Documentation

CT-2011-003 THE COMPETITION TRIBUNAL IN THE MATTER OF the Competition Act, R.S.C. 1985, c. C-34, as amended; IN THE MATTER OF an application by the Commissioner of Competition pursuant to section 79 of the Competition Act;

AND IN THE MATTER OF certain rules, policies and agreements relating to the multiple listing service of the Toronto Real Estate Board.

BETWEEN: THE COMMISSIONER OF COMPETITION Applicant AND

THE TORONTO REAL ESTATE BOARD Respondent ________________________________________________________________________ REPLY OF THE COMMISSIONER ________________________________________________________________________

PART I: OVERVIEW 1. The Commissioner of Competition (the "Commissioner") repeats and relies upon the allegations in her Amended Notice of Application, Statement of Grounds and Material Facts and Concise Statement of Economic Theory (the "Amended Application") and, except as hereinafter expressly admitted, denies the allegations in the Response filed by TREB (the "Response"). Capitalized terms used below are as defined in the Amended Application.

- 2 - 2. On or about August 25, 2011, TREB's Board of Directors (the "Board") adopted a binding policy and rules governing how and to what extent brokers could use information in the TREB MLS system on their websites (the "Website Rules"). TREB had previously released the Website Rules in draft in late June 2011, approximately one month after the Commissioner filed her application. In the Amended Application filed on July 7, 2011, the Commissioner identified serious deficiencies in TREB's draft Website Rules. However, TREB's Board adopted the Website Rules without changes, despite any comments from TREB members and the Commissioner's Amended Application. As a result, while it labels the Website Rules as a "VOW" policy and rules, TREB continues to prevent genuine VOWs.

3. TREB has therefore not resolved the issues raised in the Commissioner's Amended Application. As a result of TREB's restrictions, brokers who wish to operate a VOW remain unable to offer the same real estate brokerage services available from a traditional broker in a "bricks and mortar" setting, including providing valuable MLS information to consumers through a VOW. The Website Rules do not change TREB's anti-competitive practices, nor their stifling effect on innovation, all to the detriment of consumers and brokers. In this proceeding, TREB's Website Rules comprise part of the "TREB MLS Restrictions" as defined in the Amended Application.

4. In its Response filed on August 19, 2011, TREB did not address several key aspects of the Amended Application. In particular, TREB's Response offered no defence for its discriminatory treatment of TREB members who wish to operate a VOW, versus those who operate a traditional model.

5. Further, TREB did not respond to the Commissioner's position that TREB substantially or completely controls the relevant market through its ability to enact, interpret, and enforce rules, policies and agreements, including the TREB MLS Restrictions, that govern the use of and access to the TREB MLS system. As a trade association, TREB’s argument that it has no such control because it does not compete in the market, is a technicality favouring form over substance. It ignores the reality that TREB's members do compete in the market and TREB enacts and enforces its rules, policies and agreements for their benefit.

- 3 - 6. Indeed, TREB's enactment of the Website Rules on August 25, 2011 aptly demonstrates its ongoing control of the relevant market. The Website Rules are calculated to restrict how innovative brokers provide services to consumers, to further entrench the dominant traditional model of providing real estate brokerage services to consumers, and to impede the Commissioner's efforts to have the Tribunal scrutinize TREB's practices.

7. The copyright arguments raised by TREB are not relevant to this application and subsection 79(5) of the Act does not apply. TREB's conduct is anti-competitive and cannot qualify as an "act engaged in pursuant only to the exercise of any right or enjoyment of any interest derived under the Copyright Act ...", as subsection 79(5) requires. TREB uses its ownership of the TREB MLS system to create and enforce anti-competitive access terms that restrict how brokers compete. Doing so goes well beyond a mere exercise of TREB's rights (if any) under the Copyright Act. As such, TREB cannot rely upon the exception in subsection 79(5).

8. TREB glosses over the fact that while its Website Rules, in purported defence of privacy rights, do not allow innovative brokers to provide consumers with valuable MLS information, TREB imposes no such restrictions on traditional brokers. If TREB is genuinely contesting the Commissioner's position on privacy grounds, then TREB's traditional member brokers must already be in widespread violation of the very privacy rules TREB claims to be concerned about. TREB cannot have it both ways.

9. Remarkably, TREB even claimed that the restrictions in its Website Rules may be pro-competitive because "[u]nrestrained VOWs may create excessive incentives for price competition among buyers' brokers ..." In fact, the Website Rules are demonstrably anti-competitive, and "too much" price competition among real estate brokers in the GTA is hardly a concern.

10. The Commissioner submits that TREB and its members substantially or completely control the market for the supply of residential real estate brokerage services in the GTA. The TREB MLS Restrictions are a practice of anti-competitive acts that has had, is having or is likely to have the effect of substantially preventing or lessening competition in that market.

- 4 - Accordingly, the Tribunal should make an Order under section 79 of the Act and grant the relief requested by the Commissioner.

PART II: DETAILED REPLY PLEADINGS General 11. TREB selectively referred in paragraphs 6, 7, 22 and 23 of the Response to certain communications between the parties prior to the commencement of this proceeding. These communications were "without prejudice" settlement discussions (whether reflected accurately or not in the Response) that are privileged and, in any event, are irrelevant to the disposition of this application. Paragraphs 6, 7, 22 and 23 of the Response should be struck, or disregarded.

12. TREB's summary of its enforcement record of the TREB MLS Restrictions in paragraph 24 of the Response is neither accurate nor complete. In addition, as noted in paragraph 52 of the Amended Application, the narrow Ontario court decision in question was rendered without deciding the issues raised under the Act. As TREB itself agreed, "the issue of whether TREB's rules and policies regarding its members' use of the MLS Database conformed to, or infringed, Canadian competition law was not before [the court] to decide" in that proceeding.

Product Market 13. TREB's Response avoids taking a position on product market definition. The Commissioner maintains the position taken in the Amended Application, particularly at paragraphs 41-42.

TREB Substantially or Completely Controls a Class or Species of Business 14. Although TREB repeatedly alleges in its Response that it has no market power because it does not compete in the market, it fails to respond directly to the Commissioner's position that TREB and its members have: (i) the ability to enact, interpret, and enforce rules, policies and agreements, such as the Website Rules, that govern the use of and access to the TREB MLS system; and (ii) the power to exclude from the TREB MLS system any brokers and brokerages that do not abide by those rules, policies and agreements. As brokers cannot realistically compete

- 5 - without access to the TREB MLS system, TREB and its members substantially or completely control the supply of residential real estate brokerage services in the GTA.

15. Contrary to its Response at paragraphs 2 and 41 and its Concise Statement of Economic Theory at paragraphs 19-20, TREB has a compelling incentive to exert its control for the benefit of TREB and its members. TREB's practices protect the interests of the majority of its traditional, dues-paying members from the competitive threat of innovative brokers who want to use VOWs to enter or expand in the market and offer more attractive services to consumers. As a trade association, TREB has used and is using its rule-making ability and power of exclusion to maintain the status quo, stifle innovation and significantly harm competition. Those members of TREB who provide services using a traditional model benefit from TREB's anti-competitive conduct. Those members, or potential members, of TREB who wish to innovate and deliver key MLS information to consumers through a VOW, are prohibited from doing so. As a consequence, consumers who could benefit from innovative services offered through VOWs are unable to take advantage of them.

16. For these same reasons (inter alia), TREB cannot rely, as it purports to do in paragraph 39 of the Response, on the draft Competition Bureau guidelines. TREB is hardly a mere supplier of an input used in the delivery of residential real estate brokerage services.

Practice of Anti-competitive Acts 17. The TREB MLS Restrictions are a practice of anti-competitive acts, the purpose and effect of which is to discipline and exclude innovative brokers who would otherwise compete with TREB’s traditional member brokers. TREB's restrictions constrain the ability of its member brokers to compete if they wish to expand their service offerings to provide innovative, Internet-based services to their customers, such as through a VOW. Furthermore, the TREB MLS Restrictions exclude potential competitors, who are not yet in the market, from joining TREB and launching innovative real estate business models.

"Sold" and other Historical Data 18. Through the Website Rules, TREB continues to protect the traditional model of delivering residential real estate brokerage services to consumers, by restricting the nature and

- 6 - extent of MLS data that is available on a VOW. TREB's Website Rules prohibit brokers from displaying highly valuable information on their websites about properties that have already sold, or been agreed to be sold but are not yet closed. TREB thereby imposes unnecessary and costly service requirements on innovative brokers (rather than allowing them to automate) and requires consumers to contact brokers at an earlier point in time in their search for a home (or when selling their home) than they may wish to do, to obtain the information they need. In simple terms, TREB's Website Rules protect the incumbents’ business model and hinder the development of new and more efficient models.

19. TREB's Response attempts to deflect attention away from its restriction on MLS data and onto brokers' use of advertising websites such as realtor.ca. While brokers may arrange to display their own, current listings on public websites and on one another's websites through Internet data exchanges, this is a far cry from allowing brokers to deliver real estate brokerage services in an innovative way, such as by operating a VOW that contains a complete inventory of current listings, sold data and other highly pertinent residential property information that is readily available from the TREB MLS system.

Discrimination 20. TREB's Response fails to address the Commissioner's fundamental concern that the Website Rules are discriminatory. They deny members' ability to provide certain MLS data through a VOW, yet TREB imposes no corresponding restrictions on brokers who provide the very same MLS information to consumers by means other than an Internet website. The Response did not even attempt to defend or explain TREB's conduct.

21. Further, TREB did not provide any specific response to paragraph 51 of the Amended Application, which states that TREB has made no attempt to enact or enforce rules to restrict traditional brokerages (as distinct from innovative brokerages) from providing, at their sole discretion, all information relating to historical solds, pending solds and other information that TREB insists upon excluding from the data feed provided to member brokers who want to operate VOWs.

- 7 - Exclusionary or Disciplinary Effect 22. Contrary to the allegations at paragraph 48 of the Response, the TREB MLS Restrictions have a negative effect that is exclusionary and disciplinary. The TREB MLS Restrictions exclude both potential competitors who are not yet in the market and those innovative member brokers who are already eager to compete using a VOW.

23. In addition, the TREB MLS Restrictions do not allow brokers currently operating a traditional brokerage to implement a hybrid business model that would provide consumers with a choice of obtaining services, including TREB MLS information, from the broker personally, or through the broker's VOW, or by some combination of the two.

Copyright Issues Raised in TREB's Response 24. The copyright issues raised by TREB are not relevant to this application because subsection 79(5) of the Act does not apply to TREB's conduct.

25. Paragraphs 1 and 45 of TREB's Response inaccurately summarize subsection 79(5) of the Act by omitting an essential element. Subsection 79(5) does not state that "the exercise of those rights is not an anti-competitive act" as TREB alleged in paragraph 1, nor does subsection 79(5) exclude from the definition of anti-competitive act "the lawful exercise of intellectual property rights", as alleged in paragraph 45.

26. Rather, subsection 79(5) provides that an act engaged in pursuant "only" to the exercise of any right or enjoyment of any interest derived under the Copyright Act is not an anti-competitive act. Only an act that is the mere exercise of a right, and nothing else, may fall within the statutory exception under subsection 79(5) of the Act.

27. TREB selectively licenses its intellectual property in the TREB MLS system solely to member brokers who comply with the TREB MLS Restrictions. As discussed in paragraph 48 of the Amended Application, brokers cannot realistically compete in the relevant market unless they have access to the TREB MLS system. By using its ownership of the TREB MLS system to create and enforce anti-competitive access terms, and by licensing access to the TREB MLS system, TREB limits the manner in which brokers compete in the market for residential real

- 8 - estate brokerage services. Doing so goes well beyond a mere exercise of TREB's rights (if any) under the Copyright Act. Subsection 79(5) of the Act simply does not apply.

28. Indeed, even TREB's own argument at paragraph 4 of the Response conceded that "rules imposed by TREB over its members' access to and use of the TREB MLS" protect other interests beyond just the "intellectual property rights of TREB and its members".

29. In addition, the limited access to and use of the TREB MLS system achieved through the TREB MLS Restrictions confer on TREB and some of its members numerous competitive advantages other than those derived from the Copyright Act. TREB's Concise Statement of Economic Theory, attached to the Response, itself concedes such benefits. TREB has chosen to protect the interests of its traditional brokers by using its intellectual property rights to shield them from competition from innovative business models such as VOWs. Such conduct is far outside subsection 79(5) and is anti-competitive within the meaning of sections 78 and 79(1) of the Act.

30. TREB's attempt to exculpate itself under the Competition Bureau's Intellectual Property Enforcement Guidelines, published in 2000, has no merit. TREB's Response quotes two paragraphs from those guidelines to support its position, yet fails to refer to the paragraphs immediately before and after its quotation – paragraphs that support the Commissioner's position in this application. For the reasons set out above, particularly in paragraph 27, the omitted paragraphs do not support TREB's position.

Privacy Issues Raised by TREB 31. TREB seeks to distract from the clear merits of the Commissioner's objection to TREB's discriminatory treatment of its members by raising the false spectre of "privacy concerns" and casting itself as the protector of consumers. The information at issue is data such as the selling price of a residential property, the number of days it was for sale on the market and price changes during that time, all of which is currently and freely distributed by traditional brokers to consumers on a regular basis by means other than a VOW. TREB cannot realistically characterize itself as the protector of consumers' privacy, given that it does nothing to stop its members from sharing all of that information with consumers – provided that they do so in a

- 9 - traditional manner that reinforces the "bricks and mortar" model of doing business that is so profitable to those members at the expense of other brokers and consumers.

32. The Commissioner pleads that TREB must enact, apply and enforce rules, policies and agreements that are the same for all brokers. To do otherwise, as the TREB MLS Restrictions provide, is discriminatory and substantially prevents or lessens competition in the relevant market.

The TREB MLS Restrictions Lessen or Prevent Competition Substantially 33. Contrary to paragraphs 49 to 60 of the Response, the TREB MLS Restrictions have lessened and prevented, and will continue to lessen and prevent, competition substantially in the market for the supply of residential real estate brokerage services in the GTA. But for the TREB MLS Restrictions, consumers would benefit from substantially greater competition in the relevant market.

34. TREB’s control of the relevant market through the TREB MLS Restrictions gives it the power to exclude and discipline innovative brokerage models, thereby protecting and perpetuating the static traditional brokerage model for the delivery of residential real estate brokerage services. The TREB MLS Restrictions also prevent existing brokerages from offering innovative hybrid or mixed-model services to consumers, as described above. TREB’s restrictions on innovative, Internet-based business models, such as VOWs, have negatively affected the range of services being offered over the Internet by brokers to their customers and have denied consumers the benefits of the downward pressure on commission rates that would otherwise exist.

35. With respect to prices and price competition, TREB claims: (a) that there is "clear evidence of price competition" amongst brokers in the GTA (in paragraph 55 of the Response);

(b) that TREB's rules "do not prescribe the commission structures that must be adopted by its members" (also in paragraph 55 of the Response); and

(c) that "[u]nrestrained VOWs may create excessive incentives for price competition among buyers' brokers ..." (CSET, paragraph 24).

- 10 - TREB must strictly prove these allegations using current and historical sales and commission data of its members using the TREB MLS system.

TREB's Concise Statement of Economic Theory ("CSET") 36. The Commissioner will respond fully to TREB's economic theories at the hearing of this matter. At this time, the Commissioner will limit her reply to the following.

37. In the CSET, TREB appears to characterize itself as a neutral platform operator whose incentives are merely "to operate the TREB MLS to maximize the extent of trade in the GTA", maintain liquidity and facilitate transactions in the market (CSET, paragraphs 4, 7, 10 and 20). In reality, TREB is by no means a neutral or disinterested entity. Its mandate is to advance the interests of its member brokers. TREB's Board is made up almost exclusively of brokers who actively participate in the market for the supply of residential real estate brokerage services, and whose brokerage firms do so. Most, if not all, carry on business using a traditional model and charge their clients based on commission rates that are a percentage of the purchase price of the property. As noted above, TREB has powerful incentives to exercise control over brokers' conduct in that market and to promote and perpetuate a model that has compensated traditional brokers well, while stifling innovation and vigorous competition.

38. TREB raises "two-sided markets" in an attempt to obfuscate legitimate issues raised by the Commissioner. The Commissioner rejects TREB's argument that the remedies requested in this application will have any material impact on the TREB MLS system as a platform. Any impact on TREB's broker members will be the result of positive competitive forces in the marketplace, which can only be good for the market and consumers.

39. Contrary to paragraph 24 of the CSET, TREB's Website Rules are not pro-competitive. The Commissioner pleads as follows:

(a) VOWs Depleting the Value of the TREB MLS System: This argument is not relevant to the present proceedings. In any event, TREB's resistance to VOWs and its imposition of restrictive Website Rules cannot be supported by a concern for accuracy on the TREB MLS system. Rules and policies related to accuracy should apply equally to all brokers' activities regardless of their business models.

- 11 - (b) Excessive Incentive for Price Competition Amongst Buyers' Brokers: the Commissioner puts TREB to strict proof of these allegations and states that price competition is to be encouraged. In addition, for economic analysis purposes, much of the non-price competition that occurs in the real estate industry, which takes the form of brokers prospecting for new listings, is economically wasteful and inefficient activity that is reduced or eliminated by VOWs.

(c) VOWs Obtaining Market Power: TREB alleges in paragraph 24 of its CSET that "[b]ecause of network effects, a VOW might become the public face of the MLS, creating market power for the VOW". It is incongruous for TREB to argue, on one hand, that it has no market power despite its ownership of the TREB MLS system and its rule-making ability and, on the other hand, that if a VOW becomes the public face of TREB's MLS, it would have market power.

(d) Harm to Liquidity: while TREB appears to equate the liquidity of the residential real estate market in the GTA with the number of brokers who participate in the TREB MLS system, in fact liquidity is a function of the number of listings on the TREB MLS system. If increased competition from VOWs reduces the number of brokers participating in the market (traditional or otherwise), liquidity should not be affected as it should not affect home sellers from listing properties on the TREB MLS system. VOWs containing complete MLS data may make it more attractive to list on the TREB MLS system, compared with other less effective means to buy or sell a property.

(e) Free Riding: there is no free riding issue, as VOWs will not disadvantage listing agents. Rather, VOWs give greater exposure to homes for sale, which benefits brokers. VOWs do not cause consumers to withdraw from the TREB MLS system.

(f) Brokers Withdrawing from the TREB MLS system: given the critical importance of the TREB MLS system to the provision of residential real estate brokerage services in the GTA, and the benefits received by brokers from it, it is highly unlikely that brokers will withdraw from the TREB MLS because of VOWs. Even if some weaker competitors were to exit the market, it would not affect competition or liquidity generally.

(g) Increased Costs due to Referral Fees: even if referral fees were to emerge and be material, competition among referral VOWs would keep fees low. In addition, brokers may decide for themselves whether or not to work with referral VOWs.