Leeder v. NAR: Overview and Analysis

Back in October, after Judge Woods laid the wood to NAR and the corporate defendants in the Moehrl v. NAR case, I wrote:

Finally, I’ll go out on a limb (it’s a short one, I think) and predict that now that the motion to dismiss was denied, and denied in this manner with the judge laying out a clear roadmap for victory for the plaintiff, I think we’ll see (a) the scope of the lawsuit get bigger, and (b) far more law firms and plaintiffs emerge.

Well, seems I was prescient. Robstradamus strikes again. Since then, two additional lawsuits have been filed.

The first is Bauman v. MLS, out of Massachusetts. Here’s some coverage from Newfinancemagazine (that’s how they spell it on their site). The full Complaint can be found here. But honestly we’re not going to cover this one today, because the other lawsuit, Leeder v. NAR, is a straight up monster. It is even more frightening than Moehrl for a variety of reasons.

After the motion to dismiss was denied in Moehrl, and the DOJ sued NAR, the industry said, “Thank God 2020 is finally over! What a shitty year! It can’t get any worse!” 2021 and Leeder stepped up, and was like, “Hold my beer.”

Turns out, it can get worse. And it did.

The Leeder Case

Leeder v. NAR was filed in the US District Court for the Northern District of Illinois on January 25, 2021. (By the way, that is the same court where Moehrl v. NAR was filed.) I was sent the Complaint by a reader (thank you!) but had not had time to read it until today. Well, I have. And I am… ah… shall we say… concerned.

The lead attorneys for the plaintiffs are Korein Tillery, a complex litigation firm with a string of victories worth billions, with offices in St. Louis and Chicago. They might not be Cohen Milstein and Hagens Berman, but they’re not nobodies either. They seem to be very competent lawyers, and it shows in the Complaint.

Leeder presents a different angle: it’s not just the sellers who are screwed, but the buyers too. It’s right there in paragraph 1 of the Complaint:

1. For decades, homebuyers across America have been unwittingly paying too much for, and receiving too little from, services offered to home buyers by real estate agent members of NAR. Despite agent representations (which NAR permits and encourages) that such services do not cost home buyers anything, home buyers in fact pay a hefty cost for these services—namely, supracompetitive commissions at levels fixed by the Defendants, which in turn lead to higher home prices paid by buyers.

This is the evolution of the Commission lawsuits, and it is a particularly troubling one for the industry, even more so than Moehrl and Sitzer.

Direct Result of the DOJ-NAR Lawsuit and Settlement

Let’s start with this: the other lawsuits kind of came out of nowhere. Leeder, by contrast, was born from the lawsuit filed by the DOJ against NAR and the simultaneous settlement they entered into. In the section discussing statute of limitations, we find this:

122. Plaintiff and the Class had no knowledge of Defendants’ unlawful conspiracy and could not have discovered it by the exercise of due diligence until, at the earliest, November 19, 2020, the date the DOJ announced the settlement of its antitrust claims against NAR.

123. Moreover, it was reasonable for Plaintiff and Class Members not to suspect that Defendants were engaging in any unlawful anticompetitive behavior. Plaintiff and Class Members are unsuspecting home buyers who do not have in-depth knowledge or information about the real estate industry and are not well-versed with NAR’s framework. [Emphasis added]

It seems clear that the Leeder lawyers relied heavily on many of the same facts and elements that the Moehrl and Sitzer lawyers used to get past the defendants’ motion to dismiss, including the Buyer Agent Commission Rule. At the center of this lawsuit is the same issue at the center of the others: steering by buyer agents.

But the Leeder lawyers are far more explicit about the steering and emphasize it more, at least on paper. In ¶11 of the Complaint, we get this:

The conspiracy also enables brokers to “steer” home buyers away from lower commission homes. As a result, home buyers are harmed in at least the following ways:

a) the conspiracy has inflated the cost of buyer agent services by inflating buyer agent commissions;

b) since buyer agent commissions are paid out of the price buyers pay for their homes, inflated buyer agent commissions in turn have inflated home prices; and

c) the conspiracy has reduced the quality of services provided by buyer agents by, for example, facilitating the steering of home buyers by their brokers towards higher-commission homes and away from lower-commission homes, even though such homes may otherwise match buyers’ criteria.

This was no copy-and-paste job; the lawyers here did their homework, and introduced several new elements.

Every one of these new elements is dangerous to the defendants and poses major challenges not seen in Moehrl.

Not Commissions, but Price of the Home

First new element is an obvious one, but profoundly dangerous. The lawyers point out what many of the REALTORS that were criticizing the Moehrl case pointed out: the only person bringing the money to the closing table is the buyer. The REALTORS were saying, “Why is the seller bitching?” The Leeder lawyers are saying, “Our clients overpaid for the house.”

Under “Effects of the Conspiracy” we find this:

• Home buyers have paid, through the purchase price of their homes, inflated buyer agent commissions and inflated total commissions;
• Inflated total commissions are incorporated into the home purchase price, thereby causing buyers to pay higher prices for homes;
• The retention of a buyer agent has been severed from the setting of the broker’s commission; the home buyer retains the buyer agent, while the home seller sets the buyer agent’s compensation;
• Price competition among brokers to be retained by home buyers has been restrained;
• Competition among home buyers has been restrained by their inability to compete for the purchase of a home by lowering the buyer agent commission; and
• The quality of buyer agent services has been reduced, as buyer agents are incentivized to steer their clients to higher commission homes;
• The quality of buyer agent services has also been reduced through barriers that prevent buyer agents from presenting and receiving purchase proposals that reduce the buyer agent commission, thus making the proposals more attractive to and more likely to be accepted by sellers; and
• Broker Defendants have increased their profits substantially by receiving inflated buyer agent commissions and inflated total commissions.

Even where they’re demonstrably wrong, they’re not exactly wrong… if that makes sense. For example, there is tremendous price competition among brokers to be retained by home buyers. Redfin, Homie, REX, and other discount brokerages compete on price for buyer business.

But none of them can reduce the buy-side commission, since that is set by the listing broker. Instead, they have to offer a rebate to the buyer — something that is not allowed in all 50 states. (Which leads to another lawsuit, REX – Real Estate Exchange, Inc. v. Brown et al.) So while the plaintiffs are demonstrably wrong that there is no price competition, they’re not exactly wrong… right?

This move away from alleging too-high commissions as damages to alleging too-high home prices as damages is tremendously important and tremendously dangerous for the defendants for two reasons.

1. The Industry Has Been Admitting As Much

One of the most common responses from the industry to the prospect of cooperation and compensation going away has been some variation of this sentiment, posted in an Inman Op/Ed:

Through this settlement, NAR has succeeded in preserving a vital cog in the housing market’s machine: the ability of buyers to capitalize the cost of real estate services. Only because the seller pays both sides, does the buyer get to include the commission in the amount being financed.  The alternative would be hugely disruptive. Buyers would have to fund the cost of real estate services out of cash. For a first-time buyer otherwise eligible to put 3 percent down, this would be a 50 percent to 66 percent increase in the amount of cash needed to complete that purchase. It could be years before the mortgage system and tax regulations could be adjusted to “correct” for such a change.

Basically, REALTORS were admitting that the reason why the seller pays the commission for both the listing agent and the buyer agent is that allows the fee to be baked into the price of the home, which can then be financed. Any solution where cooperation and compensation goes away would require changes to mortgage regulations to allow buyers to finance the buyer agent commission.

2. The Damages Are Much, Much Higher

The direct result of that system of financing the buyer commission is that should Leeder win in court, the damages are going to be eye-watering even compared to the already eye-watering amount that the Moehrl and Sitzer lawsuits could be.

The reason is simple: amortization. In the Moehrl case, the seller is alleging to have overpaid commissions by 3% (or whatever). Say he sold a $400K house; 3% is $12K. Damages would then be calculated on that amount, then trebled because antitrust. In the Leeder case, the buyer is alleging to have overpaid for the house itself by 3%, which was then amortized over 30 years at some interest rate. This case is wanting to go back to 1996 as the cutoff point for statute of limitations. That’s 25 years.

$12K at 8% (which is about what 30-year fixed was in 1996) over 25 years = $27,785. Treble that, and you get to the damages figure in Leeder. I ran a rough estimate that the damages in Moehrl could be $50 billion. The damages in Leeder could be $100 billion, or more.

The Problematic NAR Rules

In the Moehrl case, the problematic NAR Rules were collectively referred to as Buyer Broker Commission Rule, but that referred to a combination of rules and policies and Code of Ethics provisions which could be interpreted in a number of ways. And importantly, NAR has steadfastly maintained that all of the rules implicated in Buyer Broker Commission Rule such as SoP 16-16 and SoP 3-2 were all legitimate and defensible.

In fact, in its Motion to Dismiss, NAR straight up said there is no such thing as a Buyer Broker Commission Rule:

First, Moehrl’s complaint is based on a demonstrably false and fundamentally incorrect characterization of the NAR Handbook on Multiple Listing Policy (the “NAR Handbook”) and the NAR Code of Ethics. Moehrl refers to the provisions that he cites, collectively, as the “Buyer Broker Commission Rule.” He claims that this “Rule” prohibits brokers for buyers of residential real property (“buyers brokers”) from negotiating commissions with brokers who represent sellers of such property (“listing brokers”) and who list such property on a Multiple Listing Service (“MLS”). However, there is no such Rule, either in name or in substance, and provisions in the NAR Handbook and Code of Ethics on which Moehrl relies are directly contrary to his allegations.

In the Leeder case, however, the plaintiff cites the same rules that Moehrl cites, then adds four more: The Commission Concealment Rule, NAR’s Free-Service Rule, NAR’s Commission Filter Rules, and NAR’s Lockbox Policy. If those four seem vaguely familiar to you, longtime VIP reader, it might be because those come straight out of the DOJ’s Complaint against NAR:

These rules, policies, and practices include: prohibiting an MLS from disclosing to prospective buyers the amount of commission that the buyer broker will earn if the buyer purchases a home listed on the MLS (“NAR’s Commission Concealment Rules”); allowing buyer brokers to mislead buyers into thinking that buyer broker services are free (“NAR’s Free-Service Rule”); enabling buyer brokers to filter MLS listings based on the level of buyer broker commissions offered and to exclude homes with lower commissions from consideration by potential home buyers (“NAR’s Commission-Filter Rules and Practices”); and limiting access to lockboxes that provide licensed brokers physical access to a home that is for sale to only those real estate brokers who are members of a NAR-affiliated MLS (“NAR’s Lockbox Policy”).

The DOJ Complaint goes on to list the specific sections where these problematic rules can be found: Policy Statement 7.58, Policy Statement 7.23, Policy Statement 7.3; Section IV.1.a of the Virtual Office Websites Policy; and Sections 18.3.1 and 19.15 of the Model MLS Rules, and so on and so forth. The lawyers at the DOJ do their homework. They do not mess around.

All of these rules were demonstrably in place until the NAR-DOJ Settlement. It’s not like NAR can say no such rule exists, since NAR agreed to change all of those rules:

NAR and its Member Boards must not adopt, maintain, or enforce any Rule, or enter into or enforce any Agreement or practice, that directly or indirectly:

1. prohibits, discourages, or recommends against an MLS or MLS Participant publishing or displaying to consumers any MLS database field specifying the compensation offered to other MLS Participants;

2. permits or requires MLS Participants, including buyer Brokers, to represent or suggest that their services are free or available to a Client at no cost to the Client;

3. permits or enables MLS Participants to filter, suppress, hide, or not display or distribute MLS listings based on the level of compensation offered to the buyer Broker or the name of the brokerage or agent; or

4. prohibits, discourages, or recommends against the eligibility of any licensed real estate agent or agent of a Broker, from accessing, with seller approval, the lockboxes of those properties listed on an MLS.

V. REQUIRED CONDUCT

A. By not later than 45 calendar days after entry of the Stipulation and Order in this
matter, NAR must submit to the United States, for the United States’ approval in its sole discretion,
any Rule changes that NAR proposes to adopt to comply with Paragraphs V.C-I of this Final
Judgment.

That feels like Game Over, Man to me. NAR just agreed with the DOJ in an antitrust action that these four rules were problematic. They agreed to change them.

How then do they defend against Leeder in open court on these four rules? The answer is, they don’t; they can’t. They would be laughed out of court, and their lawyers possibly sanctioned, if they were to try something that silly. It’s quite difficult to start off the defense with, “Yeah, so it turns out that four of the six rules that the plaintiff points to as anticompetitive were in fact anticompetitive, so we settled with the DOJ, but these other two rules? They’re fine. They’re awesome.”

I thought NAR and the corporate defendants would have a tough time in the Moehrl and Sitzer cases, given how the judge seemed to be leaning. But in Leeder, I’m having a tough time even thinking of what the defense strategy could be.

That is all made worse by….

The Problem of the Buyer as Plaintiff

Another major issue is the difference between having the buyer sue you, and the seller sue you. With the seller, the defendants could at least ask, “Did you sign a listing agreement? Did that agreement say 6%?”

There is an element of the seller bitching after the fact, despite having agreed up front to pay the listing broker what they agreed upon. It’s a bit of going back on your word, if you will. I mean, the seller likely sat down at the kitchen table with the listing agent who made a big listing presentation, told them what he thinks their house is worth, and then went over the commission. I have shown videos of that in previous posts, and there are scripts everywhere in the industry on how to handle the commission conversation.

The sellers, at the very least, knew what they were paying and had agreed to pay that. They signed on the dotted line.

With buyers… let’s face it: most of them signed nothing. The practice of using Exclusive Buyer Agency Agreements is relatively new in the industry. If we’re going back to 1996 as the cutoff date… there are going to be millions of buyers who never signed anything at all with the buyer agent. They did not sit at the dinner table with the buyer agent explaining commissions, cooperation and compensation, and how they’re the only people bringing money to the closing. They never had that talk about commissions at all. They were told, “Work with me! I’m free to you, because the seller pays me!”

Plus, there was that whole “Commission Concealment Rule” and “NAR’s Free-Service Rule” thing. As the plaintiffs plead:

Additionally, as alleged herein, NAR’s policies, rules and practices specifically prohibit the disclosure of total broker commissions to home buyers and encourage buyer agents to represent to their clients that they are receiving the brokers’ services for free. As a result, the average home buyer does not appreciate that buyer agent services cost them anything, let alone that Defendants actively conspire together to maintain supracompetitive broker commissions.

Hoo, boy, that’s gonna be some tough sledding if you’re the defense counsel.

Implications

I suppose we’re not going to know the true implications until we see how this case plays out, and I just read the Complaint last night. We haven’t seen an Answer from NAR and the corporate defendants. So nobody knows anything.

I can, however, engage in some informed speculation based on what we know so far.

As described above, there are some real advantages for plaintiffs who are buyers rather than sellers. They signed nothing, they were told that the agent’s services are free, and critically, NAR admitted to having rules that were anticompetitive vis-a-vis buyers. The “Commission Concealment Rule” is an example. (At a minimum, NAR agreed to change those rules after being sued by the DOJ, so even if they did not admit any fault, or admit those rules were anticompetitive, it is a tacit admission.)

The challenge for the defendants, and why I’m having a tough time seeing what the defense strategy looks like, is that they have to concede that the four rules targeted by the DOJ were problematic, but still somehow convince the court/the jury that the core practice of having sellers pay the buyer agent did not lead to higher home prices and is not ultimately the problem.

Alternatively, the defendants have to convince the court/the jury that even if having sellers pay the buyer agent does lead to higher home prices, that is the homeowner’s decision, not the listing broker’s decision and certainly not the trade association’s decision. That is, they would need to show that the homeowner would price the home as he would price it with no regard for the cost of commissions.

Finally, a policy argument can be made that even if cooperation and compensation leads to higher home prices, it’s worth accepting that because the alternative is that buyers would be unrepresented in the biggest purchase of their lives. Buyers deserve good professional representation, and the only way to pay for that representation is through cooperation and compensation. Evidence and testimony from the field showing that when offered the choice, buyers would rather have their agent be paid by the listing broker, even when the whole economics of that system is explained to them, would be helpful.

One foreseeable outcome that should Leeder survive dismissal (and given what’s happened with Moehrl, which is arguably a weaker case, it’s hard to see Leeder getting dismissed), plaintiff lawyers will find that angle of attack to be far more attractive. It’s likely easier to win, and the damages will be far higher because of amortization. Which means we should see even more lawyers gather, like sharks to blood in the water.

If you’re not a lawyer defending NAR and the corporate defendants, however, what if anything is there you can do in light of this new development?

Well, the answer is the same as I have written in my quick reaction post about the NAR-DOJ settlement:

When I wrote my initial take on Moehrl v. NAR, I titled the post Gotterdammerung. The twilight of the gods is the end of the world in Norse mythology. Quite a few people said I was overreacting. “This won’t go anywhere!” was the common response.

You tell me if I was overreacting then, or overreacting now. Because I do feel that many MLS executives, MLS Boards, and REALTOR leaders were underreacting to the lawsuits and the weaknesses they revealed, and they might be underreacting now to what this lawsuit-settlement reveals.

If you are a 7DS client or past client, or just someone who has been following my work, I sincerely hope you’ve been thinking about contingencies and have been drawing up contingency plans. God only knows how much I’ve preached the idea of thinking like a prepper: hope for the best, but prepare for the worst.

Well, it’s time to break out your contingency plans and see if they’re still relevant. If you don’t have a contingency plan, it’s time to call your favorite consultant whether me or anybody else, and start working on one pronto. You probably have enough time to get one together before the next shoe drops.

Seriously, prepare. Develop contingency plans; if you have them already, update them. 2021 just might be all aboard the crazy train year.

-rsh