Iowa Ass'n of REALTORS® v. Smith: State Association Obtains Injunction against FSBO Website

An Iowa court has considered a lawsuit brought by the Iowa Association of REALTORS® ("Association") against a company that did not hold a real estate license and operated a website that allowed property owners to advertise the availability of their properties.

AgentsBeware.Com, L.L.C. ("Company") is a business that owns and operates a website which sells advertising space to property owners who are interested in selling or leasing their property on their own, as opposed to using a real estate professional. The Company's website became public in March 2004. The consumers pay a flat fee to the Company for their advertisements and the amount is the same whether or not the owners successfully sell or lease their property. The Company does not have any contact with interested buyers, as all inquiries about the property are sent directly to the owner. The Company did have a packet of information it provided to owners called its "Seller's Kits" containing such things as real estate documents, but these “kits” were not provided in all instances and the information contained in the "kits" varied.

The Company did not have a real estate license nor did anyone affiliated with the Company have a real estate license. The Company ran two advertising campaigns. The first campaign stated that you could avoid "annoying agents" by visiting the Company's website, and the second stated that "[y]ou usually pay more for your home because of that seven percent" commission, among other things. The Company's website also stated that the Company would "list" a home for sale or lease, and went on to state that an owner would "have all the luxuries that a real estate agent provides without inflated costs". The Company also advertised its services in the real estate section of the phone book.

The Association brought a lawsuit against the Company, seeking an injunction to prevent the Company from continuing to do business in violation of the state's real estate license laws. The Company raised many defenses to the Association's allegations, including challenging the constitutionality of the state's real estate license laws.

The Iowa District Court for Polk County partially granted the Association request for injunctive relief. In general, a court will grant an injunction to avoid irreparable injury while the court considers the merits of the underlying case. However, a party can also seek a statutory injunction which only requires proof of a statutory violation. Since the Association had alleged statutory violations, the court ruled that in order to receive the requested injunctive relief, the Association had to prove statutory violations by a preponderance of the evidence.

The Company raised many challenges to the Association's lawsuit. First, the Company argued that the Association was not the party who should be bringing this lawsuit; instead, this lawsuit should be brought by the Iowa Real Estate Commission or real estate licensees. Looking at the relevant law, the court stated that an association is entitled to bring a lawsuit on behalf of its members when: 1) the association's members could bring the lawsuit on their own; 2) the interests the association is seeking to protect are relevant to the association's purpose; and 3) the claim asserted or the relief requested does not require the involvement of individual association members. Here, the Association represented individuals whose income was primarily drawn from real estate commissions and so it represented the individuals who would be most impacted by the Company's business practices. Thus, the court ruled that the Association was a proper party to bring this lawsuit.

The Company also made a number of constitutional challenges to the state's real estate license laws. Among other challenges, the Company argued that the license laws unconstitutionally restricted interstate commerce and also violated the First Amendment protections for commercial speech. The court rejected the commerce clause allegations because the state's interest in protecting consumers from unsavory business practices outweighed any burdens on interstate commerce. The court also found that the license law's restrictions on the type of information used in advertisements served a legitimate purpose to help monitor the standards of real estate professionals and avoid misleading speech. Thus, the court rejected the constitutional challenges brought by the Company.

After rejecting the various challenges made by the Company to the Association's lawsuit, the court next considered whether the Association was entitled to the injunctive relief it sought. The state's real estate license law requires that someone providing real estate brokerage services have a license, and then the statute goes on to define what constitutes real estate brokerage services, which includes: the listing of property for sale or lease; advertising oneself as being in the business of selling, leasing, or managing property; assisting in the procurement of property; and preparing real estate documents. The statute is violated when an unlicensed person provides any of the listed services.

Looking at the Company's actions, the court found that some sections of the state's license laws were violated by the Company. The court determined that the Company was not "listing" real estate on its website nor "procuring" prospects for the purchase of real estate, but was instead acting as an Internet advertiser. Nor was the Company's practice of providing real estate forms to its customers in violation of the prohibition against preparing real estate documents, as the Company did not help consumers complete these forms.

However, the court found that the Company had used real estate terminology on its website, and these terms could potentially confuse the public about the services offered by the Company, such as the offering of real estate forms or stating that it offered the same services as real estate licensees without the additional costs. The court said that the Company could not claim to be merely an advertiser on one hand, but then purport to offer other services on its website. Therefore, the court determined that the Company had violated the state's license laws by advertising itself as offering some real estate services without a real estate license. Therefore, the court entered an order allowing the Company to continue to operate its website, but with the following changes: first, it cannot compare its services to licensed real estate professionals; publish a disclaimer that it is not a licensed real estate professional; must display on all signs that the property is "For Sale By Owner"; and finally, the Company must move all of its phone book advertising to the "Advertising" section of the phone book and remove it from the "real estate section".

Iowa Ass'n of REALTORS® v. Smith, No. CE 49630 (Iowa Dist. Ct. Mar. 29, 2005). [Note: When an official reporter citation becomes available for this case, the citation will be updated to reflect this information].

Editor's Note: NAR Legal Affairs would like to thank Paul McLaughlin of the Iowa Association of REALTORS® for alerting us to this decision.