Rockwell publishing real estate law chapter 21

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© 2009 Rockwell Institute

California Real Estate Law

Lesson 21:
Antitrust Law

© Copyright 2007 Rockwell Publishing, Inc.

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


1

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
Purpose of antitrust law
When businesses work together to control prices or
limit supply ? higher prices; economy suffers

When marketplace is competitive ? better products
and prices


Antitrust Law
Purpose of antitrust law
Antitrust laws support competition in marketplace.

Antitrust laws also designed to encourage:
l entrepreneurs
l small businesses


2

Antitrust Law
History of 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


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.


3

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


4

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
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
Individual vs. group action
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%


5

Conspiracy
Individual vs. group action
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%.


Conspiracy
Agreement to act
Important part of conspiracy is agreement to act.

Agreement may be:
l spoken
l gesture (nod, wink)
l silence (interpreted as tacit agreement)


Prohibited Acts
Unreasonable restraints on trade
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.


6

Prohibited Acts
Unreasonable restraints on trade
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
Per se rule
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


Rule of reason
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

7

“Quick look” test
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


Prohibited Acts
Impact on competition
Antitrust violation requires actual injury to
competitor or consumer.
l not just unhappiness about changed business
landscape


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

8

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


9

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
Penalties
Federal antitrust penalties vary, depending on:
l individual or corporation
l civil or criminal


10

Enforcing the Law
Penalties
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


Enforcing the Law
Penalties
Civil cases:
l parties injured by antitrust violations may sue
violators for treble damages (3X actual
damages)


Enforcing the Law
Penalties
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


11

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 and commission fixing
Price fixing: cooperative setting of prices or price
ranges by competing firms
l price fixing is per se antitrust violation


12

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


13

Group boycotts and the MLS
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


Tie-in arrangements
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


14

Tie-in arrangements
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


Market allocation
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


15

Avoiding antitrust violations
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

Summary

l Price fixing
l Group boycott
l Tie-in arrangement
l List-back agreement
l Market allocation


16

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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