A civil lawsuit filed by the Department of Justice (DOJ) against the Kentucky Real Estate Commission (KREC) should send shock waves through the real estate industry -- at least through the eleven other states that prohibit rebates by brokers and agents to consumers.

The DOJ's Antitrust Division filed a lawsuit on Thursday, March 31, 2005 against the Kentucky Real Estate Commission, "for limiting competition among real estate brokers in the Commonwealth of Kentucky." The Department said that the Commission's regulations restrict competition and cause consumers to pay higher prices for certain real estate services.

Agrees Tom Reddin, CEO/Real Estate, for IAC Financial Services and Real Estate (LendingTree, Realestate.com), "The unfortunate thing is consumers and agents in 12 states aren't able to enjoy the benefits of rebates, but we have a referrral model. We have a variety of incentives including a $1000 Home Depot gift card; Costco cash rebates when consumers close with us; we have five airline programs with major carriers; AAA vacation packages; Priority Club programs with hotel chains. Consumers love them, and they are great marketing tools for real estate agents."

Realestate.com and LendingTree offer rebates and incentives in all 50 states.

The civil antitrust lawsuit, filed in the U.S. District Court for the Western District of Kentucky, challenges the Kentucky Real Estate Commission's regulations that prohibit Kentucky real estate brokers and sales associates from offering rebates and other inducements to attract customers as a violation of Section 1 of the Sherman Act.

According to the DOJ, real estate brokers were quoted as saying that the rebate ban "inhibits free trade" and avoids a "bidding war" among brokers that could "lessen [broker] profits," which confirms the Department's allegation that the ban harms home buyers and sellers.

"Restricting brokers from competing through rebates and inducements, is a per se violation of the antitrust laws that, as confirmed by the brokers themselves, inflicts higher prices on Kentucky consumers," said R. Hewitt Pate, Assistant Attorney General in charge of the Department's Antitrust Division. "The federal antitrust laws protect consumers against restrictions on competition, even when they are adopted by state-created entities like the Kentucky Real Estate Commission."

The state action doctrine provides immunity from federal antitrust liability for the actions of entities like the Kentucky Real Estate Commission only when there is a clearly articulated state policy to displace competition and the state actively supervises the conduct.

"Here, Kentucky has neither articulated a policy to displace competition nor supervised the conduct at issue," said Pate. This case reflects the continuing efforts of the Department to eliminate this kind of anti-competitive conduct by state-created entities that harms consumers.

The DOJ's investigation opened only a few months ago, resulting in surprisingly quick action, say observers. "In January of this year, South Carolina moved to prohibit real estate-related rebates when the legislature passed a new statute -- it was done very quietly, which was a surprise to us," said a spokesperson with LendingTree. "What they did was delete a key phrase, and the statute now reads: "[No licensee may pay] a commission or compensation to an unlicensed individual."

Other states with regulations against sharing broker commissions and rebates with consumers are Kansas; Alaska; Mississippi; Oklahoma; Louisiana; New Jersey; Missouri; Tennessee; Oregon; Alabama; South Dakota; and West Virginia. Rhode Island and New York have regulations that are subject to some interpretation, said the spokesperson, but LendingTree does not offer rebates in these states. Meanwhile, other states such as Iowa are in the process of considering a prohibition on rebates to consumers via the licensing laws. The Iowa Real Estate Commission has appointed a task force to investigate the issue, say sources.

"The prohibition isn't against rebates on some broad scale (like a rebate you might get from Dell or some other products)," explains the LendingTree spokesperson. "They're real estate-specific and embedded in the real estate statutes."

According to the civil lawsuit complaint, KREC's policy is to preserve broker competition. Kentucky specifically prohibits the Kentucky Real Estate Commission from "promulgating any administrative regulation which in any way fixes prices, establishes fees, or sets the rate at which licensees are compensated."

Despite this prohibition, the Kentucky Real Estate Commission regulations prohibit real estate brokers from competing by, for example, offering cash rebates or refunds, or a free home inspection, the DOJ said in its court filing. Nor can they compete by taking a customer out to dinner or donating money to a charity of the customer's choice. The Department's suit seeks to restore this beneficial competition. As aptly put by another broker quoted in the complaint, striking down these regulations and permitting, "[r]ebates and inducements will increase competition and give consumers more choices in service."

"I can't imagine any legitimate reasons if a state denies licensed real estate brokers from providing rebates and incentives and how that would help consumers," says Reddin. "I'm sure the other 11 states that have had these laws in place are taking a close hard look at them and reconsidering."

Officials with KREC could not be reached for comment in time for publication, but the DOJ says the court will determine a pre-trial schedule once the Kentucky Real Estate Commission files its response to the government's lawsuit. KREC has 20 days to file a response with the court.

About the other eleven states with similar regulations, DOJ Anti-trust Division spokeswoman Gina Talamona says, "We were conducting an investigation and it was determined that a lawsuit was warranted. I can't comment if we are looking anywhere else."

Published: April 4, 2005

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