Application of the Antitrust Laws to Colleges and Universities The "Trade or Commerce" Requirement. by John M. Nannes

Transcription

1 Application of the Antitrust Laws to Colleges and Universities The "Trade or Commerce" Requirement by John M. Nannes I. "Trade or commerce" requirement under the Sherman Act A. Sherman Act 1. Section 1 of the Sherman Act proscribes: "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states...." 15 U.S.C. 1 (emphasis added). 2. Section 2 of the Sherman Act makes it unlawful to: "monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states...." 15 U.S.C. 2 (emphasis added). B. "Trade or commerce" limits application of the Sherman Act to "commercial activities." The Supreme Court has indicated that the Sherman Act: 1. applies to "business and commercial transactions," Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 (1940), 2. is aimed at combinations and conspiracies that have commercial objectives, Klor's v. Broadway-Hale Stores, 359 U.S. 207, 213 n.7 (1959) (discussing Apex Hosiery), and 3. is rarely applied to organizations or activities which are noncommercial in nature. Id. C. The "trade or commerce" inquiry looks at the nature of the activity, rather than the entity engaged in that activity. Skadden, Arps, Slate, Meagher & Flom LLP, Washington, D.C. I want very much to thank Ivy Johnson, a new associate at the firm, who did the research underlying this scintillating topic. She probably had little choice once I asked her to do it, but she did so without complaint, for which I am also grateful.

2 1. See Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) (declining to find exemption for lawyers because, although there are public service aspects to the profession, lawyers provide services for money, which "is 'commerce' in the most common usage of that word"); 2. Apex Hosiery v. Leader, 310 U.S. 469, 493 (1940) (declining to find exemption for all labor union activities because some union activities could "restrain commercial competition"); and 3. Virginia Vermiculite v. W.R. Grace & Co., 156 F.3d 535, 541 (4 th Cir. 1998) ("We emphasize that the dispositive inquiry is whether the transaction is commercial, not whether the entity engaging in the transaction is commercial."). D. Determining what constitutes "commercial activity" in non-commercial domains: 1. The activity must have the potential to affect competition. a. See Apex Hosiery v. Leader, 310 U.S. 469 (1940) (holding that antitrust laws did not apply to labor union strike because, although the strike increased the price of labor and the cost of the plaintiff's goods, it did not restrain competition); Goldfarb v. Virginia State Bar, 421 U.S. 773, (1975) (rejecting argument that "competition is inconsistent with the practice of a profession" and concluding that "anticompetitive activities by lawyers may exert a restraint on commerce"). b. But see, NOW v. Scheidler, 968 F.2d 612 (7 th Cir. 1992) (concluding that antitrust laws did not apply because defendants' efforts to close abortion clinics were not aimed at affecting competition among abortion providers, but were aimed at destroying all abortion clinics). 2. Courts also look at whether the activity produces some economic benefit (but not necessarily profit). Such benefits include: a. Enhancement of Prestige or Influence. See American Soc. of Mechanical Engineers v. Hydrolevel, 456 U.S. 556, 576 (1982). In concluding that the Sherman Act applied to the exclusionary activities of a standards-setting organization, the Supreme Court noted that the organization derived benefits from the standards it set, including publication fees, prestige, and influence. 2

3 b. Economic Benefits Conveyed on a Nonprofit Entity. See Virginia Vermiculite v. W.R. Grace & Co., 156 F.3d 535, 541 (4 th Cir. 1998). In concluding that the donation of mining property to a nonprofit group was subject to the antitrust laws, the court noted that the transaction had "direct commercial benefits" for the organization, including receipt of the property and protection of the value of its members' property. II. Determining whether activities of colleges and universities are subject to the Sherman Act A. The antitrust laws have been applied to various commercial activities. 1. Dispensing of Food and Beverages on Campus. See Eastern Food Services v. Pontifical Catholic University of Puerto Rico Service Assoc., 222 F. Supp. 2d 131, 135 (D.P.R. 2002) (assuming Sherman Act applied but finding campus too small to constitute relevant geographic market). 2. Provision of Health Care and Health Insurance. See Tony Lee. v. Life Insur. Co. of North America and The University of Rhode Island, 829 F. Supp. 529, (D.R.I. 1993) (assuming Sherman Act would apply but finding plaintiff's allegations insufficient to show restraint was unreasonable). 3. Sale of Books on Campus. See Sunshine Books v. Temple University, 697 F.2d 90, 92 (3d Cir. 1982) (assuming Sherman Act applied). 4. Sale of Rights to Broadcast College Sports. See NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 101 n.22 (1984)(concluding that Sherman Act applied despite NCAA's nonprofit character). B. Application of the antitrust laws to other activities involving colleges and universities: 1. Tuition and Financial Aid United States v. Brown University, 805 F. Supp. 288 (E.D.Pa. 1992), aff'd, 5 F.3d 658 (3rd Cir. 1993). a. Background The "Overlap" agreements: MIT and the Ivy League schools collectively determined the amount of financial aid to award to students who were admitted to more than one of the schools. 3

4 The schools agreed to: award financial aid only on the basis of need; merit-based aid was prohibited, and share financial information about admitted students and apply the same "needs analysis" for assessing how much a student's family would be expected to contribute; this ensured that all aid packages offered to an individual student would be the same. The effect of the agreements was to prevent the schools from competing for the best students through merit-based aid, or higher need-based awards. b. Suit by the Department of Justice i. The Overlap agreements violated the Sherman Act by "conspir[ing] to restrict the amount of financial aid awarded [to] undergraduate students." Financial aid recipients receive a "discount" that reduces the cost of attendance. By restricting financial aid awards, the Overlap agreements restrained price competition among the schools in the sale of undergraduate education to students receiving financial aid. As a result, some students paid more than they would have otherwise. ii. All defendants except MIT consented to judgment prohibiting them from entering into any agreements similar to the Overlap agreements. c. MIT's arguments to the District Court: The Overlap agreements did not affect "trade or commerce" because: i. They were not commercially motivated. Awarding financial aid was a "charitable" activity, and the Overlap agreements were intended to maximize use of financial aid funds (by preventing a school from using the funds for awards intended to entice students to enroll at the school rather than to meet their financial needs). ii. They did not have any commercial effect and were revenue neutral. The effect of the agreements was to increase the number of needy students that could enroll if admitted. 4

5 d. District Court Decision: The Overlap agreements are subject to the Sherman Act. i. Exchanging money for educational services and awarding financial aid (which set the price aid applicants would pay for their education) was "unquestionably commercial in nature." ii. The court rejected the argument that the agreements were not subject to the Sherman Act because they were not commercially motivated. Relying on Goldfarb, the court concluded that an activity did not have to be commercially motivated to be subject to the antitrust laws. e. Third Circuit Decision: i. Financial aid is not charity, but is part of the process of setting tuition prices, and is therefore commercial in nature. ii. "[D]iscounting the price of educational service for needy students is not charity when a university receives tangible benefits in exchange." Aid enables more exceptional students to attend MIT, which increases its pool of applicants, which results in a higher caliber student body; a higher caliber student body enhances the school's prestige (from which nonprofit entities derive substantial benefit); the Overlap agreements enable MIT to enjoy these benefits without having to compete with other schools for the best students through merit-based aid or higher need-based awards. iii. Because the Overlap agreements clearly affected "trade or commerce," the absence of a commercial motive was irrelevant. Motive would be important in a case involving conduct that was "distinctly noncommercial." 2. Other application of the antitrust laws to colleges and universities: a. Provision of on-campus housing: 5

6 i. Provision of on-campus housing is generally considered a commercial activity that is subject to the antitrust laws; it is unclear whether a commercial motive is necessary or whether consideration of the effects is sufficient. b. Accreditation In Hamilton Chapter of Alpha Delta Phi v. Hamilton College, No. 95CV0926, 1996 U.S. Dist. Lexis 4695 (N.D.N.Y. Apr. 12, 1996), rev'd, 128 F.3d 59 (2d Cir. 1997), both the district court and the Second Circuit looked at motive to determine whether the antitrust laws applied. In that case, several fraternities alleged that a policy requiring all students to live on campus violated Section 2 of the Sherman Act. No. 95CV0926, 1996 U.S. Dist. Lexis 4695 at *2. The college moved to dismiss, arguing that the Sherman Act did not apply because the policy was not commercially motivated, but instead was intended to improve the school's ability to attract female students. Id. at 4. The fraternities argued that the Sherman Act applied because "renting living space in exchange for money" was clearly commerce. Id. at 5. Finding that the provision of housing could not be separated from the college's academic mission, the district court concluded that the Sherman Act did not apply. Id. at 7. The Second Circuit reversed, noting that the lower court had ignored an allegation by the fraternities that the policy was intended to raise revenues. 128 F.3d 59, 66 (2d Cir. 1997). But See Hack v. Yale, 16 F. Supp. 2d 183 (D. Conn. 1998) (assuming that Sherman Act applied to policy requiring students to live on campus without examining the purpose of the policy). i. The cases appear to agree that accreditation decisions are not commercial activity unless there is some evidence that the decisions were motivated by a commercial or anticompetitive purpose. In Marjorie Webster Junior Coll. v. Middle States Assoc. of Colls. & Secondary Schs., 432 F.2d 650, 654 (D.C. Cir. 1970), the D.C. Circuit concluded that "an incidental restraint of trade, absent an 6

7 c. Admissions Criteria intent or purpose to affect the commercial aspects of the profession, is not sufficient to warrant application of the antitrust laws." Noting that "accreditation is an activity distinct from the sphere of commerce[, going] rather to the heart of the concept of education itself," the court found that the objectives of the accrediting organization were not commercial. The court noted, however, that "it is possible to conceive of restrictions on... accreditation that could have little other than a commercial motive." See also Found. for Interior Design Educ. Research v. Savannah Coll. of Art & Design, 73 F. Supp. 2d 829, 835 (W.D. Mich. 1999), aff'd, 244 F.3d 521 (6th Cir. 2001) (allegation that accrediting organization had denied college accreditation to protect its members from competition was "a sufficient allegation of commercial intent to avoid dismissal"). The parties did not raise the "trade or commerce" issue on appeal, but the Sixth Circuit expressed doubt about the continuing vitality of Marjorie Webster in the aftermath of Goldfarb. i. Setting admissions criteria is generally not viewed as commercial activity. In Burton v. Selman, 494 F. Supp. 603, 621 (S.D.N.Y. 1980), aff'd, 636 F.2d 1204 (2d Cir. 1980), the district court concluded that admissions criteria were "distinctly noncommercial" even though they might have some incidental effect on competition. In that case, a foreign medical student, whose transfer applications to numerous U.S. medical schools had been denied, alleged that the schools conspired to change their admissions criteria in violation of the Sherman Act. Id. at 609. Although the student argued that the criteria would restrict, and increase the cost of, medical care, the court found that that effect was "purely incidental." Id. at 621. The court considered Marjorie Webster, but looked only at the effect of the admissions criteria, not the motive behind application of the criteria. Id. 3. Motive versus effect: The most prominent issue among these cases concerns whether a commercial or anticompetitive motive is 7

8 relevant in determining if an activity affects "trade or commerce" and therefore is subject to the antitrust laws. a. Motive. Numerous courts, beginning with the D.C. Circuit in Marjorie Webster, have required a showing of commercial motive when the activity is considered "noncommercial." In addition to Marjorie Webster, see Hamilton College, No. 95CV0926, 1996 U.S. Dist. Lexis 4695 (N.D.N.Y. Apr. 12, 1996), rev'd, 128 F.3d 59 (2d Cir. 1997); Found. for Interior Design Educ. Research, 73 F. Supp. 2d 829 (W.D. Mich. 1999); see also Smith v. NCAA, 139 F.3d 180 (3 rd Cir. 1998), vacated on other grounds, 525 U.S. 459 (1999) (considering motive behind admissions standards for athletes after concluding they had only an indirect effect on competition). b. Effect. Other cases, the most prominent of which is United States v. Brown University, have looked that the effects of the activity in question, rather than the motive behind it. See also Burton, 494 F. Supp. 603 (S.D.N.Y. 1980), aff'd, 636 F.2d 1204 (2d Cir. 1980); Banks v. NCAA, 746 F. Supp. 850, (N.D. Ind. 1990) (concluding that antitrust laws applied even though NCAA eligibility rules were not commercial because their effect was to "curtail[] output and blunt[] the ability of member institutions to respond to consumer preference"). c. The Sliding Scale. In both Brown and Burton, the court acknowledged that commercial motive would be relevant to assessing whether a "noncommercial" activity affected "trade or commerce." See Burton, 494 F. Supp. at 619 ("Courts are properly reluctant to intrude into the academic decision-making process except where invidious abuses are indicated.") See Brown, 5 F.3d at 667 (indicating that focus on intent would be appropriate when "the nature of the conduct... was distinctly noncommercial") III. Current Issues A. Agreements to Eliminate Early Admissions Policies 1. Under Burton v. Selman, admission criteria would not be subject to the antitrust laws because, although there may be some commercial 8

9 effect, it is indirect, and therefore does not affect "trade or commerce." 2. In Burton, the court does not consider whether the policy sought by the medical schools regarding foreign medical students would restrain competition among the schools for such students. 3. In Brown, the Third Circuit made it clear that setting the price of tuition was distinctly commercial. Policies (such as "early admissions") that are not directly related to the setting of prices and the exchange of money for services might be viewed as noncommercial. If found to be noncommercial in nature, a court could still consider whether an anticompetitive motive existed for an agreement to eliminate early admissions. B. Efforts to address the "football problem" 1. Title IX has been interpreted to require rough parity in spending and in the actual number of slots on athletic teams for men and women. Given the high cost of college football, including salaries of coaches, some colleges have tried to achieve parity by eliminating less-popular male sports. 2. Any policy aimed at solving the "football problem" through agreements that would reduce the cost of college athletics, e.g. by capping coaches' salaries, would probably be viewed as sufficiently commercial to be subject to the antitrust laws. See, e.g., Hennessey v. NCAA, 564 F.2d 1136 (5 th Cir. 1977). 3. Because of uncertainly concerning the standard (i.e. per se or rule of reason) to be applied on the merits and whether a court would consider motives behind such a policy (i.e. such as preservation of less-popular men's sports while retaining parity under Title IX), consideration is being given to possible statutory exemption. See generally "Advisory Panel Would Ease Some Title IX Rules," N.Y. Times C13 (Jan. 31, 2003). Recommendation 8 would have urged exploration of "an antitrust exemption for college athletics," but was not adopted and thus will reportedly not be pursued by the Secretary of Education for the time being. The final report was issued February 28, 2003, C. There is a pending suit involving challenges to three programs that allegedly involve stipends for medical residents: "matching" of applications with residency programs, information exchanges of stipend and related information, and accreditation standards. Jung v. Association of Medical Colleges, No. 1:02CV00873)(D.D.C. 2002). 9

10 1. One of the defendants, American Council for American Medical Education, filed a motion to dismiss, contending, inter alia, that its actions setting accreditation standards and accrediting residency programs do not constitute "trade or commerce." 2. The motion was argued orally on February 26, D. Financial Aid 1. Statutory Exemption After Brown, Congress enacted a temporary statutory exemption permitting colleges to agree (1) to provide need-based aid only and (2) on financial aid formulas but not on awards to individual students. The exemption was subsequently extended and amended to permit colleges to share individual students' financial information through a third party. In 2001, an effort was made to make the exemption permanent. Instead, it was extended through 2008, and GAO was ordered to conduct a study on the effect of the exemption. 2. Effect of the Exemption a. The stated purpose of the exemption is the same as that offered by the colleges in Brown: The need-based financial aid system serves social goals that the antitrust laws do not adequately address namely, making financial aid available to the broadest number of students solely on the basis of demonstrated need. Without it, the schools would be required to compete, through financial aid awards, for the very top students. Those very top students would get all of the aid available, which would be more than their demonstrated need. The rest would get less than their demonstrated need or none at all. b. However, it is not clear that the effect predicted by Congress in enacting the exemption would come about. GAO has not issued its report (due 2006). It has been argued that Ivy League schools would not reduce need-based aid even if it offered meritbased aid. These schools are among the richest in the nation, but devote a smaller portion of their 10

11 gross revenues to financial aid than many poorer colleges. Because these colleges could afford to substantially increase the total amount of aid that they give, offering merit-based aid or higher needbased aid to top applicants would not necessarily reduce the amount of need-based aid offered to others. Thus, the absence of competition among the schools may be reducing the total amount of aid that they would otherwise award. See Herschel Grossman, Scholarships: Need or Merit, THE CATO JOURNAL, Vol. 14, No There is, however, a lesson to be learned here. Congress does not often respond to the antitrust agencies' enforcement efforts by enacting statutory exemptions to overturn those efforts. When Congress does so, it presumably reflects policy judgments about the wisdom of applying the antitrust laws to a particular activity. How, if at all, should this affect future decisions by the antitrust enforcement agencies to apply the antitrust laws to colleges and universities? 11