C21, REMAX Legal Wranglings Come to Neutral End

Much time, millions of dollars, and incalculable legal, executive, and administrative effort can finally be considered "water under the bridge" as two of the nation's largest franchise organizations--Century 21 and RE/MAX International--have settled a series of legal actions and counteractions that began six years ago.

The battle began with a dispute over which organization had the right to call itself "the nation's largest." The often bitterly disputed legal confrontation was instigated by Century 21 when it was owned by Metropolitan Life Insurance Co. RE/MAX quickly countersued. The litigation was extensive by the time Cendant bought Century 21 in 1995. Since that time, Cendant executives have consistently described the disputes as “something that we had nothing to do with and that have been assigned to our legal department for resolution."

Observers who've followed the encounter from its beginnings note that its intensity seemed to be accentuated by the intense adversarial business relationship between RE/MAX founder and chairman Dave Liniger and Century 21's president before the Cendant takeover, Richard J. Loughlin.Now that it has blown over, the settlement calls for neither party to admit liability and, according to both companies, will allow each to focus its energies on real estate business.

Attendant to its settlement with RE/MAX, Century 21 has also ended a legal action against W. Patrick Murphy, a former Century 21 employeenow working for RE/MAX. Pre-Cendant Century 21 officers charged Murphy with misappropriation of trade secrets when he affiliated with RE/MAX. Murphy countered with a defamation suit. In August 1997, Century 21’s claims were dismissed, and Murphy was awarded damages of $550,000. Both parties filed appeals. But the settlement closes all the pending litigation on mutually agreeable terms without admission of guilt or liability by either party.

RE/MAX is involved in another legal wrangling that may have significant industry ramifications. Recently, the 6th U.S. Circuit Court of Appeals overturned the May 1995 decision of a district court that had ruled against the franchisor. In the case, RE/MAX alleged that northeastern Ohio megabrokerages Realty One and Smythe Cramer were engaged in monopolistic and conspiratorial tactics by adversing--reducing from prevailing standards--commission splits in transactions involving certain salespeople and brokerage companies. The appellate court concluded that the trial judge had erred in disregarding key evidence of conspiracy and in ruling that RE/MAX had no case. That jury also questioned whether the ability of Realty One and Smythe Cramer to sustain adverse splits for more than 10 years was a result of monopoly power. On the basis of the decision, the case was remanded to the district court for retrial.

Should a decision ultimately favor RE/MAX, it could challenge the position that, absent contrary instructions from a client, a listing company has the right to determine the share of commission paid to a cooperating licensee. Adversing of commission splits typically is used when a company has lost or wishes to prevent losing salespeople to another company. In the Ohio case, Realty One reduced the prevailing 50 percent co-op commission split to 30 percent for cooperative transactions with RE/MAX. Smythe Cramer cut the split to 25 percent.

An analysis of Cendant Corp.’s 1998 annual report reveals that, despite the accounting fraud that caused the company to suffer a massive loss in market capitalization (from a high of $42.5 per share to a low of $6.5), the former chairman of CUC International (the Cendant merger partner responsible for the irregularities) was paid more than $50 million in termination benefits following his resignation as chairman and a member of its board of directors. Walter A. Forbes received $38.4 million in cash payments and 1.3 million shares of Cendant stock options, with a value of $12.5 million. The options were immediately vested and expire in June 2008. Forbes' employment contract stipulated a severance package unless termination related to a provable offense.

The annual report also offers Cendant Chairman, President, and CEO Henry R. Silverman's response to the question, Who's to blame for what happened? Says Silverman: “Among others, certain managers at the former CUC. Of course, it's inappropriate for me to say who I think they are. I believe the people responsible for the criminal acts committed at the former CUC International will eventually be identified through active investigations currently under way by various federal agencies.”

If a recent survey conducted for the Ohio Association of REALTORS® is any indication, the state may need to implement an internal industry public relations program. As reported by Opinion Strategies Inc., only 48 percent of Ohio brokers and 65 percent of salespeople evaluate their fellow licensees as “competent” or “very competent.” In the same survey, 85 percent of consumers who've used real estate salespeople find them competent or very competent. Both studies were completed after the initial phase of an extensive public perception advertising campaign conducted last summer by NAR and the Ohio Association.

Although RELO identifies itself as “the nation’s largest network of independent real estate firms,” three of its recently named directors are affiliated with brokerage companies owned by other corporations. Herb Freeman (CBS Real Estate Co., Omaha) and Ron Peltier (Edina Realty Inc., Edina, Minn.) are executives of companies owned by MidAmerican Energy Holdings, the energy-centered conglomerate headquartered in Des Moines, Iowa. RELO Director and Secretary Joseph Aveni, a former owner of Realty One, Cleveland, sold his company to Insignia Inc. in 1997. In addition, RELO Chairman Dick DeWolfe is CEO of DeWolfe New England Realty, a subsidiary of DeWolfe Cos., an actively traded, publicly owned company. Although it's independent, the company still answers to shareholders.

The April 2 issue of the Real Estate Cyberspace Society’s audiotaped newsletter gave its listeners an opportunity to compare the outlooks of top executives of the two major Internet real estate consumer sites. Program host, John M. “Jack” Peckham III, president of the society, asked Stuart Wolff, chairman and CEO of RealSelect, which operates REALTOR.COM, and Brian Mistele, CEO of Microsoft's HomeAdvisor, how their sites differ from those of the competition.

Wolff responded: “REALTOR.COM has more listings than any other Web site--the only complete database of homes for sale in the United States. Through unique relationships with major portals, REALTOR.COM is the major real estate partner for five of the top six or seven search engines. In joining REALTOR.COM for your listings, you get exposure on the popular REALTOR.COM site plus a network of portals--America Online, Excite, Netscape, InfoSeek and Lycos--to give 100 percent reach to all home shoppers.”

Mistele made his case: “HomeAdvisor is built with the consumer in mind; therefore, it includes neighborhood information, online calculators, and information about the real estate process. HomeAdvisor doesn't charge real estate practitioners for putting their name on their listings. HomeAdvisor also allows the consumer to shop for mortgage loans online.”

Editor's Note: Listings on REALTOR.COM are free. Salespeople who want to add their name, phone numbers, and E-mail address, link their listings to their personal home page, showcase listings by adding two additional photos, pay an annual fee.

Thanks in part to a partnership with Intuit's QuickenMortgage Web site, REALTOR.COM, the Internet's largest property listing site, features a complete consumer Finance Center. (At the REALTOR.COM home page, click on Resource Center and then Finance Center.) The center features mortgage calculators, financial checklists and work sheets, guidelines for assessing a borrower's financial position, an explanation of the loan application process, and information about applying for, closing on, and refinancing a home mortgage.

One tried-and-true way of establishing or improving profitability in a residential real estate company is to sell more homes at higher prices while controlling costs. That formula was exercised adroitly by franchisees in the various Cendant Corp. brands during the first quarter of 1999. As a result, according to its recently released quarterly financial report, Cendant revenue from franchise royalty fees increased $12.3 million (15 percent) compared with the same period last year. Those royalty revenues rose largely as a result of a 14 percent increase in the number of homes sold and an 8 percent increase in the average price of those homes. Before interest, taxes, depreciation, and amortization, earnings from the real estate franchise unit increased $12.2 million (21 percent) to $71.4 million.