NAR/DOJ lawsuit stymies innovation

by Brian N. Larson

This two-part series appeared on Inman News May 31-June 1, 2006. It discusses the impact of the National Association of Realtors' policy-making on so-called virtual office Web sites, the Department of Justice lawsuit against NAR, and the impact of both on online brokerage innovation.

Online brokerage delayed 4 years and counting
(Part 1)

Real estate brokerages and multiple listing services have no clearer guidance today in online brokerage than they did four years ago, despite years of National Association of Realtors policymaking and the Justice Department's lawsuit against the trade group.
The early days of the virtual office Web site debate were typified by fairly open and vigorous discussions. NAR policymaking muddled things quite a bit and brought the attention of the federal government. Right now, the NAR/DOJ lawsuit is the thing, and the industry stands to lose regardless of the outcome.

The potential consequences are grave, but MLSs and brokers might be able to do something about it. They should 1) look back at how the issues arose in the first place, 2) consider the consequences of a continued lack of clarity regarding online brokerage, and 3) engage in constructive discussions to resolve the issues without regard to the NAR/DOJ spat. Part one of this guest opinion sets out after the first of these objectives, and Part 2 will cover the second and third.

The early days

Four years ago, NAR launched its first effort to regulate what were then called virtual office Web sites, VOWs. VOWs were around for years before that, though. At least as far back as 1998, a broker in Minneapolis operated a Web site where he displayed the entire MLS listing inventory to consumers who became his clients online. At the time, I managed the MLS in the Twin Cities. We examined what the broker was doing and realized that we should not attempt to prevent him from delivering brokerage services online. In short, our lawyers told us we could not dictate the medium in which a participating broker delivered his services.

However, we could insist that he live up to the same professional standards as all other brokers, and that he show his client information relating only to properties which 1) he believed the client had or was likely to have an interest in purchasing, and 2) he believed the client had the means to purchase. To us, it seemed clear in the MLS offer of compensation and the MLS policies governing reproduction of listings that cooperating brokers may show listings only to potential buyers who were willing and able to purchase them. At the very least, we told our VOW broker, he would have to ask his client what she was looking for and how she would pay for it. We also demanded that the broker verify the e-mail address or some other means of contacting the client. We never adopted a "VOW policy." We believed these requirements to exist in our MLS rules, the VOW-operating brokers involved did not complain, and we never had any serious trouble with VOWs after that. 

VOWs may have played a role in our decision to adopt IDX, the means by which brokers are allowed to advertise each other's listings on their Web sites. Some folks thought that IDX would steal the thunder of VOWs, because IDX allowed consumers to see almost all the listings without having to register. Folks generally believed, and rightly, as it turns out, that consumers would rather have a little less information if they can be excused from providing personal information up-front. IDX did not precipitate VOWs and online referral models; quite the contrary – IDX was our first reaction to VOWs. It proved to be an effective one, making VOWs less attractive without prohibiting them.

But from the beginning, we struggled with the dividing line between advertising and online brokerage. IDX was advertising, no doubt, because it involved showing a great quantity of listings to anyone interested in seeing them on the Internet. This is really no different than showing the listings in a newspaper ad or in the window of your brokerage firm office. Because you need a listing broker's permission to advertise her listings, IDX had to provide an opt-out for listing brokers.

Online brokerage raised complicated questions about both online and traditional practices: What is necessary to establish a client or customer relationship? How much should the client or customer be able to see? The answers are important, because in theory, if online brokerage is just brokerage online, then listing brokers could not opt out of the display of their listings by competitors.

A further example illustrates the problems. Today almost all MLS systems provide for the following scenario: A consumer sends an e-mail to real estate licensee Susie Smith, saying "I want to buy a three-bedroom home in St. Paul – please e-mail me listings." Susie goes into the MLS system, enters the consumer's e-mail address and search parameters. Now, the MLS system sends a daily batch of new and changed listings and each day the consumer receives these listings without any further mediation from Susie. Advertising? Or brokerage online? Gray area in the middle?

NAR policymaking

In the beginning, the NAR seemed to share our view of VOWs – they said online brokerage could be regulated only to the extent that traditional bricks-and-mortar brokers were. If you could do something in the bricks-and-mortar environment, you should be able to do it online. The NAR staff put out an unofficial white paper to this effect late in 2000. But the political machinery within the nation's largest trade association was fated to come up with an entirely different policy conclusion – by the summer of 2002, we were all considering a new proposed NAR policy that lumped IDX together with VOWs and provided for a listing broker opt-out.

That summer, after leaving the Twin Cities MLS, I prepared a report for The Realty Alliance and the late Charles McKee, then its CEO. Interestingly, the group's mainline "traditional" brokers were divided about how to handle VOWs. Eleven Realty Alliance firms took part in interviews to give their perspectives on VOWs. Nine of the firms interviewed agreed with this statement: "Online provision of brokerage services should not be hindered by listing brokers being able to opt out of their competitors' virtual office Web sites." But four of 11 agreed with this statement: "No broker should be able to display my listing on her Web site without my permission, no matter whether she calls her site a 'VOW' or 'IDX' or whatever." That means at least two firms agreed with both statements, which contradict each other.

The report I prepared for The Realty Alliance never received much support, even within the Alliance itself. Fears of new business models frightened mainline brokers. While they wanted to support online brokerage in general, they also wanted a way to prevent particular, undesirable entities from getting their listings. NAR leaders and other public figures in the industry encouraged the misperception that VOWs were akin to referral-model brokerages – which as it turns out is not true at all. Under pressure from a relatively small number of quite large firms, NAR added the "selective opt-out" to its policy, which would now permit listing brokers to opt-out of IDX and online brokerage on a blanket basis, or on a competitor-by-competitor basis.

The NAR policy went through a major revision in 2003 (one which restored the distinction between IDX and VOWs and left the pre-existing IDX policy largely intact) and slight revisions thereafter. After protracted but inconclusive negotiations with DOJ, NAR announced a dramatic overhaul in September 2005. That final policy went back to lumping IDX and VOWs together. In effect, listing brokers could opt out (on a blanket basis only) of other firms' online brokerage efforts.

The September NAR policy precipitated the DOJ lawsuit that now threatens opportunities to innovate.

DOJ and NAR squabbles miss the point
(Part 2)

The Justice Department sued the National Association of Realtors in September 2005, alleging that its Internet property listing display policies were anticompetitive. The basis of the suit was the form of the NAR policy before the September revisions.

Leaders in the Realtor association community promptly began ridiculing the DOJ suit and its intentions. Here are paraphrases of some of the comments I've heard:

• "They sued us for a policy that has already been rescinded." This is true. I'm not sure what DOJ was thinking and why they did not update their complaint to address characteristics of the new policy. I'm not a litigation strategist, though.
• "The DOJ is saying that the real estate industry is not competitive; is there anyone who really believes this business is not competitive?" This mischaracterizes DOJ's complaint. A business can be competitive within a group of incumbent participants, even if they exclude competition from new entrants. An industry can therefore be both competitive and anticompetitive at the same time.
• "The DOJ believes that MLS should be a public utility, that anyone should have full access." I do not find these assertions in the documents relating to the case, but I cannot read the minds of DOJ attorneys, either.

Sadly, NAR's policies, the DOJ lawsuit, the resulting indignation in the brokerage community, and characterization of the DOJ's attorneys as uninformed and unreasonable all miss the point: An opt-out makes no sense in the context of online brokerage. In other words, NAR and its affiliated multiple listing services have no business dictating different operating terms for use of MLS data to deliver brokerage service online than to deliver brokerage services through traditional media. 

What MLSs ought to do is to clarify what is expected of all brokers reproducing listing content for their clients and customers. A candidate list might include 1) that the broker identify the consumer and verify some piece of contact information (phone number, address, e-mail address) within a short time after beginning to show her listing content; 2) that the broker inquire of the consumer as to her preferences regarding property to purchase; 3) that the broker make some effort to acquire information upon which the broker could base an assessment that the consumer can afford properties of the type she wants to see; and 4) that the broker show the consumer only those listings consistent with her expressed willingness and ability to pay. 

These requirements have long been at the heart of the cooperative function of the MLS. Traditional brokers did not hand out an MLS book to every consumer who walked through the door. In fact, they were not allowed to hand them out at all. A listing brokerage could expect that other brokers were showing its listing information to prospective buyers who were or at least might be interested in purchasing them. After all, the only reason a listing broker puts listings into the MLS is to encourage other brokers to sell them, not to help consumers to browse them.

Consequences of having no resolution

A few companies have continued to operate and build virtual office Web sites, or VOWs, and other forms of online brokerage services since NAR's first attempt at policy-making on the subject. But in general, development of online brokerage has been stunted or concealed by the uncertainty surrounding NAR's policies and its dispute with the DOJ. Today an online brokerage operator makes an investment in an approach that may not be viable long term, regardless of whether the DOJ or NAR wins the suit.
If NAR wins, other brokers will be able to opt out of online brokerages, perhaps even on a selective basis. Any online brokerage or group of them with a very effective business model runs the risk that traditional brokers will pull out. On the bright side, the most recent NAR policy would have allowed only blanket opt-outs, and these would have affected IDX as well as VOWs. Most listing brokers would not want to run the risk of losing IDX exposure unless the stakes were very high.

It is unclear what would happen if the DOJ wins. But either under NAR's September 2005 policy of blanket opt-outs or under the DOJ's vision of no opt-outs, one significant problem might be state regulators. State laws and most MLS policies prohibit the advertising of another broker's listing without the listing broker's permission. Some states have already said that displaying other brokers' listings online is a form of advertising. In the aftermath of the NAR/DOJ suit, it is hard to say whether other states will follow suit, whether DOJ will attempt to prevent that (as they have with other state regulations of real estate), and what the consequences will be for online brokerage. Any form of opt-out for listing brokers puts online brokerage at a substantial disadvantage.

Ironically, the most disturbing scenario may be the one in which NAR and DOJ reach a settlement. In that case, the future of online brokerage may be decided by lawyers who have never been involved in a real estate transaction, let alone have experience as a real estate broker. The policy chimera that would emerge might look more terrifying than anything so far proposed, and it would likely be subject to a consent decree, meaning NAR and the DOJ would have to agree on changes in the future to fix it. On the bright side, a settlement between would be binding only on those MLSs that choose to conform to NAR policy. MLSs may consider whether that conformity makes sense anymore.
So many issues are up in the air now that only the brave and foolish will invest significant amounts of money in online brokerage today. The consequences for real estate brokers are grave: Instead of being able to use MLS content as an advantage, a lever to transition into online brokerage, forward-looking brokers are stymied by the policies, or the lack of them. In the meantime, new entrants like Zillow and well-funded behemoths like Google are unchallenged as they gather steam behind their business plans. Instead of allowing their broker competitors to display their listings in online brokerage, traditional brokers are now sending their listings to the new models.

The way through

NAR General Counsel Laurie Janik announced to a group of association leaders May 18 that she does not believe the NAR/DOJ suit will be over anytime soon. 

I suggest that MLSs seek out the online brokerage operators that are or may be interested in discussing what the reasonable limitations of online listing display should be. These discussions can happen alongside the NAR/DOJ lawsuit, but need not be substantially connected with them. MLSs that can strike a balance with online brokers should adopt policies consistent with that balance. Different MLSs might come up with equally effective and equally legal solutions to this problem. As they do so, a small number of effective models will likely develop.

For NAR-affiliated MLSs, pursuing this course poses risks in their relationships with the national association. For the MLS prepared to take those risks, the rewards will be mostly intangible: The knowledge that you have positioned your organization to be a leader in the development of online brokerage, and the opportunity to shape the outcome rather than just swallowing whatever the lawsuit settlement looks like. One significant advantage is finding resolution so that all brokers, traditional and new-model alike, can understand what is to be expected of them in the online brokerage environment.

© 2006 Brian N. Larson