Commissions Vulnerable to Antitrust

Real estate licensees typically serve on state real estate commissions. It’s critically important that REALTORS® serve on these powerful boards, which have great responsibilities, from granting licenses to real estate brokers and salespeople and regulating their professional conduct to writing licensee education requirements and certifying real estate schools.

Earlier this year, the Supreme Court of the United States issued an important decision that affects any state regulatory agency, such as a real estate commission, and the individuals who serve on these agencies. The ruling could make REALTORS® serving on real estate commissions liable for antitrust violations if the commission harms competition in its regulatory capacity.

The court said state agencies that include industry participants could claim antitrust immunity only if the agency could show that its regulatory actions were derived from a state policy and that the state actively supervised the commission. Any member serving on a state real estate commission must ensure that it meets the above test when it is enacting regulations; otherwise the member could be held liable for antitrust violations.

Case in point

A state statute created the North Carolina State Board of Dental Examiners as the agency that regulates the practice of dentistry in the state. Eight members comprise the dental board: six licensed dentists who are currently active; one dental hygienist; and a consumer appointed by the governor. The state played no role in the activities of the board.

In the 1990s, dentists began offering teeth-whitening services. Eventually, nondentists offered this service at a cost lower than what dentists typically charged. Even though teeth-whitening was not included within the statutory definition of dentistry, the board interpreted its regulatory powers as covering this service and ruled to ban unlicensed practitioners from offering this service. Eventually, the nondentists stopped offering teeth-whitening services in the state.

The Federal Trade Commission determined that the board violated the antitrust rules by excluding nondentists from the teeth-whitening market. The board then appealed to the Fourth Circuit Court of Appeals and lost. The board then appealed to the U.S. Supreme Court.

The Supreme Court affirmed the rulings of the FTC and the Fourth Circuit. The board argued that an exception to antitrust law protects a state’s regulatory activities from antitrust scrutiny when the state is acting in its sovereign capacity. However, the court rejected that argument and ruled that for a state to qualify for this immunity, it must satisfy two requirements: the action must be expressed as a state policy, and the policy must be actively supervised by the state.

The court determined that the antitrust exception required more than a mere “facade” of state involvement, particularly where market participants (i.e., the dentists) were in charge of enforcing the license law. Instead, when a state agency is composed of active market participants and they are in charge of enforcing the state regulations, the state must actively supervise the agency to qualify for antitrust immunity. While the court did not clearly define what would constitute state supervision, it ruled that the board could not argue for antitrust immunity because North Carolina exercised no supervision over the board.

What does this mean for real estate?

The Supreme Court’s decision in the North Carolina dental case will likely bring new challenges to regulations made by state agencies such as real estate commissions. Indeed, one state real estate commission has already received a threat that it violated antitrust laws when it attempted to regulate an unlicensed business.

The decision by the Supreme Court in the North Carolina dental case has important ramifications for state regulatory agencies, such as real estate boards, where market participants regulate other market participants. The decision does not, however, affect other types of commissions on which REALTORS® may serve, including economic development boards or local zoning commissions.

The test established by the court in this case requires a state to “actively supervise” the agency, and the exact scope of this requirement is something that will become better defined in future decisions. What is clear is that active supervision requires that the state have the power to review and reverse actions by the agency. The test also will be applied on a case-by-case basis and will be determined by the facts of each case.

Real estate licensees serving on commissions should attempt to seek indemnification from the state for their role as a commissioner and also ensure that the commission qualifies for antitrust immunity.