Antitrust Flashcards
The name might make you think of trust falls or relationship exercises, but antitrust laws are legislation aimed at promoting competition and preventing unfair trade practices and monopoly.
Let’s take a look at some of the key elements of antitrust.
Sherman Antitrust Act
The most important federal law governing antitrust is the Sherman Antitrust Act. We’ll go over this act later.
Per Se Violations
Antitrust laws were created over a century ago, but they’ve been continuously updated to reflect the modern business climate. But because these antitrust laws are so old, there have been tons of cases involving antitrust violations.
That’s why there are such things as per se violations, which are acts that are considered inherently illegal. This is because they’ve been proven illegal over and over again.
Collusion
These per se violations are types of collusion. Collusion is an unlawful agreement between competitors to monopolize a market, disadvantage other competitors, or otherwise undertake activities in violation of fair trade laws.
Antitrust Behaviors
Most behaviors that fall under the umbrella of antitrust activity are forms of colluding, but they can be more specifically categorized as one of the following:
Price fixing
Group boycott
Market or customer allocation
Tie-in agreements
Let’s examine each of these behaviors a little more closely.
What’s Antitrust?
Price fixing is any effort made by competitors to jointly establish a fixed rate, price, or commission, and it is considered an antitrust violation. It occurs when competitors agree to do any of the following:
Raise or fix prices for their goods or services
Set a minimum price they will not sell below
Reduce or eliminate discounts
Setting Commission Rates
In the world of real estate, price fixing might look like a group of brokers getting together and agreeing to set the commission rates in their area.
That’s illegal. Commission is the method by which home buyers and sellers compensate brokers and, thereby, agents (you). So by colluding with other brokers to set commission rates at a certain amount, those brokers would be engaging in price fixing.
While each brokerage firm is free to determine the commission or fee it will charge clients for services, representatives of the brokerage firm may NOT discuss such matters with representatives of another brokerage firm. That’s collusion!
Remember: Commission rates must always be negotiable between the broker and their client!
Discussing Split Commissions
A broker may discuss the amount of a cooperating fee desired from another broker, but only within the context of a specific transaction.
For example, let’s say Ben and Jerry are agents representing a buyer and seller, respectively. The seller’s commission was already determined in the listing agreement, but Ben and Jerry could still negotiate how the commission is split. To do this, Ben and Jerry have to talk about that commission. That conversation is allowed.
Legal vs. Illegal
It is possible brokerages will have similar pricing or commission structures. This can happen organically because of market conditions, and it is fine and 100% allowable.
Similar pricing only becomes illegal, and truly becomes price fixing, when two or more people come together and decide as a partnership/group that they’re going to set their pricing and/or commission rates to a specific amount. See the difference?
Price Fixing Activities
Some seemingly innocent conversations can lead you down the path of a violation. ALWAYS avoid:
Any discussion of prices
Any analysis of commission rates
These discussions could happen anywhere:
In business meetings
At social gatherings
In line at your local McDonald’s
Keep in mind that being present during the discussion is dangerous, even if there is no overt or express agreement.
Outside of actual negotiations, it’s safest to just avoid that type of conversation altogether, with anyone, at any time. 🚫
Price Fixing vs. Open Competition
American consumers have the right to expect the benefits of free and open competition, which implies the best goods and services at the lowest prices.
Public and private organizations often rely on a competitive bidding process to achieve this end. The competitive process only works, however, when there is competition and prices are set honestly and independently.
Illegal Everywhere
Price fixing isn’t just illegal among competitors; it is also illegal among professional associations. No one is above the law! The national, state, local Board of Realtors, or state government agencies can’t do things like set a uniform commission rate.
Avoiding Price Fixing
Group boycotts, like price fixing, are also a per se antitrust violation.
A group boycott is an agreement between two or more competitors to NOT do business with another competitor for the purpose of inducing the other competitor to change its business practices or fail altogether.
One example of a group boycott in real estate would be if a group of full-service brokerage firms agreed NOT to show the listings of a new discount brokerage.
Consumers would be harmed by this practice – the selection of homes shown to them would be unnecessarily reduced and limited. Many consumers might not even know more affordable homes exist in their area!
Boycotting Entities
Group boycotts could also be against an entity other than a broker, such as a:
Website
Newspaper
Advertising firm
For instance, if two or more agents or brokers talk about how they don’t like the prices of their advertising firm, decide not to use them anymore, and persuade several other agents not to use them either, that is a group boycott against an entity and a per se antitrust violation.
This kind of boycotting would impede the freedoms of an open market, as agents and brokers would be setting advertising rates instead of factors like supply, demand, and the publisher itself.
Group Boycotts
Dividing and conquering worked well for Napoleon, but it’s not a best practice in real estate.
A violation of antitrust law in which competitors agree to portion the market amongst themselves is called market or customer allocation. This is a per se antitrust violation.
If one broker talks to another broker about divvying up real estate territory, even if it makes sense geographically, they are breaking the law. Territory should never be divided and people should never refuse clients because they are in another brokerage’s “area.”
No Restraint on Trade
Maybe a customer allocation between two brokerages seems perfectly logical. “We’re on the north side and you’re on the south. Let’s divvy up clients that way!” Nope! This is a restraint on trade because it limits the choice of the consumer. And that’s illegal.
After all, if Consumer Carl asks for help at Northtown Brokerage, and they say, “Nah, you live on the south side, go to Southtown Brokerage,” Carl’s choices have been limited.
Market or Customer Allocation
A tie-in agreement is a conditional agreement stipulating that a product or service desired by a party will be offered ONLY on the condition that the party also agree to purchase a second product or service. Tie-ins are antitrust violations.
If a broker were to attempt to mandate the use of a title company, a lender, a home inspector, etc., in order for a client to get that broker’s services at a certain commission rate, that would be an illegal tie-in agreement.
A bench with assorted pillows, one of which reads welcome home.
Scenario: Tina, Jim, and Harry
Let’s consider the case of Tina, Jim, and Harry.
Tina is looking to buy a new home.
Jim is Tina’s agent and is helping her buy a new home.
Harry is a mortgage lender.
Jim and Harry are friends. Jim promises Tina a 20% commission reduction if she agrees to use Harry’s lending services. Harry’s prices are pretty high, but Tina decides to do business with Harry anyway to get the discount. Jim gets a cut from Harry for bringing Harry more business.
While this might seem like an okay deal to Tina (Jim is lowering his commission rate, after all), she ends up spending more money in the long run because her mortgage has a much higher interest rate than most competitor mortgages.
This tie-in agreement between Jim and Harry inhibited open competition, to Tina’s detriment.
Tie-In Agreements
Now that you know the behaviors that are no-gos, it’s important to understand the legislation that enforces those behaviors.
Without enforcement, rules are just guidelines that don’t have to be followed.
History
Antitrust laws started becoming a big issue in the late 1800s as gilded-age “robber barons” used their wealth and power to create monopolies. The government thought it was a good idea to step in and create laws to help promote healthy competition, and thus the Sherman Antitrust Act was born.
The Sherman Antitrust Act
The Sherman Antitrust Act is a landmark law that was passed in 1890 that prohibits the formation of trusts, or monopolies, in the marketplace. It governs business by regulating anti-competitive conduct to promote fair competition on behalf of American consumers. The Act outlaws restraint of trade.
It also allows the government to prosecute and penalize anyone who violates this act. Actions do have their consequences, Anthony.
Compare to RESPA
Remember RESPA? Sure you do. RESPA and the Sherman Act are pretty different, but keep in mind that both:
Protect consumers
Go after anti-competitive practices
Prohibitions
The Sherman Act prohibits the commerce-restraining activities we talked about:
Price fixing
Boycotts
Market or customer allocation
Tie-ins
And any and all activities that restrain and monopolize business.
Purpose
But remember that this act exists for one basic reason:
To protect consumers and businesses by creating healthy competition, while keeping prices low and quality high.
For this reason, any violations of antitrust laws are taken very seriously. Any activity that even approaches a violation of antitrust laws should be avoided.
Other Antitrust Acts
Congress passed two additional antitrust laws in 1914:
The Federal Trade Commission Act: Created the Federal Trade Commission (FTC), the nation’s consumer protection agency.
The Clayton Act: Prohibits mergers that are anti-competitive, prohibits pricing that is predatory and/or discriminatory, and strengthens other antitrust legislation. Also allows for civil lawsuits in the case of slander.
Both the FTC Act and the Clayton Act overlap with their parent law, the Sherman Antitrust Act. Usually, when you are guilty of something from the FTC or Clayton, you are also guilty under Sherman.
Arizona and Antitrust
The Arizona Attorney General’s Office protects the public from antitrust and anticompetitive practices, as well as from consumer fraud.
Antitrust Laws
Sherman Act violations involving agreements between competitors are usually punished as criminal felonies.
Penalties
Individual violators: Fined up to $1 million and sentenced to up to 10 years in federal prison for each offense
Corporations: Fined up to $100 million for each offense
In addition, violators are subject to discipline by their state license law board.
The Clayton Act
The Clayton Act also states that, if a party sues another party, they are able to claim up to three times the damages they incurred, plus any court and attorney fees.
That cost will look different for every case, but it will always be pretty expensive. 💰
Enforcement
But who enforces these costly penalties?
The Antitrust Division of the U.S. Department of Justice (DOJ) handles criminal and civil prosecution of Sherman Act violations. To investigate antitrust violation cases, the DOJ may:
Work with the FBI
Monitor calls
Hire informants
Utilize secret listening devices
No matter how sneaky you think you may be, Anthony, the DOJ is probably sneakier! 🕵️♀️
The FTC also handles civil enforcement action, and private parties can bring lawsuits against persons or individuals to claim the damages they have suffered.
What This Means for You
Be careful about what you say. Even if you half-jokingly whisper to your competing agent friend that you dislike another competitor and someone overhears this, you could be found guilty. There’s nothing you can do at that point. If you’re taken to court, you might not even be given the chance to defend yourself.
I know all these rules (and penalties!) might seem a little daunting, but the key to avoiding these violations is simple: Never discuss prices, commission, competitors, or just money in general with other agents from other brokerages. That is the business of your company and your company only.
Even though real estate is a tight-knit community with a lot of overlap between competitors, it’s important that if you feel like your conversation might be steering you down a path of illegality, hightail it out of there. It might even be a good idea to announce to the people around you that that’s the reason you’re leaving.
Crime and Punishment
As a licensee, you will have to answer to antitrust law. But it’s difficult to answer to antitrust law if you don’t know all of that fancy jargon about collusion, price fixing, market allocation, etc. Now that you know the jargon, you’ll be able to digest the legislation and apply it to your practice!
But before you go, let’s review some of the important terms, concepts, and principles you’ve learned along the way.
Key Terms
Here are the key terms you learned in this chapter:
collusion
an unlawful agreement between competitors to monopolize a market, disadvantage other competitors, or otherwise undertake activities in violation of fair trade laws
price fixing
any effort made by competitors to jointly establish a fixed rate, price, or commission; considered an antitrust violation
market allocation
a violation of antitrust laws in which competitors agree to divide markets amongst themselves
Sherman Antitrust Act
a landmark law passed in 1890 that prohibits the formation of trusts, or monopolies, in the marketplace; this law governs business by regulating anti-competitive conduct to promote fair competition on behalf of American consumers
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter.
Antitrust Behaviors
Most behaviors that fall under the umbrella of antitrust activity are forms of colluding, but they can be more specifically categorized as one of the following:
Price fixing
Group boycott
Market or customer allocation
Tie-in agreements
Avoiding Antitrust Violations
A chart describing what to say and not say in order to avoid antitrust violations.
Image description
Violations of the Sherman Act
Violations of the Sherman Act may be considered felonies. Possible punishments for license holders include:
A fine of up to $350,000
Imprisonment of up to three years
Loss of license
Chapter Summary
