A Michigan-based real estate association’s policy of excluding discount broker listings from its multiple listing service (MLS) violates Section 5 of the Federal Trade Commission (FTC) Act, according to the Court of Appeals for the Sixth Circuit. In reaching its April 6, 2011, decision upholding the FTC’s decision condemning the practice, the Sixth Circuit employed a full rule-of-reason analysis to find both that: 1) the association’s website policy “gave rise to potential genuine adverse effects on competition” due to the association’s substantial market power and the policy’s anticompetitive nature; and 2) the association’s policy in fact cause actual anticompetitive effects. In applying such an analysis, the Sixth Circuit skirted the Commission’s earlier ruling that the conduct in question was “inherently suspect,” and thus could be subjected to an abbreviated rule of reason analysis that would not inquire into market power of the venture. In addition, despite the Sixth Circuit’s finding of actual adverse effects on competition, the court reaffirmed the notion that such a finding is unnecessary in Section 5 cases, because the Commission has the authority under that statutory provision to find a violation based on the probable anticompetitive effects of a restrictive practice.

Background

Realcomp is an association composed of local real estate agents and brokers.[1] The primary service it offers members is its MLS, a database of property listings that can be viewed and searched by local brokers who participate in the MLS.[2] Realcomp’s MLS is the largest in Michigan.[3] One function of the MLS is to disseminate listing information to selected public websites, which can be searched by members of the public.[4] However, Realcomp allegedly maintained a policy restricting information concerning what is known as “Exclusive Agency” listings from being distributed to public real-estate advertising websites through its MLS feeds, and excluded these types of listings from its default search setting.[5]

According to the FTC, there are two common types of listing agreements: traditional Exclusive Right to Sell agreements and Exclusive Agency agreements.[6] Exclusive Agency listings tend to be less expensive for a home seller and less lucrative to a listing broker than the traditional “Exclusive Right to Sell” listing contract. This is because under an Exclusive Right to Sell listing, the broker is paid the same irrespective of whether he or she was the procuring cause of the sale transaction; under an Exclusive Agency listing, if the sale is procured without a cooperating broker, the broker is paid less or no additional compensation by the seller.[7] In addition, under an Exclusive Agency listing, a seller has the option of selecting limited brokerage services a la carte rather than having to pay for the full array of brokerage services.[8] Traditional brokers tend to dislike discount, limited-service Exclusive Agency listings.[9] Here, brokers employing the traditional model allegedly reached an agreement intended to foreclose or restrict the circulation of these discounted Exclusive Agency listings on public websites, presumably to steer consumers toward the more-traditional full-service model.[10]

In October of 2006, the FTC issued an administrative complaint against Realcomp, alleging that the association’s MLS policy restricting the publication of nontraditional listings “unreasonably restrained competition among brokers in the market for the provision of residential real-estate-brokerage services in southeast Michigan,” and “constituted unfair methods of competition in violation of Section 5 of the FTC Act.”[11] The FTC’s Chief Administrative Law Judge (ALJ) ruled in favor of Realcomp, however, finding under a traditional rule-of-reason analysis that the FTC staff had failed to show significant anticompetitive effects of the policy.[12]

The Commission unanimously reversed the ALJ, stating that the policy was “inherently suspect and therefore presumptively unlawful.”[13] Under this framework, a challenged practice is presumed to be anticompetitive, and the burden shifts to the challenged party to show legitimate justification for the practice. Although he Commission utilized the “inherently suspect” framework, it went further and found that the practice had both potential and actual anticompetitive effects.[14] Some commentators indicated concern that the Commission’s utilization of the “inherently suspect” framework in this case marked a “significant expansion” in the types of practices that could be subject to an abbreviated analysis.[15]

Realcomp petitioned the Sixth Circuit for review. After declining to adopt the Commission’s abbreviated “inherently suspect” analysis, it applied a full rule-of-reason analysis and ruled for the Commission.[16]

The Sixth Circuit’s Decision

The Sixth Circuit stated that it was required to uphold the FTC’s findings if they were supported by “substantial evidence.”[17] The court then utilized a full rule-of-reason analysis and determined that substantial evidence did support the Commission’s findings that: 1) the questioned policy gave rise to potential adverse effects on competition because of Realcomp’s substantial market power and the policy’s anticompetitive nature; 2) the policy did, in fact, cause actual anticompetitive effects; and 3) Realcomp’s procompetitive justifications were insufficient to overcome the FTC’s claim.[18]

Rule-of-Reason Analysis

The Sixth Circuit first determined there was clearly an agreement between Realcomp’s members with respect to the challenged policy.[19] It next turned to whether this agreement “unreasonably restrained trade in the relevant market.”[20]The court noted that it had three options when employing such an analysis: 1) a per se analysis, under which an agreement is so “plainly anticompetitive” that no inquiry into market power or anticompetitive effects is necessary, and courts will not accept an argument that the restraint may be justified as procompetitive or competitively neutral, 2) a full rule-of-reason analysis, which requires a thorough analysis of the relevant market and effects of the restraint, or 3) a “quick-look” analysis, under which, because the likelihood of anticompetitive effects is obvious, a detailed analysis of the relevant market and effects is unnecessary, and the burden shifts to the proponent to provide procompetitive justifications.[21] The Commission had ruled that the restraint was invalid under both a quick-look, or “inherently suspect” analysis, and under a full rule-of-reason analysis.[22] The Sixth Circuit upheld the Commission based on the full rule-of-reason analysis, without reaching the question of whether the actions in this case were so plainly anticompetitive as to warrant abbreviated analysis.[23] Although some courts had deemed certain MLS practices to be potentially anticompetitive, such as when MLS rules deny membership to some brokers, or when dealers exclude discount brokers altogether from a venue, the Sixth Circuit declined to hold that the MLS policy at issue in Realcomp was sufficiently analogous to those practices to warrant a quick-look analysis.[24]

Anticompetitive Effects

The Sixth Circuit then declared that, under its full rule-of-reason analysis, the FTC was required to either show 1) the potential for genuine adverse effects on competition, which would be sufficient to make out a Section 5 claim, or 2) actual detrimental effects, which would also be sufficient to make out a Sherman Act Section 1 claim.[25] In this case, the Sixth Circuit found there was substantial evidence of both the potential for anticompetitive effects and actual anticompetitive effects.[26]

In terms of potential adverse effects, the ALJ had determined that Realcomp’s significant market share in southeastern Michigan, the fact that brokers without full access to an MLS would be at a significant competitive disadvantage, and the fact that barriers to entry would make it very difficult for a competitor to enter the market, caused Realcomp to possess substantial market power.[27] The Sixth Circuit upheld these findings.[28] Further, the Sixth Circuit ruled that because Realcomps’ restrictions reduced competitive broker options available to home sellers, the policy was anticompetitive in nature.[29] Thus, due to its market share and the anticompetitive nature of its MLS policy, Realcomp’s policy had the potential for anticompetitive effects, meeting the requirements of a Section 5 violation.

To support its argument that potential anticompetitive effects would be sufficient for a violation of Section 5 of the FTC Act, even in the absence of evidence of actual anticompetitive effects, the Sixth Circuit relied heavily on the Supreme Court’s 1986 decision in FTC v. Indiana Federation of Dentists.[30] The Indiana Federation Court employed a “quick-look” analysis[31] to uphold an FTC decision condemning the practice of a group of dentists to withhold X-rays from insurance companies, which hindered the insurance companies’ ability to implement alternative benefit plans. [32] In order to obviate the need to show actual anticompetitive effect, the Realcomp court focused on the Indiana Federation Court’s determination, under Section 5 of the Federal Trade Commission Act, that “concerted and effective effort to withhold (or make more costly) information desired by consumers” to determine whether to make a particular purchase is “likely enough to disrupt the proper functioning of the price-setting mechanism of the market that it may be condemned even absent proof that it resulted in . . . the purchase of higher priced services[]”.[33]

The Sixth Circuit nevertheless went further and examined the Commission’s evidence of actual anticompetitive effects, which must be shown in order to make out a Sherman Act Section 1 violation. The Commission had found persuasive quantitative analysis conducted by an economic expert that corroborated evidence that consumers were substantially harmed by the policy, which reduced the share of less-expensive listings in the southeastern Michigan real-estate market.[34] The Sixth Circuit agreed that the FTC’s findings of actual adverse effects were supported by “relevant evidence that a reasonable mind might accept as adequate . . . ”[35] Regardless of whether these expert findings were conclusive, however, the Sixth Circuit stressed that the FTC’s demonstration of the substantial likelihood of potential anticompetitive effects of Realcomp’s policy, even in the absence of evidence of actual anticompetitive effects, was sufficient to uphold the FTC’s decision under Section 5 of the FTC Act.[36]

Procompetitive Justifications

The Sixth Circuit noted that under a full rule-of-reason analysis, Realcomp could prevail if it could show a countervailing procompetitive justification for its MLS policy.[37] Realcomp argued, and the ALJ had concluded, that without the restrictive policy, home sellers with Exclusive Agency agreements could “free ride on Realcomp members” who invest in the MLS by paying dues or otherwise supporting the MLS.[38] The Sixth Circuit rejected this argument, noting that all home sellers must use a paying Realcomp member to utilize the MLS, and both Exclusive Agency listing brokers and Exclusive Right to Sell listing brokers pay the same dues.[39] The Sixth Circuit also rejected Realcomp’s argument that eliminating payment to a cooperating broker under an Exclusive Agency listing injures the MLS, because the home seller then compensates the MLS only through payment to the listing broker.[40] The court pointed out that cooperating brokers may provide services to a home seller with an Exclusive Agency contract, and that the cooperating broker is compensated for these services. Therefore, it is entirely possible for a home to be sold under an Exclusive Right to Sell listing without the assistance of a cooperating broker.[41]

Conclusion

The Sixth Circuit’s Realcomp decision indicates that a joint real estate venture utilizing an online listing service with policies in place that limit the types of listings that are disseminated could find itself subject to FTC challenge under Section 5 of the FTC Act, and potentially from private plaintiffs seeking damages under Section 1 of the Sherman Act as well. While private parties have no authority to bring suit under the FTC Act, the FTC’s and Sixth Circuit’s Realcomp determinations that the challenged practice caused actual competitive harm creates the risk that practices such as those challenged in that case may justify treble damage claims under the Sherman Act.

In addition, although the Sixth Circuit avoided directly addressing the issue of whether practices such as those challenged in Realcomp warrant application of an abbreviated “inherently suspect” analysis, it did not rule out such a possibility.[42]

Finally, the court clearly reaffirmed the notion that a finding of actual adverse effects is unnecessary in Section 5 cases.[43]