The Sherman Act regulates all kinds of businesses within the United States, preventing them from forming monopolies and infringing on consumer rights.
But what does that have to do with the real estate industry? The Sherman Act plays a vital role in regulating the housing industry just like any other. Any real estate professionals who violate federal antitrust law could find themselves in a whole lot of trouble.
That’s why as a real estate professional, you need to be knowledgeable about the Sherman Antitrust Act and other federal antitrust laws. Not sure where to begin? Keep reading, and we’ll tell you everything you need to know!
What Is the Sherman Antitrust Act?
The Sherman Antitrust Act is the first federal law prohibiting contracts, conspiracies, or agreements that restrain trade. This act also prohibited businesses from forming monopolies or trusts. But what is a monopoly, you ask?
A monopoly is when one single seller in the market is offering a commodity, service, or good. This seller has no competition, so they can raise their prices to any rate they see fit. The consumer has no choice but to buy from the monopoly and is entirely at their mercy regarding pricing.
Luckily, colluding or merging to form a monopoly is now considered unlawful, thanks to the Sherman Antitrust Act and other antitrust laws. While the Sherman Act created an important precedent, we should note that it has since been replaced with new federal acts that better uphold antitrust legislation.
What Are Antitrust Laws?
Antitrust laws are a collection of federal and state government laws that regulate the conduct and organization of business corporations. These laws typically aim to promote fair competition for the benefit of consumers.
The three major antitrust laws are
- The Sherman Antitrust Act
- The Clayton Act
- The Federal Trade Commission Act
But you might ask, “Why are there multiple antitrust acts?” Don’t worry- we’ll be fully explaining the other two soon!
Why Was the Sherman Antitrust Act Passed?
Why was the Sherman Antitrust Law created in the first place? Well, necessity breeds innovation; the Sherman Antitrust Act was passed in 1890 to break up big monopolies dominating their markets.
What were the most notable monopolies during this time? Standard Oil, American Tobacco, and J.P. Morgan were all single sellers of their goods in the United States market. The Sherman Antitrust Act broke up these trusts, which helped regulate the prices of goods and gave consumers more power.
Examples of Sherman Antitrust Violations in Real Estate
Now that we know more about the Sherman Trust Act, you may wonder, “What do antitrust laws have to do with real estate?”
Well, the Sherman Act prohibits several behaviors that compromise a fair housing market, including:
- Price fixing
- Bid rigging
- Group boycotting
- Market allocation
- Tie-in arrangements
These are all examples of antitrust violations in real estate, but what do they each mean? Let’s take a closer look!
Price fixing is the practice of setting the price of a good or service to make a particular price a standard. Any agreement, even if it just implied with other brokerages to set a standard commission rate, violates antitrust law.
One example of price fixing would be two brokers getting together and agreeing to offer their clients the same price or commission rate. This interferes with a fair market and means that clients will have to pay higher prices.
Bid rigging is an illegal practice where competitors agree in advance on who will win the bid on a property. This creates higher pricing than what would have occurred under a free market, effectively cheating consumers into paying more.
For example, if two competing realtors agree to take turns being the lowest bidder to drive up the price of a home sale, this is considered bid rigging.
Group boycotting is when two or more people conspire against another business by no longer supporting or working with it.
For example, if two brokers agreed never to conduct business with a third broker to have less competition, then it’s a clear violation of the Sherman Antitrust Act.
Market allocation is when real estate brokers divide the market amongst themselves so they don’t have to compete with each other. This behavior is considered engaging in monopolistic practices and violates antitrust law.
One example of market allocation is if brokers decided to split up their area into different regions, designating a different realtor for each spot. This means that within each region, there is no competition, and home buyers will end up having to pay more.
A tie-in arrangement is when a seller requires the purchase of another separate product/service for the sale of the first.
An example of a tie-in arrangement would be if a real estate agent agreed to sell a property only if the buyer agrees to list the property with their firm.
Penalties for Violating the Sherman Antitrust Act
The penalties for breaking antitrust laws include hefty fines and even jail time in some cases.
Many people didn’t pursue legal action against offenders, as the cost and time that went into a court case were deemed not worth it.
Why wasn’t it worth the trouble? Well, the Supreme Court severely limited the power of the Sherman Antitrust Act, nearly making these antitrust laws obsolete. Many consumers didn’t feel they could win antitrust cases against big businesses.
How the Supreme Court Limited the Sherman Act
The Supreme Court applied the “rule of reason” interpretation to the Sherman Antitrust Act. This meant the courts could weigh the positive competitive features of a business against its anticompetitive conduct before deciding if it was unlawful.
This setback, in combination with the loose wording of the Sherman Act itself, left a lot open to interpretation. Violators of the Sherman Act could easily find loopholes to get themselves acquitted and keep running their businesses as usual.
Supreme Court Case United States v. E.C. Knight Co.
The Supreme Court Case that most limited the Sherman Act was United States v. E.C. Knight Co., also known as the Sugar Trust Case. The E.C. Knight Company’s monopoly in the sugar-refining industry seemed to violate the Sherman Act.
In this case, the Supreme Court established that the Sherman Antitrust Act was constitutional but could only regulate interstate commerce. As a result of this decision, the E.C. Knight Company won the case. This changed everything, taking away a considerable chunk of the Sherman Act’s power and rendering it almost useless.
So why isn’t the business world now a lawless land filled with monopolies and trusts? New acts have since been created to uphold antitrust legislation and ensure fair business competition. This brings us to the new and improved version of the Sherman Act, the Clayton Act.
What Is the Clayton Trust Act?
Like the Sherman Antitrust Act, the Clayton Act of 1914 was designed to break up monopolies and ensure fair competition in the market. So what does this antitrust law offer that the Sherman Act didn’t?
The Clayton Act strengthened the original antitrust law, explicitly listing business practices that would compromise a fair market. No longer could businesses find loopholes around the Sherman Act; these new antitrust laws were clear and final. In fact, we still operate under these laws today.
What Is the Federal Trade Commission Act?
The Federal Trade Commission Act (FTC) of 1914 enforces the Clayton Act and ensures fair practice in all markets, including housing. Any real estate business must ensure they are meeting the legal standards of the FTC by not breaking antitrust laws.
The FTC Act also declared that strikes, boycotts, and labor unions would be legal under federal antitrust laws.
This gives consumers even more power, as big businesses can’t take advantage of them without the threat of repercussions. If a company were unethical in some way, consumers could stop buying its goods and support the competition instead. If a business wasn’t treating its employees well, it could organize within its labor union and go on strike.
Essentially, acts like the Clayton Act and the Federal Trade Commission Act are the new and improved versions of the Sherman Antitrust Act.
Antitrust Laws and Interstate Commerce
Before the Sherman Antitrust Act was passed, Congress passed the Interstate Commerce Act in 1887. Why?
The Interstate Commerce Act ensured free trade by regulating the railroad industry and its monopolistic business practices. Because the railroad system was the only basis for interstate commerce, the railroad controlled many businesses and desperately needed regulation.
While the Interstate Commerce Act did not allow the federal government to decide this industry’s specific pricing and rates, it demanded that the rates be “reasonable and just.”
But it’s important to remember that the Sherman Antitrust Act is still considered the first federal antitrust law, not the Interstate Commerce Act. This is because the Sherman Act impacted all kinds of business across the United States, at least before the interference of the Supreme Court.
How Do Antitrust Laws Apply to Foreign Nations?
Now that we understand how the federal government regulates business within the United States, you may wonder, “How do federal antitrust laws apply to foreign nations?”
The Federal Trade Commission created an international antitrust program to ensure their goals expanded to a global economy. Known as the International Antitrust Enforcement Assistance Act of 1994, this interstate commerce antitrust act allows the FTC to enter into agreements with foreign nations.
What to Know for the Real Estate Exam
For the real estate exam, it’s essential you are aware of what the antitrust laws are and their history. Remember, antitrust laws are a collection of federal and state government laws that regulate the conduct and organization of business corporations. Antitrust laws help a healthy real estate economy, and as a real estate professional, you must follow them.
If you’re studying to take the real estate exam, you probably know there is still a lot to learn. Now that you’re an expert on the Sherman Antitrust Act and federal antitrust laws, why not brush up on some other topics?
Study all the terms you’ll find on the exam with our Real Estate Flashcards. Best of luck!