, LLC; National Association of Realtors (NAR); Realogy Holdings Corp.; and Keller Williams Realty, Inc., had enforced anticompetitive regulations, thereby violating antitrust laws. Specifically, they argued that the rules mandating sellers to compensate buyer’s brokers was developed and implemented by the NAR to advantage real estate agents and brokerages at sellers' expense.

Residential Real Estate Transactions

In a standard residential real estate transaction, the listing agent and seller enter into a listing agreement for the sale of a property. This listing is then included in the MLS directory—access to which requires being a licensed real estate agent and NAR member—unless the seller opts out. The MLS not only serves as an independent directory but also disseminates listings to third-party platforms like Zillow, Redfin, independent brokerage websites, and others. As a result, participation in the MLS is typically encouraged. 

The listing agreement delineates the listing agent’s commission, in the United States typically 5-6% of the sale price, and specifies the commission split with the buyer’s broker. This arrangement establishes the buyer’s agent’s compensation at the commencement of the seller-broker representation agreement.

Central to the dispute is whether the NAR and associated brokerages collectively endorse a system and set of rules that suppress competition and contribute to inflated real estate commission rates.

MLS Listing Compensation Requirement

A crucial NAR regulation, outlined in the NAR's MLS Handbook (Section 2-G-1), mandates that all MLS listings offer compensation to other MLS participants. This rule explicitly "prohibits participants from 'publishing listings that do not include an offer of compensation' or 'include general invitations ... to discuss terms and conditions of possible cooperative relationships.'" (Burnett v. National Association of Realtors (W.D. Mo., Dec. 16, 2022, No. 4:19-CV-00332-SRB) 2022 WL 17741708, at *2.) Compliance with Section 2-G-1 is mandatory. 

Buyer Broker Commission Rule/Cooperation Compensation Rule

Another NAR rule requires Seller-Brokers to compensate Buyer-Brokers: “In cooperative transactions REALTORS® shall compensate cooperating REALTORS®[.]” (Id.) The NAR Code of Ethics further states that “REALTORS® shall cooperate with other brokers except when cooperation is not in the client's best interest.” (Id.) “At the oral arguments held on these motions, the parties agreed there is no such thing as a non-cooperative transaction that is facilitated by an MLS.” (Id.) The evidenced produced also indicated that the defendants’ position was that it was always in the client’s best interest to market a property on a MLS. So, essentially, the NAR rules, Code of Ethics, and general business practices (1) mandate buyer-broker commissions in order to utilize MLS; (2) presume that all MLS transactions are “cooperative”, thereby requiring compensation; and (3) that use of MLS is always in the client’s best interest. It is also important to note that the defendant brokerages required their franchisees to be members of NAR and to abide by NAR’s Code of Ethics, thus encouraging the adoption of these rules. 

In addition, the evidence produced by the plaintiffs underscored the training and business practices of the defendants and their agents, which included direction by brokerages to insert a 6% commission rate in all form listing agreements, to indicate that “this is what my company charges” in discussions with sellers, to inform sellers that the commission allows them to “do the advertising they do”, and that if the agent agreed to reduce their commission to remember that the buyer-broker will need to be paid a minimum of 2.5%. Again, the question was whether these rules and practices stifle competition and artificially inflate real estate commissions in violation of Federal and Missouri State law. 

Antitrust Violations Under the Sherman Act

The plaintiff’s primary assertion was that the defendants “adopted and imposed Section 2-G-1, an anticompetitive restraint, that inflated residential real estate commissions throughout Missouri in the Subject MLS.” (Id. at *5.) The court's analysis focused on the Sherman Act's provisions against trade restraints and found ample evidence to deny the defendants' motion for summary judgment, noting a concerted action to maintain the status quo.

Regarding this first claim, the court noted that:

The Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade.” 15 U.S.C. § 1. “The Sherman Act was specifically intended to prohibit independent businesses from becoming ‘associates’ in a common plan which is bound to reduce their competitor's opportunity to buy or sell the things in which the groups compete.” Associated Press v. United States, 326 U.S. 1, 15 (1945). “To establish a claim under Section 1 of the Sherman Act, a plaintiff must demonstrate (1) that there was a contract, combination or conspiracy; (2) that the agreement unreasonably restrained trade; and (3) that the restraint affected interstate commerce.” Wholesale Alliance, LLC v. Express Scripts, Inc., 366 F. Supp. 3d 1069, 1076 (E.D. Mo. 2019) (citation omitted). As the parties stipulated to the third element, the Court only addressed the first two elements…

[First] “The Sherman Act is violated where participants in a “widespread combination ha[ve] surrendered [their] freedom of action in the matter ... and agreed to abide by the will of the association[.]” Trade association rules “in and of themselves [are] contracts in restraint of commerce [where] ... they contain[ ] provisions designed to stifle competition in [that] ... field.”  (Id. at *6-*7)(internal citations omitted).)

For the reasons discussed previously, the court found sufficient evidence to preclude a motion for summary judgment by the defendants on the basis that the plaintiffs could not establish a contract, combination, or conspiracy. The record in fact showed a concerted effort to uphold the status quo – which “stifles competition among brokers by artificially inflating commission rates.” (Id. at *7.)

Secondly, the court analyzed whether the contract, combination or conspiracy constituted an unreasonable restraint of trade. In its order, the court applied the more stringent per se test, stating that “[u]nder the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.” (Id. at *9.) In applying this test, the court adopted an approach used when the agreement at issue is ‘so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.’ (Id.)  In this regard, the court held that the “Plaintiffs have met their “burden of proving the unreasonableness of the restraint merely by proving the existence of substance of the restraint itself.” (Id. at *10.)

Damages

As for the plaintiffs' damages, evidence was presented showing that Section 2-G-1 caused financial harm, with expert testimony suggesting that, in its absence, sellers would not be liable for Buyer-Brokers' commissions. (Id. at *11.)

On October 31, 2023, a jury ruled in favor of the plaintiffs, awarding $1.8 billion in damages. This verdict challenges the future of the buyer-seller agent commission structure, prompting the filing of several similar lawsuits in its wake.

Resulting Implications

The verdict in Burnett v. National Association of Realtors may mark a pivotal juncture for the real estate sector, heralding a potential overhaul of the long-established commission model integral to residential property transactions.

This landmark decision could precipitate a shift towards a marketplace where the role and compensation of buyer’s agents are critically reevaluated. In such a scenario, buyers might find themselves in positions where they need to negotiate commissions or fees directly with brokerages for the assistance of an agent (thereby increasing the cost of real estate transactions). Alternatively, potential buyers may engage in transactions at arm's length, dealing directly with sellers who are represented by listing agents (potentially resulting in one-sided negotiations). Buyers, particularly those navigating the market without professional representation, might encounter heightened barriers to accessing and understanding critical information, evaluating property values, and negotiating effectively.

Real estate attorneys can play a crucial role in the buying and selling process of real estate, offering services that can supplement or replace those typically provided by buyer's agents. Real estate attorneys can provide legal guidance on matters related to the purchase, including interpreting and drafting contracts, ensuring compliance with local and state real estate laws, and advising on legal and tax implications. While buyer's agents often negotiate terms on behalf of their clients, attorneys can also negotiate deals, focusing on legal protections and favorable contract terms. In markets where buyer's agents' fees are prohibitive, attorneys can offer a more cost-effective alternative. Finally, since attorneys bill for the services rendered rather than a commission based on the sale price, buyers might save money, especially in high-value transactions.

Anticipated Industry Response

The defendants, including NAR, have announced their intention to appeal the verdict, indicating that the immediate impact of the decision may be less substantial than initially perceived. This appeal process suggests that any consequences stemming from the original verdict could be delayed or altered, pending further judicial review. Furthermore, in response to the court's findings, the NAR and associated brokerages are anticipated to undergo strategic changes to their operational practices. These changes could involve the elimination of MLS compensation and cooperative broker rules, which have been critical components of the traditional real estate transaction framework. Additionally, it is expected that these entities will implement measures aimed at enhancing the flexibility of commission/compensation negotiations. Such adjustments would not only be a direct response to the legal challenges posed by the Burnett case but also an effort to adapt to evolving regulatory and competitive landscapes within the real estate sector.

This reconfiguration could democratize property transactions, making them more accessible and equitable, but it also necessitates a careful consideration of the challenges and opportunities that lie ahead for all stakeholders in the real estate ecosystem.

Update March 26, 2024:

The National Association of Realtors (NAR) has reached a significant settlement, agreeing to pay $418 million over four years to settle lawsuits claiming that their rules unfairly inflated agent commissions. This settlement requires major changes to how agent commissions are structured, particularly through the Multiple Listing Services (MLS). Some key aspects include the elimination of the requirement for offers of compensation to be made through the MLS and the need for buyer agents to find alternative ways to be compensated, potentially from their clients directly or through seller concessions.

Additionally, the settlement introduces mandatory buyer agency agreements and prohibits MLSs from displaying broker compensation fields. This agreement covers NAR members, all state and local associations, and association-owned MLSs. However, the largest brokerages and HomeServices of America are not covered under this settlement and will have to address any legal challenges individually.

These changes are set to begin in mid-July 2024 and represent a significant shift in the real estate industry, potentially leading to more transparent and negotiable commission structures. The settlement also highlights a move towards greater consumer awareness and choice in real estate transactions, with implications for how buyers and sellers negotiate agent commissions in the future​ (RealEstateNews.com)​​ (Yahoo)​​ (RISMedia)​​ (HousingWire)​.