Rockwell publishing real estate law chapter 21

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California Real Estate Law

© Copyright 2007 Rockwell Publishing, Inc.

Lesson 21:Antitrust Law


Introduction

This lesson will discuss:

l antitrust law

l prohibited acts

l enforcing the law

l antitrust law and the real estate profession


Antitrust Law

Antitrust laws are aimed at preventing business arrangements and practices that have effect of restraining trade.

Examples:

l monopolies

l price fixing

l anticompetitive agreements

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Antitrust Law

Focus of antitrust laws:

l originally: oil, gas, tobacco companies

l later: communication and transportation companies

l today: software companies and Internet-related services


Antitrust Law

When businesses work together to control prices or limit supply ? higher prices; economy suffers

When marketplace is competitive ? better products and prices

Purpose of antitrust law


Antitrust Law

Antitrust laws support competition in marketplace.

Antitrust laws also designed to encourage:

l entrepreneurs

l small businesses

Purpose of antitrust law

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Antitrust Law

In late 1880s, businesses in certain industries (oil, gas, tobacco, etc.) began merging and consolidating into huge corporations known as trusts.

Monopoly: occurs when one seller of goods or provider of services has exclusive control over market; results in lack of competition with no reasonable substitutes

History of antitrust law


Antitrust Law

States began enacting antitrust laws, but these laws were only effective within state borders.

Sherman Antitrust Act: federal law enacted in 1890

l Congress has since passed other antitrust laws, but Sherman Act remains foundation of federal antitrust law.



Antitrust Law

Sherman Act regulates interstate restraints on trade.

l at first, only used to break up trusts in certain industries

Courts later expanded meaning of “trade” to include not just production and sale of goods, but also the provision of services.


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Antitrust Law

In 1950, U.S. Supreme Court held that federal antitrust laws apply to real estate industry.

In 1976, California supreme court held that California’s antitrust law (Cartwright Act) applies to services by real estate brokers.


Summary


Antitrust Law

l Monopoly

l Sherman Antitrust Act

l Cartwright Act


Prohibited Acts

Not all business decisions that increase profits or market share violate antitrust laws.

l competitive practices and lower prices aren’t necessarily antitrust violations—may simply be good business practices

Market share: amount of business a company does in a particular area

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Prohibited Acts

To be antitrust violation, business activity must:

1) be the result of a conspiracy,

2) be an unreasonable restraint on trade, and

3) create an impact on competition.


Prohibited Acts

Conspiracy: agreement between two or more people to commit illegal act (or to use illegal methods to achieve legal purpose)

Example: It’s ok to make profit from selling widgets. It’s not okay to make profit from selling widgets by making it impossible for anyone else to sell widgets in same area.

Conspiracy


Conspiracy

Conspiracy requires group action.

l one person acting alone isn’t enough

Group action: action between two or more competitors or groups

Example: two brokerages conspire to list properties at 7%

Individual vs. group action

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Conspiracy

Under antitrust law, real estate brokerage is considered single entity.

l broker can set fixed commission rates for salespeople ? not antitrust violation

Example: Broker for Mountain Realty tells salespeople to take listings at 7%.

Individual vs. group action


Conspiracy

Important part of conspiracy is agreement to act.

Agreement may be:

l spoken

l gesture (nod, wink)

l silence (interpreted as tacit agreement)

Agreement to act


Prohibited Acts

Restraint on trade: any act that prevents individual or company from doing business in a certain area or with certain people

l act that hinders free trade

Antitrust laws prohibit unreasonable restraints on trade.

Unreasonable restraints on trade

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Prohibited Acts

Courts use three tests for determining whether activity constitutes unreasonable restraint on trade:

l per se rule

l rule of reason

l “quick look” test

Unreasonable restraints on trade


Unreasonable Restraints on Trade

Per se: action that is automatically illegal, regardless of the circumstances

Certain activities (such as price fixing) have been determined by courts to be unreasonable restraints on trade and unlawful per se.

l doesn’t matter whether parties had any intent to break law

Per se rule



Rule of reason: balancing test that is applied when act isn’t a per se violation, but might still be an illegal restraint on trade

Courts weigh activity’s impact on competition

l decides whether activity’s negative effects outweigh positive effects

l requires considering individual circumstances of each case

Rule of reason

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Quick look test: shortened version of rule of reason test; applied when there’s no per se violation of law, but anticompetitive effects of restraint on trade are plainly obvious to casual observer

l expedites cases

“Quick look” test


Prohibited Acts

Antitrust violation requires actual injury to competitor or consumer.

l not just unhappiness about changed business landscape

Impact on competition

Summary


Prohibited Acts

l Market share

l Conspiracy

l Group action

l Restraint on trade

l Per se

l Rule of reason

l Quick look test

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Enforcing the Law

Actions to enforce antitrust laws may be brought by:

l Antitrust Division of U.S. Department of Justice

l Federal Trade Commission


Enforcing the Law

Department of Justice investigates antitrust complaints brought through:

l its own investigation division

l Federal Bureau of Investigation (FBI)

Department of Justice may bring:

l civil action

l criminal action

l both


Enforcing the Law

Federal Trade Commission may initiate civil or administrative antitrust proceedings.

l but can’t impose criminal sanctions

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Enforcing the Law

In California, Cartwright Act is enforced by state attorney general.

Attorney general may initiate:

l civil actions

l criminal actions


Enforcing the Law

Both state and federal law give individual citizens power to pursue antitrust violations in civil court.


Enforcing the Law

Federal antitrust penalties vary, depending on:

l individual or corporation

l civil or criminal

Penalties

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Enforcing the Law

Criminal cases:

l individual violators: fined up to $1,000,000 and sentenced up to 10 years in federal prison

l corporations: fined up to $100 million for each offense

Penalties


Enforcing the Law

Civil cases:

l parties injured by antitrust violations may sue violators for treble damages (3X actual damages)

Penalties


Enforcing the Law

California antitrust penalties:

l individuals: up to $250,000, prison up to 3 years

l corporations: up to $1,000,000 or two times gain received from illegal act, whichever is greater

Penalties

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Summary


Enforcing the Law

l Federal Trade Commission

l Department of Justice

l Treble damages


Antitrust Law and Real Estate

Real estate agents should be aware of potential dangers in:

l price and commission fixing

l group boycotts

l tie-in arrangements

l market allocation



Price fixing: cooperative setting of prices or price ranges by competing firms

l price fixing is per se antitrust violation

Price and commission fixing

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To avoid appearance of commission fixing:

l two agents from different offices should never discuss commission rates

l avoid casual announcements of commission changes

l publications and MLS should avoid “recommended” or “going” rates




California law requires any standard form (such as listing agreement) that establishes or changes broker’s compensation to contain following disclosure in bold face, 10 point type:

l NOTICE: The amount or rate of real estate commissions is not fixed by law. They are set by each broker individually and may be negotiable between the seller and the broker.




Commission splits:

l two competing agents may discuss commission split on individual transaction

l but they can’t agree to uniform or standard commission splits for all transactions


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Group boycott: agreement between two or more real estate brokers to exclude other brokers from fair participation in real estate activities

l illegal per se

Group boycotts and the MLS



Broker allowed to refuse to do business with individual broker.

l but can’t tell other brokers (or agree with other brokers) to do the same

Group boycotts and the MLS



Tie-in arrangement (also called tying arrangement): occurs when a buyer is required to purchase one product or service in order to purchase another product or service

l illegal per se

Example: list-back agreement

Tie-in arrangements

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List-back agreement: developer tells builder he may buy lot only if he lists finished house with developer’s agent

l violates antitrust laws if listing requirement is condition of original sale

Tie-in arrangements



Market allocation: it’s illegal for competing brokers to agree not to sell:

1) certain products or services in specified areas,

2) in specified areas, or

3) to certain customers in specified areas.

Market allocation limits competition.

l illegal per se

Market allocation



Individuals and businesses can decide which areas and people to do business with

l but they can’t agree with other individuals or businesses to allocate territory/customers

Market allocation

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Brokers should:

l always establish fees/listing policies alone

l never use listing forms with pre-printed commission rates

l never imply to customer that commission is fixed or non-negotiable

l never discuss business plans with competitors

l train their licensees to be aware of what may constitute antitrust violation

Avoiding antitrust violations

Summary



l Price fixing

l Group boycott

l Tie-in arrangement

l List-back agreement

l Market allocation

Legal Aspects of Real Estate Lesson 21 Cumulative Quiz

1. Which of the following is an unreasonable restraint on trade?

A. Price fixing B. Creating a monopoly C. Entering an anticompetitive agreement D. All of the above

2. The primary federal antitrust law is the:

A. Monopoly Act B. Sherman Act C. Cartwright Act D. Conspiracy Act

3. Which of the following is NOT a requirement for an antitrust violation to exist?

A. Creation of a monopoly B. Unreasonable restraint on trade C. Result of a conspiracy D. Impact on competition

4. The definition of trade includes:

A. production of goods only B. sale of goods only C. production and sale of goods D. production and sale of goods and services

5. A conspiracy requires a:

A. written agreement to act B. monopoly C. group action D. legal purpose

6. A criminal proceeding for violation of federal antitrust law must be brought by:

A. the Federal Trade Commission B. an individual citizen C. the Department of Justice D. a competing business

© 2009 Rockwell Publishing 1

7. Which of the following is a negative effect that would be a factor in determining whether an activity is an unreasonable restraint on trade?

A. An increase in innovation B. Lower prices C. A per se violation D. Deterioration of services

8. A party that suffers losses because of antitrust violations can sue the offender for how much of the actual damages suffered?

A. One-half the amount of actual damages B. Three times the amount of actual damages C. Five times the amount of actual damages D. Up to $10 million

9. A real estate brokerage would commit an antitrust violation if it had:

A. agents working as independent contractors instead of as employees B. an agreement with another brokerage setting commission splits for all transactions C. branch offices covering different geographical areas D. more than 20 affiliated licensees

10. A court that conducts an economic analysis to determine whether an activity's negative impact on competition outweighs its positive effects is applying the:

A. quick look test B. per se rule C. rule of reason test D. unilateral action rule

11. In the real estate industry, price fixing issues come up most often with:

A. commission rates B. listing prices of homes C. sales prices of homes D. mortgage interest rates

12. Antitrust violations can also be violations of:

A. the Endangered Species Act B. environmental law C. the Americans with Disabilities Act D. real estate license law


13. An arrangement that requires a buyer to purchase something else in addition to the product or service she wants is known as:

A. a group boycott B. price fixing C. a tie-in agreement D. commission splitting

14. An example of illegal market allocation would be:

A. An individual broker assigning different farms to her affiliated licensees B. Two competing brokers agreeing to stay out of each other's geographic areas C. A brokerage in which one agent specializes in selling luxury homes D. A broker focusing on sales of commercial property

15. What is one practice that a broker or agent should adopt to avoid antitrust law violations?

A. Establish fees independently, without consulting competing firms B. Use listing forms with pre-printed commission rates C. Warn clients about the incompetence of competitors D. Never tell a client that commission rates are negotiable

16. Three large steel companies plan to merge and form a giant steel corporation. Which statement is most likely to be true?

A. Steel prices will probably go down B. Small steel companies will be better off because they have fewer competitors C. The Federal Trade Commission will intervene if the merger appears likely to have

anticompetitive effects D. The merger will not affect interstate trade

17. Two brokers know that a particular agent doesn't maintain the confidentiality of his clients, because in the past he told them things that should have stayed confidential. The brokers agree not to work with this agent in the future. This is an example of:

A. market allocation B. using illegal methods to achieve a legal purpose C. monopoly D. price fixing

18. Which practice involving commissions would NOT be an antitrust violation?

A. Using a form with a pre-printed commission rate B. A multiple listing service publishing recommended commission rates for its members C. A broker suggesting to other brokers that they need to charge higher commissions D. Two brokers negotiating a commission split for a single transaction


19. If the anticompetitive effects of an action are plainly obvious to a casual observer, a court may use the:

A. valid defense rule B. market allocation test C. quick look test D. group action rule

20. A broker at an MLS meeting casually mentions that she plans to raise her commission rates. Several other brokers raise their commission rates after the meeting. This is an example of:

A. price fixing B. market allocation C. a group boycott D. a tie-in arrangement


Rockwell publishing real estate law chapter 21

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