Back in July, I wrote about the Department of Justice (“DOJ”) unexpectedly pulling out of the settlement agreement it had reached with NAR and said:
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.
Well, the new lawsuit by NAR against the DOJ clearly spells out exactly what was going on behind the scenes.
I have a few thoughts. These are just first-impression kind of thoughts. It isn’t as if I did a deep dive into Lexis/Nexis and conducted legal analysis; it’s just questions that arise, and inferences I make. As always, I am not licensed to practice law anywhere. And even if I were, I am not your lawyer. So go consult your attorney with actual legal questions.
Let’s get into it.
The Lawsuit
I have embedded the Complaint from the lawsuit below. I do think it’s interesting that the address of the United States of America is 950 Pennsylvania Ave, NW 🙂 but that’s just the address for the DOJ.
It’s a complicated complaint, and I’m not 100% sure I understand exactly all of the moves made, but in essence, NAR’s complaint is that there was a contract formed between the USA (via its Department of Justice) and NAR on the way to negotiating and signing the settlement agreement/consent decree, and that contract should be enforced by the Court. Enforcement of said contract means that the Court should quash the Civil Investigative Demand that is asking all sorts of uncomfortable questions.
As one of my industry lawyer friends said when we were talking about it, so much of the Complaints brought us back to first year of law school to 1L Contracts class. Offer, acceptance, consideration, estoppel, reliance, etc. etc.
Where I get confused is this:
As is the regular practice for Antitrust Division Consent Judgments, NAR also agreed to enter a Stipulation with a number of commitments that applied to NAR during the time between the filing of the proposed Consent Judgment and its approval by the Court, including a provision that provided the Antitrust Division could withdraw from the proposed Consent Judgment—and only the Consent Judgment—before it was entered by the Court. (Complaint, p.7) [Emphasis in original]
So NAR is acknowledging that this paragraph from the Consent Judgment (which I discussed in the previous post above) is valid, but is claiming that it doesn’t apply to the investigation:
Final Judgment in the form attached as Exhibit A may be filed with and entered by the Court, upon the motion of the United States or upon the Court’s own motion . . . provided that the United States has not withdrawn its consent. The United States may withdraw its consent at any time before the entry of the proposed Final Judgment by serving notice on Defendant and by filing that notice with the Court.
So… the DOJ could walk away from the settlement at any time before the Final Judgment is entered by the Court, but according to NAR’s complaint, the DOJ cannot walk away from the promise to stop investigating NAR that led to the settlement.
It’s a bit of a… “We no longer have a settlement, and you can do what you want going forward… except for investigating us on a few things.”
What are those few things? The Complaint gives us some of the behind-the-scenes drama that I didn’t know about when writing my first reaction to the DOJ withdrawal.
The Backstory is Clear Now
As the factual backstory in the Complaint unfolds, it is manifestly obvious what happened.
The DOJ started investigating NAR in 2019. NAR and the DOJ started negotiating in 2020. By October, the two sides had reached high-level agreement on settlement terms: NAR would agree to some changes (the four items I covered in previous posts) in exchange for the DOJ not poking around NAR’s business anymore.
Specifically, the key thing (the only thing) that NAR wanted was for the DOJ to stop looking at Cooperation and Compensation rules. From the Complaint:
In its October 16 revisions, NAR struck the proposed reservation of rights clause from the draft Consent Judgment, which provided: “Nothing in this Final Judgment shall limit the right of the United States to investigate or bring future actions to prevent or enjoin violations of the antitrust laws concerning any NAR Rule, including any rules relating to the payment of Broker commissions or offers of compensation (e.g. NAR’s Participation Rule) or any other Rule adopted or enforced by NAR or any Member Board, that is not already specifically enjoined by this Final Judgment.” [Emphasis added]
That was replaced by the language that appears in the final Consent Decree that “omitted any reference to the Participation Rule. It provided: “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.”
To make sure that the DOJ understood what it was giving up, NAR sent multiple communications to the DOJ that it was closing its investigation of the Participation Rule and the Clear Cooperation Policy:
NAR will only agree to sign a consent decree including this provision [the reservation of rights clause] if DOJ provides written confirmation, prior to the execution of the decree, that it will issue a closing letter to NAR upon execution of the decree that confirms:
1. the Division has closed its investigation of the Participation Rule;
2. the Division has closed its investigation of the Clear Cooperation Policy;
3. NAR has no obligation to respond to CID No. 29935 (in its entirety); and
4. NAR has no obligation to respond to CID No. 30360 (in its entirety).
Then in November, the DOJ did indeed stop its investigations into the Participation Rule and Clear Cooperation Policy.
So everybody thought they had a deal. Except that this went down in November. Specifically, on November 19th of 2020. “Election Day” was November 3rd… though in 2020 it was more like “Election Month” and as everybody and his mother expected, things just dragged on and on and on with recriminations and accusations of fraud and cheating and so on for months. Obviously, we all know about January 6th and it wasn’t clear until that day that Biden had become the President.
Timing sucks for NAR, since it sent the proposed rule changes to the DOJ on January 4th. Nobody but nobody in Washington DC was caring about anything like that on January 4th given the drama around 2020 Elections.
Instead, after the new Biden Administration took power, appointed people, and so on… the new Powers that be (see what I did there?) changed the tune. Ultimately, what the new Biden DOJ wanted was the ability to go after the Participation Rule and Clear Cooperation Policy.
From the Complaint:
81. NAR’s counsel explained that the Antitrust Division’s commitments to (1) close the investigations of the Participation Rule and Clear Cooperation Policy; and (2) withdraw the related CIDs were the only benefits that NAR received from the settlement agreement, and thus the closing letter, which memorialized those commitments, was a key part of NAR’s decision to enter into the settlement agreement, including the Stipulation and Consent Judgment. Id.
82. NAR’s counsel expressly acknowledged that the Antitrust Division’s commitments did not mean NAR had immunity from all future investigations. NAR’s counsel told Antitrust Division Staff that the effect of the parties’ agreement would depend on the nature and scope of any future investigation. Id. ¶ 23. In an illustrative example, NAR’s counsel volunteered that if NAR made material changes to the Participation Rule or Clear Cooperation Policy, the Antitrust Division would be able to investigate those changes. Id. NAR’s counsel acknowledged that, if such an investigation were to be opened, it was possible there could be disagreement between NAR and the Antitrust Division about whether the new investigation breached the parties’ agreement, but maintained that it made no sense to address that potential conflict before such a scenario arose.
Well, as we all know now, the DOJ said “No Deal” and took the unprecedented step of withdrawing from the Settlement, voluntarily dismissing its own case, with strong indications that they planned to file a new lawsuit with a far broader scope.
The whole case, from a legal/contract standpoint, I suppose turns on whether the Court thinks there was one agreement or two.
The DOJ would, I think, claim that there was one agreement: the Consent Decree. All of the preliminary negotiations were just that: preliminary negotiations. If there was no Consent Decree settlement, then there would be no dropping investigations. And since the DOJ had the right to withdraw from the Settlement, it did so, and now can investigate away.
NAR’s position is that there were two agreements: the Consent Decree and the agreement to Drop the Investigation. The DOJ had the right to withdraw from the first agreement, but not the second one. It has to drop the investigation.
I think this is going to be a bit of a stretch but… we’ll see what happens in court. I think it’s a bit of a stretch because the normal layman’s point of view is going to be that this was one deal, one contract. I mean, from the DOJ’s perspective (and I think most normal non-lawyer people’s perspective), they would have dropped the investigation only if there was a settlement that made the investigation pointless. Now, the DOJ has no settlement but it can’t investigate?
On the other hand, NAR’s approach is kind of like treating the Drop the Investigation piece as if it’s earnest money. Yeah, the sale fell through, because you decided after inspection not to go through with the purchase of the home. But we get to keep your earnest money deposit. Except that earnest money doesn’t prevent the buyer from buying another house; this Drop the Investigation kind of does. It’s as if the Sales Contract, instead of earnest money deposit, said that the buyer promises not to tour any other houses if he decides not to buy this one.
I mean… I guess… but we’ll see what the Court has to say about that.
What the DOJ Wants to Know
What is far more interesting for us, since the case is not decided, is what the DOJ wanted to know about Participation Rule and Clear Cooperation Policy that was so threatening, so dangerous that NAR was willing to bend over backwards and agree to all kinds of shit to stop the DOJ from even asking questions.
I didn’t have a copy of the CID itself until this lawsuit was filed. Now, it’s part of the Exhibits, so here it is:
It’s a doozy of a document. It’s worth reading in full if you’re in the MLS side of the industry. The DOJ wants all minutes of meetings of NAR’s Board and any committees related to MLS rules. But in addition, the DOJ wants all documents (which includes emails and text messages and social media posts) related to:
a. requiring listing brokers to make an offer of compensation to buyer brokers to list a home on an MLS;
b. conditioning MLS membership or participation on offering or accepting compensation to and from other MLS participants;
c. prohibiting, restricting, or inhibiting display or publication to consumers (including potential home buyers, clients, or customers) of the compensation offered by listing brokers to cooperating brokers;
d. prohibiting buyer brokers from making the submission of an executed offer to purchase contingent on the listing broker’s agreement to modify the offer of compensation or using the terms of an offer to purchase to attempt to modify the listing broker’s offer of compensation;
e. permitting Realtors® to represent their services as free or without cost;
f. encouraging or requiring MLS members, syndicators, purchasers, or users of MLS data or operators of IDX sites or VOWs, when displaying MLS listings, to separate MLS and non-MLS listings or to treat MLS and non-MLS listings differently any other way;
g. permitting listing brokers to make offers of compensation to other MLS participants that vary based on the identity of the cooperating broker; and
h. regulating, inhibiting, restricting, prohibiting, or impeding the negotiation of offers of cooperative compensation between brokers. [Emphasis added]
Oh my. In addition, the DOJ asks about Clear Cooperation Policy, about Moehrl and Sitzer, about brokerages withdrawing from the MLS, etc. And then we have this:
6. Submit all documents relating to brokers steering potential buyers toward or away from homes for sale based on the amount of cooperative compensation offered by a listing broker.
7. Submit all documents relating to any possible or actual rebates of any broker commission or any offer of any gift card or other benefit to any home seller or buyer, including all communications relating to such rebates or offers between NAR and(a) any personnel of any state regulatory agency or legislature or (b) any personnel of any association of Realtors®.
I’m leaving out a lot of things, all of which are Things That Make You Go Hmmm.
But the general picture that emerges is a DOJ whose staff lawyers have spent a lot of time learning about the big controversies in the real estate industry, particularly around the MLS and around data. So many of these items are things we have discussed here on Notorious, and have been in various lawsuits. The question about IDX caught me off guard, but that came straight out of REX v. Zillow. The questions about brokerages withdrawing from an MLS are odd; I wonder what that’s about. This comment about a 2018 Business Review Letter in 2018? What was that about?
Whatever that particular issue is, it seems to me that the DOJ attorneys are pretty well briefed on the biggest issues and trends in the industry. They might not be the best informed as to every little detail, but they’re smart and have learned over the last couple of years. They’re asking the right dangerous questions. No wonder NAR settled in exchange for not having to answer these questions.
A Few Questions of My Own
So what happens next? It is obvious from the backstory that basically NAR was willing to do anything, agree to anything, move heaven and earth, to preserve what it called the Participation Rule and the Clear Cooperation Policy. NAR wanted that so badly that NAR was willing to agree to a Consent Decree, modify a bunch of things including lockbox access to non-MLS members, in order to protect them. NAR wants that still, enough to bring a lawsuit against the federal government.
If NAR loses, then the DOJ goes back full-force with the CID and probably piles on a few more onerous document demands on top to get even. I have no idea what the personalities involved are, but I can’t help but detect a bit of anger in NAR’s Complaint, and I’m fairly sure the DOJ is going to be pissed off at NAR. The DOJ is not a machine; it’s a group of human beings, with emotions. They’re going to be looking to punish NAR for this; it’s entirely human nature.
If NAR Wins…
If NAR wins, things get more interesting. Because victory means that the DOJ can’t investigate further. The Court will enjoin the DOJ and quash the CID. I imagine the DOJ will appeal, since they have an unlimited budget, but let’s say that the DOJ is forestalled for now.
Does that stop the FTC? After all, I’ve already written that the big guns for the United States in this is not litigation through the DOJ but regulation through the FTC. And I wrote that before the Biden Executive Order directing the FTC to do just that: regulate real estate brokerage and listings.
Presumably, the FTC will undertake its own broad investigations and issue its own CIDs to NAR and others. If the Court prohibits the DOJ from investigating NAR’s Participation Rule, does that prohibit the FTC from investigating it?
I imagine this is why the lawsuit names “United States of America” as the lead defendant, precisely to have whatever Court order reach beyond the DOJ. Presumably, winning here would prevent any agency of the federal government from asking these questions. But that seems like an even longer stretch to me. The DOJ undertook the investigation in 2019, based on whatever they thought at that time. The FTC would be undertaking an investigation in obedience to a new Executive Order from a new President. The “contract” between the Trump DOJ in 2020 binds the Biden FTC in 2021? Really?
What About the States?
Suppose that the court order does somehow stop the FTC. Does that stop non-federal investigations? I can’t imagine that it would.
So if the absolutely livid DOJ and FTC decide to go after NAR anyhow, and the court order stops them from investigating NAR, what stops them from providing large block grants in the tens of millions to state attorneys general so they can start peppering NAR with all kinds of investigative demands that look exactly like CID 30729?
You might want to know more about the very appropriately named NAAG: National Association of Attorneys General. And H.R. 3460 – State Antitrust Enforcement Venue Act of 2021, which has bipartisan support. And then there is this from StateAG.org:
What does NAR and the various state and local Associations do when the state AG’s come after you, with fresh funding from the federales?
Private Lawsuits
Finally, we have the public spectacle of NAR suing the federal government simply to stop an investigation. No matter how that effort turns out, how will this play in the various current (and future) private civil lawsuits, like Moehrl, Sitzer, Leeder, Conti, etc. etc. and so on?
When the plaintiff’s attorney correctly points out that NAR is so terrified of transparency that it is willing to take on the United States of America, is the judge likely to look favorably on NAR’s various attempts to prevent discovery or not?
For that matter, we detailed how the DOJ’s intervention played a huge role in the reversal of the Court’s perspective in REX v. Zillow. Does that same dynamic play out in courtrooms where all kinds of lawyers bring all kinds of cases once the DOJ and the FTC decide that it’s on like Donkey Kong and starts contacting judges and law clerks across the country? What do you think?
How do you imagine those private lawsuits play out in the aftermath of this?
Victory Will be Pyrrhic, Defeat Will be Carthaginian
So let me wrap up my thoughts here.
If NAR should win this lawsuit, the victory will be a pyrrhic one for all of the reasons I cited above. Even in winning, and somehow getting the DOJ to stop its investigation, does not stop all players from stopping what they want to do. And having pissed off the United States of America and given them reasons to go after NAR even more, I don’t know what the ultimate result will be.
But if NAR should lose this lawsuit, and the DOJ is cleared to proceed… then I imagine the intensity will be amped up by a few hundred degrees. The lawyers at the DOJ who were involved with this whole mess will have real personal motivation to see NAR destroyed; it’s only human to have those emotions. So like Cato the Elder of Roman times, the saying around the DOJ then will be “NAR delenda est.” And like the outcome from the Third Punic War, where Carthage was not only defeated but utterly destroyed and ruined, I think NAR has given real motivation to the United States of America to not only defeat it, but to utterly destroy it and salt the earth around its ruins.
I don’t quite know what that hyperbole (which I used because man, the imagery and the language is just so good) means in practical terms. But I expect that if the DOJ wins, their broad investigation will become broader still, and be even more intrusive, even more detailed, and even more burdensome. The process is the punishment, and NAR just gave plenty of motivation to the DOJ to make the process as punishing as possible.
Now let the Defenders of the Faith rise up and tell me how wrong I am, and how awesome NAR is, and how strategic NAR’s legal team is. Let them tell me how this is all Biden’s fault, or Trump’s fault, or whatever. Because none of that matter now. The lawsuit is filed, the die is cast, the Rubicon crossed and now, it’s on like Donkey Kong.
But… to local MLS leadership, to local Association leadership, to state Association leadership, to everyone who has ever served on a Board somewhere making decisions about MLS policy or MLS rules… I have to ask, what you gonna do when the DOJ or the State Attorney General or some private litigator comes for you with their demands for documents and information?
I’m not your lawyer, but I will say this: Don’t delete any emails. You really don’t want to be up on obstruction of justice criminal charges.
-rsh
Bob Marley-Bad Boys (OfficialMusic)
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1 thought on “Musings on the NAR vs. USA Lawsuit”
ROB,
As you know, the real estate industry has made some changes over the years with the rebirth of things like the “time share” (Pacaso) or “we buy homes for cash” (iBuyers). Listing transparency is alive and well thanks to the likes of Zillow and others.
However, after our 20 years in the brokerage business the metal fence around the mechanics of the NAR/MLS transaction has remained pretty much the same (ex – Docusign etc.).
IMHO, it is pretty obvious where this is headed. Open marketing and sales platforms that offer users all options for buying and selling; one agent, two agents, no agents. The cost of service will vary accordingly and presto the real estate business will finally be an open, less controlled, marketplace where everyone (buyers, sellers, service providers) can choose services unrestrained from the strict do’s and don’t from a third party.
Didn’t we all see this coming? Eventually the curtain had to be pulled back. My bet is on .gov.
We’ll see.
Thanks,
Brian
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