Commercial PropertySupreme Court Ruling Could Allow Franchisors To Legally Put A Floor Under Agent Commissions
With rare exception, Supreme Court anti-trust rulings aren"t industry-specific, says Florida attorney Hank Sorensen. That"s why Realtors should pay attention to what happened when a manufacturer of fine leather goods tried to put a floor under what retailers could discount the items for when they sell them to consumers.
The answer will not only surprise you, but there are some implications for real estate franchise organizations.
"On June 28, 2007, an atomic bomb went off in the real estate brokerage industry," opens Sorensen in a brief concerning the recent Leegin Creative Leather Products, Inc. v. PSKS, Inc.
There"s no way to make anti-trust simple, but to break down the story, explains Sorensen, The Sherman Act in 1895 was the federal response to monopolies such as Standard Oil, and A&P foods to keep mom and pop shops alive. In 1911, vertical or franchisor/manufacturer to retailer pressures to fix prices were deemed anti-trust.
Leegin makes high-end leather products under the various names such as Brighton, and did not want retailers carrying the brands to discount the goods below a certain amount. PSKS cried anti-trust, and the court case went up the food chain til it got to the Supreme Court which ruled that the manufacturer does indeed have the right to impose minimum prices that retailers can charge for the company"s products. Not only did the decision overrule the 1911 precedent, it opened up a new category for more litigation overturns -- the "rule of reason."
The court rule expressly "permits a court to view the reasons for and market effects of the restraint as well as other factors that may bear on the justification for the pricing schedule," writes Sorensen. This insures that a brand known for quality will be able to uphold its pricing because consumers will expect and get a fairly typical experience from retailers who know the product, merchandise the product and sell to consumers.
Are you beginning to see the implications for real estate? If a manufacturer can set price floors, there"s no reason why franchise organizations such as Realogy or RE/MAX couldn"t set minimum commissions for its agents. So if you want to discount, join another franchise.
What makes this OK? It"s vertical, not horizontal. In other words, the pricing comes from the franchisor to retailers. But if retailers were to fix prices with each other, that would be horizontal, and anti-trust. The Century 21 franchisor could tell brokers and agents that the minimum they want charged in any transaction is five percent. The brokers could tell their agents the same thing. But a Century 21 broker or agent could not tell another broker or agent what to charge. That would be price-fixing, a form of anti-trust.
But if you were a broker with another franchise or an independent and knew that all Century 21 agents in your area must charge no less than five percent in commissions, you could tell your agents the same thing, thereby establishing a new floor for commissions in your area.
There"s precedent that price-cutting doesn"t always work. During the burger wars, when McDonalds introduced it"s 99 cent menu, other chains cut their prices, too, but quickly realized they were being led down the garden path. Instead of undercutting each other into bankruptcy, Burger King raised its prices, and the other burger chains, including McDonalds followed suit.
The bottom line is that a franchisor has the right to establish the terms of sale for its branded products. In real estate, that would mean that brokers in the same franchise could be forced by the franchisor to standardize by requiring that brokers charge enough for their services to reinvest in upholding the brand image. In turn, the franchise would potentially reinvest in the brokers and agents to insure their capacity to uphold the brand image.
Goodbye MLS-only listing services as a loss leader. Hello, stronger brands, higher commissions.
"The Leegin opinion is certainly a blow to discount real estate brokerages and will have far-reaching effects by increasing prices in the industry," writes Sorensen. "The questions are -- to what extent will the opinion be used by franchisors to impose commission pricing schedules on franchisees, how will the brokerages react, and what effect will the schedules have on the purchase and sale sector."