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A federal appellate court has considered an antitrust challenge brought by MLS participants who argued that a portion of the user fees a regional MLS collected from MLS participants were fixed by agreement among the associations, causing certain MLS participants to pay inflated MLS fees. To learn how this decision could impact other MLSs, click here to read an analysis authored by NAR Legal Affairs.
Prior to 1991, San Diego County, California had twelve MLSs operating within it, eleven of which were operated by REALTOR® Associations ("Associations"). In 1991, the Associations decided to centralize their MLS operations into one, countywide MLS. A separate corporation was formed to accomplish this, which was named Sandicor. At that same time, Sandicor entered into "service center" agreements with each of the Associations, pursuant to which they provided support services for the MLS, including: enrolling new subscribers; billing and collecting payments; ensuring compliance with rules; and answering questions.
The costs incurred by the Associations for operating a service center varied among the Associations, with the largest association, the San Diego Association of REALTORS® ("SDAR"), having the lowest costs and the smaller associations having the highest costs. Sandicor and the Associations agreed that all Associations would receive the same service fee from Sandicor for operating service centers. This resulted in SDAR receiving a service fee which exceeded SDAR's actual cost per user, while the smaller associations received a fee below their actual costs per user (which was made up by a small stipend paid by Sandicor to the smaller associations, in order to make up for the revenue shortfall).
Sandicor required the Associations to charge all MLS participants the same user fee ("User Fee") and the Associations could not discount this fee in any way. The User Fee included the costs incurred by the Associations in operating as a service center as well as Sandicor's costs for maintaining and operating the MLS. The Associations would collect the User Fees from the MLS participants, forward all of the money to Sandicor, and then Sandicor would return to the Associations the service fee portion of each User Fee collected.
In 1998, Arleen Freeman, Edward Urata, and James Alexander (collectively, "Plaintiffs") filed a lawsuit claiming that Sandicor and the Associations violated federal antitrust laws as well as certain state laws (Arleen Freeman had previously filed a lawsuit in 1997 alleging that Sandicor had violated California's antitrust laws, which was dismissed by a state court and affirmed on appeal. See Freeman v. San Diego Ass'n of REALTORS®, 77 Cal. App. 4th 171, 91 Cal. Rptr. 2d 534 (Cal. Ct. App. 1999), rehearing den'd (Jan. 24, 2000), review den'd (April 12, 2000)). Both sides filed motions with the trial court seeking judgment in their favor, and the trial court ruled in favor of Sandicor- click here to read the earlier summary. The Plaintiffs appealed the trial court's rulings.
The United States Court of Appeals for the Ninth Circuit partially reversed the rulings of the trial court. The court first considered the allegations that Associations violated Section 1 of the federal antitrust statute, the Sherman Act, by fixing the fees Sandicor paid to the Associations for operating service centers, causing certain MLS participants to pay inflated MLS fees. The court determined that the evidence showed that the User Fee which Sandicor charged MLS participants included a service fee amount which exceeded the actual costs incurred by some of the Associations (like SDAR) for operating as MLS service centers. The court found that this evidence demonstrated that the Associations had engaged in a conspiracy to fix prices because they had set the service fee amount they received from Sandicor at a supracompetitive level, resulting in some MLS participants paying inflated MLS fees. Thus, the court reversed the trial court's ruling and found that the Associations violated Section 1 of the Sherman Act.
The court rejected the trial court's ruling that there was no price fixing conspiracy because Sandicor was the entity setting and charging the higher service fees, not the Associations. The court found that the Associations supported Sandicor's uniform service center pricing by refusing to compete with each other on the price offered to MLS participants and by prohibiting discounting of the fee, resulting in payment of inflated fees by MLS participants. The court also rejected Sandicor and the Association's argument that they could not engage in a conspiracy to fix prices because they were a single entity. The court found that the Associations and Sandicor did not constitute a single entity, as the Associations were in competition with each other for members and otherwise acted as economically independent entities. The court remanded the case back to the trial court for entry of judgment in favor of the Plaintiffs on the Section 1 allegations as well as a determination of damages and attorney's fees.
The court next considered the Plaintiffs' allegations that there was a conspiracy to monopolize the market for support services in violation of Section 2 of the Sherman Act. These allegations were based on the fact that Sandicor rejected an offer by one of the Plaintiffs to open a Sandicor service center. The court found that there was no evidence to support the monopolization allegations made by the Plaintiffs. Sandicor's bylaws and service center agreements did not reveal an intent to monopolize the market for service centers, and there were legitimate business reasons for Sandicor to reject the offer. Thus, the court affirmed the trial court's rulings in favor of the Associations and Sandicor on the Section 2 allegations.
In summary, the court reversed the rulings in favor of the Associations on the Section 1 (conspiracy to fix prices) violations but affirmed the rulings in favor of Sandicor and the Associations on the Section 2 (monopolization) allegations.
Freeman v. San Diego Ass'n of REALTORS®, 322 F.3d 1133 (9th Cir.), cert. denied, 72 USLW 3154 (U.S. Oct. 6, 2003).