At the precipice of forced change, how will the decision in Sitzer et al. v. NAR et al., affect California real estate transactions?
Kansas City, Missouri was the epicenter of a transformative legal decision, rendered by way of jury verdict issued on October 31, 2023. The National Association of Realtors (“NAR”) and two major real estate brokerage firms, HomeServices of America (which includes the Berkshire Hathaway and Intero brands, among others), and Keller Williams, were found liable for conspiring to inflate and fix commissions charged to home sellers in real estate transactions to their benefit and to the detriment of consumer clients.
The sizeable $1.78 billion jury verdict was rendered in the Sitzer/Burnett buyer broker class action commission lawsuit after a relatively efficient two-and-a-half-week trial, and after less than 3 hours of jury deliberation. Two other brokerages settled before the verdict, for a combined $138 million. It is notable that under the antitrust provisions on which Plaintiffs prevailed, the verdict could be subject to tripling of the damages award, pushing the damages total to more than $5 billion.
The class action Plaintiffs’ claims centered around the argument that, in spite of various antitrust rules and regulations, Defendants knowingly violated their own internal rules in order to uphold increased commission rates for themselves. The Plaintiffs alleged that any such internal rules or policies were simply an artifice for conspiracy to raise costs for home sellers.
The case was venued in the United States District Court for the Western District of Missouri, but the underlying facts addressed conduct that is typically ubiquitous irrespective of the state, and generally represents the manner in which real estate sales transactions are handled nationwide, including in California. Consequently, the arguments presented are readily adaptable into countless other jurisdictions, and likely will be, as similar suits are filed across the country. In Chicago, a nearly identical case is headed to trial in early 2024.
In a typical real estate transaction, a homeowner seeking to sell a property selects a “listing agent” to market and sell the real estate. While the homeowner and listing agent typically negotiate and agree to the commission percentage that the listing agent will receive, the form listing agreements also stipulate the commission percentage that will be paid to the future/potential buyer’s agent, which once set via this agreement becomes part of the transaction. The listing agent then typically lists the property on the Multiple Listing Service database, circulating the listing – which includes publication of the commission percentage to any successful buyer’s agent on the transaction.
Unfavorable to the Defendants’ case was evidence that the Multiple Listing Service databases would not even allow a listing to be added unless the listing included this set commission percentage to the buyer’s agent for the transaction on that piece of property. The Plaintiffs also introduced evidence that the industry rules that regulate real estate brokers and agents also forbid them from using the offer and counteroffer process to negotiate the amount of commission to be paid to a buyer’s agent. Essentially, the buyer’s agent’s commission was set in stone and thereafter nonnegotiable. The amount was never tied to actual services wanted, nor rendered; it was totally arbitrary. On the buyer’s side, the Plaintiffs explained that under this scenario, buyers are essentially forced to “pay” for services that they may not need or even want, inflating the price to include the commission so the buyer is effectively paying the commission as part of the purchase price. On the seller’s side, the Plaintiffs argued that forced adherence to the pre-set buyer broker commission in exchange for access to the Multiple Listing Service prevents competition from “innovative or lower-priced alternatives,” and presented evidence of agents that “steer” buyers to homes that offer higher commissions. In a competitive market, and were it not for defendants’ anticompetitive restraint, as argued by Plaintiffs, home sellers would not be forced to pay a cost that benefits and should be bone and paid by the buyer.
Keller Williams’ founder Gary Keller and NAR’s CEO Bob Goldberg testified as part of the Defendants’ bid to defend what NAR called their “Clear Cooperation Policy,” which requires listing brokers to submit a listing to the Multiple Listing Service database within one business day of marketing a property to the public, and argued that in spite of this there was always the ability to revisit and negotiate a buyer’s agent’s commission. But the 8-member jury panel sided with the Plaintiffs, who represented more than 260,000 home sellers in Missouri, Kansas and Illinois between the years of 2015 and 2022.
While the verdict will no doubt be subject to appeal, if it is upheld the decision will result in dramatic changes nationwide to the way real estate agents conduct business and are compensated. Possible fallout will likely be centered around the buyer-broker relationship and increased ability for buyers to negotiate the terms of such relationship, possibly also resulting in a direct from the buyer compensation model. This new level of leverage and heightened transparency will no doubt generate increased competition and could result in downward pressure on the overall commission paid to buyer’s agents. Certain markets may also be prime for hourly or fixed-fee arrangements to enter the marketplace.
For now, all eyes are fixed on the Honorable Stephen Bough, the jurist presiding over the Sitzer/Burnett trial. Judge Bough has set post-trial motions to be briefed throughout early 2024, with final judgment to follow, likely in the April or May 2024 timeframe.