Money for nothing, listings for free: constitutional implications of subjecting "for-sale-by-owner" websites to real estate broker licensing statutes.

• Author: Prizio, Martha L.

"The modern state owes and attempts to perform a duty to protect the public from those who seek ... to obtain its money. When one does so through the practice of a calling, the state may have an interest in shielding the public against the untrustworthy, the incompetent, or the irresponsible, or against unauthorized representation of agency. A usual method of performing this function is through a licensing system. But it cannot be the duty, because it is not the right, of the state to protect the public against false doctrine.... In this field every person must be his own watchman for truth, because the forefathers did not trust any government to separate the true from the false for us." (1)

1. INTRODUCTION

   Real estate agents are the principal facilitators in modern real estate transactions. (2) As prospective buyers and sellers become more technologically savvy and desirous of information, however, they increasingly turn to Internet-based services to search for or market available properties. (3) "For-Sale-By-Owner" (FSBO) websites allow sellers to advertise or "list" properties in online databases that permit buyers to register to obtain property information. (4) FSBO websites offer low, flat-fee rates, in contrast to the percentage commissions typically sought by real estate agents. (5)

   Though reduced closing costs are enticing to consumers, licensed agents take exception to the breadth of services offered by these websites. (6) REALTOR[R] groups insist that the stringent legal and ethical standards to which licensed real estate brokers must adhere are routinely violated by FSBO websites. (7) They contend that the personalized services and advice certain websites provide belie their purported indifference to the transactional outcome, and thus should comply with the statutory licensing requirements. (8) In response, some websites protest that licensing statute definitions are overinclusive and the corresponding restrictions impermissibly interfere with their ability to communicate. (9)

   The Institute for Justice (Institute), a self-described "libertarian public interest" law firm, seeks to excuse FSBO websites from statutory licensing requirements, claiming that such regulations are unconstitutional. (10) In ForSaleByOwner.com v. Zinnemann, (11) the Institute argued that California's licensing scheme affecting ForSaleByOwner.com (FSBO.com), a popular "Internet advertising service," unconstitutionally impinged on the website's First Amendment right to free speech and operated as a prior restraint on free speech. (12) Ultimately, the Institute prevailed on the argument that the statute denied the website equal protection under the law. (13) The district court held that the statute's exemption for newspapers created an arbitrary distinction resulting in unequal treatment. (14)

   The Institute, in its determination to invalidate licensing regulations affecting FSBO websites, next targeted New Hampshire's state licensing law. (15) In Skynet Corp. v. Slattery, (16) the Institute maintained that the New Hampshire Real Estate Practice Act (REPA) required its client to obtain licensure within the state in order to list New Hampshire properties on its website, ZeroBrokerFees.com (ZBF.com). (17) The Institute challenged the statute's constitutionality, alleging REPA provisions violated its client's First Amendment rights. (18) The district court, however, determined that the website fell within the statute's exemption, thus circumventing analysis of the constitutional challenge. (19) Despite the Institute's fervent litigation of the issue, the applicability of the licensing statutes to FSBO websites and the constitutional validity of these statutes remain unresolved in most jurisdictions. (20)

   Many contend that real estate brokers are attempting to insulate themselves from competition. (21) Nevertheless, licensing restrictions have long been a part of states' efforts to maintain professional standards and hold parties liable for misconduct. (22) In determining the constitutionality of these statutes, courts must evaluate the purposes of the regulations and the statute's ability to effectuate these goals. (23) Because little case law exists on the subject, courts must consider analogous professional licensing schemes and publications through other mediums. (24)

   Part II.A of this Note introduces representative licensing statutes with accompanying definitions that may encompass FSBO website activities. (25) Part II.B explores existing case law, focusing on professional licensing requirements that allegedly violate First Amendment rights to free speech. (26) An explanation of courts' often conflicting analyses of full and commercial speech protections precedes a review of the more uniform judicial stance on unconstitutional prior restraints. (27) Part II.D continues with a discussion of equal protection principles, specifically the application of rational basis review where neither a suspect class nor a fundamental right is implicated. (28) Part II.E concludes with a description of services offered by two prominent FSBO websites: ISoldMyHouse.com and ZeroBrokerFees.com. (29)

   Part III analyzes statutory application and constitutionality using ISoldMyHouse.com and ZeroBrokerFees.com as representative examples of FSBO websites. (30) Part III then distinguishes each website based on its range of services. (31) Part III argues that FSBO websites should submit to state law and acquire real estate broker's licenses when they expand their services beyond advertising. (32) Finally, Part III asserts that while professional licensing may prove burdensome for some, the regulations are justifiable because they promote quality of service, discourage misconduct, and ensure accountability through the creation of a fiduciary duty. (33)

2. HISTORY

   1. Real Estate Broker Licensing Statutes: Construction and Application

      Each state is responsible for instituting its own licensing laws. (34) Consequently, licensing statutes vary from state to state in their applicability to specified professions, as well as in their scope and breadth of regulation. (35) One effect of state discretion is divergent standards for real estate licensure and inconsistent consequences for violating these standards. (36)

      Most real estate licensing statutes provide that performing brokerage services, for a person other than oneself, will be considered an activity subject to regulation. (37) States differ, however, in their definitions of real estate brokers, classifications of activities attributable to those definitions, and exemptions from regulation. (38) Some states' real estate licensing statutes have recently become the basis of legal disputes. (39) The district court in ForSaleByOwner.com v. Zinnemann ruled that the FSBO website's activities fell under California's real estate licensing statute. (40) The statute in question required a broker's license for any individual seeking a fee for services rendered in connection with the purchase, sale, listing, or advertisement of property. (41) Despite the impersonal and generalized nature of the services provided by ForSaleByOwner.com, the court held that the broad statutory language encompassed the website's activities. (42)

      The New Hampshire brokerage definition under REPA is similarly broad and the accompanying licensing requirements are stringent. (43) In Skynet Corp. v. Slattery, Skynet insisted that REPA's definition of "broker" encompassed its business activity. (44) Skynet complained that REPA's provisions hindered its operations in New Hampshire due to its fear of prosecution for acting as a real estate broker without a license. (45) Skynet's principal activity is advertising property for a fixed fee on its website, ForSaleByOwner.com. (46) In addition, FSBO.com provides mortgage calculators, forms, and links to related service providers, such as lenders, attorneys, appraisers, and others. (47)

      The district court performed a thorough statutory construction analysis and determined that the broker definition has two critical components: an individual must (1) act for another (2) for compensation. (48) The court surmised that Skynet, while satisfying REPA's literal definition, does not "act for another" within the meaning of the statute. (49) The court reasoned that Skynet merely "facilitat[es] the transmission of information" and "does not conduct its business as any sort of agency arrangement with its clientele." (50)

      Despite its conclusion as to Skynet's activities, the court ultimately based its holding on the second critical component of the brokerage definition: compensation. (51) The court acknowledged that Skynet's collection of a fixed fee fell within the statutory definition of "advance fees." (52) It held, however, that Skynet's compensation also fell within the advance fee definition exemption for "fees paid solely for advertisement in a newspaper or other publication of general circulation." (53) The court read the exemption to include "mediums that transmit information like a newspaper," and determined that the Internet was such a medium. (54)

      The New Hampshire Association of REALTORS[R] (NHAR) is seeking to enforce REPA's licensing requirements against another unlicensed FSBO website, ISoldMyHouse.com (ISMH.com). (55) NHAR's complaint to the New Hampshire Real Estate Commission details the website's activities that it argues subject ISMH.com to the state's licensing laws, including the listing of properties on its online database. (56) In contrast with the websites in Zinnemann and Skynet, however, NHAR maintains that ISMH.com's activities go well beyond impersonal service; namely, that ISMH.com participates in real estate transactions by advising parties, directing buyers to affiliated mortgage brokers for financing, and screening prospective purchasers. (57) NHAR further argues that ISMH.com interferes with existing brokerage relationships by preventing communication between sellers and...