Real estate brokerages face billions in liability in 2024 due to centuries-old practice

The age-old industry of buying and selling real estate is changing before our eyes.

On Oct. 31, 2023, the Missouri federal jury in Burnett v. National Association of Realtors issued a $1.8 billion verdict – $5.4 billion if trebled – against the National Association of Realtors (NAR) and its members for violating antitrust laws.

While the NAR appeals, the plaintiffs’ attorneys in Burnett filed Batton v. Compass, Inc., in a federal district court in Illinois asserting similar claims.

Further, another similar case, Moehrl v. National Association of Realtors, is also pending in a federal district court in Illinois, with damages expected to exceed $40 billion.

Finally, Californians just filed suit in Grace v. National Association of Realtors, asserting similar claims on behalf of those transacting in real property in San Francisco.

Experts indicate the real estate industry is facing liability reaching $400 billion due to Burnett and these other similar matters.

The central issue is whether the NAR’s rules and its members’ agreement to abide by those rules unfairly restrains trade in the real estate industry. The cornerstone of these cases is NAR’s requirement that all NAR members agree as a condition of becoming a NAR member that real property purchase contracts will contain a unilateral offer to a NAR-affiliated buyer’s broker for a commission of 2.5-3% of the property’s sales price (with another 2.5-3% earmarked for the NAR-affiliated seller’s broker), and, in exchange, NAR members may access multiple listing services. These listing services advertise various properties in geographic areas throughout the United States to NAR members representing buyers and sellers.

Under the NAR’s rules, all of its members must use these databases to list properties for sale. Because most brokerages and their agents are members in the NAR, the vast majority of real property transactions in the United States stem from properties listed on NAR-endorsed multiple listing services. Thus, the NAR’s rules allegedly have a measurable effect on property prices.

Plaintiffs in Burnett bought homes listed on these multiple listing services throughout the country. They contend that requiring a seller’s broker to make a unilateral offer to a buyer’s broker to list a home on the multiple listing services artificially and unfairly raises the prices of homes.

They further contend home sellers pass the cost associated with the unilateral offer (i.e., the cost of the agreed-upon NAR-affiliated buyer’s broker’s commission resulting from the NAR’s rules) on to buyers by raising the asking price for their home by 2.5-3%. In turn, home prices are artificially inflated by the NAR’s rules, which all its members agree to. This constitutes an unlawful conspiracy to restrain trade in violation of the antitrust laws.

Plaintiffs also contend that the NAR requiring, and its members agreeing, to issue a blanket unilateral offer to use the multiple listing services without regard to the buyer’s broker’s services or experience is unfair and anticompetitive.

They also contend buyer’s brokers play a nominal role in today’s real estate market, in which buyers direct their brokers to take them to pre-picked homes due to technological advances, such as Realtor.com, Redfin, and Zillow. Thus, buyer’s brokers are unfairly compensated relative to the allegedly nominal services they provide.

Finally, Plaintiffs contend that these practices operate to incentivize the NAR’s members to steer home buyers away from homes within their criteria merely because they are not listed on the multiple listing services, which is unfair and anticompetitive. They contend this practice artificially creates a lack of supply, driving up home prices.

These allegations are not entirely new. The Department of Justice filed a complaint against the NAR on Nov.r 19, 2020, charging it with violating antitrust law. The Department later withdrew consent to a stipulated judgment it entered into. The core allegedly anticompetitive practice of NAR requiring the unilateral offer in exchange for access to the multiple listing services was not directly at issue.

Indeed, the NAR steadfastly maintains that its practices are lawful. Specifically, the NAR argues that the practice of making a unilateral offer of compensation to a buyer’s broker in exchange for access to the multiple listing services has been beneficial to consumers, homeowners and homebuyers, and the overall real estate market for more than a decade.

NAR contends that its rules allow buyers to hire experienced and qualified NAR-affiliated buyer’s brokers, who can guide them quickly and accurately to homes listed by other experienced NAR-affiliated seller’s brokers in accordance with accepted industry standards designed to protect consumers and ensure professional integrity. Thus, the NAR’s rules and its member’s agreements are designed to quickly connect buyers and sellers to professionals who have adopted rules designed to ensure that consumers have the best possible representation during the real estate transaction. In turn, homes are bought and sold more efficiently, prices are accurate, and consumers are not harmed by incompetent professionals during a seminal transaction.

The jury rejected the NAR’s arguments in Burnett, but perhaps Batton, Moehrl, and Grace will lead to different results. Whatever the correct conclusion is, Burnett, Batton, Grace, and Moehrl have substantial implications for the real estate industry.

Although those operating in the real estate industry will feel the effects of Burnett, participants to a real estate transaction consummated under the NAR’s purview may also have to deal with novel legal issues and arguments related to Burnett and cases like it now.

The jury’s findings in Burnett raises a question as to whether contracts entered into under the NAR’s rules and purview are invalid. One interpretation of Burnett’s outcome at trial suggests that any real estate transaction brokered by NAR-affiliated brokers could be invalid because it furthered an illegal conspiracy.

More specifically, contracts with the NAR-required unilateral offer in them are part of an illegal conspiracy that violates federal and state law per the jury in Burnett. Contracts cannot have illegal objects or further unlawful ends, of course. Thus, some portion of the NAR-tainted transaction may be deemed invalid as furthering an unlawful end – violation of the antitrust laws.

Arguably, at least the portion of a real estate contract setting out commissions pursuant to the NAR’s conspiracy to restrain trade is invalid. The anti-competitive commissions could be excised from the contract, with the brokerages forced to return them to the parties.

In fact, some judges may even find the anti-competitive commissions taint the contract such that the entire transaction may be unwound. Those dealing in real property under the NAR’s purview could even raise this argument now, although it would have more force if the Burnett appeal is decided adversely to the NAR (and less force if the appeal is decided in the NAR’s favor).

Some experts indicate that $30 billion dollars in potentially unlawful broker fees may be paid out annually to real estate brokerages operating under the NAR’s purview. See Mark S. Nadel, A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure (Abridged), 5 Cornell Real Estate Rev. 26, 26 n. 1 (2007). If the NAR is incorrect in its assertion that its practices are lawful, it appears some experts believe brokerages have been unjustly enriched as a result of the NAR’s alleged unlawful conspiracy for years, to the tune of billions of dollars. Regulatory agencies and consumers who dealt with NAR-affiliated brokerages may seek recovery of those billions in funds accumulated over the years.

Brokerages facing billions in liability may seek bankruptcy protection while restructuring their liabilities via reductions in force and other measures.

This could lead to further legal liability as newly unemployed real estate professionals assert employment claims against brokerages. For example, brokerages firing a class of “independent contractors” in California could be liable for misclassifying them, given legal changes presumptively classifying most workers as employees unless certain conditions are met.

Further, to cut off liability, brokerages may eliminate the unilateral offer, and some market participants may withdraw from the NAR, like Redfin did. In turn, state associations may gain regulatory prominence as the NAR’s power dwindles, adopting rules best suited to each state’s real estate professionals.

This could lead to balkanization between professionals operating in different states. For example, if one party in one state wishes to purchase property in another state, and the parties’ brokers have less stringent trade rules governing them, then one party may have a transactional advantage merely because of the trade rules their broker is subject to. States’ professionals may withdraw from the NAR, a previously unheard of move that now may be acceptable given the NAR’s troubles, and create organizations that adopt less stringent trade rules so their professionals gain this transactional advantage.

Finally, the multiple listing services may become obsolete. In turn, substitute databases not tied to an allegedly unlawful conspiracy, where perhaps buyers themselves advertise their homes, may flourish. This advancement could bring with it a host of new legal issues.

For now, those interested in the real estate industry should follow the Burnett appeal closely. Depending on how it is decided, real estate brokerages affiliated with the NAR may find themselves facing ruinous liability from all angles. In any event, parties to a real estate transaction brokered by NAR-affiliated brokerages and agents, as well as those brokerages and agents themselves, would do well to reach out to counsel to determine their rights and potential liability after the jury’s findings in Burnett. It may be that these parties have some legal recourse to either seek return of brokerage fees or unwind the transaction at issue, depending on the circumstances.