Chapter 5 Chapter 5 Brokerage and Agency Correspondence Course

Chapter 5 1 Brokerage and Agency AlaskaRealEstateSchool.com

Chapter 5 Brokerage and Agency Correspondence Course Information

Please read and become familiar with this information prior to the class date.

This part of the class will be taken correspondence. You will be required to take a test on this information and the test must be returned prior to taking the classroom portion of the course. The remainder of the class may be taken in the classroom or by correspondence.

If you have registered for the correspondence course, the test as well as the evaluation sheet must returned for grading and issuance of you graduation certificate. You may take the tests all at once or one chapter at a time. The test may be taken open book and the answer sheet must be sent back to:

Email to [email protected]

Or Fax to 866-659-8458

Or Mail to: AlaskaRealEstateSchool.com Attn: Denny Wood PO Box 241727 Anchorage, Alaska 99524-1727

copyright 2013 dwood Chapter 5 2 Brokerage and Agency AlaskaRealEstateSchool.com Agency (law) Agency is an area of commercial law dealing with a contractual or quasi-contractual tripartite set of relationships when an Agent is authorized to act on behalf of another (called the Principal) to create a legal relationship with a Third Party. Succinctly, it may be referred to as the relationship between a principal and an agent whereby the principal, expressly or impliedly, authorizes the agent to work under his control and on his behalf. The agent is, thus, required to negotiate on behalf of the principal or bring him and third parties into contractual relationship. This branch of law separates and regulates the relationships between:

Agents and Principals; Agents and the Third Parties with whom they deal on their Principals' behalf; and Principals and the Third Parties when the Agents purport to deal on their behalf. The common law principle in operation is usually represented in the Latin phrase, qui facit per alium, facit per se, i.e. the one who acts through another, acts in his or her own interests and it is a parallel concept to vicarious liability and strict liability in which one person is held liable in Criminal law or Tort for the acts or omissions of another. The concepts

The reciprocal rights and liabilities of Principal and Agent reflect commercial needs and legal realities. In any business of size, it is not possible for one person to travel everywhere to negotiate all the transactions necessary to maintain or grow the business. These problems are increased if the business is a corporation, because it is then a fictitious legal person and, as such, it can only act through human agents. Hence, independent people are contracted by businesses to buy and sell goods and services on behalf of those businesses. When agreements are made, the Principal is liable under the contract(s) made by the Agent. So long as the Agent has done what he or she was instructed to do, the result is the same as if the Principal had done it directly. If the issue is considered from the view of innocent Third Parties, they are approached by a person who is clearly identified as acting for another. They deal with that person in good faith, relying on the representation of authority. Indeed, in a busy commercial world, it would not be cost-effective to check that everyone who is represented as having the authority to act for another actually has that authority. Deals are done at face value in the majority of routine situations. If it should later appear that the alleged agent was acting without the consent of the Principal, the Agent will

copyright 2013 dwood Chapter 5 3 Brokerage and Agency AlaskaRealEstateSchool.com usually be held liable. Any other decision would be unduly disruptive to the usual flow of trade. This commercial necessity has led to the creation of a body of law that applies in any situation, commercial or otherwise, where one person is seen to be acting for another. Brief statement of legal principles

There are three broad classes of Agent:

1. Universal agents hold broad authority to act on behalf of the Principal, e.g. they may hold a power of attorney (also known as a mandate in civil law jurisdictions) or have a professional relationship, say, as lawyer and client. 2. General agents hold a more limited authority to conduct a series of transactions over a continuous period of time; and 3. Special agents are authorized to conduct either only a single transaction or a specified series of transactions over a limited period of time. Authority For these purposes, the Principal must give, or be deemed to give, the Agent authority to act.

Actual authority: This arises where the Principal's words or conduct reasonably cause the Agent to believe that he or she has been authorized to act. This may be express in the form of a contract or implied because what is said or done make it reasonably necessary for the person to assume the powers of an Agent. If it is clear that the Principal gave actual authority to Agent, all the Agent's actions falling within the scope of the authority given will bind the Principal. This will be the result even if, having actual authority; the Agent in fact acts fraudulently for his own benefit unless the Third Party was aware of the Agent's personal agenda. If there is no contract but the Principal's words or conduct reasonably led the Third Party to believe that the Agent was authorized to act, or if what the Agent proposes to do is incidental and reasonably necessary to accomplish an actually authorized transaction or a transaction that usually accompanies it, then the Principal will be bound.

Apparent or ostensible authority: If the Principal's words or conduct would lead a reasonable person in the Third Party’s position to believe that the Agent was authorized to act, say by appointing the Agent to a position which

copyright 2013 dwood Chapter 5 4 Brokerage and Agency AlaskaRealEstateSchool.com carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a Principal creates the impression that an Agent is authorized but there is no actual authority, Third Parties are protected so long as they have acted reasonably. This is sometimes termed "Agency by Estoppel" or the "Doctrine of Holding Out", where the Principal will be estopped from denying the grant of authority if Third Parties have changed their positions to their detriment in reliance on the representations made.

Authority by virtue of a position held: To deter fraud and other harms that may befall individuals dealing with agents, there is a concept of Inherent Agency power, which is power derived solely by virtue of the agency relation. For example, partners have apparent authority to bind the other partners in the firm, their liability being joint and several (see below), and in a corporation, all executives and senior employees with decision-making authority by virtue of their declared position have apparent authority to bind the corporation. Even if the Agent does act without authority, the Principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the Principal's behavior, e.g. if the Agent has purported to act in a number of situations and the Principal has knowingly acquiesced, the failure to notify all concerned of the Agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature. Liability of agent to third party If the Agent has actual or apparent authority, the Agent will not have liability on any transactions agreed within the scope of that authority so long as the Principal was disclosed, i.e. the fact of the agency was revealed and the identity of the Principal revealed. But where the agency is undisclosed or partially disclosed, both the Agent and the Principal are bound. Where the Principal is not bound because the Agent had no actual or apparent authority, the purported Agent is liable to the Third Party for breach of the implied warranty of authority.

copyright 2013 dwood Chapter 5 5 Brokerage and Agency AlaskaRealEstateSchool.com Liability of agent to principal If the Agent has acted without actual authority, but the Principal is nevertheless bound because the Agent had apparent authority, the Agent is liable to indemnify the Principal for any resulting loss or damage. Liability of principal to agent If the Agent has acted within the scope of the actual authority given, the Principal must indemnify the Agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the Principal’s business. Duties The Agent's primary fiduciary duty is to be loyal to the Principal. This involves duties:

Not to accept any new obligations that are inconsistent with the duties owed to the Principal or are outside the law. Agents can represent the interests of more than one Principal, conflicting or potentially conflicting, only on the basis of full and timely disclosure or where the different agencies are based on a limited form of authority to prevent a situation where the Agent's loyalty to any one of the Principals is compromised. For this purpose, express clauses in the agreement signed by each Principal with the Agent may identify specific types or categories of activities that will not breach the duty of loyalty and so long as these exceptions are not unreasonable, they will bind the Principals. Not to make a private profit or unjustly enrich himself from the agency relationship. In return, the Principal must make a full disclosure of all information relevant to the transactions that the Agent is authorized to negotiate and pay the Agent either a prearranged commission, or a reasonable fee established after the fact. Not to engage in “puffing”, making exaggerated statements about a property that are not necessarily true. Termination An Agent's authority can be terminated at any time. If the trust between the Agent and Principal has broken down, it is not reasonable to allow the Principal to remain at risk in any transactions that the Agent might conclude during a period of notice.

copyright 2013 dwood Chapter 5 6 Brokerage and Agency AlaskaRealEstateSchool.com As per Section 201 to 210 The Indian Contract Act, 1872, an agency may come to an end in a variety of ways: (i) By the principal revoking the agency – However, principal cannot revoke an agency coupled with interest to the prejudice of such interest. Such Agency is coupled with interest. An agency is coupled with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity. (Illustrations to section 201) (ii) By the agent renouncing the business of agency; (iii) By the business of agency being completed; (iv) By the principal being adjudicated insolvent (Section 201 of The Indian Contract Act. 1872) The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (Section 204), though he can always do so, before such authority has been so exercised (Sec 203). Further, as per section 205, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an agency for a fixed period. Notice in this connection that want of skill continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party to the other; otherwise, damage resulting from want of such notice, will have to be paid (Section 206). As per section 207, the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (Section 208).

When an agent’s authority is terminated, it operates as a termination of subagent also. (Section 210). Agency relationships Agency relationships are common in many professional areas.

employment procurement

copyright 2013 dwood Chapter 5 7 Brokerage and Agency AlaskaRealEstateSchool.com real estate transactions (real estate brokerage, mortgage brokerage). In real estate brokerage, the buyers or sellers are the Principals themselves and the broker or his/her salesperson who represents each Principal is his/her Agent. financial advice (insurance agency, stock brokerage, accountancy) contract negotiation and promotion (business management) such as for publishing, music, movies, theatre, show business and sport.

History of Agency

The laws of agency vary by state. This is a general overview. Be sure to check with your agent on the laws for your state.

AGENCY

Real Estate Brokerage began with a seller listing their home with a real estate broker. Anyone who wished to see that home had to contact the listing broker. If the house next door was listed with another broker a potential buyer had to contact that listing broker in order to see or buy that property. A broker could only show his listings. To better serve the buyer-customer, brokers conceived the idea of a multiple listing service (MLS) where each member broker would share information about their listings and invited other brokers to sell them. This way they they would be able to sell any house listed in the MLS and share in the commission. By virtue of the MLS, both the buying and selling brokers became agents of the seller. Agency remained intact. The ability to have other brokers show and sell property worked so well that brokers decided to hire real estate agents to work for them and share in the commission. Because the real estate agent worked directly for the listing broker, they too became agents of the seller.

SUB-AGENCY

Sub-agency is where one real estate company represents the seller and another real estate company represents a buyer without a buyer's agency agreement. The agent working with the buyer who represents the seller; thus the term "sub-agency."

BUYER AGENCY

Prior to the formation of Buyer Agency, every person involved in the real estate process was an agent of the seller and all fiduciary duties were owed strictly to the seller. Buyers, feeling that the deck was stacked against them, started demanding that they have equal representation in the transaction;

copyright 2013 dwood Chapter 5 8 Brokerage and Agency AlaskaRealEstateSchool.com therefore, Buyer Agency was formed. Certain fiduciary duties are owed to the buyer under Buyer Agency. The real estate agent must disclose the form of agency that he/she is working under when scheduling appointments to show property. In some states, if a buyer cannot decide about agency representation, the appointment is scheduled as a non-agent or other agent. (see below) NOTE: No matter what agency relationship is formed all parties have a right to full disclosure of all material facts, plus fair and honest treatment.

DUAL AGENCY

Dual Agency is not allowed in all states. Dual Agency means that one office represents two principals in the same real estate transaction. One agent has the listing agreement with the seller. This agent or another agent with the same real estate firm has a buyer under a buyer agency agreement, thus dual agency is formed. The intention of the various laws is to insure fairness to both parties. Discuss this with your Realtor to insure that you understand the laws in the state where you are conducting a real estate transaction.

Buyer brokerage Buyer brokerage (or Buyer agency as it is also known) is the practice of real estate brokers (and their agents) in the United States and Canada representing a buyer in a real estate transaction rather than, by default, representing the seller either directly or as a sub-agent. In most US states and Canadian provinces, until the 1990s, buyers who worked with an agent of a real estate broker in finding a house were customers of the brokerage, since, by most common law of most states at the time, the broker represented only sellers. Only in the last fifteen years or so have states passed statute law to create buyers' agency. Today, if the buyer is working with a broker other than the brokerage which "lists" the property, he may choose to enter into a buyer-brokerage agreement to be represented. (In some cases where dual agency is permitted by law, even the listing broker may represent the buyer). If the buyer does not enter into this agreement, he/she remains as a customer of the broker who is then the sub-agent of seller's broker.

Buyers as clients With the increase in the practice of Buyer Agency in the US, especially since the late 1990s in most states, agents (acting under their brokers) have been able to represent buyers in the transaction with a written "Buyer Agency Agreement" not unlike the "Listing Agreement" between brokers and sellers (often referred to as seller agency). The real estate licensee, upon entering into a written agreement

copyright 2013 dwood Chapter 5 9 Brokerage and Agency AlaskaRealEstateSchool.com with a Buyer, agrees to work solely for the buyer, and, in return, the buyer agrees to exclusive representation. At this point, a real estate brokerage owes the buyer the duties of: Loyalty to the buyer by acting in the buyer's best interest. Confidentiality by not disclosing facts that could influence the buyers ability to negotiate the best terms. Disclosure to other parties in the transaction that the licensee has been engaged as a buyer's agent. The broker negotiates price and terms on behalf of the buyers and prepares standard real estate purchase contract by filling in the blanks in the contract form. The buyer's agent acts as a fiduciary for the buyer.

Buyer Agency Agreements Like the listing agreement with sellers, the Agreements with buyers must have a starting and ending date as well as specifying how the buyer's broker is to be paid (by the seller or by the buyer himself). In addition, it should spell out the duties and obligations of all parties.

Controlling Transaction Risks Agency is a relationship between a principal (seller or buyer) and an agent (broker) who acts on behalf of the principal in dealing with a third party. Most agency relationships in real estate are created by written agreement, but a formal document is not required in all states. Agency relationships also can be created by the words, actions, or deeds of the parties, and don't require any form of compensation. The agency relationships created between the broker and consumers typically extend to the broker’s sales associates.

Agency Options: Risks and Rewards

Your options when choosing agency relationships are limited to those available to you under your state’s statutes. Typically state statutes allow:

1. Single representation. An agent represents either a seller or a buyer, but never both in the same transaction.

 Pros: A clear-cut line of responsibility for the associate with no chance of a conflict of interest between the buyer and the seller that might occur during the transaction.

2. Exclusive seller representation. An agent represents only sellers, never buyers. Licensees work with buyers as customers, but remain agents of the seller.

 Pros: A familiar structure to most real estate professionals, which accommodates the sale of in- house listings.

 Cons: Buyers working with the company don't have the option of full representation. The chance of creating undisclosed dual agency or neutral licensee is increased unless care is taken in both words and conduct to ensure that buyers understand that the sales associate doesn't represent them.

3. Exclusive buyer representation. An agent represents only buyers and never lists properties. Pros: A more natural relationship with the buyers is created and the risk of inadvertent dual agency is minimized.

Cons: A loss of potentially significant revenues from listings, as well as a possible increase in conflicts over compensation when the sellers pay it.

4. Buyer and seller representation with disclosed dual agency. An agent may represent both the buyer and the seller in the same transaction, with the informed consent of both. Not permitted in all states.

 Pros: A option that permits the benefits of an agent’s advice to both parties, this representation can usually be introduced in a company that formerly did exclusive seller representation without many changes in procedure.

 Cons: Full representation is not available to either buyer or seller. Conflicts may be created if buyers refuse dual agency or the nature of dual agency is not clear to the parties.

5. Designated representation. One agent in the brokerage company may be designated to represent the buyer and another agent to represent the seller. Only available if expressly authorized by a state’s law.

 Pros: The opportunity to offer both buyer and seller services with representation while avoiding the possible pitfalls of dual agency.

copyright 2013 dwood Chapter 5 11 Brokerage and Agency AlaskaRealEstateSchool.com  Cons: The need to establish careful guidelines for handling the confidential information of both parties in the same company

TIP: Some states also permit licensees to have non-agency, “facilitator” relationships with parties to a real estate transaction. Such “transaction broker” relationships may include many of the same functions as a traditional agency one, but the licensee typically owes reduced duties to the parties. For example, facilitator relationships often do not have the duty of absolute loyalty.

Real estate broker A real estate broker is a party who acts as an intermediary between sellers and buyers of real estate and attempts to find sellers who wish to sell and buyers who wish to buy. In the United States, the relationship was originally established by reference to the English common law of agency with the broker having a fiduciary relationship with his clients. Estate agent is the term used in the United Kingdom to describe a person or organization whose business is to market real estate on behalf of clients. In the US, real estate brokers and their salespersons (commonly called "real estate agents" or, in some states, "brokers") assist sellers in marketing their property and selling it for the highest possible price under the best terms. When acting as a Buyer's agent with a signed agreement (or, in many cases, verbal agreement, although a broker may not be legally entitled to his commission unless the agreement is in writing), they assist buyers by helping them purchase property for the lowest possible price under the best terms. Without a signed agreement, brokers may assist buyers in the acquisition of property but still represent the seller and the seller's interests. In most jurisdictions in the United States, a person is required to have a license in order to receive remuneration for services rendered as a real estate broker and must be paid only by their broker. Unlicensed activity is illegal, but buyers and sellers acting as principals in the sale or purchase of real estate are not required to be licensed. In some states, lawyers are allowed to handle real estate sales for compensation without being licensed as brokers or agents.

The difference between salespersons and brokers

In the past, when brokers (and their agents) only represented sellers, the term ‘’real estate salesperson’’ may have been more appropriate than it is today, given the different ways that

copyright 2013 dwood Chapter 5 12 Brokerage and Agency AlaskaRealEstateSchool.com brokers and their agents can help a buyer through the process rather than simply “sell’’ him or her a property. Legally however, the term 'salesperson' is still used in many states to describe a real estate agent. Real estate education: In order to become licensed, most states require that an applicant take a minimum number of classes before taking the state licensing exam. Such education is often provided by real estate brokerages as a means to finding new agents. Today in many states, the real estate agent (acting as an agent of the broker with whom he/she is employed) is required to disclose to prospective buyers and sellers who represents whom. See below for a broker/agent’s relationship to sellers and their relationship to buyers. While some people may refer to any licensed real estate agent as a real estate broker, a licensed real estate agent is a professional who has obtained either a real estate salesperson's license or a real estate broker's license. In the United States, there are commonly two levels of real estate professionals licensed by the individual states, but not by the federal government: Real estate salesperson (or, in some states, Real estate broker): When a person first becomes licensed to become a real estate agent, he/she obtains a real estate salesperson's license (or some states use the alternative term, "broker") from the state in which he/she will practice. If you want to obtain a real estate license, the candidate must take specific coursework (of between 40 and 90 hours) and then pass a state exam on real estate law and practice. In order to work, salespersons must then be associated with (and act under the authority of) a real estate broker. Many states also have reciprocal agreements with other states, allowing a licensed individual from a qualified state to take the second state's exam without completing the course requirements, or, in some cases, take only a state law exam. Real estate broker (or, in some states, Qualifying Broker): After gaining some years of experience in real estate sales, a salesperson may decide to become licensed as a real estate broker (or Principal/Qualifying broker) in order to own, manage or operate his/her own brokerage. Commonly more course work and a broker's state exam on real estate law must be passed. Upon obtaining a broker's license, a real estate agent may continue to work for another broker in a similar capacity as before (often referred to as a broker associate or associate

copyright 2013 dwood Chapter 5 13 Brokerage and Agency AlaskaRealEstateSchool.com broker) or take charge of his/her own brokerage and hire other salespersons (or broker) licensees. Becoming a branch office manager may or may not require a broker's license. Some states such as New York allow licensed attorneys to become real estate brokers without taking any exam. In some states, such as Colorado, there are no "salespeople", as all licensees are Brokers. A REALTOR, pronounced “Real-tor” (rē΄әl tōr), is a real estate salesperson or broker who is a member of the National Association of Realtors (NAR). All Realtors are brokers/salespersons, but not all brokers/salespersons are Realtors. Agency relationships with clients versus Non-Agency relationships with customers

Agency relationship: Traditionally, the broker provides a conventional full-service, commission-based brokerage relationship under a signed listing agreement with a seller or "buyer representation" agreement with a buyer, thus creating under common law in most states an agency relationship with fiduciary obligations. The seller or buyer is then a client of the broker. Some states also have statutes which define and control the nature of the representation. Agency relationships in residential real estate transactions involve the legal representation by a real estate broker (on behalf of a real estate company) of the principal, whether that person or persons is a buyer or a seller. The broker (and his/her licensed real estate agents) then becomes the agent of the principal.

Non-agency relationship: where no written agreement nor fiduciary relationship exists, a real estate broker (and his agents) works with a principal who is then known as the broker’s customer. When a buyer, who has not entered into a Buyer Agency agreement with the broker and buys a property, then that broker functions as the sub-agent of the seller’s broker in Traditional Agency. When a seller chooses to work with a transaction broker, there is no agency relationship created.

Transaction brokers Some state Real Estate Commissions, notably Florida's after 1992 (and extended in 2003) and Colorado's after 1994 (with changes in 2003), created the option of having no agency nor fiduciary relationship between brokers and sellers or buyers. Having no more than a facilitator

copyright 2013 dwood Chapter 5 14 Brokerage and Agency AlaskaRealEstateSchool.com relationship, transaction brokers assists buyers, sellers, or both during the transaction without representing the interests of either party who may then be regarded as customers. As noted by the South Broward Board of Realtors, Inc. in a letter to State of Florida legislative committees: "The Transaction Broker crafts a transaction by bringing a willing buyer and a willing seller together and assists with the closing of details. The Transaction Broker is not a fiduciary of any party, but must abide by law as well as professional and ethical standards." (such as NAR Code of Ethics) The result was that in 2003, Florida created a system where the default brokerage relationship had "all licensees …operating as transaction brokers, unless a single agent or no brokerage relationship is established, in writing, with the customer" and the statute required written disclosure of the transaction brokerage relationship to the buyer or seller customer only through July 1, 2013. In both Florida and Colorado's case, dual agency and sub-agency (where both listing and selling agents represented the seller) no longer exist. Dual or limited Agency Dual agency occurs when the same brokerage represents both the seller and the buyer under written agreements. Individual state laws vary and interpret dual agency rather differently. Many states no longer allow dual agency. Instead, Transaction Brokerage (see above) provides the Buyer and Seller with a limited form of representation, but without any fiduciary obligations (see Florida law). Buyers and sellers are generally advised to consult a licensed real estate professional for a written definition of an individual state's laws of agency, and many states require written Disclosures to be signed by all parties outlining the duties and obligations.

If state law allows for the same agent to represent both the buyer and the seller in a single transaction, the brokerage/agent is typically considered to be a Dual Agent. Special laws/rules often apply to dual agents, especially in negotiating price. Most states require that dual agency be disclosed and consented to by all parties prior to the action. In some states (notably Maryland), Dual Agency can be practiced in situations where the same brokerage (but not agent) represent both the buyer and the seller. If one agent from

copyright 2013 dwood Chapter 5 15 Brokerage and Agency AlaskaRealEstateSchool.com the brokerage has a home listed and another agent from that brokerage has a buyer- brokerage agreement with a buyer who wishes to buy the listed property, Dual Agency occurs by allowing each agent to be designated as “intra-company” agent. Only the broker himself is the Dual Agent. Some states do allow a broker and one agent to represent both sides of the transaction as dual agents. In those situations, conflict of interest is more likely to occur.

Types of services that a broker can provide Since each state's laws may differ from others, it is generally advised that prospective sellers or buyers consult a licensed real estate professional. Some Examples:

Comparative Market Analysis - an estimate of the home's value compared with others. This differs from an appraisal in that property currently for sale may be taken into consideration (competition for the subject property). Exposure - Marketing the real property to prospective buyers. Facilitating a Purchase - guiding a buyer through the process. Facilitating a Sale - guiding a seller through the selling process. FSBO document preparation - preparing necessary paperwork for "Sale By Owner" sellers. Full Residential Appraisal - but only, in most states, if the broker is also licensed as an appraiser. Home Selling Kits - guides to how to market and sell a property. Hourly Consulting for a fee, based on the client's needs. Leasing for a fee or percentage of the gross lease value. Property Management. Exchanging property. Auctioning property. Preparing contracts and leases. (Not in all states.) These services are also changing as a variety of real estate trends re-engineer the industry. General

copyright 2013 dwood Chapter 5 16 Brokerage and Agency AlaskaRealEstateSchool.com The sellers and buyers themselves are the principals in the sale, and real estate brokers (and the broker's agents) are their agents as defined in the law. However, although a real estate agent commonly fills out the real estate contract form, agents are typically not given power of attorney to sign the real estate contract or the deed; the principals sign these documents. The respective real estate agents may include their brokerages on the contract as the agents for each principal. The use of a real estate broker is not a requirement for the sale or conveyance of real estate or for obtaining a mortgage loan from a lender. However, once a broker is used, the settlement attorney (or party handling closing) will ensure that all parties involved be paid. Lenders typically have other requirements, though, for a loan. Services provided to both buyers and sellers In addition to the services to sellers and buyers described below, most real estate agents coordinate various aspects of the closing. Real estate brokers (and their agents) typically do not provide title service such as title search or title insurance, do not conduct surveys or formal appraisals of the property such as those required by lenders, and do not act as lawyers for the parties, although they may "coordinate" these activities with the appropriate specialists. Some real estate brokers may be associated with loan officers who may help to finance buyers to make their purchase. Regardless of whether a real estate agent assists sellers or buyers of real estate, negotiation and financing skills are important. Real estate brokers and sellers Services provided to seller as client Upon signing a listing contract with the seller wishing to sell the real estate, the brokerage attempts to earn a commission by finding a buyer for the sellers' property for highest possible price on the best terms for the seller. In Canada, most provinces' laws require the real estate agent to forward all written offers to the seller for consideration or review. To help accomplish this goal of finding buyers, a real estate agency commonly does the following:

copyright 2013 dwood Chapter 5 17 Brokerage and Agency AlaskaRealEstateSchool.com Listing the property for sale to the public, often on a Multiple Listing Service, in addition to any other methods. Based on the law in several states, providing the seller with a real property condition disclosure form, and other forms which may be needed. Preparing necessary papers describing the property for advertising, pamphlets, open houses, etc. Generally placing a "For Sale" sign on the property indicating how to contact the real estate office and agent. Advertising the property. Advertising is often the biggest outside expense in listing a property. In some cases, holding an Open house to show the property. Being a contact person available to answer any questions about the property and to schedule showing appointments Ensuring buyers are prescreened so that they are financially qualified to buy the property; the more highly financially qualified the buyer is, the more likely the closing will succeed. Negotiating price on behalf of the sellers. The seller's agent acts as a fiduciary for the seller. This may involve preparing a standard real estate purchase contract by filling in the blanks in the contract form. In some cases, holding an earnest payment check in escrow from the buyer(s) until the closing. In many states, the closing is the meeting between the buyer and seller where the property is transferred and the title is conveyed by a deed. In other states, especially those in the West, closings take place during a defined escrow period when buyers and sellers each sign the appropriate papers transferring title, but do not meet each other.

The "listing" contract Several types of listing contracts exist between broker and seller. These may be defined as:

Exclusive Right to Sell In this type of Agreement", the broker is given the exclusive right to market the property and represents the seller exclusively. This is referred to as Seller Agency. However, the brokerage also offers to co-operate with other brokers and agrees to allow them to show the property to prospective buyers and offers a share of the total real estate commission.

Exclusive Agency An alternative form, "Exclusive Agency", allows only the broker the right to sell the property, and no offer of compensation is ever made to another broker. In that case, the property will never be entered into an MLS. Naturally, that limits the exposure of the property to only one agency.

Open Listing This is an Agreement whereby the property is available for sale by any real estate professional who can advertise, show, or negotiate the sale. Whoever first brings an acceptable offer would receive compensation. Real estate companies will typically require that a written agreement for an open listing be signed by the seller to ensure the payment of a commission if a sale should take place. Although there can be other ways of doing business, a real estate brokerage usually earns its commission after the real estate broker and a seller enter into a listing contract and fulfill agreed-upon terms specified within that contract. The seller's real estate is then listed for sale, frequently with property data entered into a Multiple Listing Service (MLS) in addition to any other ways of advertising or promoting the sale of the property. In most of North America, where brokers are members of a national association (such as NAR in the United States or the Canadian Real Estate Association), a listing agreement or contract between broker and seller must include the following: starting and ending dates of the agreement; the price at which the property will be offered for sale; the amount of compensation due to the broker and how much, if any, will be offered to a co-operating broker who may bring a buyer. Without an offer of compensation to a co-operating broker (co-op percentage or flat fee), the property may not be advertised in the MLS system.

Brokerage commissions In consideration of the brokerage successfully finding a satisfactory ready, willing and able buyer for the property, a broker anticipates receiving a commission for the services the brokerage has provided. Usually, the payment of a commission to the brokerage is contingent

copyright 2013 dwood Chapter 5 19 Brokerage and Agency AlaskaRealEstateSchool.com upon finding a satisfactory buyer for the real estate for sale, the successful negotiation of a purchase contract between a satisfactory buyer and seller, or the settlement of the transaction and the exchange of money between buyer and seller. In North America commissions on real estate transactions are negotiable and have been under pressure for numerous reasons the average commission has declined during the last decade from 6% to about 5%. Real estate commission is typically paid by the seller at the closing of the transaction as detailed in the listing agreement.

A growing alternative commission structure is the fee-for-service, fixed-fee, a la carte or flat-fee structure. Real estate trends have caused the unbundling of real estate brokerage services and according to the 2007 Swanepoel Trends Report rising costs and cost-conscious consumers are now exploring new innovative business models such as a la carte, multi-level marketing, residual, auctioneering and other discount or online real estate models.

RESPA Real estate brokers who work with lenders may not receive any compensation from the lender for referring a client to a specific lender. To do so would be a violation of a (US) federal law known as the Real Estate Settlement Procedures Act (RESPA). All compensation to a broker must be disclosed to all parties. Lockbox With the sellers’ permission, a lockbox is placed on homes that are occupied and, after arranging an appointment with the home owner, agents can show the home. When a property is vacant or where a seller may be living elsewhere, a lockbox will generally be placed on the front door. The listing broker helps arrange showings of the property by various real estate agents from all companies associated with the MLS. The lockbox contains the key to the door of the property and the box can only be opened by licensed real estate agents (often only with authorization from the listing brokerage), by using some sort of secret combination or code provided by the brokerage or the issuer of the lockbox. Lockboxes come in two varieties - mechanical and electronic. Mechanical lockboxes utilize a combination dial or special mechanical key and are readily purchased at local home

copyright 2013 dwood Chapter 5 20 Brokerage and Agency AlaskaRealEstateSchool.com improvement centers or over the internet. Mechanical lockboxes offer the most basic protection of the homeowner's key and therefore expose the most risk of unmonitored or potentially unauthorized access to the home during the sales process. The risk stems primarily from an agent forgetting to change the combination after each sale. The frequency of use of mechanical lockboxes by agents has steadily declined due to the availability of more secure electronic lockboxes. Electronic lockboxes increase the level of security because agents wishing to show a property must have a valid electronic key to open the box. The electronic key must be renewed or refreshed at regular intervals by the agent otherwise the key deactivates itself preventing access to the lockbox contents. Electronic keys can range from credit card sized smart cards to a separate electronic box. In addition to greater security, electronic lockboxes typically record all key access activity internally. This access log can be downloaded and reviewed by the listing agent to determine the date, time and person accessing the lockbox. Electronic lockboxes also offer a host of other features such as controlling allowed showing times, homeowner privacy modes, special showing restrictions etc. Shared commissions with co-op brokers If any buyer's broker (or any of his/her agents) brings the buyer for the property, the buyer's broker would typically be compensated with a co-op commission coming from the total offered to the listing broker, often about half of the full commission from the seller. If an agent or salesperson working for the buyer's broker brings the buyer for the property, then the buyer's broker would commonly compensate his agent with a fraction of the co-op commission, again as determined in a separate agreement. A discount brokerage may offer a reduced commission in the event no other brokerage firm is involved and no co-op commission is paid out. If there is no co-commission to pay to another brokerage, the listing brokerage receives the full amount of the commission minus any other types of expenses. Potential points of contention for agents Real estate commissions are becoming a point of controversy. Home values in many areas have quadrupled over the past 20 years. This may be contributing to the increased number of licensed agents and growing competition between them. The number of real estate agents in areas tends to rise when home values do, and the productivity of existing agents goes down.

copyright 2013 dwood Chapter 5 21 Brokerage and Agency AlaskaRealEstateSchool.com The rewards have increased, but so have the demands of clients and business risks faced by agents. In North America, agents have had to become familiar with marketing through the internet as well as traditional print and other media. Additionally the law is complicated with issues such as defects in housing, grow houses and other issues of which the agent is the front line defense for his client. There is more liability than ever in advising buyers and sellers. Another controversy exists for the commissions to real estate agents. If a listing agent sells a property for any amount above the listed price, he in turn will make additional income. In theory, this will motivate him/her to get top dollar price for his client, the seller. However, if the agent representing the buyer attempts to obtain a lower sales price for his client, then he/she would make a lower commission. Thus, it could be considered to be in the agent's best interest to advise his client to purchase the property at a higher price. In practical terms, there is rarely a great enough difference between the listing (asking) price and the negotiated selling price to make a significant difference between the commissions generated on each side, and certainly hardly enough to justify an agent failing in his fiduciary duty to obtain the best terms for his/her client. Another potential conflict of interest exists when a listing agent in a very active real estate market has incentive to sell properties quickly at unnecessarily low prices in order to benefit from a high volume of sales. In any case, agents who create satisfied clients and develop subsequent referrals are likely to do far better in the long run. Real estate brokers and buyers Services provided to buyers:

Buyers as clients With the increase in the practice of buyer brokerage in the US, especially since the late 1990s in most states, agents (acting under their brokers) have been able to represent buyers in the transaction with a written "Buyer Agency Agreement" not unlike the "Listing Agreement" for sellers referred to above. In this case, buyers are clients of the brokerage. Some real estate brokerages choose only to represent buyers in an exclusive buyer's agency relationship and do not take "listings" from sellers.

copyright 2013 dwood Chapter 5 22 Brokerage and Agency AlaskaRealEstateSchool.com A real estate brokerage attempts to do the following for the buyers of real estate only when they represent the buyers with some form of written buyer-brokerage agreement:

Find real estate in accordance with the buyers needs, specifications, and cost. Takes buyers to and shows them properties available for sale. When deemed appropriate, prescreens buyers to ensure they are financially qualified to buy the properties shown (or uses a mortgage professional to do that task). Negotiates price and terms on behalf of the buyers and prepares standard real estate purchase contract by filling in the blanks in the contract form. The buyer's agent acts as a fiduciary for the buyer. Due to the importance of the role of representing buyers' interests, many brokers who seek to play the role of client advocate are now seeking out the services of Certified Mortgage Planners, industry experts that work in concert with Certified Financial Planners to align consumers' home finance positions with their larger financial portfolio(s).

Buyers as customers In most states, until the 1990s, buyers who worked with an agent of a real estate broker in finding a house were customers of the brokerage, since the broker represented only sellers. Today, state laws differ. Buyers and/or sellers may be represented. Typically, a written "Buyer Brokerage" agreement is required for the buyer to have representation (regardless of which party is paying the commission), although by his/her actions, an agent can create representation.

Find real estate in accordance with the buyers’ needs, specifications, and affordability. Take buyers to and shows them properties available for sale. When deemed appropriate, prescreen buyers to ensure they are financially qualified to buy the properties shown (or uses a mortgage professional to do that task). Assist the buyer in making an offer for the property.

The impact of globalization on real estate brokers' activities Globalization has had an immediate and powerful impact on real estate markets, making them an international working place. The rapid growth of the Internet has made the international

copyright 2013 dwood Chapter 5 23 Brokerage and Agency AlaskaRealEstateSchool.com market accessible to millions of consumers. A look at recent changes in homeownership rates illustrates this. Minority homeownership jumped by 4.4 million during the 1990s, reaching 12.5 million in 2000, according to the Fannie Mae Foundation. Foreign direct investment in U.S. real estate has increased sharply from $38 billion in 1997 more than $50 billion in 2002 according to Census data. Most local real estate agents view the foreign market as a significant revenue potential and may have already worked with international clients in their local market, new immigrants or more sophisticated investors from different cultures and from other countries. For example, they are providing value-added services to an overseas relocation employee figure out which inoculations his or her children will need as well as the steps needed to register a car in the United States. Real estate brokers want to keep central to the transaction, protect the best interests of their members and address the unique needs of each multicultural global client by acquiring specialized training and designations. (See below for more) Recently the Mexican association of real estate practitioners in Mexico, AMPI, and the NAR, National Association of Realtors in the US, signed a bilateral contract for international real estate business cooperation. Also at the local level, many other state and local associations are helping other countries achieve the same result. For instance, in New Mexico, a historically multicultural state, under the RANM, Realtor Association of New Mexico and the President’s Advisory Council, is looking into forming an ambassador association to help a foreign country into signing a bilateral agreement with the NAR. In New Mexico, there are 4500 licensed real estate professionals and only 14 or 15 CIPS designees, out of whom, only 6 speak a language other than English. Real estate brokers / agents and further education

In addition to completing the educational requirements for a state real estate license, most states issue real estate licenses for limited time periods and require real estate professionals to complete a certain number of hours of further education on an annual or biannual basis in order to renew their licenses. Required course hours range from 10 to 20 per license period. Typically, some specific courses are required to be taken; these would include real estate law updates.

copyright 2013 dwood Chapter 5 24 Brokerage and Agency AlaskaRealEstateSchool.com NAR educational requirements and recognized designations As adherents to NAR's Code of Ethics, Realtors are required to update their acquaintance with the Code every 4 years by taking a course, available on-line or "live". However, Realtors, as members of NAR, also have the option of studying for additional certifications in a variety of specialties, several of which are backed by NAR with offerings of certification and update courses available nationwide [10]. The most well known NAR sponsored designations are the following:

Accredited Buyer Representative (ABR). The Real Estate Buyers Agent Council has over 40,000 members and is the largest association of real estate professionals focusing on all aspects of buyer representation. Of the REBAC members, over 30,000 have completed REBAC’s two-day course and provided documentation of buyer agency experience. Linked to the ABR is the ABRM, Accredited Buyer Representative Manager (ABRM) for managers.

Accredited Land Consultant (ALC). ALC’s are the recognized experts in land brokerage transactions of all kinds of specialized land services including farms and ranches, raw land sales and development.

Certified Commercial Investment Member (CCIM). CCIMs are recognized experts in commercial real estate brokerage, leasing, valuation and investment analysis. There are more than 7,500 designees and an equal number of candidates principally in North America, but also in Asia and Europe.

Certified Property Manager (CPM). Geared to real estate property management specialists, designees handle all forms of management from residential to commercial to industrial.

Certified Real Estate Brokerage Manager (CRB). The designation is awarded to REALTORS® who have completed the Council's advanced educational and professional requirements. CRB designees consistently increase their level of industry knowledge, advance their earning and career potential, increase their firm’s profitability and benefit from active involvement in our network of real estate professionals.

copyright 2013 dwood Chapter 5 25 Brokerage and Agency AlaskaRealEstateSchool.com Certified Residential Specialist (CRS). Designees, with 44,000 members - 4% of NAR members - who average 43 transactions per year and earn four times as much as the average Realtor, belong to the Council of Residential Specialists which is the largest affiliate of NAR. They are involved in over 27% of all transactions because the consumer prefers to work with a more knowledgeable and seasoned brokers or agents. Requirements for this designation include a total of at least 25 transactions (or specific $$ volume of sales) over a specific time period, significant experience, as well as complete rigorous educational requirements.

Certification for Internet Professionalism (e-PRO). An e-PRO is a Realtor who has undergone a new training program presented entirely online in order to be certified as Internet Professionals. NAR is the first major trade group to offer certification for online professionalism which involves all aspects of doing business on the internet.

Certified International Property Specialist (CIPS). Realtors with the CIPS designation have both hands-on experience in international real estate transactions, Whether traveling abroad to put transactions together, assisting foreign investors, helping local buyers invest abroad, or serving an immigrant niche in local markets. CIPS designees have also successfully completed an intensive program of study focusing on critical aspects of transnational transactions, including currency and exchange rate issues and cross-cultural relationships, regional market conditions, investment performance, tax issues and more. The CIPS network is comprised of 1,500 real estate professionals from 50 countries who deal in all types of real estate.

Counselor of Real Estate (CRE). A CRE designee is one of only 1,100 by-invitation-only members of an international group of professionals who provide seasoned, objective advice on real property and land-related matters.

Graduate of the REALTORs’ Institute (GRI). The GRI designation is held by 19% of Realtors and courses are offered through state Realtor Associations with 90 hours of coursework on marketing and servicing listed properties to real estate law. In a 2003 survey, NAR has determined that GRIs earned over $33,200 more annually than non- designees.

copyright 2013 dwood Chapter 5 26 Brokerage and Agency AlaskaRealEstateSchool.com Real Estate Professional Assistant (REPA). Designed for administrative assistants or employees of Realtors (who may or may not hold a real estate license), a two-day certificate course provides an intensive introduction to the real estate business and to the specific ways support staff can become valuable assets to their employers. Changing Industry

The real estate brokerage industry is approximately half way through a 10 -15 year industry transition. This major shift is creating a fundamental change in the way homes are being bought and sold and the role the real estate agents are playing therein and many new real estate brokerage models are evolving.[11]. Compensation has traditionally been based on a percentage of the sales price, split between the buying and selling brokers, and then between the agent(s) and his/her real estate agency. While a split based on the percentage received by the broker is generally normal, in some brokerages agents may pay a monthly "desk fee" for office costs, monthly fee, etc. and then retain 100% of the commission received. The business and compensation structures are however changing as the real estate trends create various new real estate models and real estate related services such as Zillow, Redfin, Trulia, Point2, Housevalues, Realestate.com and RealEstateStoreUSA.com.

Independent Contractor or Employee Per the Internal Revenue Service rules an independent contractor is a natural person, business or corporation which provides goods or services to another entity under terms specified in a contractor within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when required, during which time she or he may be subject to the Law of Agency. Contractors often work through a limited company which they themselves own, or may work through an umbrella company.

An independent contractor in tort The employer of an independent contractor is generally not held vicariously liable for the tortious acts and omissions of the contractor, because the control and supervision found in an employer-employee

1. where the contractor injures an invitee to the real property of the employer, 2. the contractor is involved in an ultra-hazardous activity (one likely to cause substantial injury, such as blasting with explosives), or 3. the employer is estopped from denying liability because he has held out the independent contractor as if he were simply an employee or agent.

Employee An employee contributes labor and expertise to an endeavor. Employees perform the discrete activity of economic production. Of the three factors of production, employees usually provide the labor. Specifically, an employee is any person hired by an employer to do a specific "job". In most modern economies the term employee refers to a specific defined relationship between an individual and a corporation, which differs from those of customer, or client. Most individuals attain the status of employee after a thorough process of interviews with several departments within a company. If the individual is determined to be a satisfactory fit for the position, he is given an official offer of employment within that company for a defined starting salary and position. This individual then has all the rights and privileges of an employee, which may include medical benefits and vacation days. The relationship between a corporation and its employees is usually handled through the human resources department, which handles the incorporation of new hires, and the disbursement of any benefits which the employee may be entitled, or any grievances that employee may have. An offer of employment, however, does not guarantee employment for any length of time and each party may terminate the relationship at any time. This is referred to as at will employment. While the terms accountant, lawyer and photographer might refer to professions, they are not employee titles, which may include Controller, Vice President of Legal Affairs, and Head of Media Development. There are differing classifications of workers within a company. Some are full-time and permanent and receive a guaranteed salary, while others are hired for short term contracts or work as temps or consultants. These latter differ from permanent employees in that the company where they work is not their employer, but they may work through a temp-agency or consulting firm. In this respect, it is important to distinguish independent contractors from employees, since the two are treated differently both in law and in most taxation systems.

copyright 2013 dwood Chapter 5 28 Brokerage and Agency AlaskaRealEstateSchool.com Employees can organize into labor unions (American English), or trade unions (British English), who represent most of the available work force in a single organization. They utilize their representative power to collectively bargain with the management of companies in order to advance concerns and demands of their membership. Associate is a term used by some companies instead of employee. Big box retailers like Wal-Mart and Home Depot, for example, use this term for non-management employees. Other firms use terms such as teammate or team member instead of employee. Many companies further classify employees as exempt or non-exempt. This designation is used to separate employees that are eligible for overtime from those that are not. An exempt employee is one that is typically salaried and is not eligible to earn overtime. Non-exempt employees are typically paid hourly and are eligible for overtime pay.

Alternatives When an individual entirely owns the business for which he or she labors, this is known as self- employment. Self-employment often leads to incorporation. Incorporation offers certain protections of one's personal assets. Laws of incorporation vary from state to state with Delaware having the most incorporated businesses of any state in the U.S. Workers who are not paid wages, such as volunteers, are generally not considered as being employed. One exception to this is an internship, an employment situation in which the worker receives training or experience (and possibly college credit) as the chief form of compensation. Those who work under obligation for the purpose of fulfilling a debt, such as an indentured servant, or as property of the person or entity they work for, such as a slave, do not receive pay for their services and are not considered employed. Some historians suggest that slavery is older than employment, but both arrangements have existed for all recorded history.

Antitrust Law Competition law, known in the United States as antitrust law, has three main elements:

 prohibiting agreements or practices that restrict free trading and competition between business entities. This includes in particular the repression of cartels.

copyright 2013 dwood Chapter 5 29 Brokerage and Agency AlaskaRealEstateSchool.com  banning abusive behavior by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position. Practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal and many others.  supervising the mergers and acquisitions of large corporations, including some joint ventures. Transactions that are considered to threaten the competitive process can be prohibited altogether, or approved subject to "remedies" such as an obligation to divest part of the merged business or to offer licenses or access to facilities to enable other businesses to continue competing.

The substance and practice of competition law vary from jurisdiction to jurisdiction. Protecting the interests of consumers (consumer welfare) and ensuring that entrepreneurs have an opportunity to compete in the market economy are often treated as important objectives. Competition law is closely connected with law on deregulation of access to markets, state aids and subsidies, the privatization of state owned assets and the establishment of independent sector regulators. In recent decades, competition law has been viewed as a way to provide better public services.[1] The history of competition law reaches back further than the Roman Empire. The business practices of market traders, guilds and governments have always been subject to scrutiny, and sometimes severe sanctions. Since the twentieth century, competition law has become global. The two largest and most influential systems of competition regulation are United States antitrust law and European Community competition law. National and regional competition authorities across the world have formed international support and enforcement networks.

Competition law history

At a time of high inflation, Diocletian passed tough laws to stop price distortions

copyright 2013 dwood Chapter 5 30 Brokerage and Agency AlaskaRealEstateSchool.com Laws governing competition law are found in over two millennia of history. Roman Emperors and Mediaeval monarchs alike used the use of tariffs to stabilize prices or support local production. The formal study of "competition", began in earnest during the 18th century with such works as Adam Smith's The Wealth of Nations. Different terms were used to describe this area of the law, including "restrictive practices", "the law of monopolies", "combination acts" and the "restraint of trade".

Roman legislation An early example of competition law is the Lex Julia de Annona, enacted during the Roman Republic around 50 BC. To protect the corn trade, heavy fines were imposed on anyone directly, deliberately and insidiously stopping supply ships. Under Diocletian in 301 AD an edict imposed the death penalty for anyone violating a tariff system, for example by buying up, concealing or contriving the scarcity of everyday goods. More legislation came under the Constitution of Zeno of 483 AD, which can be traced into Florentine Municipal laws of 1322 and 1325. This provided for confiscation of property and banishment for any trade combinations or joint action of monopolies private or granted by the Emperor. Zeno rescinded all previously granted exclusive rights. Justinian I subsequently introduced legislation to pay officials to manage state monopolies. As Europe slipped into the dark ages, so did the records of law making until the Middle Ages brought greater expansion of trade in the time of lex mercatoria.

Middle ages

Edward III during the Black Death enacted the Statute of Labourers to cap wages, and provide double damages against infringers Legislation in England to control monopolies and restrictive practices were in force well before the Norman Conquest.[8] The Domesday Book recorded that "foresteel" (i.e. forestalling, the practice of buying up goods before they reach market and then inflating the prices) was one of three forfeitures

copyright 2013 dwood Chapter 5 31 Brokerage and Agency AlaskaRealEstateSchool.com that King Edward the Confessor could carry out through England. But concern for fair prices also led to attempts to directly regulate the market. Under Henry III an act was passed in 1266 to fix bread and ale prices in correspondence with corn prices laid down by the assizes. Penalties for breach included amercements, pillory and tumbrel. A fourteenth century statute labeled forestallers as "oppressors of the poor and the community at large and enemies of the whole country." Under King Edward III the Statute of Labourers of 1349 fixed wages of artificers and workmen and decreed that foodstuffs should be sold at reasonable prices. On top of existing penalties, the statute stated that overcharging merchants must pay the injured party double the sum he received, an idea that has been replicated in punitive treble damages under US antitrust law. Also under Edward III, the following statutory provision in the poetic language of the time outlawed trade combinations.

"...we have ordained and established, that no merchant or other shall make Confederacy, Conspiracy, Coin, Imagination, or Murmur, or Evil Device in any point that may turn to the Impeachment, Disturbance, Defeating or Decay of the said Staples, or of anything that to them pertaineth, or may pertain." Examples of legislation in mainland Europe include the constitutiones juris metallici by Wenceslas II of Bohemia between 1283 and 1305, condemning combinations of ore traders increasing prices; the Municipal Statutes of Florence in 1322 and 1325 followed Zeno's legislation against state monopolies; and under Emperor Charles V in the Holy Roman Empire a law was passed "to prevent losses resulting from monopolies and improper contracts which many merchants and artisans made in the Netherlands." In 1553 King Henry VIII reintroduced tariffs for foodstuffs, designed to stabilize prices, in the face of fluctuations in supply from overseas. So the legislation read here that whereas,

"it is very hard and difficult to put certain prices to any such things... [it is necessary because] prices of such victuals be many times enhanced and raised by the Greedy Covetousness and Appetites of the Owners of such Victuals, by occasion of ingrossing and regrating the same, more than upon any reasonable or just ground or cause, to the great damage and impoverishing of the King's subjects."[15] Around this time organizations representing various tradesmen and handicraftspeople, known as guilds had been developing, and enjoyed many concessions and exemptions from the laws against monopolies. The privileges conferred were not abolished until the Municipal Corporations Act 1835.

Elizabeth I assured monopolies would not be abused in the early era of globalization Europe around the 15th century was changing fast. The new world had just been opened up, overseas trade and plunder was pouring wealth through the international economy and attitudes among businessmen were shifting. In 1561 a system of Industrial Monopoly Licenses, similar to modern patents had been introduced into England. But by the reign of Queen Elizabeth I, the system was reputedly much abused and used merely to preserve privileges, encouraging nothing new in the way of innovation or manufacture. When a protest was made in the House of Commons and a Bill was introduced, the Queen convinced the protesters to challenge the case in the courts. This was the catalyst for the Case of Monopolies or Darcy v. Allin. The plaintiff, an officer of the Queen's household, had been granted the sole right of making playing cards and claimed damages for the defendant's infringement of this right. The court found the grant void and that three characteristics of monopoly were (1) price increases (2) quality decrease (3) the tendency to reduce artificers to idleness and beggary. This put a temporary end to complaints about monopoly, until King James I began to grant them again. In 1623 Parliament passed the Statute of Monopolies, which for the most part excluded patent rights from its prohibitions, as well as guilds. From King Charles I, through the civil war and to King Charles II, monopolies continued, especially useful for raising revenue. Then in 1684, in East India Company v. Sandys it was decided that exclusive rights to trade only outside the realm were legitimate, on the grounds that only large and powerful concerns could trade in the conditions prevailing overseas. In 1710 to deal with high coal prices caused by a Newcastle Coal Monopoly the New Law was passed. Its provisions stated that "all and every contract or contracts, Covenants and Agreements, whether the same be in writing or not in writing... are hereby declared to be illegal." When Adam Smith wrote the Wealth of Nations in 1776 he was somewhat cynical of the possibility for change.

copyright 2013 dwood Chapter 5 33 Brokerage and Agency AlaskaRealEstateSchool.com "To expect indeed that freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is more unconquerable, the private interests of many individuals irresistibly oppose it. The Member of Parliament who supports any proposal for strengthening this Monopoly is seen to acquire not only the reputation for understanding trade, but great popularity and influence with an order of men whose members and wealth render them of great importance."

Restraint of trade

Judge Coke in the 17th century thought that general restraints on trade were unreasonable The English law of restraint of trade is the direct predecessor to modern competition law. Its current use is small, given modern and economically oriented statutes in most common law countries. Its approach was based on the two concepts of prohibiting agreements that ran counter to public policy, unless the reasonableness of an agreement could be shown. A restraint of trade is simply some kind of agreed provision that is designed to restrain another's trade. For example, in Nordenfelt v. Maxim, Nordenfelt Gun Co. a Swedish arm inventor promised on sale of his business to an American gun maker that he "would not make guns or ammunition anywhere in the world, and would not compete with Maxim in any way." To be consider whether or not there is a restraint of trade in the first place, both parties must have provided valuable consideration for their agreement. In Dyer's case a dyer had given a bond not to exercise his trade in the same town as the plaintiff for six months but the plaintiff had promised nothing in return. On hearing the plaintiff's attempt to enforce this restraint, Hull J exclaimed,

"per Dieu, if the plaintiff were here, he should go to prison until he had paid a fine to the King."

copyright 2013 dwood Chapter 5 34 Brokerage and Agency AlaskaRealEstateSchool.com The common law has evolved to reflect changing business conditions. So in the 1613 case of Rogers v. Parry a court held that a joiner who promised not to trade from his house for 21 years could have this bond enforced against him since the time and place was certain. It was also held that a man cannot bind himself to not use his trade generally by Chief Justice Coke. This was followed in Broad v. Jolyffe and Mitchell v. Reynolds where Lord Macclesfield asked, "What does it signify to a tradesman in London what another does in Newcastle?" In times of such slow communications, commerce around the country it seemed axiomatic that a general restraint served no legitimate purpose for one's business and ought to be void. But already in 1880 in Roussillon v. Roussillon Lord Justice Fry stated that a restraint unlimited in space need not be void, since the real question was whether it went further than necessary for the promisee's protection. So in the Nordenfelt case Lord McNaughton ruled that while one could validly promise to "not make guns or ammunition anywhere in the world" it was an unreasonable restraint to "not compete with Maxim in any way." This approach in England was confirmed by the House of Lords in Mason v. The Provident Supply and Clothing Co.

Competition law today Modern competition law begins with the United States legislation of the Sherman Act of 1890 and the Clayton Act of 1914. While other, particularly European, countries also had some form of regulation on monopolies and cartels, the US codification of the common law position on restraint of trade had a widespread effect on subsequent competition law development. Both after World War II and after the fall of the Berlin wall competition law has gone through phases of renewed attention and legislative updates around the world.

United States antitrust

Standard Oil was one of the greatest companies to be broken up under United States antitrust laws The American term anti-trust arose not because the US statutes had anything to do with ordinary trust law, but because the large American corporations used trusts to conceal the nature of their business arrangements. Big trusts became synonymous with big monopolies, the perceived threat to democracy

copyright 2013 dwood Chapter 5 35 Brokerage and Agency AlaskaRealEstateSchool.com and the free market these trusts represented led to the Sherman and Clayton Acts. These laws, in part, codified past American and English common law of restraints of trade. Senator Hoar, an author of the Sherman Act said in a debate, "We have affirmed the old doctrine of the common law in regard to all inter-state and international commercial transactions and have clothed the United States courts with authority to enforce that doctrine by injunction." Evidence of the common law basis of the Sherman and Clayton acts is found in the Standard Oil case, where Chief Justice White explicitly linked the Sherman Act with the common law and sixteenth century English statutes on engrossing. The Act's wording also reflects common law. The first two sections read as follows,

"Section 1. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine....

Section 2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine...." The Sherman Act did not have the immediate effects its authors intended, though Republican President Theodore Roosevelt's federal government sued 45 companies, and William Taft used it against 75. The Clayton Act of 1914 was passed to supplement the Sherman Act. Specific categories of abusive conduct were listed, including price discrimination(section 2), exclusive dealings (section 3) and mergers which substantially lessen competition (section 7). Section 6 exempted trade unions from the law's operation. Both the Sherman and Clayton acts are now codified under Title 15 of the United States Code.

Post war consensus

The European Commission, established following World War II, was the first Europe wide competition authority

copyright 2013 dwood Chapter 5 36 Brokerage and Agency AlaskaRealEstateSchool.com It was after the First World War that countries began to follow the United States' lead in competition policy. In 1923 Canada introduced the Combines Investigation Act and in 1926 France reinforced its basic competition provisions from the 1810 Code Napoleon. After World War II, the Allies, led by the United States, introduced tight regulation of cartels and monopolies in occupied Germany and Japan. In Germany, despite the existence of laws against unfair competition passed in 1909 (Gesetz gegen den unlauteren Wettbewerb or UWB) it was widely believed that the predominance of large cartels of German industry had made it easier for the Nazis to assume total economic control, simply by bribing or blackmailing the heads of a small number of industrial magnates. Similarly in Japan, where business was organized along family and nepotistic ties, the zaibatsu were easy for the despotic government to manipulate into the war effort. Following, unconditional surrender tighter controls, replicating American policy were introduced. Further developments however were considerably overshadowed by the move towards nationalization and industry wide planning in many countries. Making the economy and industry democratically accountable through direct government action became a priority. Coal industry, railroads, steel, electricity, water, health care and many other sectors were targeted for their special qualities of being natural monopolies. Commonwealth countries were slow in enacting statutory competition law provisions. The United Kingdom introduced the (considerably less stringent) Restrictive Practices Act in 1956. Australia introduced its current Trade Practices Act in 1974. Recently however there has been a wave of updates, especially in Europe to harmonize legislation with contemporary competition law thinking.

European Union law

The signatories to the Treaty of Rome which covers EU competition laws In 1957 six Western European countries signed the Treaty of the European Community (EC Treaty or Treaty of Rome), which over the last fifty years has grown into a European Union of nearly half a billion citizens. The European Community is the name for the economic and social pillar of EU law, under which competition law falls. Healthy competition is seen as an essential element in the creation

copyright 2013 dwood Chapter 5 37 Brokerage and Agency AlaskaRealEstateSchool.com of a common market free from restraints on trade. The first provision is Article 81 EC, which deals with cartels and restrictive vertical agreements. Prohibited are...

"(1) ...all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market..." Article 81(1) EC then gives examples of "hard core" restrictive practices such as price fixing or market sharing and 81(2) EC confirms that any agreements are automatically void. However, just like the Statute of Monopolies 1623, Article 81(3) EC creates exemptions, if the collusion is for distributional or technological innovation, gives consumers a "fair share" of the benefit and does not include unreasonable restraints (or disproportionate, in ECJ terminology) that risk eliminating competition anywhere. Article 82 EC deals with monopolies, or more precisely firms who have a dominant market share and abuse that position. Unlike U.S. Antitrust, EC law has never been used to punish the existence of dominant firms, but merely imposes a special responsibility to conduct oneself appropriately. Specific categories of abuse listed in Article 82 EC include price discrimination and exclusive dealing, much the same as sections 2 and 3 of the U.S. Clayton Act. Also under Article 82 EC, the European Council was empowered to enact a regulation to control mergers between firms, currently the latest known by the abbreviation of ECMR "Reg. 139/2004". The general test is whether a concentration (i.e. merger or acquisition) with a community dimension (i.e. affects a number of EU member states) might significantly impede effective competition. Again, the similarity to the Clayton Act's substantial lessening of competition. Finally, Articles 86 and 87 EC regulate the state's role in the market. Article 86(2) EC states clearly that nothing in the rules cannot be used to obstruct a member state's right to deliver public services, but that otherwise public enterprises must play by the same rules on collusion and abuse of dominance as everyone else. Article 87 EC, similar to Article 81 EC, lays down a general rule that the state may not aid or subsidize private parties in distortion of free competition, but then grants exceptions for things like charities, natural disasters or regional development.

International enforcement Competition law has already been substantially internationalized along the lines of the US model by nation states themselves, however the involvement of international organizations has been growing. Increasingly active at all international conferences are the United Nations Conference on Trade and Development (UNCTAD) and the Organization for Economic Co-operation and Development

copyright 2013 dwood Chapter 5 38 Brokerage and Agency AlaskaRealEstateSchool.com (OECD), which is prone to making neo-liberal recommendations about the total application of competition law for public and private industries. Chapter 5 of the post war Havana Charter contained an Antitrust code but this was never incorporated into the WTO's forerunner, the General Agreement on Tariffs and Trade 1947. Office of Fair Trading Director and Professor Richard Whish wrote skeptically that it "seems unlikely at the current stage of its development that the WTO will metamorphose into a global competition authority." Despite that, at the ongoing Doha round of trade talks for the World Trade Organization, discussion includes the prospect of competition law enforcement moving up to a global level. While it is incapable of enforcement itself, the newly established International Competition Network (ICN) is a way for national authorities to coordinate their own enforcement activities.

Competition law theory

Classical perspective

John Stuart Mill believed the restraint of trade doctrine was justified to preserve liberty and competition The classical perspective on competition was that certain agreements and business practice could be an unreasonable restraint on the individual liberty of tradespeople to carry on their livelihoods. Restraints were judged as permissible or not by courts as new cases appeared and in the light of changing business circumstances. Hence the courts found specific categories of agreement, specific clauses, to fall foul of their doctrine on economic fairness, and they did not contrive an overarching conception of market power. Earlier theorists like Adam Smith rejected any monopoly power on this basis.

"A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the

copyright 2013 dwood Chapter 5 39 Brokerage and Agency AlaskaRealEstateSchool.com effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate." In The Wealth of Nations (1776) Adam Smith also pointed out the cartel problem, but did not advocate legal measures to combat them.

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary." Smith also rejected the very existence of, not just dominant and abusive corporations, but corporations at all. By the latter half of the nineteenth century it had become clear that large firms had become a fact of the market economy. John Stuart Mill's approach was laid down in his treatise On Liberty (1859).

"Again, trade is a social act. Whoever undertakes to sell any description of goods to the public, does what affects the interest of other persons, and of society in general; and thus his conduct, in principle, comes within the jurisdiction of society... both the cheapness and the good quality of commodities are most effectually provided for by leaving the producers and sellers perfectly free, under the sole check of equal freedom to the buyers for supplying themselves elsewhere. This is the so-called doctrine of Free Trade, which rests on grounds different from, though equally solid with, the principle of individual liberty asserted in this Essay. Restrictions on trade, or on production for purposes of trade, are indeed restraints; and all restraint, qua restraint, is an evil..."

Joseph Schumpeter argued competition drove progress capitalist democracies After Mill, there was a shift in economic theory, which emphasized a more precise and theoretical model of competition. A simple neo-classical model of free markets holds that production and distribution of goods and services in competitive free markets maximizes social welfare. This model assumes that new firms can freely enter markets and compete with existing firms, or to use legal language, there are no barriers to entry. By this term economists mean something very specific, that competitive free markets deliver allocative, productive and dynamic efficiency. Allocative efficiency is also known as Pareto efficiency after the Italian economist Vilfredo Pareto and means that resources in an economy over the long run will go precisely to those who are willing and able to pay for them. Because rational producers will keep producing and selling, and buyers will keep buying up to the last marginal unit of possible output - or alternatively rational producers will be reduce their output to the margin at which buyers will buy the same amount as produced - there is no waste, the greatest number wants of the greatest number of people become satisfied and utility is perfected because resources can no longer be reallocated to make anyone better off without making someone else worse off; society has achieved allocative efficiency. Productive efficiency simply means that society is making as much as it can. Free markets are meant to reward those who work hard, and therefore those who will put society's resources towards the frontier of its possible production. Dynamic efficiency refers to the idea that business which constantly competes must research, create and innovate to keep its share of consumers. This traces to Austrian-American political scientist Joseph Schumpeter's notion that a "perennial gale

copyright 2013 dwood Chapter 5 41 Brokerage and Agency AlaskaRealEstateSchool.com of creative destruction" is ever sweeping through capitalist economies, driving enterprise at the market's mercy. Contrasting with the allocatively, productively and dynamically efficient market model are monopolies, oligopolies, and cartels. When only one or a few firms exist in the market, and there is no credible threat of the entry of competing firms, prices raise above the competitive level, to either a monopolistic or oligopolistic equilibrium price. Production is also decreased, further decreasing social welfare by creating a deadweight loss. Sources of this market power are said to include the existence of externalities, barriers to entry of the market, and the free rider problem. Markets may fail to be efficient for a variety of reasons, so the exception of competition law's intervention to the rule of laissez faire is justified. Orthodox economists fully acknowledge that perfect competition is seldom observed in the real world, and so aim for what is called "workable competition".[43][44] This follows the theory that if one cannot achieve the ideal, then go for the second best option[45] by using the law to tame market operation where it can.

Chicago School

Robert Bork argues that competition law is fundamentally flawed A group of economists and lawyers, who are largely associated with the University of Chicago, advocate an approach to competition law guided by the proposition that some actions that were originally considered to be anticompetitive could actually promote competition. The US Supreme Court has used the Chicago School approach in several recent cases. One view of the Chicago School approach to antitrust is found in United States Circuit Court of Appeals Judge Richard Posner's booksAntitrust law and Economic Analysis of Law Posner once worked in the Department of Justice's

copyright 2013 dwood Chapter 5 42 Brokerage and Agency AlaskaRealEstateSchool.com antitrust division, has long been a professor at the University of Chicago Law School, and is likely the most widely cited antitrust scholar and jurist in the United States. Robert Bork was highly critical of court decisions on United States antitrust law in a series of law review articles and his book The Antitrust Paradox. Bork argued that both the original intention of antitrust laws and economic efficiency was pursuit only of consumer welfare, the protection of competition rather than competitors. Furthermore, only a few acts should be prohibited, namely cartels that fix prices and divide markets, mergers that create monopolies, and dominant firms pricing predatorily, while allowing such practices as vertical agreements and price discrimination on the grounds that it did not harm consumers. Running through the different critiques of US antitrust policy is the common theme that government interference in the operation of free markets does more harm than good. "The only cure for bad theory", writes Bork, "is better theory". The late Harvard Law School Professor Philip Areeda, who favours more aggressive antitrust policy, in at least one Supreme Court case challenged Robert Bork's preference for non intervention.

Policy developments Anti-cartel enforcement is a key focus of competition law enforcement policy. In the US the Antitrust Criminal Penalty Enhancement and Reform Act 2004 raised the maximum imprisonment term for price fixing from three to ten years, and the maximum fine from $10 to $100 million. In 2007 British Airways and Korean Air pleaded guilty to fixing cargo and passenger flight prices. These actions complement the private enforcement which has always been an important feature of United States antitrust law. The United States Supreme Court summarized why Congress allows punitive damages in Hawaii v. Standard Oil.

"Every violation of the antitrust laws is a blow to the free-enterprise system envisaged by Congress. This system depends on strong competition for its health and vigor, and strong competition depends, in turn, on compliance with antitrust legislation. In enacting these laws, Congress had many means at its disposal to penalize violators. It could have, for example, required violators to compensate federal, state, and local governments for the estimated damage to their respective economies caused by the violations. But, this remedy was not selected. Instead, Congress chose to permit all persons to sue to recover three times their actual damages every time they were injured in their business or property by an antitrust violation." In the EU, the Modernization Regulation 1/2003 means that the European Commission is no longer the only body capable of public enforcement of European Community competition law. This was done in order to facilitate quicker resolution of competition-related inquiries. In 2005 the Commission issued a

copyright 2013 dwood Chapter 5 43 Brokerage and Agency AlaskaRealEstateSchool.com Green Paper on Damages actions for the breach of the EC antitrust rules,[59] which suggested ways of making private damages claims against cartels easier.

Competition law practice

Collusion and cartels

Scottish Enlightenment philosopher Adam Smith was an early enemy of cartels The core of competition policy has, since the 1980s, been the anti-price fixing cartel agenda, despite criticism by economic libertarians. In The Wealth of Nations (1776) Adam Smith pointed out the cartel problem, but did not advocate legal measures to combat them. Nowadays a far stricter approach is taken. Under EC law cartels are banned by Article 81 EC, whereas under US law the Sherman Act prohibitions of section 1. To compare, the target of competition law under the Sherman Act 1890 is every "contract, combination in the form of trust or otherwise, or conspiracy", which essentially targets anybody who has some dealing or contact with someone else. In the mean time, Art. 81 EC makes clear who the targets of competition law are in two stages with the term agreement "undertaking". This is used to describe almost anyone "engaged in an economic activity", but excludes both employees, who are by their "very nature the opposite of the independent exercise of an economic or commercial activity", and public services based on "solidarity" for a "social purpose". Undertakings must then have formed an agreement, developed a "concerted practice", or, within an association, taken a decision. Like US antitrust, this just means all the same thing; any kind of dealing or contact, or a "meeting of the minds" between parties. Covered therefore is a whole range from a strong handshaken written or verbal agreement to a supplier sending invoices with directions not to export to its retailer who gives "tacit acquiescence" to the conduct.

copyright 2013 dwood Chapter 5 44 Brokerage and Agency AlaskaRealEstateSchool.com Less of a consensus exists in the field of vertical agreements. These are agreements not between firms at the same level of production, but firms at different levels in the supply chain, for instance a supermarket and a bread producer. Recently, the United States Supreme Court has become more skeptical of antitrust cases predicated on agreements between companies that are not directly in competition with one another, such as a clothing manufacturer and a clothing retailer, while maintaining the strict prohibition against agreements that limit competition between companies at the same level of the supply chain, such as agreements between two retailers or between two distributors. Vertical agreements may still be illegal, but the burden of proving them illegal was raised by a number of recent cases from the per se illegal standard to a more demanding rule of reason standard.

Dominance and monopoly

The economist's depiction of deadweight loss to efficiency that monopolies cause When firms hold large market shares, consumers often risk paying higher prices and getting lower quality products than compared to competitive markets. However, the existence of a very high market share does not always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high-market-share firm's price increases. Competition law does not make merely having a monopoly illegal, but rather abusing the power that a monopoly may confer, for instance through exclusionary practices. First it is necessary to determine whether a firm is dominant, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer." Under EU law, very large market shares raise a presumption that a firm is dominant, which may be rebuttable. If a firm has a dominant position, then there is "a special responsibility not to allow its conduct to impair competition on the common market". Similarly as with collusive conduct, market shares are determined with reference to the particular market in which the firm and product in question is sold. Then although the lists are seldom closed, certain categories of abusive conduct are usually prohibited

copyright 2013 dwood Chapter 5 45 Brokerage and Agency AlaskaRealEstateSchool.com under the country's legislation. For instance, limiting production at a shipping port by refusing to raise expenditure and update technology could be abusive. Tying one product into the sale of another can be considered abuse too, being restrictive of consumer choice and depriving competitors of outlets. This was the alleged case in Microsoft v. Commission leading to an eventual fine of €497 million for including its Windows Media Player with the Microsoft Windows platform. A refusal to supply a facility which is essential for all businesses attempting to compete to use can constitute an abuse. One example was in a case involving a medical company named Commercial Solvents. When it set up its own rival in the tuberculosis drugs market, Commercial Solvents were forced to continue supplying a company named Zoja with the raw materials for the drug. Zoja was the only market competitor, so without the court forcing supply, all competition would have been eliminated. Forms of abuse relating directly to pricing include price exploitation. It is difficult to prove at what point a dominant firm's prices become "exploitative" and this category of abuse is rarely found. In one case however, a French funeral service was found to have demanded exploitative prices, and this was justified on the basis that prices of funeral services outside the region could be compared. A more tricky issue is predatory pricing. This is the practice of dropping prices of a product so much that in order one's smaller competitors cannot cover their costs and fall out of business. The Chicago School (economics) considers predatory pricing to be unlikely. However in France Telecom SA v. Commission a broadband internet company was forced to pay €10.35 million for dropping its prices below its own production costs. It had "no interest in applying such prices except that of eliminating competitors" and was being crossed subsidized to capture the lion's share of a booming market. One last category of pricing abuse is price discrimination. An example of this could be offering rebates to industrial customers who export your company's sugar, but not to Irish customers who are selling their goods in the same market as you are in.

Mergers and acquisitions A merger or acquisition involves, from a competition law perspective, the concentration of economic power in the hands of fewer than before. This usually means that one firm buys out the shares of another. The reasons for oversight of economic concentrations by the state are the same as the reasons to restrict firms who abuse a position of dominance, only that regulation of mergers and acquisitions attempts to deal with the problem before it arises, ex ante prevention of creating dominant firms. In the United States merger regulation began under the Clayton Act, and in the European Union, under the Merger Regulation 139/2004 (known as the "ECMR"). Competition law requires that firms proposing to merge gain authorization from the relevant government authority, or simply go ahead but face the

copyright 2013 dwood Chapter 5 46 Brokerage and Agency AlaskaRealEstateSchool.com prospect of demerger should the concentration later be found to lessen competition. The theory behind mergers is that transaction costs can be reduced compared to operating on an open market through bilateral contracts. Concentrations can increase economies of scale and scope. However often firms take advantage of their increase in market power, their increased market share and decreased number of competitors, which can have a knock on effect on the deal that consumers get. Merger control is about predicting what the market might be like, not knowing and making a judgment. Hence the central provision under EU law asks whether a concentration would if it went ahead "significantly impede effective competition... in particular as a result of the creation or strengthening off a dominant position..." and the corresponding provision under US antitrust states similarly,

"No person shall acquire, directly or indirectly, the whole or any part of the stock or other share capital... of the assets of one or more persons engaged in commerce or in any activity affecting commerce, where... the effect of such acquisition, of such stocks or assets, or of the use of such stock by the voting or granting of proxies or otherwise, may be substantially to lessen competition, or to tend to create a monopoly. What amounts to a substantial lessening of, or significant impediment to competition is usually answered through empirical study. The market shares of the merging companies can be assessed and added, although this kind of analysis only gives rise to presumptions, not conclusions. Something called the Herfindahl-Hirschman Index is used to calculate the "density" of the market, or what concentration exists. Aside from the maths, it is important to consider the product in question and the rate of technical innovation in the market. A further problem of collective dominance, or oligopoly through "economic links" can arise, whereby the new market becomes more conducive to collusion. It is relevant how transparent a market is, because a more concentrated structure could mean firms can coordinate their behavior more easily, whether firms can deploy deterrants and whether firms are safe from a reaction by their competitors and consumers. The entry of new firms to the market, and any barriers that they might encounter should be considered. If firms are shown to be creating an uncompetitive concentration, in the US they can still argue that they create efficiencies enough to outweigh any detriment, and similar reference to "technical and economic progress" is mentioned in Art. 2 of the ECMR. Another defense might be that a firm which is being taken over is about to fail or go insolvent, and taking it over leaves a no less competitive state than what would happen anyway. Mergers vertically in the market are rarely of concern, although in AOL/Time Warner the European Commission required that a joint venture with a competitor Bertelsmann be ceased beforehand. The EU authorities have also focused lately on the effect of conglomerate mergers, where companies

CORRESPONDENCE EVALUATION QUESTIONS l. A broker must obey all lawful instructions given to him or her by the principal. If any such instruction violates the law, the broker should: a. do as instructed. c. sue the principal. b. withdraw from the transaction. d. retain the listing but disregard the instructions.

2. The listing broker discovered that the seller's house was infested with termites. However, the seller was unaware of the problem. The broker knowingly failed to disclose it to a buyer. In this situation: a. the seller can be held liable for damages. b. the broker can be held liable for damages. c. both seller and broker can be held liable for damages. d. neither seller nor broker can be held liable for damages.

3. Condominium Sales Realty employs Paul as a salesperson. It does not require him to attend sales meetings or spend certain hours in the office. Paul is not reimbursed for normal expenses and is responsible for paying his own income and social security taxes. His status is best described as that of: a. an employee. c. a broker-salesperson. b. an independent contractor. d. a sales associate under the 100 percent commission plan.

4. Bob is a salesperson employed by Tomorrow Realty. Helen is a salesperson employed by Condominium Sales Realty. Tomorrow Realty and Condominium Sales Realty are members of the same multiple-listing service. Helen secures a listing for Condominium Sales Realty. It is placed with the multiple-listing service, and Bob produces the sale for Tomorrow Realty. Bob can collect a commission from: a. Helen. c. Tomorrow Realty. b. Condominium Sales Realty. d. the owner of the property.

5. A statement made by a broker to a buyer that "This apartment has one of the most fantastic views of the city," when, in fact, the apartment has only poor, partial views, would be an example of a. Misrepresentation. c. fraud. b. Puffing. d. a mistake.

copyright 2013 dwood Chapter 5 48 Brokerage and Agency AlaskaRealEstateSchool.com 6. The relationship created between the real estate broker and the principal places the broker in the position of: a. a principal. c. a dual agent. b. an attorney-in-fact. d. a fiduciary.

7. The type of agency a real estate broker and seller enter into when they execute a listing agreement is generally considered to be: a. a general agency. c. a special agency. b. an ostensible agency d. a universal agency.

8. It is illegal for a broker to represent both the buyer and seller in the same transaction unless: a. the broker obtains the prior consent of both parties. b. the broker charges only one of the parties a fee. c. the parties fail to discover the dual representation. d. the broker tells both parties of the dual representation.

9. A real estate broker is said to earn a commission from a seller when: a. the sale is closed. b. the property is advertised and the broker tries diligently to sell. c. a sales contract is signed. d. the broker produces a ready, willing and able buyer.

10. At their regular monthly meeting, a group of local brokers agree that the introduction of "discount brokerages" in their area would be bad for business. Thus, they informally agree to charge commission rates no lower than 6 percent for the coming year; there was, however, no limit placed on the amount of commission above that figure the brokers could charge. This type of "friendly" agreement is: a. known as red-lining. b. allowed under the Sherman Antitrust Law. c. typical of members of a multiple listing system. d. against the law.

11. Jo is a licensed salesperson who completed a difficult transaction. Jo may accept a bonus from: a. the grateful seller. c. her own broker. b .the buyer. d. any of the above.

12. Whether a salesperson is associated with a broker as an employee or as an independent contractor is important: a. for income tax purposes.

copyright 2013 dwood Chapter 5 49 Brokerage and Agency AlaskaRealEstateSchool.com b. when applying for a license. c. when listing property, as an independent contractor may list in his or her own name. d. when establishing the escrow account.

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