Judge Andrea Wood of the US District Court for the Northern District of Illinois just granted class certification to the plaintiffs in Moehrl v. NAR, the mega lawsuit dealing with real estate commissions. This apparently sent shockwaves throughout the real estate industry, which puzzles me a bit. But then again, I’ve been following this lawsuit from the very beginning, and when the closely related Sitzer v. NAR (now Burnett v. NAR) was granted class action status, I wrote:
In a way, this was the least surprising decision as I never thought these lawsuits would be anything other than class action lawsuits, and it never occurred to me that the court would deny class status to the plaintiffs in Sitzer, in Moehrl, in Leeder, in Nosalek, or any of the other “we paid too much because of cooperation and compensation” lawsuits that might be filed.
Well, Moehrl was certified. And while much of my thoughts on this one remains the same as my thoughts about Sitzer when that lawsuit was granted class action status, there are a couple of new elements here that bear examination.
I read the memorandum opinion and order granting cert (and denying two motions by the Defendants) so you don’t have to. But that doesn’t mean I’m a practicing lawyer, an antitrust specialist, or more importantly, your lawyer. Please consult your own attorneys for actual legal opinions. What follows is for edutainment and speculation only.
Let’s start where we’ve always started these things — with the actual opinion itself.
It’s very long for a procedural ruling — 54 pages in length. But the court did have to dispose of quite a lot of arguments and issues and such.
Which it did. With an axe handle. As is often the case with legal opinions, I read for not only what was said but how it was said. I think the tone of the opinion presages much of what we can expect in the future.
The topline holding, the actual legal decisions, are as follows:
- Defendants’ attempts to exclude expert witness testimony are denied. Some of the axe handle beatings happen here.
- Plaintiffs motion for class action certification of the Damages Class is granted:Home sellers who paid a commission between March 6, 2015, and December 31, 2020, to a brokerage affiliated with a Corporate Defendant in connection with the sale of residential real estate listed on a Covered MLS and in a covered jurisdiction. Excluded from the class are (i) sales of residential real estate for a price below $56,500, (ii) sales of residential real estate at auction, and (iii) employees, officers, and directors of defendants, the presiding Judge in this case, and the Judge’s staff.
- Plaintiffs motion for class action certification of an Injunctive Relief Class is granted:Current and future owners of residential real estate in the covered jurisdictions who are presently listing or will in the future list their home for sale on a Covered MLS. Excluded from the class are (i) sales of residential real estate for a price below $56,500, (ii) sales of residential real estate at auction, and (iii) employees, officers, and directors of defendants, the presiding Judge in this case, and the Judge’s staff.
I initially misread this and thought that “current and future owners” were included in the Damages Class, which would have made this lawsuit an infinitely large damage award. But it isn’t. The current and future owners only get injunctive relief, meaning that NAR and the Covered MLSs cannot do cooperation and compensation.
It also turns out that the Plaintiffs are only seeking “overpayment” by the class of buyer commissions, instead of a full refund of buy-side commissions. Accordingly, I revise my estimate of damages down from $376 billion to about $195 billion. I guess that’s good news… except $195 billion would still bankrupt everybody involved.
On the other hand, it will be less than the Big Tobacco settlements of the late 90s, which came to $206 billion. So there’s that consolation, that real estate won’t set the record for damage awards.
Before we dive into some specific issues worth calling out, I think it’s worth noting that the general impression I get from Judge Woods is that she has zero — and I mean zero — affinity with any of NAR’s arguments. She just ain’t feelin’ them. I got this impression from her earlier opinion dismissing the motion to dismiss, and nothing has changed since then.
For example… Judge Wood denies the defendants’ motion to exclude two expert witnesses, Dr. Einer Elhauge and Dr. Nicholas Economides. I’m not entirely sure, but it seems to me she could just have said, “These guys are experts, and they can testify at trial.” Instead, we get treated to this:
Finally, Defendants challenge Elhauge’s conclusion that buyer-broker commissions in the but-for world would be lower than those enjoyed by buyer-brokers in the present world. They claim that Elhauge makes an entirely speculative leap from the general economic principle that consumers want to pay lower prices to his conclusion that those few buyers who retained buyer- brokers would pay less in a but-for world without the Challenged Restraints. The Court disagrees.
In fact, Elhauge fully explains the reasoning underlying his conclusion. For example, he predicts that there would be decreased demand for buyer-brokers in the real world and supports his prediction by considering how technological advances have decreased the value of buyer-broker services. In particular, he notes that buyers can find homes without the assistance of a buyer-broker through websites like Zillow. Elhauge then observes how, in more competitive markets, the increasing use of the internet has reduced consumer costs, highlighting how increases in the number of consumers using the internet to book air travel and to trade stocks has been accompanied by corresponding decreases in commissions for travel agents and stockbrokers.
By contrast, buyer-broker commissions have increased in the face of technological advances. Moreover, Elhauge notes that his opinion is reinforced by NAR’s own internal studies that reveal the real estate industry’s concerns about how technological advances risk reducing demand for broker services. From there, Elhauge applies the undisputed economic principle that decreased demand results in lower prices.
Thus, far from making an unsupported extrapolation from a general economic concept, Elhauge considers numerous pieces of evidence and data, applies his knowledge of antitrust law and economics, and explains each step of his reasoning. Elhauge provides similarly fulsome explanations as to other factors that would tend to lower buyer-broker commissions in the but-for world.[Line breaks for legibility added. Emphasis added.]
I mean… maybe the court needs to cite this example in order to justify the ruling? But I felt like I was reading the Plaintiff’s brief. If Judge Wood hasn’t already made up her mind as to the outcome of the case, it’s only because her job is to officiate over a jury trial. If this were a bench trial, I think we’d have a decision already.
One amusing moment, if you can find any legal opinion amusing, came when the court was denying excluding the other witness. The Defendants had argued against Dr. Economides’ estimate of damages using other countries as comparisons. The court writes in response:
Notably, five of the seven countries identified as potential yardsticks following Economides’ initial screening were used as comparators by the NAR in an internal report discussing the increasing pressure on real estate brokers to reduce commission rates. (Pl.’s Resp. to Defs.’ Mot. to Exclude Experts, Ex. 4, D.A.N.G.E.R. Report at 22, Dkt. No. 346-5.) In particular, the internal NAR report notes that many brokers “fear . . . a realignment of fees as charged in other countries in the world,” and then cites the average commission rates in the United Kingdom, the Netherlands, Australia, Belgium, and Germany.
I’m gonna guess that neither NAR nor Stefan Swanepoel ever thought that the D.A.N.G.E.R. Report would be cited against NAR and the Defendants by a judge. But there you have it.
I can go on and on, but read the opinion for yourself if you’d like. I found the general tone of the court here to be very much favorable towards the Plaintiffs and very much against the Defendants.
On Northwest MLS
I think the most important new argument advanced and swatted down has to do with Northwest MLS. As some of you know (and frankly, all of you should know), Northwest MLS in Seattle removed the mandatory compensation requirement in late 2022. NWMLS could do this because it’s a broker-owned MLS and not required to follow NAR’s various rules and policies.
NAR and the Defendants used the example of NWMLS to argue that the various rules do not artificially inflate commission rates, and the court addresses that. This part is important, I thought, so I’ll quote the whole section.
Defendants assert that Plaintiffs’ claim that the Challenged Restraints artificially inflate buyer-broker commission rates is contradicted by the evidence from the Northwest MLS. The Northwest MLS is a non-NAR affiliated MLS (and thus not one of the Covered MLSs), that recently stopped requiring listings to include an offer of compensation to buyer-brokers. Since that rule change went into effect, 99.75% of sellers continue to offer compensation to buyer- brokers, and 95% of those offers are at rates exceeding 2%.
A similar outcome can be seen with respect to the West Penn MLS, which has not required sellers to offer compensation to buyer- brokers since 2013. Defendants claim that the data from these U.S.-based MLSs reveal the individualized nature of the inquiries concerning why a given seller offers compensation to buyer-brokers and the rates at which they do so.
While Defendants accuse Plaintiffs’ experts of ignoring evidence from the Northwest MLS and West Penn MLS, Elhauge’s rebuttal report does address Defendants’ expert’s discussion of the outcomes in those MLSs and explains why he found the evidence unpersuasive. Among other things, Elhauge notes that the Northwest MLS did not entirely drop its version of the Buyer-Broker Commission Rule but instead modified its requirement that listings contain a non-zero offer of buyer-broker compensation to allow $0 offers. In other words, the Northwest MLS still requires sellers to make offers of compensation, it just allows them to offer nothing whereas they previously had to offer at least 1 cent. The same is true as to the West Penn MLS.
The Court does not find the evidence of modest modifications made by two MLSs to one of the Challenged Restraints to be fatal to Plaintiffs’ ability to demonstrate classwide impact through common proof. [Citations removed, emphasis added, line breaks added for legibility]
There have been many industry insiders — my podcast partner Greg Robertson in particular — who thought that the evidence from NWMLS proves that sellers would have no problem offering compensation to buyer agents even if they did not have to.
The trial phase might show that the jury is convinced by this evidence, but it is equally clear to me that Judge Wood isn’t having any of that here. She literally calls that change, which made all kinds of news inside the industry, a “modest modification.”
Furthermore, this passage raises the real possibility that non-NAR affiliated broker-owned MLSs are not out of the woods when it comes to copycat litigation that will follow the Moehrl playbook exactly. Even if you did not require compensation, and allowed sellers and listing agents to put in $0 in compensation, you might still find yourself on the hook… because 99.75% of sellers continue to offer compensation and your rule change is a “modest modification.” Be warned.
On “Typicality” and the Covered MLS
Another new tidbit I read, and one that will be important not in this trial but in future trials, has to do with the issue of “typicality.” Basically, to be granted class action status, there is a requirement that the claimed injury is the result of “the same event or practice or course of conduct that gives rise to the claims of other class members and is based on the same legal theory.” In other words, the named plaintiffs are “typical” of the other plaintiffs in the class.
Defendants had argued that the Moehrl class lacked this “typicality” because the named plaintiffs had listed their homes in only five of the twenty Covered MLSs. The court swats this argument down in a hurry:
That some class members listed their homes on different MLSs than Plaintiffs does not create a typicality issue because all Covered MLSs implemented the Challenged Restraints. See In re Ready-Mixed Concrete, 261 F.R.D. at 168 (“If the named class members’ claims are based on the same legal theory or arise from the same course of conduct, factual differences in date, size, manner, or conditions of purchase, the type of purchaser, or other concerns do not make plaintiffs atypical.”) As a result, Plaintiffs’ claims share the same essential characteristics as the rest of the class and typicality is established.
I think this is potentially important not for Moehrl, but for every copycat case that will come after Burnett and Moehrl. I now believe that any plaintiff can sue any MLS that “implemented the Challenged Restraints” — in other words, complied with NAR’s MLS policies and Code of Ethics provisions — and any brokerage who listed a home in that MLS, and make a class action out of it because typicality will not be an issue in every single one of those future cases.
Courts follow precedent of other courts, and here, Judge Wood gives the rationale to every judge in future cases on how to deal with the typicality issue.
Another interesting piece, which reinforces my belief that Judge Wood has already made up her mind and it’s now up to the jury to make up its mind, comes from dismissing the Defendant’s arguments that the Plaintiff’s theory about steering is merely academic and theoretical.
Moreover, contrary to Defendants’ characterization of Plaintiffs’ steering theory as abstract economic theorizing, Plaintiffs offer real-world evidence supporting the presence of steering in residential real estate transactions. Most prominently, Elhauge analyzes data regarding commission rates in the Covered MLSs and observes that commissions clustered around standard rates in each Covered MLS. During the class period, at least 90% of home sales in 17 of the 20 Covered MLSs featured buyer-broker commissions clustered around three standard rates. And 94% of sales in all Covered MLSs compensated buyer-brokers at rates of between 2.4% and 3.0%, with 85.5% of commissions in the Covered MLSs paid at one of four rates within that range: 2.4%, 2.5%, 2.8%, and 3.0%. [Citations omitted; emphasis added.]
If you’re a lawyer in a different case suing the local MLS, do you even need to hire your own expert witness? Can’t you just cite what Judge Woods cites here? I mean… Jesus H. Christ.
That’s followed up by this brutal paragraph:
Plaintiffs also note that Elhauge’s expert opinions regarding steering incentives in the residential real estate industry have been echoed by the Department of Justice and the Federal Trade Commission. Finally, Plaintiffs highlight evidence showing that Corporate Defendants themselves train brokers to wield the risk of steering against those sellers who seek to pay lower rates of commission. Consistent with that training, Plaintiffs have proffered evidence that tends to show that brokers affiliated with Corporate Defendants’ brands do, in fact, tell sellers that reducing commissions below the standard rates for their market could result in buyer-brokers avoiding their homes.
In case you were wondering, it turns out that the DOJ and the FTC probably have quite a bit of influence over how Federal judges and their clerks think about things. There being little doubt that the DOJ and FTC are watching this case, as they watch other cases, and will intervene as they deem fit, as they have in other cases, I think the influence of the DOJ (which is pissed off at NAR) is not to be underestimated.
On Benefits Outweighing the Cost
A real popular counter to the Moehrl plaintiffs, particularly from the MLS circles (for example, the Council of MLS commissioned a study on the benefits of the cooperation and compensation system) is that even if there are some negatives to sellers from having to pay compensation to buyer brokers, the system as a whole delivers far more benefits to sellers.
In particular, the Defendants argued that sellers were and are and will be buyers and that having the seller pay the commission lets buyers finance it so any “harm” is offset by the gains they had as buyers. The court swats that aside:
All of Defendants’ arguments as to the benefits to the class are grounded in the class members’ ability to pass on the cost of buyer-broker commissions to the buyer by including that cost in their home’s sales price. But the Supreme Court has barred antitrust violators from relying on such a “passing-on defense.”
Yep, that ain’t gonna work.
A brutal dismissal comes when the Defendants bring up the long history of subagency and argue against Dr. Elhauge saying he failed to “square the long-standing practice of sellers paying for their buyers’ brokers with his conclusion that sellers would no longer bear those costs in the but-for world.”
The court writes:
Defendants’ history of broker compensation practices conveniently elides the NAR’s involvement in shaping historical compensation practices in the real estate market. Moreover, those earlier practices were themselves subject to antitrust scrutiny. See, e.g., United States v. Nat’l Ass’n of Real Estate Bds., 339 U.S. 485 (1950).
That’s just… rough. That’s the court saying, “You guys created that history, and oh by the way, the Supreme Court said that history was anticompetitive.” Ouch.
A final Holy #&@$ moment comes when the court discusses damages. As mentioned above, the Plaintiffs here are only seeking “overpayment” by 1.55% instead of the full buy-side commission. Defendants made an issue of that, because of “flaws in Plaintiff’s theory of damages that preclude class certification.” The court denies that line of attack, but then goes on to write:
Certainly, in conservatively assuming that all class members would have both sold to buyers using buyer-brokers and covered the buyer-brokers’ commissions, Economides’s model likely leaves some damages on the table when viewed in conjunction with Plaintiffs’ theory of impact. Nonetheless, Plaintiffs make a permissible strategic choice to seek only the damages that they believe they can efficiently prove with certainty—the supracompetitive portion of the class’s commission payments—and forgo the more complex task of determining which class members are entitled to a full refund.
Perhaps Plaintiffs’ choice might give a class member reason to opt out of the class if they believe they are entitled to recover the entirety of the buyer-broker commission. But Defendants cannot defeat class certification by insisting that, if found liable, they should owe the class more money than the figure produced by Economides’s damages model.
Had Plaintiffs relied on a damages model that assumed all class members would have paid nothing to buyer-brokers, Defendants would likely have protested that Plaintiffs’ damages figure was excessive. [Emphasis added; citations removed; line breaks added for legibility]
OMFG. That last sentence. I’m not sure that the judge’s face was filled with contempt as she was writing it, but if it were… I wouldn’t be surprised at all.
We’re going over 3,000 words. Let me leave things there.
This post is meant to summarize the actual opinion and highlight the few new tidbits that might be relevant in this particular lawsuit, and possible future lawsuits. But a big picture “So what does this mean?” post will need to wait. Part of it is that I’ve already written that post over and over again. Any reader who’s been with me for a couple of years will have read them all.
But the other part is that combining all of those with all of the other recent developments, such as the NAR v. United States and the DOJ’s intervention into PLS.com v. NAR and Top Agent Network v. NAR and Rex v. Zillow and others all bear some thinking about.
However, in light of this opinion, and in light of everything else I’ve seen… and as preparation for that “What does this mean?” post… let’s leave this off with this observation: NAR will lose this case.