Forest Hills Realty Inc. v. Austin Sheppard Realty Inc.

Can a real estate broker establish a claim for restraint of trade where another broker was the sole broker that a co-op board would permit to present apartment transfers? In Benjamin of Forest Hills Realty Inc. v. Austin Sheppard Realty Inc., the court was called upon to decide whether the practice of the co-op building which, in effect, allowed purchases of its shares only through one specific real estate broker, constituted a violation of General Business Law, Section 340, which was the New York equivalent of the federal Sherman Anti-Trust Act. Under the circumstances of this case, the court concluded that it did not.

The plaintiff, Benjamin of Forest Hills Realty Inc., and the defendant, Austin Sheppard Realty Inc., were licensed real estate brokers located in Forest Hills, Queens. The defendant, 108-46 70th Road Owners Inc., was a co-op corporation, which owned a building located at that address in Forest Hills. The defendant, Alan Shapiro, was a licensed real estate broker and the sole shareholder of Austin Sheppard. Shapiro also was a shareholder, a member of the board of directors, and an officer of the co-op.

In December 1998, Benjamin began the lawsuit asserting two causes of action: (1) tortious interference with a contract for real estate brokerage commissions, and (2) interference with the plaintiff’s free exercise of trade and marketing in violation of General Business Law, Section 340 (commonly referred to as the “Donnelly Act”). The complaint alleged that, on each occasion that Benjamin had obtained prospective purchasers of co-op shares, he was advised that the proposed purchaser would not be approved by the co-op board unless Shapiro/Austin Sheppard was the real estate broker for the transaction.

With respect to the Donnelly Act cause of action, the plaintiff alleged: “On or about December 10, 1997, defendants Shapiro, Austin Sheppard, and members of the co-op’s board of directors conspired to prevent submission of an application for approval of the sale of co-op shares...Said Defendants’ actions and failure to act lawfully interfered with Plaintiff’s free exercise of trade and marketing in the State of New York in violation of Section 340 of the General Business Law ...

“Said defendants have on numerous other occasions conspired to prevent the submission of a prospective purchaser of co-op shares for approval by the co-op board. As a result of the actions and inactions of said Defendants in restraint of Plaintiff’s trade and business, Plaintiff suffered damages.”

Next, the defendants moved for summary judgment arguing that Benjamin’s “conclusory allegations...are legally insufficient to make out a violation of General Business Law Section 340, and compel a dismissal of said cause of action.” However, the Supreme Court concluded that there was “sufficient evidence in the record to create an issue of fact concerning whether the defendants conspired to limit the sales of co-op units to those sales arranged by Austin Sheppard.”

The record before the appellate court demonstrated that sales of the co-op’s units were routinely approved when Austin Sheppard acted as the real estate broker.

Indeed, the application package, which prospective buyers were required to complete as part of their purchase, was obtained from Shapiro and printed under Austin Sheppard’s letterhead. Moreover, the applications were divided into “outside sales,” involving brokers other than Austin Sheppard, and “inside sales,” which were sales brokered only through Austin Sheppard. There was also evidence that suggested that the co-op board has never rejected an application submitted by Austin Sheppard, and that approval had never been forthcoming for an application, which was not submitted by Austin Sheppard. Nonetheless, the court said that while such evidence indicated that the defendants had an arrangement which, in effect, made Austin Sheppard the only real estate broker which could sell co-op shares in the subject building, this did not necessarily constitute a violation of the Donnelly Act.

General Business Law, Section 340, provides, in pertinent part, as follows: “Every contract, agreement, arrangement or combination whereby...competition or the free exercise of any activity in the conduct of any business, trade or commerce or in the furnishing of any service in this state is or may be restrained... is hereby declared to be against public policy, illegal and void.”

The Donnelly Act is generally construed in accordance with the federal law known as the Sherman Act. The Sherman Act and the Donnelly Act require identical basic elements of proof for claims of monopolization or attempt to monopolize, and, in fact, the Donnelly Act was modeled on the Sherman Act.

To state a claim under the Donnelly Act, a party must: (1) identify the relevant product market, (2) describe the nature and effects of the purported conspiracy, (3) allege how the economic impact of that conspiracy is to restrain trade in the market in question, and (4) show a conspiracy or reciprocal relationship between two or more entities. The court noted that merely claiming or even proving a form of monopoly does not demonstrate violation of the statute without concomitant establishment of the relevant market factors.

In a prior case cited by the court, the plaintiff was a cleaning and maintenance company that had provided services to the defendant building and various tenants therein. After the building’s new owner and managing agent terminated the plaintiff’s services for the building, and engaged in practices that made it prohibitive for individual tenants to retain the plaintiff for supplemental maintenance services, the plaintiff started an action and asserted a violation of the Donnelly Act. The plaintiff alleged that it could not perform work in the building on a competitive basis as a result of the defendants’ acts. In measuring the allegations against the defendants’ motion to dismiss under the Federal Rules of Civil Procedure, the court concluded that the plaintiff’s failure to allege a relevant geographic market was fatal to its claim, reasoning as follows:

“The first step in a court’s analysis must be a definition of the relevant markets...because without a definition of that market, there is no way to measure [a defendant’s] ability to lessen or destroy competition... For antitrust purposes, a relevant market consists of both a product market–those commodities or services that are reasonably interchangeable, and a geographic market – the area in which such reasonable interchangeability occurs. The plaintiff must explain why the market it alleges is in fact the relevant, economically significant product market. Plaintiff’s definition of the geographic market at issue–’the Building’– is patently under-inclusive. The building at 135 East 57th Street presumably is not the only building in New York City, much less the only building on that street, to benefit from cleaning services provided by Plaintiff or its competitors.. Furthermore, Plaintiff alleges no facts in support of its claim that the single building in question constitutes a relevant geographic market for antitrust purposes...Plaintiff’s failure to allege a geographic market and a product market is thus fatal to its Donnelly Act claim.”

The court cited several other cases that held that a single building could not constitute a relevant geographic market under the Donnelly Act.

In the case at bar, the plaintiff identified the relevant product market as “the selling and buying of shares in defendant 138-46 70th Road Owners Inc., and the representation of buyers and sellers by real estate brokers.” As the court had shown, a relevant product market must include all products that are reasonably interchangeable and all geographic areas in which such reasonable interchangeability occurs. Here, it said that the plaintiff acknowledged that its business encompassed a much wider geographic area than the one subject co-op building. Nevertheless, the alleged Donnelly Act violation arose out of the sale of co-op units in this one particular building. Therefore, inasmuch as the plaintiff’s real estate business did not solely concern units in the subject building, its identification of the relevant market as only this particular building was “patently under-inclusive” in the court’s view. Accordingly, the court concluded that the plaintiff could not establish impairment of competition in a relevant geographic market sufficient to support its claim of a Donnelly Act violation.

Nor had it been demonstrated how the alleged restrictions imposed by the co-op constituted an unreasonable restraint on trade, or impaired competition in the local real estate market as a whole, as opposed to simply having a claimed adverse effect upon the plaintiff alone. While the plaintiff may have been deprived of certain brokerage commissions as a result of the co-op’s practice, these losses are clearly not tantamount to injury to competition in the market as a whole and thus did not constitute a cognizable claim under the Donnelly Act. In any event, the court held that a company has a right “to select a person with whom it does business and to refuse to deal or continue to deal with anyone for reasons sufficient to itself.”

The court further noted that “antitrust laws are concerned only with acts that harm ‘competition, not competitors,” noting: “[B]ehavior which hurts or even destroys an individual competitor is not illegal under anti-trust laws unless it also adversely affects competition.” Accordingly, the court said that a restraint-of-trade Donnelly Act violation could only occur when the alleged “conspirators” were in competition with one another or with the plaintiff.

Here, there was no allegation of any conspiracy among Shapiro, Austin Sheppard, and its competitors. The alleged conspiracy involved Austin Sheppard and various officers of the co-op and/or its management agency, and none of the latter compete with the plaintiff. Since the plaintiff had not shown a conspiracy or reciprocal relationship between two or more entities, in the court’s view, there could be no Donnelly Act violation.

Thus, under the circumstances of this case, the appellate court reversed the lower court order granting those branches of the defendants’ motions that were for summary judgment dismissing the cause of action alleging a violation of General Business Law, Section 340, and dismissing that cause of action.