In a recent legal development, another lawsuit — Kevin McFall v. Canadian Real Estate Association et al — has been filed against various real estate boards, franchisors and brokerages, echoing last year’s Sunderland case. In an exclusive interview with competition law expert and lawyer David Dunbar, we delve into the details of the McFall lawsuit and explore its implications for the real estate industry.
What McFall v. Canadian Real Estate Association et al is about
Natalka Falcomer (NF): Tell me about the McFall lawsuit.
David Dunbar (DD): The fundamental structure and arguments of the McFall lawsuit are similar to the Sunderland lawsuit. The core complaint revolves around Section 45 of the Competition Act, alleging price-fixing, and seeking damages under Section 36. At its core, the McFall case is essentially the same as Sunderland but presented somewhat differently. I guess you could say it’s the same house, but laid out differently.
Reason for the lawsuit
NF: Why file this lawsuit given that it’s the same as the Sunderland lawsuit?
DD: The McFall lawsuit is against more players, many of whom were not named in the Sunderland case. It appears that in McFall, the plaintiffs are casting the net wider to capture more “conspirators” who were not included in the Sunderland case.
What’s more, the McFall statement of claim appears aimed at addressing issues that arose in the Sunderland case when the court dismissed some claims and removed the franchisors as defendants. In other words, in McFall, the plaintiffs are refining their arguments in what looks like an attempt to bring back certain groups (like franchisors) that were previously excluded as defendants.
No new arguments
NF: Are there any new facts or arguments being made that Sunderland failed to address?
DD: I wouldn’t say there were new facts. Both cases focus on the real estate association rules, specifically the way broker fees are structured, and the anti-competitive effects of those rules. There does seem to be a refining of the arguments raised in Sunderland to substantiate their position that these rules and their anti-competitive outcomes amount to price fixing under the Competition Act.
Inspiration from Sitzer decision?
NF: Is it possible that the Sitzer decision that required real estate brokerages and real estate boards to pay $5.36 billion in damages for the same “conspiracy” claimed in Sunderland inspired the McFall lawsuit?
DD: There is potential influence from U.S. cases, but our case law and the legal theories underpinning Canadian competition law are different. Having said that, the plaintiff’s decision to include various boards and franchisors could or could not be linked to the perception of success in similar U.S. cases.
I would point out some important differences between Canada and the U.S. in this regard. The U.S. case was a jury trial, and that’s not available here. As well, McFall sticks with a pure criminal approach and doesn’t base itself on anti-competitive abuse of dominance arguments as you see in some of the American cases.
McFall’s chances of winning
NF: What are the odds that the courts will side with McFall and find a conspiracy?
DD: There are three big challenges faced by this lawsuit. We’ve already seen one of those problems in the Sunderland case when Justice Crampton threw out the price-fixing allegations, just leaving the claim based on “control” of pricing.
Proving a criminal conspiracy for price fixing requires evidence of competitors getting together to do just that and, just like in Sunderland, I would expect the defendants to say there isn’t substantial support for this in the current case. In my experience, to bring a criminal conspiracy case, prosecutors ideally want some kind of a smoking gun or concrete evidence of an agreement among competitors to fix prices — usually, that’s a conspirator who has decided to cooperate with law enforcement and testify.
This direct evidence seems to be lacking in both the Sunderland and McFall lawsuits.
The three big challenges
DD: Despite efforts in the pleading to describe the conspiracy differently, this case looks like it might face some of the same hurdles as Sunderland. Similar to the Sunderland case, there are three big challenges facing McFall:
1. Problems related to direct evidence of competitors agreeing to conspire.
2. The regulated conduct defense, which comes into play when conduct that might otherwise breach the Competition Act is authorized or at least implicitly allowed by other legislation. Brokerages and agents may well invoke this defense since they adhere to provincial regulations governing their compensation practices.
Furthermore, these professionals are obligated by legislation in all provinces nationwide to showcase homes irrespective of the commission offered. Even if steering exists, that can be seen as unethical and prohibited behavior in a regulated system, rather than evidence of a criminal conspiracy.
3. Anyone who has bought or sold a home knows that commissions can always become a factor in the overall negotiation of the house price and are often used as a tool during the negotiation process. Buyers can always ask sellers for a reduction in the price of the home to offset their having to pay the commissions.
What’s more, seller and buyer representatives will use their fees to “close a deal” by offering rebates or reducing their cut. So, it may be harder than it first appears to establish that buyers are suffering economic harm caused by the current commission structure.
Competition Act changes
NF: What about the recent Competition Act changes that allow private parties to bring lawsuits based on abuse of dominance?
DD: Interestingly, McFall was brought as a criminal conspiracy case and not an abuse of dominance case. Plaintiffs have that option now, following changes that were made to the Act last year. I don’t know what the reasoning was for these particular plaintiffs, but generally speaking, a private abuse of dominance case would be novel and therefore uncharted territory.
As well, abuse of dominance cases can often require expensive economic experts and significant resources to prove anti-competitive effects. Without getting too technical, there are some legal restrictions on how much a defendant can be ordered to pay at the end of an abuse of dominance action that might not apply in a case based on the commission of an offence under the Competition Act.
What the real estate industry should be aware of
NF: Anything that brokers, agents or associations should be concerned about?
DD: These lawsuits may trigger consumer interest and demand for changing the current commission structure, but it’s unlikely that we will see anything close to the outcome in Sitzer or billion-dollar awards to be paid by the defendants.
One thing to keep an eye out for is whether one or more provincial governments decide to take action on this issue and change the way they regulate real estate commissions.
Natalka Falcomer is a lawyer, real estate broker and Certified Leasing Officer who started her real estate career in private equity. She created, hosted and co-produced a popular legal call-in show on Rogers TV and founded and recently sold Groundworks, a firm specializing in commercial leasing law. She is currently the Chief Real Estate Officer of OJO Home Canada, leading the development and expansion of the company’s personalized home buying and selling experience for the Canadian market. She sits as a board member on The Ontario Trillium Foundation and as an advisor on NAR REACH Canada.