One of the lawsuits going on right now, which I’ve discussed in podcasts and such, is REX v. Zillow. I didn’t really write on it before for a variety of reasons, the biggest of which is that I regarded the lawsuit as an unfortunate waste of time for everybody involved.
Another reason is that I thought this issue of the Segregation Rule (or “No-Commingling Rule”) would be dealt with by the FTC in future regulations that it will surely issue. But the latest development in the case, in which the Court issued an order denying Zillow and NAR’s Motion to Dismiss is both interesting and important enough to discuss in depth.
So let’s do that.
I have embedded the Order below. You should be able to download it if you’re interested.
The long and short of it is that the case goes forward, especially against Zillow, while a number of issues are dismissed, particularly against NAR. But I’m not sure how important any of those details are, because….
The Court’s Reasoning
What is so striking is that the Court did a 180 between the first order earlier this year denying REX’s motion for a preliminary injunction and this second order. Hostility to REX was pretty evident in the first order, but now, hostility towards Zillow and NAR is fairly evident.
In this second order, the Court wove together multiple strands of arguments and facts to deny the Motion to Dismiss. It’s a rather curious and complex blend of the Segregation Rule, the Buyer Agent Commission Rule, and Zillow’s decision to get into iBuying and become a brokerage. I’m not 100% sold on how the Court did that, but that’s not important. What is important is that the Court did so.
Optional Rule… But…
Things get interesting right off the bat. This same judge had denied REX’s preliminary injunction request because he had “conclud[ed] that Plaintiff failed to satisfy its burden to show a likelihood of prevailing on its federal and state law claims, or a likelihood of suffering irreparable harm in the absence of an injunction.”
So… if the judge thought REX was unlikely to prevail, then why deny the Motion to Dismiss? I know legally speaking that the issue isn’t simply whether the plaintiff is likely to prevail, but also whether there will be irreparable harm without the injunction. But… let’s just say that the tone of the judge’s writings is different.
For example, in the previous order denying the preliminary injunction, the judge notes that the Segregation Rule (which he decided to use to talk about the No-Commingling Rule) was optional:
The challenged restraint is an optional, internal NAR rule that allegedly results in “display bias” in favor of MLS listings—a rule with which Zillow Defendants have decided to comply. Plaintiff cites no authority that the challenged restraint is “sufficiently analogous to practices already deemed by courts to be anticompetitive for it to qualify as a facially anticompetitive restraint.”
But in this Order denying the Motion to Dismiss, the judge writes:
For its part, NAR argues that Plaintiff cannot plausibly allege the existence of an unlawful agreement because NAR’s challenged rules are “optional.” This argument is unavailing for two reasons.
First, Plaintiff challenges not just the optional Segregation Rule, but also the mandatory Buyer Agent Commission Rule.
Second, the Supreme Court has concluded that the interpretation and promotion of a trade association’s “so-called voluntary standards” by the association’s agents and members could be deemed to be “repugnant to the antitrust laws,” and the association “should be encouraged to eliminate the anticompetitive practices of all its agents acting with apparent authority.”
The complaint alleges that the challenged rules were “written” by NAR and are being “promulgated” or “enforced” by its members, namely the MLSs and their members (including Zillow), and that these “combined” actions constitute illegal restraints on trade.
The complaint further alleges that “NAR is the rare trade association that sets the rules of competition among its members,” promulgating “mandates governing [IDX feeds] and the structure of compensation offers.” Allegedly, “[b]ecause of the size and scope of NAR and MLSs, these rules have become ubiquitous within the marketplace—essentially making consumers subject to them.”
In other words, brokerages, agents, and even customers allegedly have no choice but to comply with NAR’s so-called optional rules.
[Line breaks added, and citations removed for legibility]
That sounds like we have two different judges writing here, doesn’t it? The first order kind of brushes off REX’s claim, because the IDX Segregation Rule is optional; the second order not only doesn’t brush off the optionality, but specifically ties the optional Segregation Rule with the mandatory Buyer Agent Commission Rule, and then throws a dollop of “NAR is the rare trade association that sets rules of competition” and “brokerages, agents and even customers have no choice but to comply” on top of it all.
We get this pattern throughout this order in the Motion to Dismiss. In the previous order, the court says that the alleged harm here is only to REX, and the antitrust laws don’t cover that; in this order, the court specifically finds alleged harm to competition itself by including FSBOs and foreclosures and other non-MLS agents and buyers. It’s a fascinating pivot.
Zillow the Brokerage?
Another line of reasoning that keeps appearing in this order is interesting because it is both novel and (I think) wrong.
Basically, the court makes a much bigger deal of the fact that Zillow is now a brokerage engaging in iBuyer practices. In the first order, the court just notes that Zillow established its own licensed brokerage, and then accepts Zillow’s assertion (which happens to be true) that they do not compete with real brokerages:
Plaintiff argues that Defendants have entered “a paradigmatic horizontal relationship” because Zillow now offers licensed brokerage services, just as Plaintiff does. Plaintiff further contends that Zillow’s decision to join MLSs as a participant broker and to change its websites to comply with the No-Commingling Rule amount to a “group boycott” or a “cartel.”
Zillow Defendants respond that they do not compete with Plaintiff (or other traditional brokerages)—as Zillow joined MLSs and implemented the No-Commingling Rule to obtain IDX feeds for the benefit of Zillow’s separate data aggregation business, not to harm competition with respect to its brokerage business.
Then the court denies the preliminary injunction.
In this order, by contrast, we get this:
Zillow argues that because the Segregation Rule was implemented in Zillow’s capacity as a data aggregator (and not in connection with providing real estate brokerage services), Plaintiff cannot plausibly allege that the restraint occurred within the relevant market.
Even assuming that Zillow’s implementation of a new website design, which displays real estate listings nationwide, can be deemed as occurring “outside” the market for real estate brokerage services, Zillow does not address the other restraint at issue: the Buyer Agent Commission Rule, which was allegedly implemented in Zillow’s capacity as a real estate broker and MLS participant.
Zillow’s argument was that it became a brokerage only to get access to IDX data. That required Zillow as a data aggregator to obey the Segregation Rules promulgated by NAR. How Zillow operates its website has nothing whatsoever to do with its brokerage business, which is only focused on direct iBuying.
The court seemed to have bought that in the first order, then rejected it in the second. Basically, it seems that the court is saying that simply by becoming a brokerage, Zillow is party to the Buyer Agent Commission Rule; and as an MLS participant, it follows that rule, offering full compensation to buyers. The court cites, with apparent approval, REX’s allegation that “all Zillow-owned homes will be listed on the MLSs with commissions paid to agents representing buyers.”
What Zillow paying full commissions to buyer agents for homes that it owns and lists on the MLS has to do with how Zillow operates its website is not explained. But in a real way, that’s not important, at least until the inevitable appeal.
What I get from this pivot is that the court has essentially decided that Zillow becoming a brokerage and joining the MLS and subjecting itself to the various NAR rules makes all of Zillow’s actions suspect. That includes how Zillow operates its website.
Zillow the iBuyer
In another fascinating section, we get the court dragging in Zillow’s activities as an iBuyer to conclude that a state-law cause of action (“Lanham Act”) for false advertising and deceptive practices:
Zillow does not dispute that the complaint plausibly alleges that Zillow’s commercial speech—adopting a new labeling system for its website displays—misrepresents the nature of Plaintiff’s services and was sufficiently disseminated to the public. Zillow instead relies on the complaint’s purported failure to allege that Zillow made the misleading statements to influence consumers to purchase Zillow’s products or services.
The complaint alleges, however, that in late 2020, Zillow joined the NAR and MLSs to promote its “Zillow Offers” business. According to the complaint, the “growth and substantial inventory of Zillow-owned homes placed Zillow in a new position: Instead of focusing on being an open access point for consumers to display and access residential real estate listings, Zillow’s interests turned to its own substantial home inventory.”
The complaint further alleges that Zillow changed its websites “to comply with the new MLS rules” and that the “new web display includes several features that . . . insulate MLS brokers from competition.”
The complaint alleges that Zillow adopted the misleading labeling system for the purpose of influencing its customers to use the Zillow Offers business, as well as the services of other MLS agents, by concealing or discouraging the services of non-MLS agents like Plaintiff.
The Court concludes that these allegations are sufficient to state a Lanham Act claim.
Again, these facts were exactly the same in the previous preliminary injunction situations. But in that opinion, the Court points out that REX is listed by name on Zillow, that consumers will be sent to the REX website when they click on a link, and that Zillow tries to explain to consumers with pop-ups and FAQ pages. So the Court writes:
Plaintiff rejects this characterization of Zillow’s websites, but it fails to explain how a reasonable consumer could still believe that Plaintiff’s properties are listed by non- agents in light of the listing’s references to “REX Homes,” “Rex Real Estate Exchange,” or “REX Real Estate,” with direct links to Plaintiff’s website.
Although Plaintiff has presented evidence that its employees have heard from unnamed clients or other agents who were misled by Zillow Defendants’ websites, the Court gives little weight to this evidence, absent some indication that the unnamed consumers or agents actually clicked on Plaintiff’s listings. The apparent conduct of agents trolling a web page does not indicate whether a reasonable consumer is likely to be confused. The allegation about unnamed clients adds little to the claim.
Plaintiff has not supported its claim that there is any deception that is injuring a substantial portion of the purchasing public.
In the first order, the fact that Zillow is an iBuyer didn’t matter at all since Zillow was putting REX’s information on the website, even if in the Other Listings tab. In the second order, the fact that Zillow is an iBuyer means that putting REX’s information on the Other Listings tab is a no-no, and Zillow may in fact be deceiving consumers all over the place to insulate MLS brokerages from competition.
A Theory on the Pivot
First off, for the lawyers in the audience, there are differences between a Preliminary Injunction and a Motion to Dismiss. The effect of the ruling is different on the plaintiffs and on the defendants. So courts have different legal standards they have to apply in one versus the other. But I don’t think this outcome depended on jurisprudential technicalities.
I think the judge was not up to date on the happenings in this area of the law when he wrote the first opinion. He got caught up by the time he wrote the second. What do I mean?
In the first opinion, you find zero references to Moehrl or Sitzer, the two big anti-trust cases against NAR and four giant brokerages and franchises. In this one, you can’t avoid those references. (Note that neither Moehrl nor Sitzer have been decided. All of the opinions that this Court cites are opinions about motions, such as the Motion to Dismiss.)
In the first opinion, there is zero reference to a Buyer Agent Commission Rule; the judge simply wasn’t even aware of the controversy on that, despite that being a big part of the Complaint from REX. We know this because the judge in the second opinion keeps going back to the Complaint from REX to talk about allegations around the Buyer Agent Commission Rule.
Of course, both Moehrl and Sitzer were all about that particular rule (which, to be fair, is not one rule but a series of rules that all of the lawyers involved lumped into one name).
I think what happened here is that the judge did the first opinion based on what he knew at that point, and then read up on Moehrl, Sitzer, Leeder, etc and the legal controversies surrounding real estate commissions, surrounding NAR, the MLS, etc. etc. and changed his perspective on the case in front of him.
A major influence, I think, might have been the intervention by the Department of Justice. We get this tantalizing reference in the second order:
Defendants now move to dismiss the claims asserted against them. NAR also requests that the Court take judicial notice of certain documents.
Plaintiff partially opposes the request with respect to two of the documents, a complaint filed in a civil case, and the final judgment entered in that case, including a 2008 consent decree between NAR and the United States.
The United States also filed a statement of interest asking this Court to decline to draw any inference in NAR’s favor from the 2008 consent decree, which is now expired. The Court previously noted the existence of that consent decree in ruling on the motion for a preliminary injunction. Because no one disputes the authenticity of these court records, the Court GRANTS NAR’s request to take judicial notice of them as well as the unopposed documents in ruling on the instant motions. [Line breaks added, citations removed, and emphasis added]
I infer that in the first opinion, the Court was in fact swayed by the 2008 consent decree that implied all sorts of pro-competitive benefits from the MLS. In this second opinion, with the DOJ literally telling the judge to ignore anything nice about the MLS or NAR that consent decree had to say, we get the opposite outcome.
I can easily imagine that the judge, or one of his clerks, picking up the phone when they get the unsolicited DOJ filing and asking, “Hey guys? What’s up with this?” and getting an education on where the DOJ and the FTC and the United States government (remember, the Biden Executive Order) stand vis-a-vis NAR, the MLS, and the real estate industry… of which Zillow is now very much a part.
Maybe not. Maybe stuff like that doesn’t happen in our judiciary system. Who can say for sure?
It’s Not Over, But…
The order does dismiss a bunch of allegations, especially against NAR. But what this means is that the case goes forward, and REX can now enter discovery. Knowing what I know about some of the people over at REX, including the General Counsel, Mike Toth, I imagine that the discovery will be… contentious and exquisitely painful for Zillow, for NAR, and for MLS executives and leadership everywhere. Mike is extremely smart, a former judge himself, a U.S. Marine Judge Advocate General, and not a man you want to take lightly. Seriously, he’s a first-rate litigator and litigation strategist.
Plus, REX is not in it for the money. They have made that manifestly clear over the years. They’re after destroying the current system. Which means a settlement is unlikely. Which means a bunch of kids with lawyer parents are about to have their college tuitions assured, and luxury car dealerships all over Seattle, DC, and Austin should rejoice.
When it’s all said and done, Zillow may very well win the case. Like I said, I think the judge improperly and illogically drew disparate strands together about Segregation Rule, Buyer Agent Commission Rule, Zillow the brokerage, Zillow the iBuyer, NAR rules optional and otherwise, and so on and so forth. NAR might win the case. Even if they lose this case, they might win on appeal because of some of the errors that this trial court made.
But that’s not important now. What is important is that REX gets to do discovery, because in litigation, the process is the punishment.
Also, take a step back from this order, from this case. Because that’s the important takeaway for me.
What we saw in this order was a judge changing his mind between one order and the next. He changed his mind because he got up to speed on Moehrl, Sitzer, Leeder and the other cases that are making their way through the court systems. He got up to speed on where the United States stands vis-a-vis NAR, the MLS, commissions, compensation, and competition. He got educated on the Biden Executive Order that directs the FTC to regulate real estate brokerage and listings services.
And he changed his mind.
How many other Courts, how many other judges across the country are undergoing the same kind of education on what’s happening? If not today because they’re busy dealing with the cases in front of them today, how many will replicate the pattern if a case does end up in front of them?
Yes, this is pure speculation. You might even call it a *gasp* conspiracy theory. But in 2021, “conspiracy theory” could be called preview of coming attractions. Make of it what you will.