Real Estate; Unfair Methods of Competition; Unfair Trade Practice

Subject:

N.C.G.S. § 75-1.1.

Requested By: Mr. Phillip T. Fisher, Executive Director, North Carolina Real Estate Commission

Question: Does a requirement that development homeowners selling their homes list them exclusively with the developer/broker, or by an open listing, under penalty of denial of country club membership to purchasers constitute an unfair method of competition or an unfair trade practice under

N.C.G.S. § 75-1.1.

Conclusion: Yes. Such a requirement (appears to violate N.C.G.S. 75-1.1.

Lake Toxaway Estates is a resort area developed by the Lake Toxaway Company. The Company also owns a country club located in Lake Toxaway Estates, featuring golf, tennis, a lake, and a variety of other recreational amenities. The Company also is a licensed real estate broker, handling resales of homes in the Estate in addition to selling its own property, much of which remains undeveloped. On November 1, 1983, the Company mailed a letter to estates property owners informing them that anyone purchasing their homes under an exclusive listing with a competing real estate broker would not be eligible to apply for membership in the country club. A purchaser would be eligible to apply for membership only if the home was listed either exclusively with the Company or under an open listing, under which any broker could sell the home. The Company has informed this office that this restriction does not apply to sales by homeowners themselves. The North Carolina Real Estate Commission has requested an opinion from this office concerning the antitrust implications of this restriction. The office is of the opinion that it constitutes an unfair method of competition and an unfair trade practice, as both are defined by N.C.G.S. § 75-1.1.

1. Unfair Method of Competition.

The practice constitutes an unfair method of competition because it unfairly restricts competition in the residential real estate market. N.C.G.S. § 75-1.1(a) proscribes "(unfair) methods of competition in or affecting commerce. . . ." It is beyond doubt that the furnishing of real estate brokerage services is within or affects commerce. N.C.G.S. § 75-1.1(b).The only real issue is whether this method of competition is an unfair one. This office has determined that it is an unfair method of competition.

The test is whether the conduct at issue is such that a court of equity would consider to be unfair. Extract Co. v. Ray, 221 N.C. 269, 20 S.E. 2d 59 (1942); Harrington Manufacturing Co., Inc. v.

Powell Manufacturing Co., Inc., 38 N.C. App. 393, 248 S.E. 2d 739 (1978), cert. denied 296

N.C. 411, 251 S.E. 2d 469 (1979). The inquiry is not one merely of logic. "Rather, the fair or unfair nature of particular conduct is to be judged by viewing it against the background of actual human experience and by determining its intended and actual effects upon others." Harrington Manufacturing Co., Inc. v. Powell Manufacturing Co., Inc., supra, at 400. Under this test, the conduct at issue constitutes an unfair method of competition.

First, the actual effects of this practice are clear. Estates homeowners wishing to sell their homes will be coerced into listing their homes either exclusively with the Company or under an open listing. This will occur because of the apparent importance of country club membership to ownership of property in the Estates, a fact duly recognized by the Company in its letter of November 2, 1983. It probably would be most difficult to sell a home adjoining a country club if the purchaser would be ineligible to join the country club merely because of the manner in which the property was listed. This particularly is the case where the property to be sold is resort property and where the major attraction thereto is the country club and its various recreational facilities. Homeowners seeking to sell their homes are likely to be sensitive to this, and would in all probability list their property in accordance with the restriction at issue, in order to maintain the marketability of their homes.

This would force property owners to guarantee the Company a chance of selling their homes in all cases, while denying other brokers the opportunity to sell those homes in some cases. If the company obtains an exclusive listing, then it is guaranteed its commission if the home is sold. If the home is listed on an open basis, then the Company still has an opportunity to sell the home, although it then must compete with other interested brokers. But other brokers are denied the opportunity to obtain their own exclusive listing, under penalty of denial of country club membership to the purchaser. This puts competing brokers at a considerable disadvantage, one brought about solely by the Company’s control over the country club, which it owns. This disadvantage is not one which effectively may be countered in the competitive market.

Second, determination of the intent behind the practice at issue is not a simple task. Here it is important to look back at prior dealings of the Company in order to analyze the intended effects of challenged practice. This office previously has received complaints about sales practices involving the Lake Toxaway Company as early as 1974. The practice complained of at that time was that the Company denied country club membership to purchasers buying through competing brokers. This practice was discontinued pursuant to an agreement with this office. Then, in 1976, this office received a complaint that the Company was offering substantial discounts on country club initiation fees to purchasers if the property purchased was listed exclusively with and sold by the Company. This practice quickly was discontinued before this office acted upon the complaint.

This history seems to disclose a pattern of practices, all aimed at the same result — generating exclusive listings of property for sale with the Lake Toxaway Company, while denying those listings to competing brokers. Analysis of the practice presently at issue in light of this history strongly suggests that the Company is seeking to restrict competition, while guaranteeing for itself a larger share of the market.

At first blush, the practice may appear to encourage competition. Purchasers are eligible to apply for membership if the property was listed on an open basis, giving all brokers an opportunity to sell the property. This might be seen as reasonable because area brokers hav enot established a multiple listing service. But this is a problem to be resolved by the market participants acting together, not by the Lake Toxaway Company’s unilateral acts. It has no authority to prescribe market conditions for the area in which they conduct business. In light of these considerations, the practice at issue is a method of competition which a court of equity most likely would find to be unfair.

2. Unfair Trade Practice.

The practice at issue also constitutes an unfair trade practice. This differs from analysis of challenged methods of competition, which focuses on relations between competitors. Unfair trade practice analysis focuses upon relations between sellers and consumers, as well as between competitors. Aycock, North Carolina Law on Antitrust and Consumer Protection, 60 N.C. Law Review 207 (1982). An unfair trade practice is one which offends established public policy, or is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers. Johnson v. Insurance Company, 300 N.C. 247, 266 S.E. 2d 610 (1980); Spiegel, Inc. v. Federal Trade Comm’n., 540 F.2d 287 (7th Cir. 1976). Under this definition, the practice at issue is an unfair one.

The practice is oppressive and substantially injurious to consumers because it effectively prevents Estates property owners from listing their property exclusively with whichever real estate broker they should choose. This is accomplished by the Company’s control over the country club. This is an oppressive use of leverage over sellers, forcing them to conduct their business according to policies set by the company, and forcing sellers to deal with agents with whom they might not wish to conduct their business. It completely destroys the consumer’s independence in entering the market and assessing which arrangement best suits his needs.

Also, this type of restriction probably is far beyond the expectations of persons who bought their lots years ago and now wish to sell. One would assume upon purchasing either a lot or a home that later he could deal with any broker whatsoever if one the wished to sell. This practice, therefore, is oppressive to consumers, and constitutes an unfair trade practice.

3. Conclusion.

In conclusion, the practice at issue constitutes both an unfair method of competition and an unfair trade practice. It injures both competitors and consumers, and should be discontinued.

RUFUS L. EDMISTEN Attorney General

Victor H. E. Morgan, Jr. Associate Attorney General