Chapter 12. Antitrust and Related Laws

Transcription

1 Chapter 12 Antitrust and Related Laws People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public. - Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations A. ANTITRUST AND MONOPOLIES INTRODUCTION Today it is becoming increasingly important for licensees to understand federal and state antitrust laws for several reasons. In urban areas large real estate firms with offices in various states compete strongly with the individual entrepreneur. Many small firms join national franchises to obtain benefits such as national advertising and interstate relocation services. Real estate firms in both small and large cities share listings through multiple listing services. Real estate firms join national relocation services to gain the business of interstate transferees. Financing real estate purchases and insuring real property involves activities that more often than not cross state lines. Many of these modern practices with interstate impact have brought the practice of real estate within the jurisdiction of federal laws. Licensees experience some of those laws on a daily basis. For example, standards established under the federal law known as the Real Estate Settlement Procedures Act regulate almost every residential real estate closing. Perhaps less obvious in everyday practice but clearly among the most important of these laws are the federal antitrust laws that seek to prevent unfair competition. WHAT DOES ANTITRUST MEAN? Antitrust refers to prohibiting or regulating those activities that endanger business competition. Both state and federal laws prohibit persons from agreeing to restrain trade in an open competitive marketplace. In other words, antitrust laws are those statutes and judicial decisions restricting the growth and practices of monopolies. A monopoly exists when any entity, alone or in combination with others, seeks to restrict commerce to the detriment of the public. No express agreement is necessary between the parties, nor is actual intent to conspire required. PURE MONOPOLY AND PUBLIC UTILITY A pure monopoly is a product market situation in which there is only one seller of the product. This seller has absolute control over the price and sales volume in that market. The consumers must accept the monopoly price and the amount of output the monopolist chooses to offer for sale. It is not in the public's best interest for a government to allow the existence of pure monopolies because the monopolist fixes prices and restrains trade by eliminating competition. However, the federal and state governments do create market monopolies for certain products and services when the government judges this action to be in the best interest of the public. The government bases its action on the efficient and cost effective provision of the product. For Example, it would be cost prohibitive to have

2 competing water and sewage treatment companies put in the duplicate infrastructure under every street in the community. The same rationale exists for electric power, telephone, and natural gas companies. In the past, TV cable companies and solid waste collection companies were given this exclusive monopoly privilege. The government regulates these publicly sanctioned monopolies by creating some form of public service commission. These publicly sanctioned monopolies are public utilities such as the Georgia Power Company. ILLEGAL COMBINATIONS AND COLLUSION Besides the monopoly situation, a market can be dominated by a few very large, powerful firms, or the market may have only a few sellers who can control price and output in the same fashion as a monopolist. In either of these two situations, the government monitors the market activity to find evidence of price fixing or any form of restraint of trade. Participants need not enter into an actual agreement nor intend to work in combination for a monopoly to exist. Monopolies do not require overt acts. Any discouraging or eliminating of competition creates a presumption that the intent to monopolize exists. Illegal combination is another term for groups or individuals operating together to restrict trade or commerce. B. FEDERAL ANTITRUST RESTRICTION ON REAL ESTATE THE SHERMAN ANTITRUST ACT The Sherman Antitrust Act ( the primary antitrust statute that affects the real estate industry. The Sherman Act provides that all contracts, combinations, or conspiracies in restraint of trade or commerce among the states or with foreign nations are illegal. The Act further provides that any person engaged in such illegal activity commits a felony and if convicted, is subject to a fine of up to one hundred thousand dollars, $100,000.00, (up to one million dollars, $1,000,000.00, if a corporation), or by imprisonment up to three years, or both. The Sherman Antitrust Act applies to the practice of real estate when it involves interstate commerce or activities that involve trade or commerce that crosses state lines. Real estate involvement in interstate commerce occurs through the movement of persons from one state to another as a result of the sale of real property, interstate arrangements for insurance and financing, advertising across state borders, and the national exchange of referrals among brokers. The four main categories in which brokers and their agents have become the targets of federal antitrust actions under the Sherman Act are: (a) (b) (c) (d) criminal prosecutions on allegations of price-fixing; private suits for damages brought by brokers excluded from membership in local multiple listing services; civil suits and injunctive relief sought by groups of private individuals against brokers and sales associates based on allegations of price-fixing; and civil suits for damages and injunctive relief initiated by the federal government.

3 FEDERAL ANTITRUST LAWS AND REAL ESTATE PRACTICE The United States Supreme Court has held that the Sherman Antitrust Act applies to the practice of real estate since real estate practice affects interstate commerce. In McLain v. Real Estate Board of New Orleans, Inc., the Court held that real estate activities have a significant effect on interstate commerce. In the McLain case, the plaintiffs (buyers and sellers of real estate) claimed that certain real estate brokers and their trade associations conspired to fix the price of residential real estate by suppressing market information, by fee-splitting, and by the systematic use of fixed commission rates. The court rejected the brokers' claims that real estate brokerage is local in nature and therefore not in interstate commerce. The requisite "Interstate" requirement is met if the activities, while wholly local in nature, "affect interstate commerce." Under the scope of the Sherman Antitrust Act, the following activities of the real estate industry affect interstate commerce: (a) the interstate movement of persons from one state to another resulting from the sale of real property, (b) insurance arrangements involving interstate firms or the transfer of insurance funds across state lines, (c) financing that involves interstate banking institutions or the transfer of mortgage money across state lines, (d) the interstate circulation of advertising, referrals, or other forms of information, (e) large real estate firms with offices in various states competing with individual entrepreneurs, and (f) small firms joining national franchises to obtain benefits such as national advertising and interstate relocation services. The Sherman Act defines the practice of real estate as a trade because it is commercial and carried on for profit. This designation as a trade makes real estate practitioners subject to antitrust law restrictions. The U.S. Supreme Court has rejected attempts by real estate brokers to claim an exemption from the Sherman Act on the basis that real estate brokerage services involve personal services rather than commodities. The court also rejected the claim that real estate brokerage is a "profession" and not a "trade" and therefore exempt. The professional exemption has also largely disappeared, due to U.S. Supreme Court cases holding that the professions of law and engineering are not exempt from antitrust laws. ACTIVITIES THAT VIOLATE ANTITRUST LAWS (a) PRICE FIXING - Agreements among competing brokers to set commissions at fixed levels violate the law. This prohibition is not limited to agreements on a specific fee or commission. The prohibition also extends to all agreements that result in "raising, depressing, fixing, pegging or stabilizing prices." The U.S. Supreme Court has clearly stated that the act of two or more brokers adhering to minimum fee schedules or other price restrictions is price fixing, even if it is done to adhere to a professional "code of ethics."

4 (b) (c) GROUP BOYCOTT - A group boycott is also known as a concerted refusal to deal. Generally, it is an agreement among competitors to drive a rival out of business by denying the rival access to a supply or a source of customers. The rival is often a price discounter, and the conspiracy is usually motivated by a desire to keep prices at a high level. In the real estate brokerage field, many cases involve the restrictive practices of multiple listing services and local real estate boards. A federal court looked at restrictions for membership in one multiple listing service and found that the membership rules were so restrictive that many firms were denied access to the multiple listings. The court stressed two major factors: (1) that the market power of this multiple listing service was significant enough that buyers and sellers would be harmed by the unjustified exclusion of many firms; and (2) that the restrictive rules for membership exceeded the needs of the organization. This case does not mean that restrictive rules for multiple listing service membership are always anti-competitive. The courts must find sufficient evidence of a classic group boycott. At the same time individual brokers can form a group boycott, apart from MLS membership. In Park V. El Paso Board of Realtors the court found brokers liable for attempting to drive another broker out of business by disparaging him and refusing to treat his listings on a par with other brokers. TYING ARRANGEMENTS - A tying arrangement is the conditioning of the sale or purchase of one product or service to the sale or purchase of another product or service. In real estate brokerage, the most common form of tying is the "list back" agreement. For example, a real estate broker who is servicing a builder interested in a particular tract of land may extract an agreement from the builder to list the completed homes with that broker. A tying arrangement violates the Sherman Act when the court finds that: (1) there are two separate products - the tying product and the tied product; (2) the seller has sufficient economic power in the market with the tying product to appreciably restrain trade in the market for the tied product; and (3) a substantial amount of commerce is affected. FINES AND PENALTIES FOR CONVICTION UNDER THE SHERMAN ACT Licensees who, knowingly or unknowingly, violate antitrust laws face harsh consequences and penalties. Penalties for individuals may be fines of up to $100,000.00, imprisonment for up to 3 years, or both. Corporate fines may reach $1,000, Moreover, a private civil antitrust suit can result in a damage award equal to three times the actual damages caused by the illegal conduct, plus attorney fees and costs. EXAMPLES OF ANTITRUST VIOLATIONS

5 The Courts have applied the Sherman Act to individual brokers, agents, and companies; to real estate associations and boards; and to multiple listing services. The following specific activities are illegal: (a) (b) (c) (d) (e) (f) fixing real estate commission rates; price fixing of real property; unreasonable refusals by real estate boards to accept new members; unreasonable restriction on the availability of multiple listing services membership; multiple listing prohibitions against membership in more than one multiple listing service; and multiple listing service prohibitions against members distributing information on nonexclusive listings. Licensees try to avoid accusations of antitrust violations by being particularly careful to avoid even the appearance of fixing commission rates. A broker may follow his or her policy of not negotiating commission rates with clients as long as the broker sets the firm's rates independently based on actual costs of providing a service and as long as consumers understand that other companies and licensees may have different policies and rates. A licensee must never describe his or her firm's commission rate as the "standard" or "prevailing" rate of commission. SPECIFIC ACTIVITIES THAT VIOLATE THE ANTITRUST LAWS No firm or group of licensees is immune from accusations of antitrust violations. Several cases provide vivid demonstrations of this lack of immunity in Georgia. (a) Several large and small real estate firms in metropolitan Atlanta faced charges for violations of antitrust laws. Although there was never an actual trial of the issues involved, the court subjected some of the defendants in the case to heavy fines. (b) The federal government settled a suit against a real estate board in part by requiring that the board cease printing "suggested" or "standard" commission rates on the board's approved contracts. (c) Two multiple listing services faced lawsuits over their exclusionary membership practices and had to change their practices significantly. C. GEORGIA LAWS STATE LAWS RESTRICTING REAL ESTATE ANTITRUST ACTIVITIES Many states have enacted laws patterned after the Sherman Antitrust Statutes in an attempt to control more effectively monopolistic activities within their borders. Georgia has not enacted such a law. Federal Law serves as the basis for most prosecutions of trade restrictions in Georgia. Nevertheless, Georgia has enacted laws that provide alternate methods for dealing with antitrust activities

6 occurring within the State. The following three areas provide the principal means for internal state enforcement: (a) general business statutes; (b) statutes dealing with fraud and misrepresentation; and (c) the statute empowering the Georgia Real Estate Commission. Remember that the same legal restrictions that apply to any business professional also apply to the real estate professional in Georgia. Of particular interest to licensees who seek to avoid antitrust violations are two Georgia statutes known as the Fair Business Practices Act (the FBPA) and the Uniform Deceptive Trade Practices Act (the UDTPA). THE FAIR BUSINESS PRACTICES ACT (FBPA) The FBPA confers upon the Governor, through the Office of Consumer Affairs, the power to prohibit business transactions that would result in substantial actual damage to the citizens of Georgia. The Act regulates advertising and restricts activities that encourage consumer transactions. Any licensee who intentionally uses fraudulent or misleading information in an effort to encourage the sale of real property could violate the Act. Misleading information may appear in a simple statement that a licensee makes to a prospect or to a client, or it may appear in a public advertisement. Public methods of advertising include newspapers, printed notices, flyers, brochures, radio or television broadcasts, or any other marketing vehicle available to the public. The misleading advertisement, to be a violation of the Act, must have an effect on more than just one consumer. Instead, the advertisement must be likely to have an impact upon the consumer public as a whole. For example, if a licensee represents to a prospective purchaser that a property has public sewer when in fact it does not, the licensee has not violated the FBPA. The licensee may have committed fraud, but the injury is to one individual and not the public as a whole. The purchaser may file a civil suit for fraud or other tort, and the Commission may sanction the licensee. On the other hand, if the licensee advertises in the newspaper that ten lots in a subdivision have sewer when she knows they have septic tanks, she has violated both the FBPA and the License Law. APPLICATION OF THE FBPA TO ANTITRUST IN REAL ESTATE Licensees violate the FBPA when, in order to encourage consumer transactions, they falsely represent aspects of their business practice in a manner that does or could impact on the general public. For example, a salesperson violates the FBPA when he or she continually tells prospective clients that the commission rate that his or her broker charges is a "standard" or "prevailing" rate charged by all brokers in the area. The salesperson has provided false information regularly to the consumer public in an effort to encourage consumer transactions. If a broker, in order to attract new clients, advertises that his or her firm is the only one licensed to sell homes in a particular part of the city, then that broker has most likely violated the FBPA. The broker has published false or misleading information in order to encourage consumer transactions in a manner likely to affect the consumer public as a whole.

7 PENALTIES UNDER THE FBPA The State has not used the FBPA to date as a significant control over antitrust real estate activity. However, the State has become more aware of the FBPA and will likely use it more extensively in the future. The permitted penalties under the FBPA may be the reason for its potential rise in popularity. Upon conviction, an individual could incur a fine of as much as $25,000 per violation and a prohibition from engaging in similar activities. Further, the FBPA gives citizens the right to bring their own civil actions against violators. If a private citizen suffers injury because he or she purchases property through fraudulent or misleading representations that a licensee makes in a manner likely to harm other consumers, then that citizen can sue the licensee directly. If successful, the injured citizen can nullify all contracts and collect up to three times the amount of his or her loss, plus attorney fees and court costs. THE UNIFORM DECEPTIVE TRADE PRACTICES ACT (UDTPA) The UDTPA provides another mechanism for controlling antitrust activities that occur solely within state boundaries. Essentially, the UDTPA is very much like the FBPA. The UDTPA serves as a mechanism to provide penalties for individuals who fraudulently misrepresent aspects of the service they provide to their clients. The major difference between the FBPA and the UDTPA is that under the UDTPA no actual consumer transaction has to take place for a violation to occur. Therefore, the UDTPA potentially has a much broader application than the FBPA. If three brokerage firms conspire to fix commission rates and then advertise their "competitive rates" in the newspaper, they have violated the UDTPA. The fact that the advertisement contains misleading statements is alone sufficient to prove a violation of the Act. No sale needs to take place and no proof of consumer reliance on the advertisement must exist for a violation of the UDTPA to have occurred. APPLICATION OF THE UDTPA TO ANTITRUST IN REAL ESTATE Clearly, a licensee who conspires to fix commission rates or to divide geographical territory could find himself or herself subject to a law suit. A damaged individual could sue, or one brokerage firm could sue another firm under the UDTPA. For example, if the members of a multiple listing service conspire to exclude new firms and small firms from the service, this act is violation of the UDTPA. The express purpose of the arrangement is to discourage and limit competition. Under the UDTPA the excluded firm could bring suit against the members of the listing service and recover for any damages. Note that the excluded firms are business entities and have not engaged in a consumer transaction. Yet, they may recover damages for a trade restriction that has caused them harm. No such right exists under the FBPA since the excluded firm is not a member of the public induced to engage in a consumer transaction. PENALTIES UNDER THE UDTPA Penalties under the UDTPA are similar to those provided by the FBPA. If the state prosecutes under this Act, it can obtain an injunction and impose fines. Anyone bringing a civil action against a wrongdoer can recover three times the amount of his or her loss, plus attorney fees and court costs.

8 EFFECT OF THESE GENERAL BUSINESS STATUTES The State, as well as individuals, are likely to increase their use of the FBPA and the UDTPA to control illegal restraints on trade in real estate. The increased use of these statutes will likely result from two factors. First, more sophisticated homebuyers are becoming more aware of their rights. As a result, both homebuyers and the State are becoming more familiar with the FBPA and the UDTPA. Second, an individual using these statutes has the legal means to obtain significant dollar compensation for damages that the individual feels he or she has incurred due to a licensee's fraudulent or misleading dealings. GEORGIA LAWS PROHIBITING FRAUD AND MISREPRESENTATION By definition, fraud in Georgia consists of any kind of artifice intended to deceive another. The artifice can be an "act" or "a failure to act" on the part of the one who is justifiably in a position of trust or confidence. The nature of the relationship of a real estate licensee to a client automatically creates the duty of loyalty, and the relationship to a customer creates a duty of honesty and good faith. Breach of either duty can result in the nullification of a contract, the forfeiture of any commission or other fee owed to the licensee, a civil suit for damages, and the sanction of the real estate license by the Commission. An injured party, to establish fraud in Georgia, generally must prove that he or she had reason to rely on the accused. However, the relationship between a licensee and his or her client is a "confidential" one that is sufficient to establish a position of trust that the fraud laws require. For example, if a listing broker withholds from the seller any important information concerning a prospective purchaser's offer, that omission can result in the failure of a contract on the property. The agent has committed legal fraud. FRAUD LAWS AS APPLIED TO ANTITRUST IN REAL ESTATE Many of the activities prohibited by State and Federal antitrust laws are also fraudulent activities. Since Georgia lacks specific antitrust laws, a licensee is more likely to face an action for fraud than an action for antitrust. For example, if a broker tells a prospective seller that all firms in the area have the same commission rate and that the rate is nonnegotiable, the broker has misrepresented the negotiability of commission rates. The broker will most likely suffer loss through operation of the Georgia fraud laws, even though telling the sellers that commission rates were fixed is the type of activity addressed by the antitrust laws. In this example, the broker has fraudulently induced the seller into entering a contract. The seller can nullify the listing contract and collect damages from the broker. The broker will also forfeit his commission and most likely face disciplinary action by the Georgia Real Estate Commission. Note that the broker commits the violation by misrepresenting the general negotiability of commission rates. The broker can say that his firm does not negotiate its rates if, in fact, it does not. D. THE GEORGIA REAL ESTATE COMMISSION THE ROLE OF THE COMMISSION

9 It has not been the primary responsibility or practice of the Real Estate Commission to prevent illegal combinations and conspiracies. The Commission does have power to control unfair trade practices, as well as an obligation to regulate Georgia licensees. The license law, [O.C.G.A b(2)] for example, gives the Commission the authority to prevent the use of intentionally misleading advertisements of real property and the "terms, values, policies or services of the business conducted." The Commission has the power to intervene in licensees' advertising that attempts to publicize rates, combinations, or services restricting trade. The Commission may penalize any licensee, approved instructor, or school found guilty of a violation of the license law or rules and regulations promulgated by the Commission, or of any unfair trade practice. Among the items listed as "unfair trade practices" are prohibitions against substantial misrepresentations and dishonest dealing with consumers. Under the State licensing law, the Commission may reprimand or fine a licensee, or revoke, or suspend the license of any licensee found violating the license law. However, the Real Estate Commission regulates only under the license law. It does not enforce the Fair Business Practices Act or the Uniform Deceptive Trade Practices Act. Although it can impose sanctions on licensees found guilty of violating criminal provisions of other antitrust statutes. (See LICENSE LAW ). The Commission may also take action against antitrust activities that violate the unfair trade practices provisions of the License Law. (See LICENSE LAW ).