DOJ Enforcement Update: Higher Education

by McDermott Will & Emery
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According to press reports, the Antitrust Division of the US Department of Justice (DOJ) is investigating several issues related to admission of students to institutions of higher learning.

  • In January, reports emerged that DOJ was investigating whether the National Association of College Admission Counseling’s (NACAC’s) ethical guidelines violate the antitrust laws. The DOJ appeared to be concerned about an agreement not to recruit students who have enrolled, registered, declared their intent or submitted deposits to other institutions. This could affect so-called early decision programs, under which students pledge to attend a particular school in return for early consideration of their applications. Although early decision programs have existed for many years, the DOJ could be concerned about schools putting “teeth” into such programs by agreeing with each other not to recruit or accept students who pledge to enroll at other schools.
  • In early April, the Wall Street Journal reported that the DOJ had sent letters to a number of colleges and universities asking that they preserve emails and other messages detailing agreements with other schools regarding their communications with one another about admitted students and how they might use that information. The request suggests that the DOJ could be concerned that schools are unlawfully coordinating with one another regarding admission of students, limiting competition among themselves for the highest-performing students.

The DOJ’s nascent activity follows in the footsteps of other antitrust cases in higher education that have alleged horizontal trade restraints. These cases have involved financial aid, faculty hiring and coordinated application processes. The nub of DOJ’s interest is that the Sherman Act requires higher education institutions to compete for students and faculty in much the same way as ordinary businesses must compete for their customers and workers. Courts have acknowledged that some aspects of higher education differ from ordinary commerce and are subject to less rigorous rules than other types of trade restraints. However, as to the core matters of competing for students and faculty, colleges and universities should strictly avoid agreements that limit rivalry among them.  

The Sherman Act Applies to Institutions of Higher Learning

Section 1 of the Sherman Act forbids agreements in unreasonable restraint of trade. This law covers obvious agreements among commercial competitors such as bid-rigging, price-fixing, and horizontal allocation of territories or markets. Perhaps less obviously, provision of higher learning is a service that the government has treated much as it does other goods and services for antitrust purposes. The Sherman Act has no blanket exemption for restraints of trade by non-profit actors. Nor do state-run universities necessarily benefit from an exemption. The Sherman Act does have a form of judicially-created state action immunity, but its scope is narrow,[i] and it would not likely allow coordination on recruitment of students.

The Sherman Act also covers the activities of associations. Non-profit associations have regularly been subject to antitrust enforcement when their rules seek to restrain competition among their members.[ii]  This includes rules that may be couched as ethical guidelines.[iii]  Associations bring together horizontal market actors who may have a shared interest in limiting competition. Thus, to stay out of DOJ’s crosshairs, institutions should be wary of agreements, understandings or joint guidance as to:

  • Levels of tuition, fees, housing or other costs of attendance
  • The amount or type of financial aid to be offered to students
  • The recruitment of students (g., agreements to limit “poaching” of students, or to limit the discounts and benefits offered to prospective students)
  • The quality of student amenities (g., agreements to limit certain amenities)
  • The hiring, recruitment, and compensation of faculty (g., no-poach agreements)

These types of agreements impair the critical role that the DOJ sees for market competition in serving students. Avoiding such agreements will potentially keep institutions out of hot water with DOJ.

The Per Se Rule and Educational Justifications

The Sherman Act normally treats agreements to restrict price competition or to allocate customers as illegal per se under the Sherman Act, meaning that the courts condemn such agreements without any inquiry into their possible justifications. As to higher education, the Third Circuit muddied the waters a bit in United States v. Brown Univ., allowing some room for schools to justify limited coordination by balancing its harms against the benefits to the educational experience. However, the practical takeaway of Brown remains that it is better to avoid competition-limiting arrangements among schools for the core activities of competition for students and faculty.

The Brown case began when DOJ sued all of the Ivy League schools and MIT for allegedly agreeing to restrict the amount and types of financial aid they would offer to undergraduate students.[iv]  According to DOJ, these agreements were per se illegal because they “had the effect of depriving students receiving financial aid and their families of the benefits of free and open price competition.” The defendant universities other than MIT settled under a consent decree that banned agreements limiting financial aid, among other relief.

MIT initially declined to settle the case, went to trial and lost. On appeal, the Third Circuit reversed and remanded, holding that the trial court should have more fully examined MIT’s pro-consumer justifications for the joint conduct.[v] MIT had claimed, among other things, that the financial aid agreements among schools increased socio-economic diversity at member institutions and that they preserved financial aid resources for the neediest students.[vi] MIT eventually settled the case on terms that allowed it to meet with other schools to discuss common methods to determine need, to exchange financial data through a third party on families to ensure the consistency of the data, and to award financial aid solely on the basis of need.[vii] The settlement barred MIT from discussing individual student awards, prospective tuition or faculty salaries.[viii]

Although the Third Circuit’s Brown opinion gives some solace to institutions in providing room for them to justify collaborations, it ultimately upholds the principle that the Sherman Act does apply in the educational context, and that institutions must use the least restrictive means to advance their stated pro-consumer objectives.[ix]

Antitrust Challenge to The Common Application, Inc.

In a pending private case, an antitrust plaintiff has challenged the activities of The Common Application, Inc., a non-profit association of 700 colleges and universities that operates a single college application platform. The plaintiff, Collegenet, Inc., is a rival application service provider who claims that the Common Application has used tying, bundling, exclusive dealing, and other means to expand its share of the application processing market at Collegenet’s expense. According to the complaint, the Common Application has gone beyond its original mandate of simplifying data collection for students and colleges and caused a loss in net quality of application services, limiting members’ ability to brand and market themselves within their applications. Although the district court initially dismissed the complaint on antitrust standing grounds, the Ninth Circuit reversed and held that plaintiff, Collegenet, properly stated a claim when it alleged that the Common Application “limited college choice, decreased the scope of services and price competition available to student applicants, and foreclosed rivals from entry to the market.” The Common Application has sought certioriari.

The Collegenet decision shows that courts may take a broad view of what constitutes harm to competition when evaluating the legality of collaborations among colleges and universities. If the case survives to trial, the court will likely weigh the harms to competition against any putative benefits of the tying and bundling activities, such as increased ease for students in applying to multiple institutions. The court will also consider whether these benefits could have been achieved through less restrictive means that would have allowed schools to differentiate themselves in the application process.

DOJ and FTC Raise the Heat on “No Poach” Cases

Institutions of higher education have also faced antitrust claims of so-called “no poach” or no-hire agreements with respect to faculty.[x] In Seaman v. Duke Univ., the court certified a class of medical faculty who alleged that Duke and the University of North Carolina had agreed not to hire each other’s personnel. The plaintiffs have settled the case against UNC, but the litigation continues against Duke. The antitrust enforcement agencies have upped the ante still further when it comes to no-poach agreements. In October 2016, the DOJ and the Federal Trade Commission jointly issued their Antitrust Guidance for Human Resource Professionals, which announced that naked horizontal no-hire, no-solicit, or wage-fixing agreements will now be treated as potential criminal violations.[xi] The DOJ had previously filed civil enforcement actions against companies who agreed not to cold-call or hire each other’s employees.[xii] The DOJ’s current leadership has reiterated that it is investigating new cases and will pursue such matters criminally if they persist after the date the HR Guidance was issued. The DOJ also will accept applications under its criminal Leniency Program for violators who are the first to come forward, report illegal agreements, and agree to cooperate against others.

To avoid antitrust problems in today’s climate of aggressive enforcement, law departments at colleges and universities should ensure that anyone with a role in faculty hiring, compensation, and retention is briefed on the need to avoid agreements with rival institutions.[xiii]  Staff should be told to report any solicitation by other institutions to form such agreements. Institutions with questions about the scope of these prohibitions should contact skilled antitrust counsel.

Conclusion

Their public-service mission notwithstanding, the DOJ expects institutions of higher learning to compete freely for students and faculty much as ordinary businesses compete for customers and employees. In today’s high-enforcement environment, college and university counsel should be alert to Sherman Act pitfalls and seek antitrust counsel if close calls arise.


[i]  North Carolina State Bd. Of Dental Examiners v. FTC, 135 S. Ct. 1101 (2015). A state actor’s behavior qualifies for immunity only if: (1) the challenged conduct (i.e., the restraint) is clearly articulated and affirmatively expressed as state policy, and (2) the policy is actively supervised by the state itself.

[ii]  See, e.g., FTC v. Indiana Fed’n of Dentists, 476 U.S. 447 (1986); National Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679 (1978); FTC v. Superior Court Trial Lawyers Assn., 493 U.S. 411 (1990).

[iii] See, e.g., National Soc’y of Prof’l Eng’rs v. United States, 435 U.S. at 696.

[iv]  See Competitive Impact Statement, E.D. Pa. Civ. 91-CV-3274 (May 22, 1991), available at https://www.justice.gov/atr/case-document/file/989886/download

[v]  See United States v. Brown Univ., 5 F.3d 658, 661 (3d Cir. 1993).

[vi] Id. at 674-5.

[vii]  Matthew Brelis, MIT, US Resolve Suit on Aid Data, Boston Globe, Dec. 23, 1993, at 21.

[viii]  Id.

[ix]  United States v. Brown Univ., 5 F.3d at 668.

[x]  See, e.g., Seaman v. Duke Univ., M.D.N.C. No. 1:15-cv-462.

[xi] Department of Justice Antitrust Division and Federal Trade Commission, Antitrust Guidance for Human Resource Professionals, available at https://www.justice.gov/atr/file/903511/download.

[xii]  See, e.g., Complaint, United States v. eBay, Inc., 12-CV-05869-EJD-PSG (N.D. Cal., Nov. 16, 2012), available at https://www.justice.gov/atr/case-document/file/494626/download; Complaint, United States v. Adobe Systems, Inc., et al., 1:10-cv-01629 (D.C. Dist. Sept. 24, 2010), available at https://www.justice.gov/atr/case-document/complaint-0

[xiii] The one exception to this principle is the National Resident Matching Program for medical residencies, which has been exempted from the antitrust laws by statute. See 15 U.S.C. § 37b

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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