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Rockwell publishing real estate law chapter 21

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  • 1. Printable Lesson Materials Print these materials as a study guide These printable materials allow you to study away from your computer, which many students find beneficial. These materials consist of two parts: graphic summaries of the content and a multiple choice quiz. Graphic Summaries This portion of your printable materials consists of dozens of frames that summarize the content in this lesson. The frames are arranged on the page to make it easy for you to study the material and add your own notes from your textbook or the online course. Quizzes Many students learn best from sets of questions, and this multiple choice quiz allows you to focus your review of the material to important topics. 13218 NE 20th Street Bellevue, WA 98005 425-747-7272 800-221-9347 www.rockwellinstitute.com© 2009 Rockwell Institute
  • 2. California Real Estate Law Lesson 21: Antitrust Law © Copyright 2007 Rockwell Publishing, Inc.IntroductionThis lesson will discuss: l antitrust law l prohibited acts l enforcing the law l antitrust law and the real estate profession © Copyright 2007 Rockwell Publishing, Inc.Antitrust LawAntitrust laws are aimed at preventing businessarrangements and practices that have effect ofrestraining trade.Examples: l monopolies l price fixing l anticompetitive agreements © Copyright 2007 Rockwell Publishing, Inc. 1
  • 3. Antitrust LawFocus of antitrust laws: l originally: oil, gas, tobacco companies l later: communication and transportation companies l today: software companies and Internet- related services © Copyright 2007 Rockwell Publishing, Inc.Antitrust LawPurpose of antitrust lawWhen businesses work together to control prices orlimit supply ? higher prices; economy suffersWhen marketplace is competitive ? better productsand prices © Copyright 2007 Rockwell Publishing, Inc.Antitrust LawPurpose of antitrust lawAntitrust laws support competition in marketplace.Antitrust laws also designed to encourage: l entrepreneurs l small businesses © Copyright 2007 Rockwell Publishing, Inc. 2
  • 4. Antitrust LawHistory of antitrust lawIn late 1880s, businesses in certain industries (oil,gas, tobacco, etc.) began merging andconsolidating into huge corporations known astrusts.Monopoly: occurs when one seller of goods orprovider of services has exclusive control overmarket; results in lack of competition with noreasonable substitutes © Copyright 2007 Rockwell Publishing, Inc.Antitrust LawHistory of antitrust lawStates began enacting antitrust laws, but these lawswere 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. © Copyright 2007 Rockwell Publishing, Inc.Antitrust LawHistory of antitrust lawSherman Act regulates interstate restraints ontrade. l at first, only used to break up trusts in certain industriesCourts later expanded meaning of “trade” to includenot just production and sale of goods, but also theprovision of services. © Copyright 2007 Rockwell Publishing, Inc. 3
  • 5. Antitrust LawHistory of antitrust lawIn 1950, U.S. Supreme Court held that federalantitrust laws apply to real estate industry.In 1976, California supreme court held thatCalifornia’s antitrust law (Cartwright Act) applies toservices by real estate brokers. © Copyright 2007 Rockwell Publishing, Inc.SummaryAntitrust Law l Monopoly l Sherman Antitrust Act l Cartwright Act © Copyright 2007 Rockwell Publishing, Inc.Prohibited ActsNot all business decisions that increase profits ormarket share violate antitrust laws. l competitive practices and lower prices aren’t necessarily antitrust violations—may simply be good business practicesMarket share: amount of business a company doesin a particular area © Copyright 2007 Rockwell Publishing, Inc. 4
  • 6. Prohibited ActsTo 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. © Copyright 2007 Rockwell Publishing, Inc.Prohibited ActsConspiracyConspiracy: agreement between two or morepeople to commit illegal act (or to use illegalmethods to achieve legal purpose)Example: It’s ok to make profit from selling widgets.It’s not okay to make profit from selling widgets bymaking it impossible for anyone else to sell widgetsin same area. © Copyright 2007 Rockwell Publishing, Inc.ConspiracyIndividual vs. group actionConspiracy requires group action. l one person acting alone isn’t enoughGroup action: action between two or morecompetitors or groupsExample: two brokerages conspire to list propertiesat 7% © Copyright 2007 Rockwell Publishing, Inc. 5
  • 7. ConspiracyIndividual vs. group actionUnder antitrust law, real estate brokerage isconsidered single entity. l broker can set fixed commission rates for salespeople ? not antitrust violationExample: Broker for Mountain Realty tellssalespeople to take listings at 7%. © Copyright 2007 Rockwell Publishing, Inc.ConspiracyAgreement to actImportant part of conspiracy is agreement to act.Agreement may be: l spoken l gesture (nod, wink) l silence (interpreted as tacit agreement) © Copyright 2007 Rockwell Publishing, Inc.Prohibited ActsUnreasonable restraints on tradeRestraint on trade: any act that prevents individualor company from doing business in a certain area orwith certain people l act that hinders free tradeAntitrust laws prohibit unreasonable restraints ontrade. © Copyright 2007 Rockwell Publishing, Inc. 6
  • 8. Prohibited ActsUnreasonable restraints on tradeCourts use three tests for determining whetheractivity constitutes unreasonable restraint on trade: l per se rule l rule of reason l “quick look” test © Copyright 2007 Rockwell Publishing, Inc.Unreasonable Restraints on TradePer se rulePer se: action that is automatically illegal,regardless of the circumstancesCertain activities (such as price fixing) have beendetermined by courts to be unreasonable restraintson trade and unlawful per se. l doesn’t matter whether parties had any intent to break law © Copyright 2007 Rockwell Publishing, Inc.Unreasonable Restraints on TradeRule of reasonRule of reason: balancing test that is applied whenact isn’t a per se violation, but might still be anillegal restraint on tradeCourts weigh activity’s impact on competition l decides whether activity’s negative effects outweigh positive effects l requires considering individual circumstances of each case © Copyright 2007 Rockwell Publishing, Inc. 7
  • 9. Unreasonable Restraints on Trade“Quick look” testQuick look test: shortened version of rule of reasontest; applied when there’s no per se violation of law,but anticompetitive effects of restraint on trade areplainly obvious to casual observer l expedites cases © Copyright 2007 Rockwell Publishing, Inc.Prohibited ActsImpact on competitionAntitrust violation requires actual injury tocompetitor or consumer. l not just unhappiness about changed business landscape © Copyright 2007 Rockwell Publishing, Inc.SummaryProhibited Acts l Market share l Conspiracy l Group action l Restraint on trade l Per se l Rule of reason l Quick look test © Copyright 2007 Rockwell Publishing, Inc. 8
  • 10. Enforcing the LawActions to enforce antitrust laws may be brought by: l Antitrust Division of U.S. Department of Justice l Federal Trade Commission © Copyright 2007 Rockwell Publishing, Inc.Enforcing the LawDepartment of Justice investigates antitrustcomplaints 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 © Copyright 2007 Rockwell Publishing, Inc.Enforcing the LawFederal Trade Commission may initiate civil oradministrative antitrust proceedings. l but can’t impose criminal sanctions © Copyright 2007 Rockwell Publishing, Inc. 9
  • 11. Enforcing the LawIn California, Cartwright Act is enforced by stateattorney general.Attorney general may initiate: l civil actions l criminal actions © Copyright 2007 Rockwell Publishing, Inc.Enforcing the LawBoth state and federal law give individual citizenspower to pursue antitrust violations in civil court. © Copyright 2007 Rockwell Publishing, Inc.Enforcing the LawPenaltiesFederal antitrust penalties vary, depending on: l individual or corporation l civil or criminal © Copyright 2007 Rockwell Publishing, Inc. 10
  • 12. Enforcing the LawPenaltiesCriminal 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 © Copyright 2007 Rockwell Publishing, Inc.Enforcing the LawPenaltiesCivil cases: l parties injured by antitrust violations may sue violators for treble damages (3X actual damages) © Copyright 2007 Rockwell Publishing, Inc.Enforcing the LawPenaltiesCalifornia 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 © Copyright 2007 Rockwell Publishing, Inc. 11
  • 13. SummaryEnforcing the Law l Federal Trade Commission l Department of Justice l Treble damages © Copyright 2007 Rockwell Publishing, Inc.Antitrust Law and Real EstateReal estate agents should be aware of potentialdangers in: l price and commission fixing l group boycotts l tie-in arrangements l market allocation © Copyright 2007 Rockwell Publishing, Inc.Antitrust Law and Real EstatePrice and commission fixingPrice fixing: cooperative setting of prices or priceranges by competing firms l price fixing is per se antitrust violation © Copyright 2007 Rockwell Publishing, Inc. 12
  • 14. Antitrust Law and Real EstatePrice and commission fixingTo 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 © Copyright 2007 Rockwell Publishing, Inc.Antitrust Law and Real EstatePrice and commission fixingCalifornia law requires any standard form (such aslisting agreement) that establishes or changesbroker’s compensation to contain followingdisclosure 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. © Copyright 2007 Rockwell Publishing, Inc.Antitrust Law and Real EstatePrice and commission fixingCommission 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 © Copyright 2007 Rockwell Publishing, Inc. 13
  • 15. Antitrust Law and Real EstateGroup boycotts and the MLSGroup boycott: agreement between two or morereal estate brokers to exclude other brokers fromfair participation in real estate activities l illegal per se © Copyright 2007 Rockwell Publishing, Inc.Antitrust Law and Real EstateGroup boycotts and the MLSBroker allowed to refuse to do business withindividual broker. l but can’t tell other brokers (or agree with other brokers) to do the same © Copyright 2007 Rockwell Publishing, Inc.Antitrust Law and Real EstateTie-in arrangementsTie-in arrangement (also called tying arrangement):occurs when a buyer is required to purchase oneproduct or service in order to purchase anotherproduct or service l illegal per seExample: list-back agreement © Copyright 2007 Rockwell Publishing, Inc. 14
  • 16. Antitrust Law and Real EstateTie-in arrangementsList-back agreement: developer tells builder he maybuy lot only if he lists finished house withdeveloper’s agent l violates antitrust laws if listing requirement is condition of original sale © Copyright 2007 Rockwell Publishing, Inc.Antitrust Law and Real EstateMarket allocationMarket allocation: it’s illegal for competing brokersto 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 © Copyright 2007 Rockwell Publishing, Inc.Antitrust Law and Real EstateMarket allocationIndividuals and businesses can decide which areasand people to do business with l but they can’t agree with other individuals or businesses to allocate territory/customers © Copyright 2007 Rockwell Publishing, Inc. 15
  • 17. Antitrust Law and Real EstateAvoiding antitrust violationsBrokers 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 © Copyright 2007 Rockwell Publishing, Inc.SummaryAntitrust Law and Real Estate l Price fixing l Group boycott l Tie-in arrangement l List-back agreement l Market allocation © Copyright 2007 Rockwell Publishing, Inc. 16
  • 18. Legal Aspects of Real Estate Lesson 21 Cumulative Quiz1. 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 above2. The primary federal antitrust law is the: A. Monopoly Act B. Sherman Act C. Cartwright Act D. Conspiracy Act3. 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 competition4. 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 services5. A conspiracy requires a: A. written agreement to act B. monopoly C. group action D. legal purpose6. 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
  • 19. 7. Which of the following is a negative effect that would be a factor in determining whether an activity isan unreasonable restraint on trade? A. An increase in innovation B. Lower prices C. A per se violation D. Deterioration of services8. A party that suffers losses because of antitrust violations can sue the offender for how much of theactual 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 million9. 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 licensees10. A court that conducts an economic analysis to determine whether an activitys negative impact oncompetition outweighs its positive effects is applying the: A. quick look test B. per se rule C. rule of reason test D. unilateral action rule11. 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 rates12. 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© 2009 Rockwell Publishing 2
  • 20. 13. An arrangement that requires a buyer to purchase something else in addition to the product or serviceshe wants is known as: A. a group boycott B. price fixing C. a tie-in agreement D. commission splitting14. 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 others geographic areas C. A brokerage in which one agent specializes in selling luxury homes D. A broker focusing on sales of commercial property15. 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 negotiable16. Three large steel companies plan to merge and form a giant steel corporation. Which statement ismost 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 trade17. Two brokers know that a particular agent doesnt maintain the confidentiality of his clients, because inthe past he told them things that should have stayed confidential. The brokers agree not to work with thisagent in the future. This is an example of: A. market allocation B. using illegal methods to achieve a legal purpose C. monopoly D. price fixing18. 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© 2009 Rockwell Publishing 3
  • 21. 19. If the anticompetitive effects of an action are plainly obvious to a casual observer, a court may usethe: A. valid defense rule B. market allocation test C. quick look test D. group action rule20. A broker at an MLS meeting casually mentions that she plans to raise her commission rates. Severalother 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© 2009 Rockwell Publishing 4