Elite universities—Brown, Columbia, Duke, Emory, and Yale—settle lawsuit against their tuition price-fixing cartel.
by T.J. Harker
For decades, university tuition has risen, while educational outcomes have fallen. The list of reasons is long. Now we can add unlawful price-fixing to that list, at least for the nation’s elite universities, Duke among them.
In January 2022, numerous students and alumni filed a federal complaint against 17 of the nation’s elite colleges, including Duke University. The plaintiffs alleged that the elite university defendants (ignominiously dubbed the “568 Cartel”) had violated federal antitrust laws.
Specifically, the plaintiffs claimed that, beginning in 2003, a consortium of elite universities agreed “on a common formula … regarding financial aid” and to “exchange competitively sensitive information concerning … formulas and pricing.” The defendants allegedly called this information-sharing process the “Consensus Methodology.”
As of four weeks ago, Duke appears to have resolved the matter, agreeing (with Brown, Columbia, Emory, and Yale) to pay its share of $105 million towards settlement. This decision was prudent, as the evidence against Duke is strong.
In deciding to settle the case, Duke no doubt considered the high likelihood of the following: that the “568 Cartel” did not qualify for a statutory exemption from federal antitrust laws; that the Consensus Methodology was a form of unlawful price-fixing; that the cost of settling was increasing; and that the Department of Justice could be considering additional civil or even criminal actions.
The 568 Antitrust Exemption
The so-called 568 Exemption, derived from language in the Improving America’s Schools Act of 1994, exempts from federal antitrust law certain agreements between “institutions of higher education at which all students admitted are admitted on a need-blind basis.” If the 568 Exemption does not apply, then Duke’s participation in the “568 Cartel” (and its use of the Consensus Methodology) are subject to the prohibitions of the Sherman Antitrust Act.
Section I of that act has been interpreted by courts as prohibiting trade-restraints that are either “unreasonable per se” or that violate the “rule of reason.” Price-fixing of the sort alleged is almost always unreasonable per se. Thus, the entire case hinges on two issues: the threshold question of whether Duke and the other defendants qualify for the 568 Exemption and, if not, whether the Consensus Methodology constitutes price-fixing.
As you might imagine, the plaintiffs alleged that the 568 Exemption doesn’t apply and that the Consensus Methodology was a form of unlawful price-fixing. The defendants demurred on both arguments.
All of that was expected in what would typically have been routine litigation between private litigants. But in July 2022, something unusual happened: The Antitrust Division of the U.S. Department of Justice filed a “Statement of Interest” in the case. Referring to “federal antitrust laws,” DOJ claimed it “has a strong interest in their correct application,” even though it was not a party to the matter.
In its filing, the Department’s lawyers argued that “the 568 Exemption … does not immunize agreements between entities that fulfill [its requirements] and those that do not,” irrespective of a school’s knowledge of its co-members’ admissions practices. Citing Supreme Court precedent, the government averred that “courts read exceptions to the antitrust laws narrowly, with beady eyes and green eyeshades.”
In the context of the 568 Exemption, DOJ’s argument undermines every university’s defense if any member’s admissions practices do not conform to the 568 Exemption requirements. Why? Because the 568 Exemption applies to agreements between “2 or more institutions of higher education at which all students admitted are admitted on a need-blind basis.”
This position is consistent with antitrust exemptions in other contexts: for example, for co-op farmers under the Capper-Volstead Act and for insurance companies under the McCarran-Ferguson Act. In other words, if even one member of the “cartel” admits any portion of its student body on anything other than a “need-blind” basis, then none of the schools qualify for the 568 Exemption.
Unlawful Price-Fixing
Thus, when deciding to settle, Duke’s lawyers knew that DOJ believed the 568 Exemption did not apply to the universities’ conduct. This left the defendants with only one line of defense: the argument that the Consensus Methodology did not constitute price-fixing even though the universities exchanged formulas and methods for calculating need-based aid and, by implication, tuition.
The problem with this argument is that, under Supreme Court jurisprudence from 1940, price-fixing is per se unlawful when coordinated through “formula underlying price policies” (United States v. Socony-Vacuum Oil Co.).
Moreover, in its filings, DOJ displayed a nuanced grasp of the distinction between how the defendants claimed the Consensus Methodology operated versus how it operated in fact. Schools
may agree on common principles [for calculating financial need]. […] [But] if schools agree to a common method that results in an expected family contribution of $20,000 for a particular student, they [might] charge that student a net price of $20,000 without fear that the student will pick a rival school based on a more generous need-based financial aid offer. (emphases added)
In other words, agreeing on common principles is okay, but that’s not the same thing as agreeing on common methods or formulas for calculating or narrowing the range of need-based aid. According to DOJ and Supreme Court precedent, the latter is price-fixing per se. Further, according to DOJ, “these allegations suffice to plead a per se claim under Section I of the Sherman Act.” This is the case because
an agreement on the methodology used to calculate need-based financial aid … therefore eliminates an important dimension of price competition among schools—whether the offers are identical or the differences are simply narrowed—in the same way that an agreement on the minimum net price of attendance eliminates price competition. (emphasis added)
In short, DOJ thinks Duke (and the other “568 Cartel” members) violated the Sherman Antitrust Act. The Department is not a party to the case. But, as Duke’s lawyers would know, DOJ’s legal interpretation of the alleged facts would be persuasive to any court.
This put the defendants in a difficult bind: Each had to consider the possibility that at least one of the “cartel” members may not have qualified for the 568 Exemption, thereby eliminating its applicability for all members. On top of this, each had to consider that the other remaining defendants were considering the same thing.
In Duke’s case in particular, the facts were even worse. The university had already admitted in court filings that the “568 Cartel” “developed a Consensus Methodology of voluntary general recommendations for assessing student financial needs.” Given this fact, there’s little doubt that Duke’s lawyers understood how vulnerable their defense would be to the points raised above.
Their concern would have been heightened by the fact that several members withdrew from the “568 Cartel” prior to the litigation. For example, the University of Chicago withdrew in 2014 “because the cartel was limiting its ability to compete [on] price.” If true, that’s devastating to Duke’s and the remaining defendants’ case. And it rings true. After all, the very purpose of a cartel is to limit price competition.
This civil equivalent of the prisoner’s dilemma would have incentivized the remaining defendants to settle early, especially since they knew that the price of settlement would start at more than $13.5 million (the amount Chicago agreed to pay) and only rise from there.
The plaintiffs’ attorneys no doubt understood this dilemma when they included in a public filing related to Chicago’s settlement this gem: “The Settlement also allows Plaintiffs to obtain information that could assist them in prosecuting the case against the remaining Defendants with whom Plaintiffs have not settled.”
You can bet that Duke’s attorneys read this with dismay—right before they searched their clients’ emails for the extension “@chicago.edu.”
Worse to Come?
Most antitrust lawyers are experienced civil litigators with extensive knowledge of federal civil antitrust law. Fewer, however, have criminal litigation experience, in part because most antitrust actions are not criminal offenses. But price-fixing (the most egregious restraint of trade) is a criminal offense, a fact acknowledged by Duke’s internal antitrust policy.
In settling the case, Duke’s lawyers would have considered the curious fact that the Department of Justice filed a statement of interest at all. In doing so, DOJ revealed both its view of the facts (that Duke’s conduct is unlawful) and its interest in channeling the court to the “correct application” of federal antitrust laws, as described above.
This could mean that DOJ is evaluating a civil enforcement action. Though less likely, it could also mean that DOJ is considering a criminal complaint while the present private litigation unfolds.
This isn’t the first time the Blue Devils appear to have violated the nation’s antitrust laws. It’s not even the first time in the past few years. Duke recently paid $19 million to settle allegations that it conspired with UNC-Chapel Hill to suppress faculty pay—another form of unlawful price-fixing. It will pay $24 million to settle the present matter.
At some point, DOJ’s criminal prosecutors will notice if they haven’t already. In settling, Duke has gotten off cheap. So far.
T.J. Harker is the general counsel of a Knoxville, Tennessee, company. Until recently, he was an assistant United States attorney for the U.S. Department of Justice, where he investigated and tried national white-collar fraud and espionage matters.
Originally published by The James G. Martin Center for Academic Renewal. Republished with permission.
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