Corp., v. Zinnemann: FSBO Website Does Not Need Real Estate License

A California federal court has considered the constitutionality of California’s regulations prohibiting the advertising of real estate listings without a license. Corp. (“Website”) operates an Internet website which charges property owners a flat fee to advertise that their properties are available for sale. The property owners are attempting to sell their homes without using a real estate professional. The fee varies depending on the type of services that the seller has chosen and the length of time the ad will run on the site. The Website purports to have a national inventory of properties and also contains other information, such as statistical information about home sales and an area’s demographics. The site also advertises other real estate-related services such as title insurance and home inspectors. The site does not participate in the real estate transaction process and contains a disclaimer stating that it is legally prohibited from taking part in the transaction process.

California’s license laws contain strict requirements for the listing of a home for sale. Specifically, the license laws require that anyone who receives an “advance fee” related to the sale, listing, or advertisement of real property is considered a real estate broker under California law and so is required to hold a real estate license. However, the definition of “advance fee” contains one exception to the license laws for a “newspaper of general circulation”, which can accept an advance without a license.

In 2001 and 2002, the California Department of Real Estate (“Department”) began sending letters to internet companies like the Website who were publishing advertisements for California properties and demanded that these companies identify on their websites the name of the California broker under whose auspices the site was operating. The Website did not hold a California broker’s license nor did any of its employees.

The Website filed a lawsuit challenging the constitutionality of California’s license laws, arguing that the license laws violated the First Amendment of the United States Constitution. The Website argued that whatever purpose the advertising restrictions may have previously served when they were adopted in the 1950s, the advent of the Internet has rendered these provisions obsolete. Specifically, the Website argued that the distinction between a website operated by a “newspaper of general circulation” and the Website was nonexistent. Both the Website and the Department filed motions with the court seeking judgment in their favor.

The United States District Court for the Eastern District of California agreed with the Website and declared California’s restrictions on the Website’s advertising unconstitutional. The court first considered whether the license law requirements amounted to an unconstitutional prior restraint on speech. A prior restraint is a law which prohibits an individual from the exercise of First Amendment freedoms and is permissible only when narrowly drawn to serve an “obviously proper purpose”. Here, the court found that the prior restraint challenge was without merit, as the real estate license laws were not the proper subject for a facial challenge. Thus, the court rejected the prior restraint argument.

Second, the court considered whether the Website was engaged in commercial speech. Commercial speech receives a lower level of constitutional protection. The court looked at other cases which had considered similar situations, and concluded that commercial speech involves the proposal of a specific transaction between the speaker and a potential customer. Here, the Website published real estate advertisements and did not play any role in the transactions between homeowners and prospective buyers. Therefore, the Website’s real estate advertisements did not constitute commercial speech and so the court ruled that the test for restrictions on commercial speech did not apply.

Finally, the court considered whether the license laws unconstitutionally restricted the content of the Website. The Website argued that other websites containing advertisements for products such as cars and boats do not need to have a license, and newspapers do not need to have a license to publish real estate advertisements on their websites. In order to be constitutional, the state needs to show that the license laws serve a compelling state interest and are narrowly drawn to achieve that end.

The court agreed with the Website that the state’s license laws were not narrowly drawn, as the license laws prohibited the Website from publishing the very same advertisements that could appear on a newspaper’s website without offering a compelling justification on why the state has made such a differentiation between the two websites. The Department argued that the distinction between the two websites was that the Website was trying to cultivate relationship with other businesses (such as mortgage brokers) while the newspaper website was a more “traditional” advertiser. The court rejected this distinction, as it failed offer a meaningful distinction between the two websites, much less the required compelling state interest. Thus, the court declared the state’s licensure requirement prior to accepting an advance fee. Corp., v. Zinnemann, No. S 03-1019 MCE GGH (E.D. Ca. Nov. 18, 2004). [Note: When an official reporter citation becomes available for this case, the citation will be updated to reflect this information].