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September 18, 2012
By Neil S. Ende
So, you operate a small agency or master agency. Like everyone else in the industry, you are growing increasingly tired of trying to survive and maybe even make some money when youre being squeezed between the major providers and your subagents. And like everyone else in the industry, you belong to several industry groups and trade associations. So youre thinking that its about time to stop complaining to each other as individuals, and instead to address the problems the industry faces, improving economic conditions for everyone.
And it wouldnt take much. It would be easy, for example, to start such a discussion at an industry event where several speakers talk about the disastrous market conditions were all facing” and how its hard to make a profit at todays prices” and how weve lost all discipline in our industry.” That would start everyone thinking in the right direction, and with only a small amount of luck, it would get everyone headed in the right direction, too.
Sounds like a great idea, and an easy way to start some major improvements, right? The only problem is, it may be illegal. And not just a little” illegal, more like everyone goes to jail” illegal.
How can that be? After all, most agents are relatively small. And even if they agreed” to something, that couldnt possibly have any real negative effects on consumers in light of all the alternatives consumers have.
Well heres more bad news: Thats irrelevant. While size (i.e., what you may call market power”) may matter for certain kinds of antitrust analysis, when it comes to price fixing, it does not matter how big you are or how much market share you control.
Hard to believe? Many years ago, the real estate agents in the Maryland suburbs of Washington, D.C., would have agreed with you. In fact they did agree with you. So, one year, at their annual industry gathering, the president of one of the agencies got up and talked to the group about the increasing costs and decreasing margins his agency was facing. He concluded by saying that his agency was considering increasing the commissions it was charging by 1 percentage point. Thats just us,” he went on to say, Were going to make our own decisions, and Im not telling anyone else what to do.”
Someone from another agency stood up and said, Weve been looking at the same issue at our agency, and were also facing shrinking margins from increasing costs, and the fact that weve been at the same commission rate for many years now. And were having conversations about what to do about it. But we havent made any decisions.”
Someone from a third agency said, Were thinking about it too. No decisions yet.”
Several people from several other agencies said nothing at all.
Over the next six months, the average level of commissions charged by the agencies for selling houses moved up about 1 percentage point from what had been the average commission rate.
Several months after that, the Department of Justice indicted most of the agencies and many of the individuals. Everyone was convicted. The agencies paid big fines, and the individuals went to jail.
How Can That Be?
The answer is that Section 1 of the Sherman Act makes illegal any agreements (or conspiracies) in restraint of trade. Price fixing is a classic form of illegal agreement under Section 1.
Everyone thinks they know what price fixing is all about: big companies, gathering in smoke-filled rooms, agreeing on prices. While that does happen, it turns out that what an agreement” is may be very different from what you think, and as a result it is surprisingly easy to find yourself at the wrong end of the law.
You can be guilty of an illegal agreement” or conspiracy” even if there was never anything formal about the agreement, and the agreement” does not even have to be explicit. If two company representatives leave a meeting with an understanding” tacit, implicit, based on a wink or a nod of how they will both act on pricing, they have agreed” for antitrust purposes.
And the act of agreeing is itself illegal. Where there is an agreement in fact (if not form) a common understanding” that can be tacit or implicit to engage in prohibited conduct, that is an illegal agreement, and if it concerns prices, it is price fixing.
And illegal price fixing” is not limited to saying we agree to charge $X.” Any agreed conduct that affects price is illegal, including for example, whether or not to discount, limits on discounts, and whether and how to pass along to customers increases in costs or in taxes.
Thats what happened to the Montgomery County Realtors. The Department of Justice and the jury put together the facts:
There was a lot of discussion at the annual meeting about increasing commissions by about 1 percentage point.
Over the next six months or so, thats exactly what happened.
That showed that during the annual meeting, the agents came to an agreement an understanding that it would be safe” to increase commissions by 1 percentage point with little or no risk of losing sales, because the other agents were going to do the same.
Lets take a hypothetical example a bit closer to home. Master agencies and subagencies make their living on commission payments and thus the level of commissions paid by carriers are a subject of constant conversation. Carriers want to pay as little as possible to their master agents and subagents, and master agents and subagents want to be paid as much as possible. These incentives can lead to conversations, for example, among subagents as to minimum acceptable commission percentages and other terms of compensation. As the percentage or dollar amount paid in commissions is a price” that can be fixed in the eyes of the antitrust laws, discussions of this nature can be very dangerous.
Agreements to fix prices always are unlawful. And because it is illegal to agree to fix prices, it is not a defense to argue that the price fixing goal was not achieved, that the agreed price or price increase was fair or reasonable, that the price increases were justified by increasing costs, or that the purpose of the price fixing was laudable or worthwhile.
Likewise, other agreements, whether undertaken by an industry association or alliance or an individual, that have the effect of reducing competition, including agreements to boycott or not to deal with a third party, also can be illegal.
Violations of Section 1 of the Sherman Act almost always are prosecuted by the Department of Justice as crimes, rather than in civil enforcement actions, and can carry very serious penalties of up to $100 million for corporations. Moreover, it is critical for you to be aware that violations of the antitrust laws can also carry penalties of up to $100,000 and 10 years in jail for individual violators. Over the last 10 years, long jail terms for individuals even for executives of non-U.S. companies who may never have even visited the United States on business have become the rule, not the exception.
Companies found to have violated the antitrust laws in civil lawsuits can also be liable for three times the proven damages, such as the amounts by which they overcharged their customers as a result of their illegal price fixing. Further, even if your company and you personally survive a federal investigation and/or a lawsuit, the cost of defense will be extremely high, both in dollars and the potentially more crippling distraction of management time and attention from running your business.
The Risks of Getting Together
Any formal or informal groups, and any meetings of competitors including meetings of trade associations and meetings for legitimate and even public interest reasons create significant hidden dangers under the antitrust laws. The group meetings can create an environment and provide the opportunities at conferences and other events for competitors to meet, discuss and agree in violation of the antitrust laws, not only at the formal meetings and formal dinners, but also over informal meals, coffee breaks, golf and other social events.
How Do You Protect Yourself?
Proactive conduct is required to ensure that everyone in the organization understands clearly what can and cannot be discussed and what actions can and cannot occur. This is best accomplished through a formal antitrust compliance and monitoring program, including rules of conduct for meetings and other discussions that are developed, presented and supervised by qualified antitrust counsel. This program will not only help reduce the chance that a violation will occur, but it will also evidence the organizations proactive efforts to comply, which can be an important factor if an attorney general or antitrust regulatory authority commences an audit or an investigation. The best practices followed by the most professional organizations also include antitrust counsel present at, and monitoring of, group meetings, both to keep everyone from straying into a dangerous area and to underscore the organizations commitment to compliance.
Antitrust compliance is a very serious matter, particularly for industry groups, trade associations, and their members. You and your company can commit a criminal violation of the antitrust laws by your mere participation in a meeting in which a prohibited discussion occurred or a prohibited agreement was reached even if you merely sat silently and listened, and then went out and did what everyone implicitly agreed to do. If you ever find yourself in a meeting, regardless of the context or formality, in which the discussion moves to a prohibited area, you need to stand up, announce in a loud and obnoxious voice that you refuse to be part of that kind of discussion, then knock over a glass of water or a chair and actually walk out of the room so that you are not party to that discussion or agreement and so everyone remembers that you left.
And unfortunately, the chances of finding yourself in such a meeting are not small; think about the number of meetings of trade associations and the like youve attended in which industry conditions” market conditions” and problems facing the industry” all code for declining prices were not a major topic of both formal and informal conversation.
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