Closing the Deal: Ten Years after the Real Estate Prohibition Order

Remarks of Harry Chandler
Deputy Director of Investigation and Research
(Criminal Matters), Competition Bureau

Competition Law Session
1998 Annual Conference and Trade Show
Canadian Real Estate Association
Windsor, Ontario

September 27, 1998

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Introduction

I would like to begin by saying that my colleagues and I are pleased to have this opportunity to participate in the Competition Law Session of the CREA annual conference, especially since this year marks the 10^th anniversary of the Real Estate Prohibition Order. The fact that these sessions are held each year, and are generally well attended, is testament to the high level of commitment which CREA and its member boards, associations and realtors have made to achieving conformity with the Competition Act and the Order.

In the limited time available to me, I would like to touch on a number of subjects which I feel would be of particular interest to you as realtors and association officials. I will first explain what competition law and policy are all about, and what is the appropriate role of the Competition Bureau in the Canadian economy and, in particular, the real estate sector. I will then outline some general competition principles which I believe are integral to a competitive market in real estate services. I will briefly discuss some of the recent trends in the industry, and offer my views on their implications for competition. I will conclude by providing you with our impressions on how the Prohibition Order has benefitted the industry and the public during this past decade, and by suggesting an alternative approach designed to build on the successes which were achieved under the Order.

The Role of Competition Law and Policy

Competition policy in Canada encompasses several activities. First and foremost is the application of the criminal and civil provisions of the Competition Act. Another aspect of competition policy is the intervention by the Competition Bureau before federal and provincial regulatory bodies such as the Canadian Radio-television and Telecommunications Commission and the Ontario Energy Board. The purpose of such interventions is to ensure that regulatory authorities take into consideration the effects on competition when discharging their legislated responsibilities. Another related activity is the provision of input to the design and implementation of government legislation and policies that affect the competitive market system. For example, the Bureau has played an important role in the introduction of competition in the telecommunications, transportation and energy sectors. Recently, the Bureau has provided input to the Real Estate Council of Ontario, and likewise Alberta, in the drafting of their respective industry codes of conduct. Another facet of competition policy involves the representation of Canada's interests in respect of international trade and anti-trust issues.

Many of you might think of the Competition Bureau as a regulatory agency. That is certainly understandable, since in many ways the Competition Act and the Prohibition Order, by prohibiting certain types of anti-competitive conduct, appears to be regulating business behaviour. However, competition policy is actually the antithesis of regulation. Unlike regulation, competition law does not involve prior approval for a course of business conduct. The Competition Bureau does not regulate levels of service, quality, prices or profits. Rather, the Bureau is an investigative agency whose purpose is to ensure that these outcomes are determined by competitive market forces.

It is generally recognized that a competitive marketplace is the best means of enhancing efficiency and maximizing total economic welfare. The Competition Bureau subscribes to this view, and strongly advocates the elimination of regulation in favour of competition, wherever possible. Vigorous and effective competition encourages firms to lower costs, reduce prices, improve services and develop new products.

The objective of the Competition Act is to establish boundaries between acceptable and unacceptable business conduct. It discourages business behaviour that restricts or prevents the competitive and efficient operation of markets. The Competition Act seeks to create an economic environment in which business people can test their entrepreneurial skills, and consumers can derive the benefits which competition delivers.

I would like to emphasize that the Competition Bureau is not a regulator of the real estate brokerage industry. The regulation of professional standards and trading activity is the responsibility of the provinces through their appointed authorities. We do not involve ourselves in matters that do not raise important competition issues.

Another misconception is that the Bureau favours one type of real estate service over another, or low commissions over higher commissions. That is simply not the case. Our role is to protect the process of competition, not to judge individual product offerings or prices. We do not believe that a lower price is necessarily a better price. On the other hand, we also do not believe that lower prices necessarily mean lower standards of service, since lower prices might be achieved through operational efficiencies. Our message to consumers is that they should shop around to find the combination of product and price which best meets their particular needs. In marketing jargon, this is called the "value proposition".

Conforming with the Competition Act and the Prohibition Order

The Competition Act is a statute of general application, applying to virtually all industries across Canada. The Act consists of both criminal and civil law provisions which proscribe various types of anticompetitive conduct. The Act also provides a number of remedies to address actual or potential violations of these provisions. These include prosecution and punishment of offenders; injunctions; prohibition orders; reduction or removal of customs duties; orders affecting intellectual property rights; and private civil action. The Real Estate Prohibition Order is an example of the use of one of these remedies to deter industry misconduct without resorting to a full-blown prosecution. Later, I will discuss the history and rationale for this Order, its effects on the industry, and how it might evolve in the years ahead.

The criminal provisions of the Competition Act deal with such matters as price-fixing and market-sharing conspiracies, bid-rigging, predatory pricing, price maintenance, price discrimination and misleading advertising. A violation of any of these provisions could result in significant fines and imprisonment. For example, this past summer, a number of multinational companies in the food-additive business were fined a total of almost $20 million for conspiring to fix prices in the Canadian market. In 1996, an operator of a small driving school in Sherbrooke, Quebec was sentenced to one year in jail for various Competition Act offences. And many of you are probably aware of the 1994 convictions of two real estate companies, and two senior officials of one of those companies, for price maintenance activities directed at some small "discount" realty firms in Calgary.

The civil provisions of the Competition Act address issues such as abuse of dominant position, mergers, exclusive dealing, tied selling, market restriction and refusals to supply. Civil cases are adjudicated before the Competition Tribunal, which has the authority to make remedial orders when the activity in question would result in a substantial lessening of competition. Most of these provisions would not apply unless the entity engaging in these types of practices has significant market power. As an example, real estate boards unquestionably have such market power by virtue of their high membership rates and their control over the Multiple Listing Service™. Consequently, boards must be very careful not to use their control over the MLS™ to engage in anticompetitive behaviour.

As a complement to the enforcement activities of the Bureau, the Competition Act also provides that any person who has suffered losses as a result of the commission of an offence under the Act, or as a result of a contravention of an order of a court or of the Competition Tribunal, may sue for damages against the offending party. At least one real estate board in western Canada has faced such a lawsuit.

As you can see, the consequences of contravening the Competition Act or the Prohibition Order can be severe. The Bureau gives a high priority to real estate issues because of the size of the industry and its direct impact on major purchases by consumers. We have a very good pipeline into the marketplace, and we would almost certainly detect any transgressions. For these reasons alone, it makes good business sense to conform fully with the Act and the Order.

But there is another good reason not to break the law. If the real estate brokerage industry is to be regarded by the public as providers of professional services, and if it is to maintain the public's trust, the industry must raise itself above even the suspicion of any wrongdoing. Reports of anticompetitive activity concerning any single board or realtor reflect badly on the entire industry, and reinforce negative stereotypes and perceptions.

The Bureau operates on the premise that most business people want to comply with the law. To assist them, the Bureau has produced a variety of publications which explain the Act and the approach which the Bureau takes to the administration of the various provisions. These materials are available on the Bureau's Internet web site at http://cb-bc.gc.ca .

The Bureau attempts to strike the right balance in its responses to situations of non-conformance with the Act. Although important elements of this policy have been in place for many years, they have been integrated into what we now refer to it as the Conformity Continuum. The continuum consists of a variety of compliance tools. These include public education in the form of guidelines, pamphlets and participation in conferences such as this one today. Our toolbox also includes oral and written advisory opinions; information contacts; voluntary codes of conduct; written undertakings; prohibition orders; civil proceedings before the Competition Tribunal; and, of course, prosecution in the criminal courts. Our choice of responses would depend on a variety of factors, including the gravity of the alleged infraction; previous anticompetitive conduct; the willingness of the parties to resolve the particular matter; and Bureau priorities. The Bureau is mindful of the need to utilize limited resources wisely; however, we also cannot ignore the need to deter serious and deliberate misconduct.

How, then, can you, as realtors and association officials, comply with the Competition Act and the Prohibition Order? For those of you who actively participate in the operation of a real estate board or association, I strongly urge you to carefully read the Canadian Real Estate Association Compliance Guideline for Real Estate Boards, and adhere to those guidelines in the exercise of your association duties. In respect of your business dealings as individual realtors, I recommend that you abide by the following seven basic competition principles:

• DO NOT collude with other realtors to fix commission fees, rates or splits, or to boycott certain realtors or advertising media. This principle also applies to companies operating within a franchise group where the companies are not all owned by the same person.

• DO NOT discriminate against a realtor who is not a board member, or who has a low-commission policy.

• DO NOT encourage another realtor to raise commission rates or fees, or discourage a realtor from lowering them.

• DO NOT encourage any independent advertising media to refuse advertisements from another realtor, or to refuse commission-rate advertising or for-sale-by-owner advertising.

• DO NOT harass a realtor with frivolous ethics complaints. This "death-by-a-thousand-cuts" approach can significantly affect a realtor's ability to compete in the marketplace.

• DO NOT interfere with the right of realtors to develop and advertise their individual product offerings. Product offerings might include alternative types of listing contracts such as flat-fee or seller-assisted listings, or perhaps affinity arrangements with other service providers.

• DO NOT mislead the public in advertisements or representations. All of your claims should be true not only in the literal sense, but also in the general impression which they convey.

Competition Trends in the Real Estate Industry

I would now like to comment on a number of emerging trends in the industry, and to provide you with my views on their implications for competition.

One of the most important developments has been the emergence of the Internet. Virtually unknown ten years ago, the Internet today is used by almost one in five North Americans, and the number of users is growing exponentially. This phenomenon has by no means bypassed the real estate industry. Not long ago, real estate boards carefully guarded their MLS™ catalogues, making sure that none of the information reached a consumer except through a board member. Today, potential home buyers can click their mouse onto MLS Online™, and search through tens of thousands of properties to locate the ones that best suit their needs.

Understandably, realtors are concerned that the Internet will undermine the traditional role of the real estate agent in the transaction. The concept of "public access to the MLS" still generates much debate among realtors. To be sure, the Internet will change the way real estate is bought and sold in Canada, and will make it easier for consumers to buy or sell homes with less reliance on the services of a realtor. However, I believe that those realtors who adapt to changing market realties, and who continue to offer a good "value proposition" to the consumer, will prosper in this new environment.

In the past few years, a number of online real estate databases have emerged on the Internet. In addition to MLS Online™, these Internet content providers include RealSelect's REALTOR.com™(operated in partnership with the National Association of REALTORS™), as well as CyberHomes™, HOMES.COM™, HomeScout™ and HomeSeekers™. Recently, Microsoft entered the market with its HomeAdvisor™ service. In addition, a number of Internet search engines, such as Yahoo™, Lycos™, Excite™ and Infoseek™, are adding real estate categories to their menus through distribution agreements with these Internet content providers.

In Canada, unlike the U.S., there is only one major national database of real estate, which is MLS Online™. It goes without saying that MLS Online™, which comprises more than 85% of property listings in Canada, holds a dominant position in the supply of Canadian real estate listings information. As I mentioned earlier, special care must be taken by those holding a dominant position in a market to ensure that they do not abuse their position by engaging in anticompetitive conduct.

In the U.S., Microsoft and RealSelect are presently in a vigorous competitive battle to win the hearts of real estate boards and real estate firms who hold valuable property-listing databases. Both companies are offering dollars for listings, as well as other advantages such as customized web pages. We hope that a competitive market for real estate listing information will also develop in Canada.

In terms of the application of the Competition Act, we would be concerned about agreements which unreasonably control the acquisition and distribution of real estate listing information. For example, real estate boards and companies should have the benefit of full competition among Internet content providers who purchase real estate listings data. Such competition would ensure that real estate boards and firms would obtain a market-determined price for their database product. As well, competition among Internet content providers should not be prevented or substantially lessened by agreements which require real estate boards or firms to deal exclusively with one Internet content provider. Furthermore, we would be concerned about any distribution agreement which stipulates that the distributor may not also distribute other information products, such as information on for-sale-by-owner properties, or listings supplied by real estate agents who are not members of a real estate board.

A second trend which is occurring in the real estate industry is the consolidation among real estate firms. In the U.S., the Century 21, Coldwell Banker and ERA brands are now all owned by Cendant Corporation. In Canada, Prudential has bought Countrywide; RE/MAX International has bought RE/MAX of Western Canada; and Royal LePage has acquired Realty World Canada and other brokerage firms, and is also creating a network of franchised associate offices. This trend can be procompetitive if it promotes efficiencies and does not lead to excessive concentration in the industry. For example, this consolidation could benefit consumers if it resulted in an efficient and competitive market for relocation services.

This trend towards consolidation is likely to mean that smaller companies will have to find market niches in order to compete effectively with the larger entities. The larger firms might rely less on the MLS™, and put greater emphasis on in-house referrals. This could result in less need for co-operation among firms in real estate transactions. So long as these outcomes are market-driven, and not the result of artificial barriers created to lessen competition, we would have no reason to become involved.

A third trend which we are observing is the formation of affinity relationships between realty firms and other service providers, such as mortgage lenders, insurance underwriters, consumer clubs and airlines. We believe that these types of strategic alliances can be beneficial because they have the potential to increase consumer choice, generate efficiencies, improve services and decrease prices. Affinity relationships might also enable smaller firms to compete effectively in the market by creating opportunities for referral business. We are pleased to see that the Real Estate Council of Ontario has abandoned its plan to ban third-party benefits, an action which could have significantly constrained these affinity partnerships. On the issue of transparency, we fully support RECO's intention to require appropriate disclosure of the nature of these third-party relationships.

Amendments to the Competition Act

I would now like to provide a few comments about Bill C-20, a Bill to amend the Competition Act.

The main purpose of this package of amendments is to update the Act in the areas of deceptive telemarketing, misleading advertising, wiretapping, mergers and remedial orders.

In my view, the most important of the amendments are those which deal with deceptive telemarketing. Although deceptive telemarketers target all groups of society, they tend to focus on those who are most vulnerable, such as seniors. The amendments will create new criminal provisions which will require persons engaging in telemarketing to disclose certain types of information such as their identity and the nature and price of the product or business being promoted. The provisions will also prohibit telemarketers from making false or misleading representations, and from engaging in specific deceptive practices relating to contests, prior payments, and prices which are grossly in excess of fair market value. These provisions protect not only consumers, but also those business people who engage in legitimate and truthful telemarketing activities.

In respect of misleading advertising, the proposed amendments will supplement the existing criminal provisions with new civil remedies. The Bureau will be able to stop misleading advertising quickly and effectively by applying to the Competition Tribunal or a court for remedial action, which could include cease and desist orders, monetary penalties, information notices and consent orders. The criminal provisions will remain in place to deal with the most serious incidents of deceptive advertising.

The proposed amendments will also enable the Bureau to use wiretapping to gather evidence of serious offences such as price-fixing or market-sharing conspiracies, bid-rigging and deceptive telemarketing. This power is viewed as necessary due to the covertness of price-fixing and bid-rigging agreements, and the oral nature of deceptive telemarketing. Because wiretapping involves a serious intrusion on privacy, the Bureau would have to obtain prior judicial approval, based on strict criteria, before using this new evidence-gathering tool.

On the merger front, the proposed amendments contain provisions which will improve the efficiency and effectiveness of Bureau merger examinations. The amendments will strengthen the Bureau's ability to obtain relevant information on transactions, and will make it easier for the Bureau to obtain an interim order preventing the completion of a merger while the transaction is under review.

Bill C-20 contains a number of "housekeeping" amendments concerning court orders under section 34 of the Act. It clarifies the rules for including prescriptive terms in court orders. Prescriptive terms are those which require a person to do something, as opposed to prohibiting a person from engaging in certain conduct. The implementation of compliance programs, or the making of restitution to victims, are examples of prescriptive measures. The proposed amendments also provide for a ten-year statutory time limit on new orders, unless the court specifies a longer period. I should emphasize that this time limit will apply only to new orders. The Real Estate Prohibition Order will not be affected by this particular amendment. Bill C-20 also proposes a new provision which will allow the Attorney General, or any person to whom an order applied, to ask the court to vary or rescind the order. Although this amendment will be retroactive to include all existing orders, I should point out that a similar provision already exists in paragraph 15 of the Real Estate Prohibition Order.

The present amendment process is just the first step in a continuing review of the Competition Act. The Bureau has established a permanent amendments unit, under my supervision, designed to keep the Act effective and relevant.

The Real Estate Prohibition Order

The Prohibition Order came into being on December 20, 1988, thereby ending a series of inquiries into the activities of several real estate boards across Canada. These investigations had uncovered considerable evidence of anticompetitive conduct, including:

• attempts to standardize commission rates and splits;

• unreasonable restrictions on advertising;

• prohibitions against the offering of incentives to list or purchase property through a member; and

• unwarranted requirements for board membership.

While these inquiries were in progress, CREA approached the Bureau to resolve the matters without lengthy and costly litigation. The ensuing discussions ultimately led to an agreement on the terms of the Prohibition Order. This Order was approved almost unanimously at the 1988 CREA annual conference in Vancouver, and subsequently signed by a judge of the Federal Court of Canada.

The Prohibition Order applies, directly or indirectly, to CREA and all of its member boards and associations across Canada. The Order applies directly to CREA and nine specific boards, and indirectly to all CREA-member boards and associations through a series of bilateral competition law agreements. The Order contains prohibitions against a number of specific types of anticompetitive behaviour. In effect, this Order is a mandatory code of conduct for the industry in respect of competition matters.

The Prohibition Order brought about immediate improvements. CREA and all of its member boards and associations reviewed their bylaws and rules, and made amendments to conform with the Order. Extensive educational programs were developed and implemented to educate members on competition law. CREA assumed an intermediary role, advising its members of the Bureau's perspective on issues, and conversely, ensuring that its members' viewpoints were well-represented before the Bureau.

For the most part, we consider that the Prohibition Order has been a success. We are satisfied that most real estate boards and associations have taken the Order seriously, and that they give it full consideration when enacting or amending bylaws or rules. CREA, on behalf of its members, has frequently sought advisory opinions from the Bureau on the application of the Order to various fact situations. This process has probably avoided many potential competition problems.

The most common type of complaint which we receive involves disciplinary actions against board members. Although often these disciplinary actions were justified, in several cases they appear to have been motivated by a dislike of so-called "discounters". We remain concerned that those who offer lower commissions might be disproportionately subjected to ethics complaints, and might not receive a fair hearing before their competitors who sit on the professional standards committees. I believe that this type of problem can be avoided by screening complaints better; by adopting alternative dispute resolution processes; and by adjudicating unresolved issues before an independent arbitrator rather than by peer review. Not only would these initiatives improve conformity with the Competition Act and the Order, but they would likely also be less expensive and time-consuming, and could avoid potential applications to a court for judicial review on the basis of a reasonable apprehension of bias on the part of the disciplinary panel. I am sure that some boards or associations are already considering these options, and I would encourage everyone to do so.

Are You Ready for a Voluntary Code of Conduct?

Now that the Prohibition Order has been in effect for almost ten years, we believe that it is time to consider the question of whether there might be other ways of maintaining and improving the degree of conformity with the Competition Act that has been achieved under the Order. One problem with the Prohibition Order is that it represents a legalistic approach not unlike statutes and regulations. General competition principles sometimes get pushed aside in favour of strict rules of statutory interpretation. The application of the Order to a particular issue seems to depend more on the meaning of particular words rather than on the wider competition objective that the document was intended to achieve. Another problem is that the Order is a document frozen in time. In some cases, the Order does not address important new issues, while in other cases, it speaks to issues that are perhaps no longer important.

Earlier, I referred to the Prohibition Order as a mandatory code of conduct for the real estate industry. In 1988, in light of the seriousness of the activities which were under investigation at the time, we were not confident that we could rely on the real estate brokerage industry to act responsibly unless motivated to do so by potential legal sanctions. The problems which occurred in Calgary just a few months following the issuance of the Prohibition Order seemed to validate our concerns. However, I believe that the industry has come a long way since then, and I am now comfortable about broaching the subject of cautiously moving towards a voluntary code of conduct for the industry.

Voluntary codes of conduct are not a new concept, but they are now becoming more common as governments search for better ways to achieve program objectives. Codes of conduct also offer benefits to those who agree to abide by them. In addition to averting costly and time-consuming litigation, a code of conduct represents a public statement by a company or industry that it is committed to behaving in an ethical and responsible manner. The Competition Bureau is very interested in developing this type of approach as part of its Conformity Continuum.

Industry Canada, along with the Treasury Board Secretariat, has undertaken a study of the use of voluntary codes as a means of encouraging organizations to behave in ways that benefit both themselves and the community. You can obtain a copy of this study electronically on the Internet at http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca00963.html.

This study identified a number of characteristics which are common in successful voluntary codes. In brief, they are as follows:

• Explicit commitment of the leaders;

• Rank-and-file understanding and acceptance of the code and its objectives;

• Clear statement of objectives, expectations, obligations and ground rules;

• Transparency in the development and implementation of the code;

• Regular flow of information;

• A fair, open and accessible dispute-resolution system;

• Meaningful inducements to participate;

• Negative repercussions for failure to join or comply.

Although I do not want to prejudge what a voluntary code of competition practices would entail for your industry, I foresee that it could consist of broad competition principles accompanied by specific interpretive guidelines, much like your present Code of Ethics and Standards of Business Practice. However, unlike these existing codes and standards, what we have in mind is a code of conduct for real estate boards and associations, rather than for their individual members. I envisage that the code of conduct would be primarily self-administered by the industry. Accountability would be through the independent dispute resolution process, rather than through the courts. I am certain that a voluntary code of conduct, if drafted properly and given the full commitment of the industry, would encourage conformity with the Competition Act. Like the Prohibition Order, the code of conduct would complement, but not replace, the application of the Competition Act.

This type of code would be most effective if it applied to all real estate boards and associations. However, since participation would have to be voluntary, we would not rule out the possibility of separate codes of conduct for individual boards or associations, if that were the preference. Depending on the response of the industry to the development and implementation of an effective voluntary code of conduct, we would be prepared to support an application to the Federal Court of Canada to vary or rescind the Prohibition Order.

Conclusion

The real estate industry is undergoing tremendous change in Canada and around the world. The Internet, as well as industry consolidation and diversification, are fundamentally altering the way real estate is bought and sold. Underlying these changes are free-market forces, which encourage participants to become more efficient, to innovate, and to offer better "value propositions" to consumers. These beneficial outcomes are only possible if the marketplace is not constrained by artificial barriers to competition. The purpose of the Competition Act is to protect the process of competition by preventing or eliminating these barriers. The Competition Act is not designed to regulate individual businesses, nor to protect anyone from the forces of competition.

The Competition Bureau can, and will, be vigilant in detecting and investigating violations of the Act. In some cases, the result will be a referral of the matter to the Attorney General for prosecution. However, the Bureau attempts to follow a balanced approach to dealing with situations of non-conformity. Where appropriate, the Bureau will consider alternative options which meet the objectives of the Act.

The Prohibition Order promotes conformity by providing a code of conduct for the industry. In our view, this Order has been a success in meeting this objective. However, after ten years, we believe that now is an opportune time to consider a new approach to maintaining conformity with the Act. In that regard, we'd like to work with CREA and its member boards and associations in developing a modern and flexible voluntary code of conduct for the real estate industry.

Once again, I would like to thank CREA for providing us with this opportunity to participate in the Competition Law Session, and I would like to thank all of you for the interest which you have shown in respect of the Competition Act and the Prohibition Order.