Smoke without fire? Inside the college price-fixing case

Congressional staffers in Washington are keeping a wary eye on the progress of a class action antitrust case that alleges that 17 of the United States’ most elite colleges and universities colluded in offering financial aid, starting for the bulk of these schools in 2003.

Whether Judge Matthew F Kennelly of the Seventh Circuit of the Northern District of Illinois (Chicago) decides to allow the case to proceed or accedes to the defendants’ motion to dismiss, the case will influence what the staffers advise their senators or representatives to do when the antitrust carve-out (an exemption that allows the colleges and universities to cooperate in such a way that otherwise would violate the Sherman Antitrust Act) expires on 30 September, a month after the financial aid cheques for the 2022-23 academic year start flowing.

This lawsuit, says Peter McDonough, vice-president and general counsel of the American Council on Education, an organisation of some 2,000 colleges and universities including the 17 named in the complaint, “is similar in some respects to the antitrust challenge against the ‘overlap group’ of schools by the Justice Department in the 1990s”.

“But since Congress specifically described what is permissible by enacting the Section 568 exemption, and schools have had several decades to figure out what is permissible and what is not, I would be surprised to learn that there’s fire where this smoke is being sent up by way of the new lawsuit. The schools named in the complaint are very antitrust aware and particularly sophisticated. And they have access to good legal advice,” he said.

The antitrust action, brought under the Sherman Antitrust Act, alleges that by colluding with each other as to the amount of financial need students have, universities would illegally restrict access by students requiring financial aid and that they would award these students less financial aid than they otherwise would have provided, effectively raising the cost of their higher education.

In an e-mail, Karie Stern of Brazer Communications, which handles media relations for the four law firms representing the students (568cartel.com) told University World News that the brief filed says that each of the financial aid students at “nine of the elite, private universities named in a federal lawsuit alleging conspiracy to limit financial aid awards could have their tuition, room, board and fees fully covered”.

Absent the alleged collusion, she continued, “the net price for each student currently on financial aid at the eight other universities named in the complaint could fall by an average of almost US$12,000 annually”.

Origins of the Sherman Antitrust Act

Dating back to 1890, the Sherman Antitrust Act bans anticompetitive agreements and monopolistic practices. It was famously used in 1911 to break up John D Rockefeller’s (horizontally integrated) Standard Oil of New Jersey. (ExxonMobil is a successor company.)

There are exemptions to the Sherman Antitrust Act, the best known being Major League Baseball. The exemption to the act implicated in the financial aid suit is contained in Section 568 of the Higher Education Act, which former president Bill Clinton signed into law in 1994. This exemption allows institutions of higher learning to collaborate in adopting principles of determining financial need if certain conditions are satisfied.

The ‘carve-out’ pertained to 21 colleges and universities known as the 568 Presidents Group. The plaintiffs in the financial aid suit claim that because of their actions, 17 colleges and universities fall outside the scope of the exemption.

While this carve-out was passed 125 years after the Sherman Antitrust Act became law, it would appear to accord with the intentions of its author. As McDonough notes, in the congressional debate on the bill, former senator John Sherman (Ohio) said that he did not see any reason why it would apply to educational associations since they are “not in any sense a combination or arrangement made to interfere with interstate commerce”.

The 568 exemption codified into law the essential terms of a consent agreement reached in 1991 between the Massachusetts Institute of Technology (MIT) and the US Department of Justice, which put an end to litigation stemming from the antitrust investigation that had begun in 1989 into the so-called ‘overlap group’.

In that case, eight Ivy League institutions plus the MIT had coordinated undergraduate financial aid programmes; the word ‘overlap’ referred to students admitted to more than one of these schools.

The Ivy League schools settled with the government, while MIT elected to go to trial. After losing in federal district court, MIT won at the Third Circuit Court of Appeals, which remanded the case back to the district court for consideration under a less rigid legal rubric. This second trial never took place because, as is very often the case in antitrust actions, the government and the accused entered into a consent decree.

It was at this point, says John Lopatka, A Robert Noll Distinguished Professor of Law at the Pennsylvania State University School of Law, that Congress passed a law that largely tracks the consent decree.

“The first condition that schools must satisfy in order to collaborate on awarding financial aid is that their admissions policy has to be ‘needs blind’. So, they can’t admit students by taking into account the student’s financial need.”

If the institutions satisfy this condition, explains Lopatka, they can collaborate on the method of determining financial need. “So, what the schools have done is they have come up with a common methodology of determining the applicant’s own contribution to the cost of attendance.”

According to figures from the United States government, for the 2018-19 school year, for example, tuition, fees, and room and board at Duke University in Durham, North Carolina, came to US$77,069. On average, students received US$44,610 in financial aid from the university, leaving the student to pay US$32,459, most often, partially with federally insured student loans.

Since financial aid is calculated on need, a student whose family income was between US$48,001 and US$75,000 would have received more aid from Duke and would have been personally responsible for paying US$7,160, while a student whose family income was between US$75,001 and US$110,000 was personally responsible for paying US$18,113.

The law contains another caveat. The schools “may not agree on the financial aid that will be awarded to any particular student”, says Lopatka. “They can use the same methodology, but that methodology is sufficiently rubbery that different schools using it can come up with slightly different calculations for different applicants.”

A House of Representatives report written during the 2001 renewal of exemption said that the legislative goal of the law was to ensure that “No student who is otherwise qualified ought to be denied the opportunity to go to one of the nation’s most prestigious schools because of the financial situation of his or her family”.

The plaintiffs’ case

The five law firms representing the plaintiffs contend in the complaint that “by their own admission, the 17 colleges and universities have participated in a price-fixing cartel that is designed to reduce or eliminate financial aid as a locus of competition, and that in fact has artificially inflated the net price of attendance for students receiving financial aid” to attend these elite colleges and universities.

Among the pieces of evidence the complaint points to for this is the 568 Presidents Group’s website, which says: “The Consensus Approach … seeks to reduce much of the variance in need analysis results that has been experienced in recent years”.

“The 568 Cartel,” the term used in the class action complaint, “uses the shared, competitively sensitive information about enrolment, costs, and other data relating to the Defendants’ available resources for financial aid to arrive at a common and agreed formula for setting the ability to pay, which results in artificially inflated net prices of attendance”.

And, since subsequent years’ financial aid is largely predicated upon a student’s freshman year award, this artificially low first-year award negatively affects students’ subsequent year awards.

Evidence from admissions officers from a number of schools shows, the plaintiffs contend, that the congressionally mandated wall between admissions and financial aid was porous, which favoured students with deep pockets.

“If a full-paying student says he’ll definitely come,” the complaint quotes an admissions officer at the University of Pennsylvania (UPenn) saying, “letting him in can be a relief.” For its part, the website of Vanderbilt University (Nashville, Tennessee) states that the university “reserve the right to be need aware while admitting waitlisted students” (emphasis added).

Columbia University School of General Studies, which enrols more than 2,500 students a year (30% of the school’s undergraduate enrolment), including students who split their time between the campus in Manhattan and Sciences Po in Paris and Trinity College Dublin, admits to not being ‘needs blind’, asserts the complaint.

The suit also alleges that a number of the universities limited enrolment of students who needed financial aid by enrolment management systems.

The filing quotes education writer Jeffrey Selingo’s 2020 book Who Gets In and Why: A Year Inside College Admissions: “Those colleges control how much they spend on financial aid by recruiting heavily in rich schools and admitting in early decisions a significant proportion of students who tend to be wealthier. And even when schools are need-blind, admissions officers still see the zip codes [postal codes] and occupations of the parents when reviewing applications.”

Another means by which these universities are said to have violated the law mandating ‘needs blind’ admission policies is by the uniquely American practice of giving preference to children of wealthy donors.

“Because of the limited number of spots available in any given class, the advantage given to one group entails a disadvantage imposed on the other,” asserts the complaint.

One example the complaint highlights occurs at Dartmouth College. As many as 50 applicants each year – 4%-5% of the freshman class – are accepted through a special process in which development officers (responsible for fundraising) and admissions officers meet to review a list created by the development office.

The complaint further argues that assigning an additional 2% of their unrestricted endowment funds would not materially affect the growth of the endowment but would substantially increase financial aid awards.

For Brown University (Providence, Rhode Island) this would mean an average increase in awards of US$6,531. At California Institute of Technology (Caltech in Pasadena), which has an endowment of US$848,658,000, the increase would amount to US$36,979, while at UPenn, which has an endowment of US$10,337,266,000, the increase in financial aid awards would on average be just over US$47,000.

With the exception of Vanderbilt University, each of the other higher education institutions named in the case have either declined to comment or not responded to a request by University World News for comment.

Speaking for Vanderbilt, Julia Jordan, senior media relations specialist for communications and marketing, said in part: “Our financial aid programme, Opportunity Vanderbilt, is recognised as one of the country’s best needs-based programmes. We will continue to defend the university’s holistic admissions and generous institutional needs-based financial aid practices.”

According to the complaint, were Vanderbilt to assign an additional 2% of its unrestricted endowment funds, which total US$6,569,806,000, to financial aid, on average awards would rise by US$40,467, says the complaint.

Getting the case into court

According to Lopatka, the plaintiffs face an uphill battle getting their case into court.

First, their lawyers have to convince Federal Judge Kennelly of the Ninth District of Illinois Eastern Division not to dismiss the case, as the colleges and universities have asked. The defence’s argument that “we are entitled to the exemption, we complied with the requirements of the statute and, therefore, the case is over” must also be overcome before the case can even go to trial.

Second, the plaintiffs have to allege enough factual material to suggest that the defendants’ conduct plausibly violates the antitrust law.

“When you’re looking at a case like this, which has to be judged under the rule of reason, the first step is to define a market. Have the defendants defined a market?

“For example, other schools may compete with the defendant schools, and they would be part of the market. The defendants, then, might not have market power, because the students could attend other schools that offered better financial aid packages. Without market power, the defendants would not violate the rule of reason,” says Lopatka.

Finally, according to Lopatka, “let’s suppose that the schools are not entitled to this exemption and that this collaboration is an antitrust violation. Then the plaintiffs have to prove they were injured. Did they actually pay more than they would have paid absent the collaboration? The plaintiffs, who are suing as a class, need a common method of showing that each of them was injured.”

Were the judge to refuse to dismiss the case at this stage in the proceedings, Lopatka told University World News, the plaintiffs are going to ask for years’ worth of records from admissions offices, bursary offices, financial aid offices as well as “a whole set of depositions, under oath testimony from admissions officers, financial aid officers and university administrators”.

While predicting the outcome of a legal case in advance is always difficult, Lopatka thinks that if the case goes to trial, the plaintiffs have a good chance of winning.

“I suspect the defendants will win this case by proving they are protected by the 568 exemption. But the application of the exemption is primarily a legal question and can likely be determined before any trial. If the case is not dismissed, both sides will have strong incentives to settle. If the case is not settled and proceeds to trial, the implication will likely be that the court found the exemption inapplicable. At that point, the plaintiffs have a good shot of establishing that the collaboration was anticompetitive and injured them.”

James J Rodgers, a partner at the law firm of Dilworth Paxson LLP (Philadelphia, Pennsylvania) and chair of the firm’s AntiTrust Practice Group, also thinks that if the case goes to trial, the plaintiffs “have a pretty solid argument”.

The case for the defence

When I asked him what the defence might look like, he proposed several arguments.

One is that the colleges and universities’ actions were mostly in compliance with Congress’s intent when it created the exemption. Waitlisted applicants, it could be argued, fall into a different category than do other applicants because decisions on them are made “when you’re trying to determine the size of your incoming class”.

“At that point, do you want to take somebody in who is going to be a heavy financial aid burden when you’ve already spent [via awards] most of your financial aid budget?”

Rodgers also thinks that the defence might argue that, yes, the defendants got together, but what did they actually do? “Did they fix the price of an elite education? Did any one of them agree on how much they will charge 20 individuals now? So my argument would be ‘there’s no there there’,” he says, quoting Gertrude Stein’s description of California in the 1920s. “It’s not like price-fixing a toaster.”

For his part, Katharine Corman and A Barton Hepburn Professor of Economics at Wellesley College (Wellesley, Massachusetts) Phillip Levine also doubts that the 568 Group can be found to have colluded. The author of A Problem of Fit: How the complexity of college pricing hurts students – and universities (2022), Levine told me that since “lower income students pay less to attend these institutions than any others, that would be an odd form of collusion”.

Further, the fact that “these 568 Group institutions are using funds [from their large endowments] to cover lost revenue associated with greater financial aid contrasts with the way you might expect colluding firms to act”.

Neither Lopatka nor Rodgers have seen any indication of what Congress intends to do before the 568 exemption expires at the end of September. According to Rodgers, even if the exemption were to expire, financial aid awards made under it would “be allowed to run their course”.

The universities and colleges would not, however, be able to operate for the January intake under the 568 carve-out. How this would affect financial aid and admissions decisions is unclear.