A Texas federal court has considered a Texas-based timeshare marketer's challenge to regulatory efforts directed at the marketer from California and Florida.
A timeshare interest is a right to enjoy a property for a limited period, similar to the legal interest of a hotel guest. Most timeshares are purchased by consumers directly from the developer or resort. Selling a timeshare in the secondary market can be difficult for a number of reasons. First, a seller has to compete with new timeshare interests. Second, the seller usually does not live near the timeshare property, making it difficult for the seller to show the property. Third, the low price of timeshares makes marketing it extensively uneconomical and makes it hard to compete with the timeshare marketing efforts of resorts and developers, who are able to use economies of scale in their marketing efforts.
Stroman Realty ("Challenger") operates a real estate brokerage in Texas which has specialized in the marketing of timeshare interests since 1979. The Challenger is one of the largest marketers of timeshare interests in the United States. All of the Challenger's real estate salespeople are licensed in Texas. Over the years, the Challenger has marketed properties located in approximately 1,250 resorts in 47 states and 29 countries. The Challenger operates a national website marketing timeshare interests and also engages in other marketing efforts for timeshares. The Challenger charges a $499 listing fee for each timeshare and collects a commission from the sale of a timeshare, usually 10% of the sale price or $750, whichever is greater. Over 90% of the Challenger's income comes from the listing fees.
The real estate commissioners for Florida and California (collectively, "Regulators") both sought to have the Challenger comply with their licensing requirements whenever the Challenger had dealings with buyers or sellers who were residents of their states. In particular, Florida bars the collecting of listing fees by out-of-state licensees from Florida residents unless they have registered with the Florida secretary of state and met other requirements. California bars Internet sites from doing business with California residents without a California real estate license in addition to barring out-of-state licensees from collecting listing fees without meeting certain requirements. The Challenger filed a lawsuit against the Regulators, seeking an injunction preventing the Regulators from using their licensing laws to interfere with the Challenger's business practices.
The United States District Court for the Southern District of Texas granted the Challenger's motion and entered an injunction prohibiting the Regulators from taking actions against the Challenger. The Regulators argued that they should be allowed to regulate the Challenger because they needed to be able to protect their consumers. However, the court noted that the laws of Texas, Florida, and California for real estate licensees were substantially similar, weakening the Regulators argument for needing to impose their own state laws upon the Challenger when the Challenger was already regulated under a similar Texas regulatory scheme. For example, the court found that all of the states had similar minimum education standards and advertising regulations.
The court considered whether the Regulators jurisdictional claims were constitutional. The court analyzed the Regulators' actions under six theories: whether the Regulators actions preferred local commerce to interstate commerce; the actions have more than an incidental impact on interstate commerce; the actions do not effectuate a legitimate local purpose; the intended goal of the regulation could be achieved by an alternative means which do not burden interstate commerce; the intended goal does not have a local benefit that exceeds its impact on trade; or the danger that other localities may adopt similar restrictions. If the Regulators’ actions do not pass any of the above constitutional requirements, then the court would declare the actions of the Regulators unconstitutional.
Looking at the burden on interstate commerce, the court found that the selling of timeshare interests almost always involves individuals located in different states, since timeshares are vacation properties. In fact, the transaction could easily involve parties located in four different states. For example, 23% of the timeshare sales in California were to nonresidents, and half of the Challenger's California transactions involved parties located in three different states. Since the sale of timeshares generally involves interstate commerce, the court found that the Regulators' proposed action burdens interstate commerce.
Once a regulation is found to burden interstate commerce, the next step for courts is to determine whether the regulation is narrowly crafted to burden interstate commerce as little as possible. The court found that the laws of the Regulators' states did not pass this test. Many of the dangers that the Regulators sought to prevent, such as dishonesty or poor performance, could also be found in the laws and regulations of Texas and so could be regulated by Texas. In addition, the Federal Trade Commission provides national protection for consumers. The court also rejected the argument that the Regulators enforce their rules equally against both in-state licensees as well as out-of-state licensees because that was an irrelevant consideration when determining the burden on interstate commerce. Since the court found that the local protections claimed by the Regulators burdened interstate commerce and were not narrowly drawn to serve their state purpose, the court ruled the Regulators' actions were unconstitutional. The court then entered injunctive relief prohibiting the Regulators from interfering with the Challenger's business of marketing timeshare interests.
Stroman Realty, Inc., v. Antt, No. H-98-283 (S.D. Tex. July 28, 2005), appeal filed (5th Cir. Sept. 16, 2005). [Note: When an official reporter citation becomes available for this case, the citation will be updated to reflect this information].