Exploring the Worst Case Scenario: Copycat Litigation & Peculiar Hell for the Local MLS

In my last post exploring the worst case scenario from the commission lawsuits (Sitzer, Moehrl), I mentioned that MLSs will be going through their own special hell. I thought I would expand on that. Because while NAR might be dealing with a huge crisis, NAR is very wealthy with enormous resources. They probably can cope with the worst case scenario.

It is not at all clear to me that local Associations and the local/regional MLSs are similarly equipped.

Let’s start with the basic outline of what we know so far.

  • Moehrl v. NAR was filed first and covers huge swaths of the country, but Sitzer v. NAR (now Burnett v. NAR) out of Missouri got class action status first and is going to trial early next year — February 21 if the calendar dates hold. Trial is scheduled for two weeks.
  • Note also that this is a jury trial, not a bench trial. So the lawyers are going to have to convince six regular people (federal courts usually have juries of six for civil cases) that they’re right.
  • Word is — from speaking to lawyers I know — that the judge in the Sitzer/Burnett case tends to work fast. The jury might make the actual decision, but the judge can hurry things along. We might get a decision by April, maybe May. If anything, I rather think the jury is going to have trouble with the damages phase, rather than the actual “who do you find for?” phase.
  • If you have read Judge Bough’s opinion denying NAR’s motion to dismiss (which I have, so you don’t have to), then you are likely to reach the conclusion that the judge is going to lean towards the plaintiffs in the Sitzer/Burnett case. Again, the jury decides but the judge referees. I think it’s safe to say that the plaintiffs may be playing in front of a home crowd.
  • In the Sitzer/Burnett case (as well as the Moehrl case), the defendants are but five: NAR, Realogy (now Anywhere), HomeServices of America, RE/MAX and Keller Williams. None of the local Associations or the local MLSs involved — the lawsuit names Heartland MLS in Kansas City, MARIS in St. Louis, Souther Missouri Regional MLS in Springfield, and CBOR MLS in Columbia — are defendants in the lawsuit.

Okay, I happen to think that NAR will lose at trial. It might win on appeal, but convincing a jury of regular non-industry people who might have bought or sold a home at some point in the past several years that they did not get screwed is going to be quite difficult. It really isn’t that hard to convince people they got screwed by corporations.

Plus, we are discussing worst case scenarios here. So that implies two things: the plaintiffs win, and they get everything they want. I have already estimated that the Sitzer/Burnett case could be $6 billion in damages. Say it ends up half that at $3 billion in damages. The lawyers involved are looking at perhaps a third of that as take-home pay: $1 billion payday from this one lawsuit in Missouri.

What happens next is as obvious as the sunrise: copycat lawsuits.

As always, I am a lawyer but I am not your lawyer. This is just for entertainment and education. Please consult your actual lawyer for real discussions about what you and your organization should and should not be doing.

Copycat Litigation and Antitrust

The plaintiffs bar — the lawyers who bring these class action lawsuits in the first place — tends to be a tight-knit and mercenary group. Turns out, they have conferences just like REALTORS do. Here’s one I found recently: 2023 Trial Lawyers Summit. What do you imagine they would talk about at cocktail receptions? They have online forums and groups just like REALTORS do, and they have friends and networks just like REALTORS do.

It is simply a matter of time before we see a slew of cases that look a whole lot like Sitzer/Burnett but filed against different defendants. Why?

Turns out, there are some federal rules that try to prevent proliferation of copycat lawsuits, particularly in antitrust. I found this excellent article from Herzfeld + Rubin addressing this exact topic. What the article says in essence is that the courts are likely to dismiss or transfer or consolidate copycat lawsuits based on three factors:

  1. Chronology — the first-to-file lawsuit survives, everything afterwards might not
  2. Similarity of the parties — are we looking at pretty much the same plaintiffs and same defendants?
  3. Similarity of the issues — are we looking at pretty much the same legal issues?

Judges tend to look with real disfavor on copycat lawsuits. They’re busy people, and holding a trial is an expensive proposition: courtroom, court reporters, clerks, bailiffs, etc. etc. are not free.

At the same time, courts do have the duty to resolve disputes so they can’t just throw cases out just because they look similar to other cases somewhere else.

So to avoid getting smacked down by the court for being a copycat lawsuit, the lawsuit needs to have different parties. You can’t go sue NAR, Realogy, HomeServices, RE/MAX and KW and hope to go far since they’ve already been sued, and they’re already getting sued. (But see below.) But if you were to name completely different defendants… now you can’t get thrown out since no court anywhere is hearing a case against them and for entirely different plaintiffs or class of plaintiffs.

Here’s the list of markets in the Moehrl lawsuit:

  • The Bright MLS (including the metropolitan areas of Baltimore, Maryland; Philadelphia, Pennsylvania; Richmond, Virginia; Washington, D.C.);
  • My Florida Regional MLS (including the metropolitan areas of Tampa, Orlando, and Sarasota);
  • The five MLSs in the Mid-West that cover the following metropolitan areas: Cleveland, Ohio; Columbus, Ohio; Detroit, Michigan; Milwaukee, Wisconsin; Minneapolis, Minnesota;
  • The six MLSs in the Southwest that cover the following metropolitan areas: Austin, Texas; Dallas, Texas; Houston, Texas; Las Vegas, Nevada; Phoenix, Arizona; San Antonio Texas;
  • The three MLSs in the Mountain West that cover the following metropolitan areas: Colorado Springs, Colorado; Denver, Colorado; Salt Lake City, Utah;
  • The four MLSs in the Southeast that cover the following metropolitan areas: Fort Myers, Florida; Miami, Florida; Charlotte, North Carolina; and Raleigh, North Carolina.

Note that none of those MLSs are defendants in any case. They have been called co-conspirators, but they have not (yet) been sued. The point is, that’s going to change in copycat lawsuits.

Step one would be to go after all the smaller REALTOR Associations and their small MLSs and sue them. Not as much money to made there, but then, those smaller organizations won’t have the budget or legal talent to deal with an antitrust lawsuit either. Bright MLS has millions of dollars and very competent legal counsel. But what about Central Susquehanna Valley Board of REALTORS out of Danville, PA with its 364 members? How do you think they’d hold up to an antitrust lawsuit? Too small? Not enough money to be made? Fine — take a look at say the Des Moines Area Association of REALTORS with its 2,844 members. Think they could withstand the demands for documentation and discovery and depositions?

There are two reasons to start small. First, easy wins = easy money. Second, easy wins create even more precedent for bigger cases. The Sitzer ruling will be the match that lights the fire, but each additional fire keeps adding on. At some point, some court will get a copycat lawsuit but naming MRED out of Chicago, and the plaintiff’s lawyer will be able to cite a dozen other courts who have ruled for the plaintiffs on identical grounds. Then the high-priced lawyers of MRED have a much harder time trying to refute things.

Step two would be to look for states and areas not named in the Moehrl list. California really stands out. Almost the entire Northeast is absent from the Moehrl list, so look at NY/NJ/CT. Look at New England. Metropolitan areas not named above — think Chicago, Atlanta, Miami — look like fertile ground for plowing. (If suing in states/areas that Moehrl does not cover, the lawyers might be able to sue the same defendants, since people in those markets would not be covered by the Moehrl ruling. It is also possible that the court would just throw it out as a copycat lawsuit and tell the lawyers to wait for a decision from Moehrl before wasting the court’s time, or just expand the Moehrl lawsuit with additional plaintiffs in additional areas.)

Step three, of course, would be to go after the MLSs named in Moehrl and the Associations who own them as “unindicted co-conspirators” if you will. The claim will be something like, “Sure, we got justice from NAR and the four corporate defendants, but these MLSs and their locals were part of the conspiracy and they never paid for their part in the wrongdoing.”

Or… frankly, all three at once. The big national class action firms would go after the biggest fish, larger regional firms would go after major metro areas that have not been named in the Moehrl or Sitzer lawsuits, while even small local ambulance chasers can easily file lawsuits against some 300 person local MLS and Association claiming injury on behalf of the 2,500 people who bought and sold in that county.

Expect to see a LOT more videos like this from all kinds of lawyers all over late night cable TV programs in your local area:

Totally Unprepared

What I find kind of astonishing in 2022 is that as far as I can tell from a lot of conversations with friends and colleagues and contacts throughout the industry is just how unprepared the vast majority of MLS and local Association leaders are for what’s coming. Seriously. I first wrote about Moehrl v. NAR in March of 2019. Sure, we had the whole pandemic lockdown thing but that means people had a lot of time sitting at home. Nonetheless, almost four years later, I know for a fact that most of the smaller MLS and Association CEOs and their volunteer leadership have no idea of what’s happening and why.

More importantly, most of them have very little idea of what to do if the worst case scenario were to come to pass.

Part of the problem, I guess, is that NAR itself has consistently done its “we’re gonna win” thing since the beginning. So local leaders and members have chosen to simply disregard the issue. Who cares about preparing for copycat lawsuits when Big Daddy NAR is going to smack down these idiot lawyers who don’t know the first thing about how homes are bought and sold.

Even today, after Sitzer has been certified as a class action and trial date has been set, if you go look at NAR’s resources for Association Executives, you’ll find “Intro to Core Standards” and “Roadmap to Diversity & Inclusion”:

Lower down, you find “Coronavirus: A Guide for REALTOR Associations” and “Sustainability Resource Guide.” What you don’t find are any resources geared to help local AEs prepare for lawfare.

Here are a few resources I think AE’s need to have soon:

  • “You Got Served, Now What?”
  • “Best practices on interviewing antitrust defense counsel”
  • “How to preserve emails, text messages, and other evidence so you don’t go to jail.”
  • “Forensic Accounting and You: What the AE needs to know about financial rectal exams.”
  • “Fiduciary duty of your Directors during a lawsuit”
  • “Understanding liability insurance coverage”
  • “How to talk to a Department of Justice investigator”
  • “Bankruptcy 101: Chapter 7 vs. Chapter 11”

I understand and have always understood not panicking the membership over distance threats like big antitrust lawsuits. I have never understood not panicking Association Executives, MLS CEOs, elected leadership, and those men and women whose role is to do things like “strategy” for the local Association. Maybe I’m being unfair, and NAR has been informing the living shit out of the leadership across local, state and national levels about what’s going on and what they need to do to prepare.

I doubt it though. Pretty sure I would have heard about such an effort if one existed.

So as of December of 2022, I conclude that most local and state Association leaders are wholly unprepared for what is headed their way starting sometime in April or May of next year when the Sitzer/Burnett decision will be handed down. At least… in a worst case scenario.

Peculiar Hell for Local MLS

The above applies to both the local and state Associations and to the MLS. There are a couple of things that will plague the local MLS if the worst case scenario comes to pass.

The first is that they will have to struggle with whether the MLS should remain affiliated with NAR at all. I think you all know my personal take on that question (No) but it’s not a question that most local MLSs have ever considered.

Yet, in the aftermath of Sitzer, if worst case scenario occurs, then two consequences result. One, as mentioned in the previous post, NAR will be going through serious austerity. NAR might not have the money to be doing things like paying for local MLS liability insurance. (In fact, it isn’t clear that NAR itself will have a company brave enough to keep insuring them. $300 billion liability exposure isn’t something even Lloyds of London could take on easily.) Two, the local MLS’s vulnerabilities all stem from NAR rules and policies since the local MLS doesn’t make its own rules unless permitted to do so by NAR.

Combine lack of benefits from affiliation with NAR with the vulnerabilities that come from affiliating with NAR and it’s quite likely that we’re going to see local MLSs have to engage in real soul-searching debate about continuing to be a REALTOR MLS at all.

The second is whether the local MLS has much value if cooperation and compensation are consigned to the dustbin of history. The MLS is not a de jure monopoly with powers granted to it by the government; it is a de facto monopoly that relies on network effect. That network effect is built on cooperation and compensation. Without it, the MLS has to rely on something like:

(a) We have all of the data;

(b) We provide a suite of tools for members;

(c) We provide local tech support for real estate brokers and agents;

(d) We provide the rules of the road for market participants.

Let’s take these in reverse order.

The problem with (d) rules of the road is that while rules are very valuable to market participants, I don’t know that “rules” are ever a selling point to keep people paying subscription fees. Because any MLS, any marketplace, any online portal is going to have rules too. Ebay has extensive rules and policies. So does Zillow. Will a buyer agent decide to join the local MLS and keep paying fees because of the rules? Maybe.

Problem with (b) and (c) is that other institutions and organizations in real estate have staked their value proposition on providing tools for real estate agents and provide tech support for those tools. Look at Zillow’s current strategy with ShowingTime+ for example. Or every single brokerage in the country and every single franchisor in the country. Not only is the local MLS now getting into conflict with those institutions (we are all very familiar with the whole “leveling the playing field” kerfuffle from brokerages), but it isn’t at all clear that a MLS with 400 members has the capability to provide tools and tech support worth a damn.

The problem with (a) we have all the data, of course, is… so does everybody else. As I have often mentioned on these pages, bare facts are not copyrightable. The only “data” that the MLS has that can be protected are the photographs and property descriptions. As of December of 2022, we now have both CoStar and Zill0w (after acquiring VRX Media) offering to take photos and videos for their agent customers. Not a single MLS that I am aware of does the same; instead, the MLS claims to acquire the copyright or license from the broker or agents when they upload the listing. I wrote a whole Red Dot paper on problems with this approach, so let me just say that it isn’t what the MLS thinks it is.

Fewer, Larger, Richer

Back in 2016, I made a bit of a splash in MLS circles when I got up at CMLS and told the assembled MLS executives and leadership that the core problem of the MLS is that there were too many of them, who were too small and too poor. In the intervening years, we have seen some consolidation happen but those who were involved in MLS M&A have battle scars and the horror stories to go with them. And during that period, we went from something like 800 MLSs to 600 MLSs.

After the apocalypse, assuming worst case scenarios, that pace of consolidation simply won’t do.

Let’s just say that a firestorm of copycat lawsuits, massive settlements and judgments, widespread bankruptcy filings across the MLS and Association landscape, etc. happens. Let’s further stipulate that somehow, the MLS and the Associations survive, operate under austerity, and spend ten years paying off the “debt” from giant legal judgments.

Cooperation and compensation are still history. The MLS has to rely on some value proposition premised on having data and providing tools and support to subscribers.

Those are things that larger companies do better than smaller companies, period. (Except maybe support, but even that’s debatable.) Data on housing in one county is nice, but data on housing in 200 counties is simply more valuable. Tools provided by a 400 person MLS are not going to be competitive with tools provided by a 40,000 person MLS. They’re just not.

Which means from the start of the apocalypse to the final conclusion, getting out of being a ward of the state, etc., we will absolutely see consolidation at breakneck speed. That in turn means the local MLS will be dealing with the kind of predator-prey dynamic we have never seen in the industry to date, because NAR was always there to prevent such competition.

Sure, the end result of all that will be fewer MLSs who are mega-regionals and very large, with significant financial strengths (after they’re done paying the plaintiffs from various lawsuits). But the road from 600 or so MLSs to 10 or so MLSs is not going to be a pleasant one for the local MLS leadership. On that road, it’s a mistake to look only at big regional “MLS” (however that’s defined) like CRMLS, Bright MLS, Stellar MLS, etc. as the predator.

I would start by looking at balance sheets and war chests. Then look at technology and value propositions to real estate agents who no longer have cooperation and compensation to bind them together. Today, in late 2022, the three companies to watch are CoStar, Zillow and Opendoor. I think it is a serious mistake to think that some 1,000 member MLS will only entertain offers from Bright MLS but not from CoStar. They’re pushed to the brink of losing their identity and losing local control; will they really care that they’re merging with a “fellow MLS” or not? Maybe. But I’d think on it some.

The Peculiar Hell and What Comes After

Let me wrap up. Starting from the premise that the worst case scenario comes to pass, then the points to take away here, I think, are as follows:

  • Expect copycat litigation targeting local and state Associations and local and regional MLSs.
  • Expect to lose those cases, leading to unthinkably large judgments.
  • Given that expectation, expect any settlements to be unthinkably large. No lawyer confident of winning a $100 million judgment is going to accept $1 million settlement.
  • The local leadership is woefully — if not completely — unprepared for what is headed our way.
  • NAR will be too busy fighting for its survival to offer a lot of assistance to the locals and to the MLSs.
  • And while that’s all going on, the local MLS has to (re)discover some value proposition.
  • They have to do that while every other MLS large and small have to (re)discover their value propositions, and try to grow as fast as possible.
  • Competition, fighting, mergers, acquisitions, consolidations, etc. will all be happening at breakneck speeds in a wild free-for-all between all of the local MLSs.
  • And in that grand melee, there will be at least three (if not more) extraordinarily well-funded players with fantastic technology and tools and services trying to do the exact same thing that every local MLS will be trying to do.

Having said all that, what comes after once the local Associations and the local MLSs go through hell, is a new order for the industry.

There will be fewer MLSs (I favor 10-13, to reflect the major college football conferences, while others prefer 3-4), but they will all be far bigger, far more professionally run, and have far more money. Brokers and agents and proptech developers will no longer have to deal with 600 random rulesets, but a dozen or so, with great uniformity between them. Cost of MLS may be lower overall because of economies of scale; conversely, cost might be higher, but the subscribers will get more from the MLS because of economies of scale.

Homes will still get listed, still get bought and sold, and agents will still be busy helping people buy and sell. They might be paid differently, but they’re not going away because human nature is not going to change in a few short years.

Now, once again, all of this is assuming that a worst case scenario comes to pass. If you are far more optimistically inclined than I am, do feel free to ignore all of this and return to your regularly scheduled programming.

If on the other hand, you are now waking up to what could be headed your way, might I suggest getting started as soon as possible on contingency planning? Though the apocalypse could hit next April/May, it’ll still be a couple of years before you really have to deal with disasters. That may be enough time to get your ducks in row. I hope you do for your sake, and for all of our sakes.

-rsh

 

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