The Sherman Antitrust Act is a landmark federal act passed by Congress in 1890. The core principle of the Sherman Antitrust Act is to ensure healthy and fair free-market competition.
Let's review the different types of antitrust violations: price-fixing, group boycotting, market allocation and tie-in agreements.
Price-fixing is the practice of setting prices for products or services, rather than letting competition in the open market establish those prices. In real estate, price-fixing occurs when competing brokers agree to set a standard price for sales commissions, fees, or management rates.
The Sherman Antitrust Act forbids any type of price-fixing in any industry. For example, if you and your neighbor both sell apples, the two of you can’t get together and decide that you’re both going to charge the same price for an apple.
In the real estate industry, antitrust laws go a step further. No actual consultation needs to take place between individuals about price-fixing to constitute an antitrust violation. A simple discussion among competitors about the pricing for services is considered an invitation to fix prices and is, therefore, a violation of antitrust law.
As a result, the real estate industry operates on the principle that discussing fees between real estate brokers is illegal unless the brokers are cooperating on the same deal. Real estate brokers should understand that any agreement with other brokerages to charge a standard commission is a violation of antitrust laws even if that agreement is only implied.
Real-estate brokers typically price their services based on a percentage of the sale price and it’s common for them to offer a publicly-announced share of that commission to any broker that brings in a buyer. These commissions may seem standard within a certain market but the keyword here is “seems” because they are technically not fixed at a particular price.
Although this violation is all too common, brokers and agents can’t tell potential clients that a given commission rate is standard. This is important! No such thing as a standard commission exists, or it would be price-fixing. No local real estate board, or any other association of real estate agents, has the authority to set a commission rate or create any standardized fees for services.
Brokers must independently determine commission rates or fees only for their own firms. The fact that many brokerages in a particular area charge the same commission is a matter of competition and individual business decisions, not because of any agreement between the brokerages.
However, a broker may require salespersons working as independent contractors to abide by the company's set commission rate. This is not a violation of any antitrust laws as these agents all work under the same brokerage.
This also means that multiple-listing organizations, boards of REALTORS, and other professional organizations may not set fees or commission splits. Nor can they deny membership to brokerages based on the fees the brokers charge.
Group boycotting occurs when a group of competitors collectively agree not to do business with a third party in order to eliminate competition.
For example, Broker Vivian and Broker Carol, who each own separate brokerages, do not like the way Broker Stephen runs his brokerage. If Vivian and Carol agree to not make any referrals to Stephen, they have just violated the Sherman Antitrust Act. It’s okay for an individual broker to decide they don’t want to do business with another broker because they believe the other broker acts unethically. It’s getting together as a group to boycott the other broker that’s against the law.
This doesn’t just apply to business between brokerages. For example, let’s say advertising rates in a local newspaper have increased substantially, hurting all of the real estate companies in town. But no company is willing to stop advertising for fear of losing clients and customers to their competitors, who continue to advertise at the high rates. To pressure the newspaper into reducing rates, which would benefit companies and consumers, the real estate companies agree to stop advertising until the newspaper complies. This is a violation of antitrust laws.
Here’s another example: A number of brokerages agree not to show another company's listings because they think their advertising techniques are highly unethical and are destroying the community. In their minds, the brokerages believe they’re doing this for the greater good and that makes it okay. But that's still group boycotting and therefore illegal.
In both cases, the brokerages believe they’re doing the right thing by the community and their customers. Even though these agreements might have some beneficial effects for consumers, it doesn’t matter- they’re still against the law.
Allocation of customers or markets occurs when there’s an agreement between brokers to divide their markets or allocate customers to avoid competing for each other’s business. This is a clear antitrust violation.
For example, there might be two major brokerage firms in town. If they decide to draw a line down the center of town, agreeing that one will take any properties east of the line while the other stays to the west of the line, this agreement would violate antitrust laws.
It’s also illegal to allocate customers. This happens when multiple brokers agree to stay away from each other’s clients or former clients, thus preventing competition for clients.
An agreement to sell one product but only on the condition that the buyer also purchases a different product or service is called a tie-in arrangement because you have "tied" the purchase of one thing with the purchase of another. This is also an antitrust violation.
Say you are a broker, and you own a property that a builder wants to buy. As part of the sale, you require the builder to re-list the property with you when he sells it. Because you’ve required the builder to list the property with you as a condition of your selling it to him, you’ve broken the law.
Knowing what the Sherman Antitrust Act is and understanding what it regulates will not only help you pass your real estate exam, but it’s also a “must-know” as you go on to practice real estate. So learn it, and learn it well!