Daily Development for Tuesday, May 13, 2003
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

The Reporter for this item is Theresa Klickner of the California Bar.

BROKERS; MULTIPLE LISTING SERVICES; ANTITRUST:  Countywide multiple listing service corporation and local realtor associations held to be engaged in price-fixing in violation of the Sherman Act.

Freeman v. San Diego Association of Realtors, 322 F. 3d 1133 (9th Cir. 2003).

Real estate agents who were Subscribers to a countywide listing service (known as Sandicor) sued the Sandicor and local associations who founded Sandicor and were shareholders in it.  The suit alleged claims under the Sherman Act for price fixing and conspiracy to monopolize market for support services.  The allegedly fixed prices were the prices charged to individual realtors by the service for monthly service charges.

Prior to 1992, twelve Multiple Listing Services (MLS) had been operated in San Diego County, California, by different real estate trade associations serving subscribers in different parts of the county.  As in other parts of the United States, the MLS lets real estate agents share information about available properties through a computerized database.  In addition to providing database access to subscribers, the MLS operators also provided support services to members, though the nature and price of the support services varied between the associations.

The eleven MLS operators who were also local Associations of Realtors decided to combine databases to form a single MLS, thereby reducing costs of operating the database.  Sandicor was the entity created by the associations to run the database, and the associations became Sandicor's shareholders and appointed its directors.   Notwithstanding this centralization of service, the associations decided to continue to provide local support services for the MLS independently.  The associations' costs for providing support services "varied widely" with the largest association (San Diego Association of Realtors) spending $10 per month (per user), and the smallest association spending close to $50.  To accommodate the smaller associations, Sandicor was created under a centralized model whereby the associations signed up subscribers  and collected MLS fees on Sandicor's behalf, but Sandicor decided on a uniform fee that all agents had to pay. The MLS fees were delivered to Sandicor, but  Sandicor then paid a fee for support services back to the associations.  Under the service agreements between Sandicor and the associations, the associations were prohibited from discounting the MLS fee in any way.

Under the original agreement, the support fee was set by the associations at $25 per month, meaning that SDAR (which spent $10 per subscriber for support) received more than its cost per subscriber and the smaller associations had   to be subsidized for their losses in providing support services.

These facts formed the basis of plaintiff's claim that Sandicor's MLS fee was inflated because the support fees paid by Sandicor to the associations was "fixed at a supracompetitive level."  Plaintiffs alleged that by fixing support fees in the service agreements between Sandicor and the associations, defendants violated section 1 of the federal Sherman Act,  which bars "[e]very contract ... or conspiracy[] in restraint of trade or commerce among the several States."  15 U.S.C. 1.

Plaintiffs also claimed that defendants violated Section 2 of the Sherman Act by conspiring to monopolize the market for support services.  This claim was based on Sandicor's denial of plaintiff Freeman's request to operate a support service center for Sandicor's customers.

Plaintiffs filed a class action in federal court seeking an injunction and damages in excess of $10 million, naming as defendants Sandicor, the associations, the California Association of Realtors, and assorted officers and directors.  The district court refused to certify the class.  Following summary judgment motions by both sides, the district court rejected defendants claim that their conduct had no substantial effect on interstate commerce, but sustained their claim to immunity under Section

1 because they were a single entity under Copperweld Corp. v. Independence Tube Corp., 467 U.S.
752 (1984).  Both sides appealed.

Judge Alex Kozinski wrote for the Ninth Circuit panel that found price-fixing, but not conspiracy.
Starting with interstate commerce, the court readily found a "substantial effect" from the MLS activities by noting that Sandicor's MLS handled over $23 billion in home sales over a four-year period, with approximately $10 billion in interstate home mortgage financing.

The price fixing discussion provides some amusing cultural references while setting out the court's finding that defendants' activities constituted "per se" price fixing.  The court begins by stating "[n]o antitrust violation is more abominated than the agreement to fix prices" which it backs with the following (in footnote 10): "One manual captures the principle nicely in question and answer format:

'[Q.] May competitors agree to fix prices?  [A.] Duh.  What do you think?'  Eliot G. Disner, Antitrust Law for Business Lawyers  4.06, at 82 (2001)."  Dispensing with each of the offered defenses, the court held that the associations engaged in price fixing and the plaintiffs had standing to sue.  "The associations purposely fixed the support fee they charged to Sandicor at a supracompetitive level.

Sandicor passed on some portion of that inflated support fee to agents, who paid higher prices for MLS as a result.  This is precisely the type of injury the antitrust laws are designed to prevent."  In particular, the court rejected defendants' arguments that they had to set the support fees higher to get the smaller, inefficient associations to join.  While noting that this concern for "the weakest among them has a quaint Rawlsian charm to it," competition is the philosophy behind the antitrust laws.

"The Sherman Act, to put it bluntly, contemplates some roadkill on the turnpike to Efficiencyville."

Regarding Sandicor's claim to immunity as a single entity, the court examined the potential and actual competitive nature of the associations in providing support services and found that they were not a single entity.

In the end, the court made it clear that joint ventures among competitors are not all bad and that combining MLS databases can be legal.  However, deciding to fix support fees is not.

Comment: The case is particularly useful for its strong language stating that the U.S. antitrust laws assume that competition is best for the consumer, and thus arguments that the consumer in fact benefitted from a bigger database in which all local associations participated do not avail when the cost of such efficiency is the fixing of support fees.  It didn't matter whether the defendants made out a case that the price fixing in this case was good for the economy - it is price fixing and that is per se a bad thing.

The editor agrees.  Any clever lawyer or economist can make out an argument that virtually any anticompetitive activity in fact, under certain given circumstances, leads to lower prices or more choice for consumers.  The problem is that, sooner or later, if price fixing is permitted, the disease will spread and the alleged benefits will disappear.    Market participants will just have to find some other way to modernize.

Readers are encouraged to respond to or criticize this posting.

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