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Universities May Incur Antitrust Liability Acting Jointly in Response to the COVID-19 Pandemic

Posted  April 17, 2020
By Ethan E. Litwin, J. Wyatt Fore

The upheaval caused by the COVID-19 pandemic has forced virtually every company and institution engaged in commercial transactions to re-evaluate and drastically alter its business practices.  While they are wise to do so, they would also be wise to remember that their susceptibility to the commercial effects of the pandemic offers no immunity from antitrust enforcement where companies have entered into anticompetitive or exploitative agreements, even if those agreements are necessary to stave off bankruptcy or to avoid mass layoffs.

The regimen of social isolation that is being mandated around the world to halt the spread of COVID-19 is hitting service industries particularly hard—including providers of educational services.  It has been reported that the loss of international students by itself could cost American colleges and universities tens of billions of dollars.  This naturally creates incentives for industries to collaborate on strategies to mitigate the economic impact of the pandemic.  Indeed, several weeks ago, confidential sources reported to us that representatives of several prominent universities discussed jointly canceling open houses for international students.  The purpose of such a joint decision would have been to eliminate competition so that rival schools would not gain a competitive edge with recruits by telling them “we cared enough to bring you to campus.”

Such collusive behavior could easily spill over into more dangerous waters.  With on-campus classes canceled, some parents and students are now openly wondering if at least some tuition payments should be refunded.  Although some schools have lowered housing and dining fees, few, if any, have agreed to refund part of the semester’s tuition, let alone offer reduced tuition should the pandemic continue to impact the 2020-21 academic year, even though some university officials have already begun contingency planning for the possibility that campuses may remain closed this fall.

Widespread dissatisfaction with distance learning and the possibility of fall closures should naturally have led schools to compete on lowering the price of tuition.  Students that have been banished from campus have been deprived of the campus-based educational experience, which is the basis for the current (and, arguably, exorbitant) price of tuition.[1]  Moreover, there is an emerging consensus that  long-term “distance learning” conducted via Zoom or similar technologies is not a sufficient substitute for the in-class educational experience.  Yet prices have not fallen to compensate students for the provision of a service that is demonstrably inferior to the service they purchased.

While some may argue that determining comparative pricing would be too subjective an exercise, there is an objective metric for quantifying the price that distance learning should otherwise command in a competitive market.  Distance learning classes resemble those provided through the online extension programs offered by many colleges.  Yet the tuition associated with extension programs is considerably less than on-campus classes.  For example, Harvard’s tuition (exclusive of room and board) is $47,730 per year, while the Harvard Extension School estimates tuition of only $29,440 for an entire Bachelor’s degree.  Universities may cite to the high costs of running a school, but many of those costs are directly tied to the brick and mortar facilities that may remain mothballed for as long as this pandemic endures.  If universities fail to compete on tuition (or, relatedly, in cutting costs) antitrust prosecutors and consumers may question whether this was the product of illegal collusion.  Indeed, history shows that high-cost industries facing declining demand and revenues are the most susceptible to the lure of illegal collusion.

Consumer behavior in response to schools’ failure to compete on price may have already caused schools to collude on the type of conduct that is generally considered to be per se violations of the antitrust laws.  For example, reports suggest that US students may, en masse, decide to take a European-style “gap year” for 2020-2021.  In response to this potential development, some schools have adopted a policy that students who elect to take a gap year must reapply for admission.  Moreover, most schools have continued to maintain their May 1 deadline for accepted students to enroll, despite opposition from students.

While Harvard (or any other school) is within its rights to unilaterally refuse to refund or lower tuition despite its inability to deliver an in-classroom educational experience, schools create significant antitrust risk when they discuss with each other their plans to do so, or otherwise agree on what steps they are taking to protect their finances in response to the pandemic.  This is not an abstract concern: Elite universities have been the subjects of government and private lawsuits alleging a variety of antitrust violations, including price-fixing financial aid, collusive practices with respect to early admission programs, and no-poaching agreements concerning faculty members.  And despite one notable Third Circuit case to the contrary,[2] the U.S. Department of Justice considers such actions to be per se antitrust violations.  Per se violations may not be defended as socially necessary, in the public good, or otherwise on balance procompetitive.  If universities have discussed their financial planning, exchanged information regarding tuition plans, or actually agreed to avoid a “race to the bottom” on tuition during the COVID-19 pandemic, among other things, they may well find themselves on the wrong side of a price-fixing case brought by the federal government. Even reports of a pending government price-fixing investigation would also inspire the filing of class action lawsuits by affected students and their parents.  These class action litigations, all of which would seek treble damages, could take several years and cost tens, if not hundreds of millions, of dollars in legal fees and settlement payments to resolve.

Finally, we also note that although DOJ has, to date, brought only civil enforcement actions against colleges and universities, schools should be aware that DOJ has also repeatedly warned that naked price-fixing agreements are subject to criminal antitrust prosecutions.  The penalties associated with criminal price-fixing conduct are severe.  Schools and those individuals who are engaged in price fixing of tuition may be prosecuted, leading to steep criminal fines for the school (which can exceed $100 million) and criminal fines (up to $1 million) and prison sentences (up to 10 years) for those persons involved in the conspiracy.  At-risk personnel may include not only those persons who were involved in the formation and execution of the illegal conduct, but also those people who knew about the illegal conduct, were in a position to stop that conduct, and failed to do so.  And, it goes without saying, that ignorance of the law is not a defense to a criminal antitrust violation.

All businesses and institutions of higher learning should consider whether the challenges caused by the COVID-19 pandemic make it advisable to revisit and enhance their current antitrust compliance practices.  In addition to training those personnel who are most likely to engage in meaningful discussions with their counterparts at competitor schools (or otherwise have oversight responsibility for those who do), leaders of colleges and universities should take all necessary steps to ensure that tuition-related decisions are taken unilaterally, without any discussion or agreement with any competitor school.  If conversations about tuition or other financial transactions have already taken place with competitors, school leaders should consult with antitrust counsel if they have not already done so.

For similar reasons, school personnel who believe that they or their colleagues have engaged in discussions or entered into agreements that may be illegal, may want to seek independent legal counsel to advise them as to their rights and potential liability.  Finally, parents and students who believe that their school may have engaged in anticompetitive conduct should consider contacting experienced antitrust counsel to advise them of their rights.

Edited by Gary J. Malone

[1] Cf. Grutter v. Bollinger, 539 U.S. 306, 319 (2003) (crediting administrator testimony emphasizing “educational experience” that occurs “both inside and outside the classroom”).

[2] See United States v. Brown Univ. in Providence, et al., 5 F.3d 658 (3d Cir. 1993).

Tagged in: Antitrust Enforcement, Antitrust Litigation,

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