One of the bastions of the real estate business model is about to be tested in court - the commission split between competing brokers and their agents. In markets in which one or more brokers significantly dominate the marketplace, commission splits which are other than the 50/50 splits outlined in most sales contracts can become unfairly lopsided - as much as 70-30 or 75-25, in favor of the dominant brokers. The world's largest franchise, RE/MAX, wants to eliminate adverse commission splits and is willing to spend what it takes to do so in court. The defendants, Realty One and Smythe Cramer want to eliminate the 100 percent commission model and retain their market dominance. Both sides will have their day in court, thanks to the U.S. 6th Circuit Court of Appeals.

The U.S. 6th Circuit Court of Appeals just reversed an earlier district court summary judgment requested by Realty One and Smythe Cramer, the defendants in the unfair commission split suit filed by RE/MAX. In effect, that means that while the district court threw out the suit, the Court of Appeals has ruled that the suit will go to trial.

The implications are far-reaching. The outcome of the suit could determine the rules of competition in the real estate industry and the incentives which drive that competition.

At issue is the practice of imposing adverse commission splits against selected companies, a practice which RE/MAX contends is actually designed to eliminate competition in markets which are dominated by large brokers such as the Northeast Ohio real estate marketplace where the defendants have a 50 percent market share. RE/MAX also alleged that the "adverse splits" are the result of a conspiracy between Realty One and Smythe Cramer, the two regionally dominant companies. At the heart of the issue is the way agents are paid in commission splits with their brokers or through 100 percent plans as outlined by RE/MAX and some other franchises.

In 1987, the defendants began imposing adverse commission splits on RE/MAX agents. It remains to be seen whether the courts will determine whether this action was done in a conspiracy and had the affect of eliminating RE/MAX agents as competition.

Daryl Jesperson, president of RE/MAX, said, "There's no question that the brokers have been damaged. The amount grows everyday. We have lost some brokers and agents. It is a tribtue to the dedication of our brokers who are sticking this out."

Asked how much business he believes has been lost, Jesperson commented, "How do you measure business that you didn't get?"

In explaining its decision, the Court states, "Re/Max contends that defendants Realty One, Inc. and Smythe Cramer Company have dominance in the northeast Ohio real-estate markets and have used that dominance to defeat Re/Max's attempt to introduce its unique and, it claims, more-efficient sales-agent compensation system. Re/Max argues that the defendants control the northeast Ohio markets in two ways: (1) by obtaining the listings for a large majority of homes for sale and (2) by attracting and employing the large majority of experienced real-estate agents. There is nothing, of course, illegal in that. What is illegal, according to Re/Max, is the means it claims the defendants have employed to perpetuate that dominance--the defendants' so-called "adverse splits" policy, which we shall explain in due course. According to Re/Max, the real and intended effect of this policy is that the defendants essentially refuse to sell homes to customers brought to them by Re/Max agents. In consequence, Re/Max argues, it cannot attract experienced agents for its sales force, because, given Realty One's policy of boycotting purchasers produced by Re/Max, experienced agents would not make enough money working for Re/Max. Without experienced agents, Re/Max argues, it is prevented from entering the northeast Ohio real-estate market.

"Realty One, on the other hand (but not Smythe Cramer), counterclaims that Re/Max is attempting to become, through unfair competition, the dominant player in the northeast Ohio real-estate markets. It argues that Re/Max, with its national network of franchisees, is purposely operating at a loss in northeast Ohio by offering greater compensation to experienced agents than it can afford or the market can bear--a sort of predatory pricing--in order to capture the market in experienced agents and thereby establish a real-estate monopoly in northeast Ohio.

In reaching its decision, the three-judge panel concluded that the trial judge had erred in entering summary judgment against RE/MAX and in disregarding key evidence an attempt "to exclude competition from the marketplace." Among other things, the court rejected the defendants' justifications [for adverse splits] as "not legally supportable."

The court also observed "...that adverse-splits policies have failed when attempted in other markets. This fact, when combined with the evidence that such policies are economically irrational absent market dominance, strongly suggests that the defendants' ability to sustain adverse splits for more than ten years arises from monopoly power, whether exercised individually or collectively..."

Based on the Court of Appeals decision, the case is now remanded to the District Court to be set for trial.

The wheels of justice turn slowly. The suit, which has been on the docket since the early 90's, may be long in resolution. Anti-trust suits are typically brought by the government, not by private sector competitors.

So far, a trial date has not been set. "We anticipate an early trial date, perhaps as early as this fall," said Jesperson.

The decision can be read at the U.S. 6th Circuit Court of Appeals Web site.

Published: April 15, 1999

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