DOJ Ends the Armistice with NAR: Back to the Trenches We Go

[UPDATE: To celebrate Independence Day, I’ve decided to make this one open to everyone. My VIP subscribers have mostly already read it over the weekend anyhow, and the issue is important enough to the industry as a whole that I thought it an appropriate July Fourth gift of sorts. Yay, ‘Murica!]

I was traveling most of the day today, running away from the 100-plus heat of Las Vegas, which is critical when your HVAC goes on the fritz. But just before I got in the car, I learned about the shocking news that the United States Department of Justice pulled out of the settlement it had agreed to with NAR back in November. I wrote about it at the time, and thought it was a sign that NAR was surrendering to the DOJ.

Turns out, I was wrong. It was the other way around – the DOJ was surrendering to NAR. The DOJ agreed to a settlement proposal to get a quick win, a pelt on the wall, but according to new information I received, the DOJ was actually signaling that it was done with NAR for at least seven years (the term of the proposed final judgment order). Now, it must be noted that the source of the new information is highly, highly biased against NAR as you’ll see. But absent evidence to the contrary, and given what just went down, I’m convinced of it.

Whatever the reason behind the move, the important thing is the move itself: earlier today, the DOJ withdrew from the settlement negotiated with NAR back in November of 2020. In response, NAR just released a statement which I found on Facebook (it has not yet been uploaded to NAR’s Latest News section as of this writing):

“This is a complete, unprecedented breach of agreement by the Department of Justice to withdraw its consent from a fully negotiated settlement that had been approved by the head of the Antitrust Division and we had begun to implement. The National Association of REALTORS®’ rules and policies have long sought to ensure fair and competitive real estate markets for home buyers and sellers. Grounded in our commitment to act in the best interests of buyers and sellers, we regularly update our rules and policies to protect consumers and provide transparency. NAR has fulfilled all of our obligations under the settlement agreement and now DOJ is inexplicably backing out. If the Department does not live up to its commitments under the terms of the agreement, we are confident in our pro-consumer and pro-competition policies.”

Dem’s fightin’ words right there. This language — “unprecedented breach” and “Department does not live up to its commitments” — is not one that someone who is wanting to negotiate further or make amends makes. The armistice is over. Back to the trenches, we go.

Overanalyzing the Withdrawal

That the DOJ withdrew is a fait accompli. The question is why.

Until someone in the know, either from the DOJ or from NAR, comes out and spells it out for us, we are left wondering. So let’s do some very close (one might argue, too close) readings of the announcement and the legal document that the DOJ filed with the court.

The Press Release

We begin with the press release from the DOJ. All emphasis is mine to highlight what I think is important.

Today the Justice Department’s Antitrust Division filed a notice of withdrawal of consent to a proposed settlement with the National Association of Realtors (NAR). The department has also filed to voluntarily dismiss its complaint without prejudice. The department determined that the settlement will not adequately protect the department’s rights to investigate other conduct by NAR that could impact competition in the real estate market and may harm home sellers and home buyers. The department is taking this action to permit a broader investigation of NAR’s rules and conduct to proceed without restriction.

First off, the DOJ felt that the settlement restricted their ability to keep investigating NAR; and since investigations likely lead to action, to take action against NAR. That’s obvious.

What’s surprising is that the DOJ filed to dismiss its own complaint without prejudice, which means all of those claims can be brought up in the future. In other words, instead of the DOJ saying, “Okay, settlement doesn’t work for us; we’re going to trial then” which would be normal, the DOJ is saying, “Okay, settlement doesn’t work for us, please throw out what we sued NAR for back in November, because we’ll be filing a whole new lawsuit at some point.”

Combined with that last clause, talking about a broader investigation of NAR’s rules and conduct, it is fair to draw the inference that whatever the DOJ brings against NAR after the armistice will be what they brought in the first lawsuit back in November plus some. There is no other reason to voluntarily dismiss their own original complaint.

Whatever comes next will be bigger and badder than what came in November.

“The proposed settlement will not sufficiently protect the Antitrust Division’s ability to pursue future claims against NAR,” said Acting Assistant Attorney General Richard A. Powers of the Justice Department’s Antitrust Division. “Real estate is central to the American economy and consumers pay billions of dollars in real estate commissions every year. We cannot be bound by a settlement that prevents our ability to protect competition in a market that profoundly affects Americans’ financial well-being.”

As the real estate industry’s leading trade association, NAR has rules and policies that affect millions of real estate brokers and agents and, in turn, impact millions of American home buyers and sellers, who, according to reported industry data, paid over $85 billion in residential real estate commissions last year. The department filed a complaint and proposed settlement on Nov. 19, 2020. The complaint alleged that NAR established and enforced certain rules and policies that illegally restrained competition in residential real estate services. The proposed settlement sought to remedy those illegal practices and encourage greater competition among realtors, but it also prevented the department from pursuing other antitrust claims relating to NAR’s rules.

I personally didn’t see any language preventing the DOJ from doing anything whatsoever in the Settlement Agreement, but I am not an antitrust attorney so I probably missed something. What I didn’t miss is the DOJ itself saying that they felt prevented from pursuing other antitrust claims against NAR.

The withdrawal, then, combined with the above (voluntary dismissal plus broader investigations) clearly signals that the DOJ will be pursuing other antitrust claims relating to NAR’s rules.

Under a stipulation signed by the parties and entered by the court, the department has sole discretion to withdraw its consent to the proposed settlement. The proposed settlement may also be modified with consent from the department and from NAR. The department sought NAR’s agreement to modify the settlement to adequately protect and preserve the department’s rights to investigate and challenge additional conduct by NAR, but the department and NAR could not reach an agreement. Because the settlement resolved only some of the department’s concerns with NAR’s rules, this step ensures that the department can continue to enforce the antitrust laws in this important market.

So, the DOJ had other concerns with NAR’s rules. We don’t know what those other concerns were or are. But we do know that they exist.

Since the DOJ felt that they were tying their hands behind the back with this settlement, they went to NAR and asked that the handcuffs be removed. NAR said no, and the DOJ said, “Okay, we’re done with this armistice. See you in the trenches.” Like I said above, I was wrong in my earlier post about who was surrendering to whom.

The Notice of Withdrawal

There is one other piece of evidence. The DOJ filed, as it is required, a legal document with the court formally notifying the court that they were withdrawing from the settlement. I have uploaded that document for your easy access, but here it is as well:

That’s pretty straightforward, isn’t it? The DOJ wanted to amend the Reservation of Rights provision in the original settlement agreement to make sure they had the ability to go after NAR for other potential issues. NAR said no. DOJ withdrew, as it had the right to do.

What confuses me is that the section cited in the Notice, Section XI of the Settlement Agreement, says this:

XI. UNITED STATES’ RESERVATION OF RIGHTS
Nothing in this Final Judgment shall limit the right of the United States to investigate and bring actions to prevent or restrain violations of the antitrust laws concerning any Rule or practice adopted or enforced by NAR or any of its Member Boards.

That seems pretty damn broad to me. Maybe there’s some technical interpretation here or something.

There may be an answer, but from a highly biased source: REX. This little brokerage disruptor has been fighting NAR and the industry for years, and most recently sued NAR and Zillow over NAR’s IDX rules. REX filed comments with the DOJ during the legally required 60 day period for public comments after a proposed settlement is published in the Federal Register.

There’s a lot in that letter. Let’s explore some of it.

The REX Letter

Let me clarify at the outset that I’m skeptical of the idea that one public comment letter submitted during the routine statutorily-required public comment period changed the DOJ’s mind. Seems too farfetched and frankly, it requires a bit too much good faith in our system of government to believe that one letter made the United States DOJ change its mind on a settlement it had already negotiated and published.

However, the issues and objections that REX raise are, I think, likely similar to issues and objections that others may also have raised. So I do think it’s worth reading and understanding those issues and objections, which in the aggregate might have changed the DOJ’s mind.

Here’s the REX Letter:

It’s a long document and filled with issues and objections that are highly technical. But let me see if I can summarize.

Lockbox Enforcement

I do think one of the things that might have swayed the DOJ (if that’s what happened) is REX’s report that after the settlement was announced, they contacted various MLSs to get lockbox access. They were told no. But what’s potentially damaging is not simply that they were told no, but that they were told no by NAR, not by the individual MLSs. Long excerpt:

Reasonably believing that the announcement of a simultaneous lawsuit and settlement with federal law enforcement authorities was sufficient to motivate a greater degree of interest in constructive dialogue on the part of MLSs, REX wrote these supposedly “independent” entities to request immediate lockbox access. (See one example of a REX letter that was sent to numerous MLSs attached as Exhibit A.) You can imagine REX’s surprise when we didn’t hear back from the MLSs to whom we wrote, but from NAR’s attorneys. If ever there were evidence that the supposedly independent 600 or so local MLSs are controlled by a single entity, which imposes terms on industry participants, it is this: drop a note to the nearby MLS on a matter relevant to the way business is actually done and the letter is systemically rerouted to higher headquarters for further command and control.

Instead of agreeing to implement the lockbox access to which NAR agreed, NAR’s attorneys assured REX that lockbox access would not be granted until the last possible moment. (See letter from NAR’s attorneys attached as Exhibit B.) All REX was asking for was the remarkably simple step of granting equal lockbox access to all licensed agents. We noted this in our reply to NAR and redoubled our efforts with the MLSs, even asking for instructions as to where REX could send payment for lockbox access. (See REX letter to NAR’s attorneys attached as Exhibit C). After hundreds of outreach efforts by REX, only *one* MLS expressed an interest in providing lockbox access. [Emphasis added]

That’s… not a good look. I think NAR and local MLSs were perfectly within their rights to deny REX lockbox access, but it’s not a good look when REX sends letters to hundreds of MLSs and gets one back from NAR’s lawyer. It might give lawyers at the DOJ who didn’t want to settle in the first place a stronger argument when meeting to decide to withdraw.

The Makan Letter

This part is technical inside-lawyer stuff, and I’m not going to into discussion of the Tunney Act (APPA) and standards of review and so on. But I think it might be relevant for political reasons. REX claims that the former Assistant Attorney General Makan Delrahim sent a letter to NAR saying that the DOJ was no longer interested in Clear Cooperation Policy on the same day that the settlement agreement was announced.

The implication appears to be that there was some kind of a quid pro quo deal struck, where NAR agreed to settle on the DOJ lawsuit, and the DOJ agreed to stop looking at NAR’s other rules and policies, like Clear Cooperation.

Obviously, the DOJ thought something was up since its press releases and its Notice of Withdrawal both talk about how they felt they were restricted by the settlement. And the DOJ specifically wanted to address Section XI, and NAR’s refusal led to the withdrawal.

Since I’m not an antitrust lawyer or scholar, I’ll focus on human motivation: politics. Makan Delrahim was a Trump appointee. Trump ran on deregulation and a far more hands-off approach to businesses. The DOJ is under new leadership now, and the Biden Administration is not one that anyone would call a fan of deregulation.

Perhaps this withdrawal was motivated at least in part by the Biden DOJ to signal a break from a far more corporate-friendly and laissez faire Trump DOJ? If so, the unusual step of voluntarily dismissing its own complaint and setting up for a far broader investigation fits in perfectly.

The Other Rules, Specifically, The Big One: BAC

REX raised Clear Cooperation earlier, but it really goes all-in on the big one: Buyer-Agent Commission (BAC) rule. To be clear, there is no such rule. NAR made a pretty big deal about that in the civil antitrust lawsuits of Moehrl and Sitzer. But it’s clear that the courts and lawyers are using BAC or BRAC or whatever made-up term to mean the web of rules and policies that lead to buyer brokers getting paid by the listing broker — in other words, cooperation and compensation.

This is, obviously, the Big Kahuna Burger if you’re the plaintiffs in Moehrl, Sitzer and Leeder. This is the big one if you’re REX or Consumer Federation of America or various economists who think that commissions are too high in the United States.

If there was some kind of an understanding that the settlement would limit the DOJ from investigating cooperation and compensation, then the DOJ’s withdrawal can and should be read as a clear signal that they will be on that like white on rice going forward. Perhaps the new complaint to be filed, after a “broader investigation” will be targeted squarely at buyer agent commissions.

I do think it’s possible that a number of letters to the DOJ during the 60 day comment period echoed REX’s concern. A whole lot of very important and influential people think that we need to eliminate the practice of having sellers pay the buyer agent. In case anybody wants to argue one way or the other in the comments, don’t; it’s not about whether they’re right or wrong. It’s about whether they’re influential to judges and government officials, and there is no doubt that they are. Those influential people could have convinced the new Biden DOJ Antitrust Division that they were making a huge mistake if they went along with a settlement agreement entered into by the hands-off Trump DOJ.

To the Trenches

So the armistice is over. There will be no peace deal. The DOJ will take to the field… at some point.

The problem right now is that we have no idea just how broad the DOJ’s “broader investigations” will be. I assume that the four issues in the November lawsuit will remain live… but what else will the DOJ be throwing at NAR and the industry? I don’t know, and nobody who isn’t working for the DOJ Antitrust Division actually knows. But we can speculate.

I think it is highly likely that the DOJ take up buyer agent commissions. It’s the Big Kahuna. It’s the center of all of this. It’s also the pillar of the residential real estate industry. Why do a broader investigation if you’re not going to touch the rule(s) at the heart of at least three big class action civil antitrust lawsuits?

I think the IDX rules might also come under investigation, and I’m 100% confident that it will if REX has any kind of influence on the DOJ. The anti-commingling rules are not beloved by the bigger tech companies, bigger brokerages, national franchises, and so on. There was a lawsuit (on its way to being dismissed, I think) on this very topic. I think the DOJ could take that one up.

Clear Cooperation Policy might be another one, again because there was an actual lawsuit on it: PLS v. NAR. Sure, that was dismissed, but there is an angle to Clear Cooperation that the DOJ would find interesting: the office exclusive loophole. A more activist Biden/Merrick Garland DOJ might take a closer look at that one.

Extreme Outlier — possibly too fanciful even for me — may be the DOJ suing to breakup NAR. In past antitrust cases (e.g., AT&T, Microsoft, etc.) the DOJ has tried to break up large companies they considered monopolies. I don’t know that they’ve ever tried with a trade organization, but perhaps an incident like NAR’s lawyer responding to hundreds of letters from REX might make them think about forcing NAR to break itself up. It’s not unheard of.

Of course there may be other rules and practices that the DOJ might look into. Only they can say. All I can say is that the field is wide open now.

Wrapping Up

I’m going to limit this post to examining and speculating on the DOJ and possible litigation/enforcement action. But I promise a future post where I’ll speculate about the real big gun: regulation. Because that feels to me like the more likely outcome: not litigation and consent decrees and such by the DOJ, but direct regulation by either the FTC or HUD.

Nonetheless, this withdrawal is… if not unprecedented as NAR says, certainly uncommon and wholly unexpected. MLSs everywhere can stop implementing whatever it was that they were going to implement to comply with the proposed settlement. I’m afraid REX will be shut out of lockboxes for quite some time longer. But I can’t think of that as a positive, because what comes next is likely going to make the first November lawsuit look tame by comparison.

If you think about it, the November lawsuit was more or less a slap on the wrist. The required changes were annoying perhaps, but fairly minor: disclose compensation, don’t say your services are free, don’t allow searching by compensation amounts, and let licensed non-MLS members use the lockbox. The world wasn’t going to change because of those four things. What comes next, I fear, will be more along the lines of a punch in the throat if not a knife to the heart.

If you weren’t getting ready before, well, get ready now. If you were getting ready before, get more paranoid now. There is ample reason for paranoia after today.

-rsh

Edwin Starr – War (Original Video – 1969)

Original video of Edwin Starr singing his famous song: “War” [Original Music video from 1969] Originally written under the Motown label, and first performed by The Temptations, “War” was later re-released as a single with Edwin Starr as vocals. This version is considered a more emotional version and has become the most popular protest song ever.