A Quick Overview of the Sherman Antitrust Act as it pertains to Real Estate Law
June 8, 2023
To put it simply, The Sherman Antitrust Act was enacted in order to prohibit agreements in restraint of trade. The Sherman Antitrust Act of 1890 remains one of the most important pieces of legislation affecting business today. Federal antitrust laws deter attempts to monopolize trade, price fixing, group boycotts, tie-in agreements, and forbids market allocation. In short, the Sherman Antitrust Act is designed to promote free competition in the marketplace.
Antitrust Laws Definition
Let's start by defining antitrust law and this act specifically. The antitrust definition is a collection of laws and regulations intended to promote fair competition and business practices in the United States marketplace. These laws are typically put in place by the federal government.
Sherman Antitrust Act Definition
The Sherman Antitrust Act is a US federal law that prohibits agreements in restraint of trade. The act was passed in 1890 and it is still one of the most important pieces of legislation affecting business today. It does this by limiting certain activities that can be used to gain an unfair advantage over competitors.
The Sherman Antitrust Act outlaws attempts to monopolize trade, price fixing, group boycotts, tie-in agreements, and forbids market allocation. In short, the Sherman Antitrust Act is designed to promote free competition in the marketplace.
However, the Act does not apply to unions or other labor organizations. The Federal Trade Commission enforces the Sherman Antitrust Act. We’ll take a look at what antitrust laws in real estate might look like, but first let’s cover the basic provisions.
How Outlawed Practices are Defined in the Sherman Antitrust Act (Horizontal versus Vertical)
Let's talk for a minute about the different kinds of outlawed agreements of the act. The Sherman Antitrust Act outlaws a few specific types of agreements between companies. It categorizes these agreements as horizontal restraints and vertical restraints. Either could be agreements that restrain trade, or they are basically any agreements that limit competition or reduce the number of competitors in a market.
What are Horizontal Restraints?
A type of restraint of trade that is illegal under the Sherman Antitrust Act is horizontal restraints. Horizontal restraints are agreements between entities on the same level of the market (such as competitors) that restrict competition between them. Horizontal restraints can take many different forms, but some common examples include price fixing, market allocation, and group boycotts.
What are Vertical Restraints?
Vertical restraints are also illegal under the Sherman Antitrust Act. Vertical restraints are agreements between companies that operate at different levels of the same supply chain or market. A vertical restraint could be an agreement between a developer and a homebuilder to only use certain contractors or suppliers.
While vertical restraints can sometimes be beneficial for consumers, they can also limit competition and raise prices. These agreements are partially allowed by the Sherman Antitrust Act because they can help ensure that products are distributed efficiently. However, vertical restraints must not be used to limit competition between distributors or retailers.
The Sherman Antitrust Act has Three Main Provisions:
- It prohibits agreements between companies that restrain trade.
- It outlaws monopolies or attempts to monopolize a market.
- It prohibits companies from engaging in exclusionary practices or practices that deter competition.
What is the Penalty for Violating the Sherman Antitrust Act
The Sherman Antitrust Act is enforced by the U.S. Department of Justice and the Federal Trade Commission. Companies in violation of these laws can be fined up to $100 million and can be imprisoned for up to 10 years. Individuals could be fined up to $100,000 and up to 3 years in prison.
How does the Sherman Antitrust Act relate to real estate
The Sherman Antitrust Act has been used in relation to real estate transactions for over 100 years. In fact, one of the first major cases brought under the antitrust law was against the Real Estate Board of New York in 1912. The case revolved around allegations that the board had conspired to keep prices artificially high.
More recently, the US Department of Justice filed an antitrust lawsuit against Microsoft Corporation in 2000. The DOJ alleged that the company had violated Section 2 of the Sherman Antitrust Act by abusing its monopoly power.
While there have been some high-profile cases involving antitrust law and real estate, most interactions between the two are relatively mundane. However, it's important for businesses involved in real estate transactions to be aware of antitrust law and ensure that they are compliant with it.
What are the possible implications in Real Estate
The Sherman Antitrust Act could limit the ability of an agency to engage in certain practices - namely exclusionary practices. Exclusionary practices are activities that prevent or discourage competitors from entering a market. This can take many different forms, such as exclusive dealing, tie-in arrangements, and predatory pricing, but more on that in a minute.
While the Sherman Act has been around for over 100 years, the real estate industry has only recently come under increased scrutiny from regulatory agencies. This is likely due to the fact that the real estate industry is seen as a key area for economic growth. There has also been a lot of consolidation in the industry in recent years. As a result, businesses involved in real estate transactions need to be aware of antitrust law and make sure that they are compliant with it.
Price Fixing in Real Estate Law
One type of restraint of trade that is illegal under the Sherman Antitrust Act is real estate price fixing.
Horizontal price fixing occurs when two or more companies agree to charge the same price for a good or service. For example, if two real estate firms agree to charge $5,000 for a home inspection, they would be violating the Sherman Antitrust Act.
Vertical price fixing occurs when an entity charges prices for a good or service at different levels of the supply chain. For example, a developer might charge a higher price for a home if it is built by one of its affiliated homebuilders. While vertical price fixing can sometimes be beneficial for consumers, it can also limit competition and raise prices.
Examples of Price Fixing in Real Estate
There are a few different antitrust violations in real estate that can occur. Some of the most common violations include market allocation, price-fixing, and bid rigging. Bid rigging is when businesses agree not to compete for contracts by submitting competitive bids. This can lead to higher prices for consumers and less competition in the marketplace.
Group Boycotts in Real Estate Law
Group Boycotts Definition
Group boycott is an antitrust violation that can occur when two or more companies or real estate professionals agree to not do business with a particular company or person. This typically happens in the form of a contract combination. Contract combination occurs when businesses agree to limit their interactions with each other in order to restrict competition.
Examples of Group Boycotts
Let’s look at an example of group boycotting in real estate. Imagine there are two real estate brokerages in town and they don't like a third brokerage that has just opened up shop. They could agree not to sell homes to anyone who uses that third brokerage.
Or, they could agree not to advertise in the local newspaper if that newspaper runs ads for the third brokerage. Either way, this would be an illegal group boycott.
Just like price-fixing agreements, group boycotts are illegal because they restrict competition and can harm consumers by limiting their choices.
Market Allocation in Real Estate Law
Market Allocation Definition
Market allocation occurs when two or more entities formally agree to divide up customers, geographic areas, or products among themselves in order to reduce competition.
Examples of Market Allocation
Market allocation occurs when two or more companies agree not to compete with each other in a particular market or geographic area. For example, two real estate brokers could agree that one will only serve clients in certain zip codes while the other serves the remaining zip codes.
Or, let's say that there are two real estate brokerages in town. They decide to split up the town between them so that each brokerage only serves one half of the town. This would be an illegal market allocation agreement because it would restrict competition and lead to higher prices for consumers.
Tie-in Agreements in Real Estate Law
Tie-in agreement Definition
A tie-in agreement is an agreement between two businesses where one agrees to sell only products manufactured or provided by another. This is generally prohibited unless it’s for a unique product or part of a package not available elsewhere which makes it legal.
Examples of Tie-in Agreements
Tie-in arrangements occur when a company requires another company to purchase one product in order to purchase another product from the same company. A tie-in agreement is an arrangement between two or more businesses where they agree to sell specific products. These would typically be services that are manufactured or provided by one of the other businesses.
For example, a car manufacturer may have a tie-in agreement with a particular tire manufacturer. As a result, the car manufacturer would be required to sell cars that are equipped with tires manufactured by the tie-in partner.
In real estate, this act might protect home buyers from being pressured into purchasing overpriced goods and services. This could look like specific title insurance or any other necessary 3rd party services as a requirement of closing on their home.
Tie-in agreements are generally prohibited under the Sherman Antitrust Act. However, there are some exceptions to this rule. For example, tie-in agreements may be permissible if the product being offered for sale is unique and not available from any other source.
Additionally, tie-in agreements may be permissible if the product being offered for sale is part of a unique package of products and/or services. Those services would have to be unobtainable from any other source. Neither of these conditions would be common in most industries and especially the real estate industry.
What if the Sherman Antitrust Act was Repealed?
If the Sherman Antitrust Act were repealed, it would be easier for businesses to engage in the aforementioned exclusionary practices - barring any free market correction. Without the act, agencies would be able to split up neighborhoods and areas of town. That would limit the ability of new competition to enter the market while hiking prices for buyers and sellers.
Supporting real estate services such as title companies, appraisers, builders, etc. could all engage in price-fixing causing prices to skyrocket. In short, the repeal of the Sherman Antitrust act would be bad for consumers and new businesses. As for the real estate industry, a repeal could harm one of the most important industries in the country as a whole.
How businesses can ensure that they comply with these laws
Businesses can ensure that they are compliant with the Sherman Antitrust Act by familiarizing themselves with the specific provisions of the act listed in this article. To ensure that they are in compliance with the act, businesses can (and should) consult with an attorney who is knowledgeable in antitrust and real estate law.
Summary of the Sherman Antitrust Act
The Sherman Act prohibits agreements in restraint of trade. The purpose of the Act is to protect consumers from anticompetitive practices by ensuring that businesses compete fairly in the marketplace. The Sherman Antitrust Act applies to all businesses, regardless of size with some exceptions like unions or other labor organizations.
The Act is an important law that protects consumers from unfair prices and promotes competition in the marketplace. Antitrust laws in real estate prohibits agreements between companies that restrain trade, monopolies, and anticompetitive practices. Violators of the law can be fined up to $100 million and can be imprisoned for up to 10 years. Understanding these provisions can help you save money and be a more informed consumer and/or professional.
