Illinois District Court Rules that Sherman Act Suit Against Top Universities Will Proceed
Recently Judge Matthew F. Kennelly of the Northern District of Illinois denied the motions to dismiss filed by 17 top private universities in a class action lawsuit accusing the universities of conspiring to fix prices by using an agreed-upon “formula” to determine students’ financial aid, in violation of Section 1 of the Sherman Act. The decision in Henry et al. v. Brown University et al. concludes that the scope of an antitrust exemption to certain financial aid practices among universities is limited to agreements among a group of schools with fully need-blind admissions programs, where each school in the group meets that requirement. The ruling also addresses the burden associated with proof of a party’s withdrawal from a civil conspiracy.
Plaintiffs’ Claims and Defendants’ Motions
Plaintiffs are students and parents of students who attended the defendant universities, which include MIT, Brown University, California Institute of Technology, University of Chicago, Columbia University, Cornell University, Dartmouth College, Duke University, Emory University, Georgetown University, the Johns Hopkins University, Northwestern University, University of Notre Dame, the University of Pennsylvania, Rice University, Vanderbilt University, and Yale University.
Plaintiffs allege that the universities violated Section 1 of the Sherman Act by participating in a “price-fixing cartel” designed to reduce financial aid, with the effect of “artificially inflat[ing] the net price of attendance for students receiving financial aid.” Plaintiffs allege that each university has been a member of the 568 Presidents Group—a group of universities that, according to its website, “works together in an effort to maintain a need-based financial aid system.” The 568 Presidents Group has developed a “set of common standards for determining the family’s ability to pay for college,” known as the Consensus Methodology. Plaintiffs allege that the Consensus Methodology allows the universities to fix prices for attendance, which “has disadvantaged and in fact caused financial injury” to plaintiffs.
The universities collectively moved to dismiss plaintiffs’ claims on multiple grounds, including that their conduct is immunized from antitrust scrutiny by Section 568 of the Improving America’s Schools Act of 1994 (the “568 Exemption”) which provides an express exemption from the antitrust laws. They also asserted that plaintiffs had failed to state a claim for a violation of Section 1 of the Sherman Act because plaintiffs had not alleged a plausible market definition. Separately, Brown, Emory, Chicago and Johns Hopkins argued that plaintiffs had failed to plausibly allege that they were members of the conspiracy at relevant times, and Yale argued that it did not participate in the alleged anticompetitive conduct.
The 568 Exemption
Section 568 of the Improving America’s Schools Act of 1994 creates an express exemption to the antitrust laws where higher education institutions that admit all students on a need-blind basis agree on the following:
(1) awarding financial aid only on the basis of “demonstrated financial need”;
(2) “common principles of analysis” to determine students’ need for financial aid, as long as individual financial aid officers remain able to “exercis[e] independent professional judgment with respect to individual applicants”; or
(3) a common aid application form, as long as individual institutions are permitted to request further data.
There are two limitations to the Exemption: (1) it does not apply to federal financial aid, and (2) it does not apply to “any contract, combination, or conspiracy with respect to the amount or terms of any prospective financial aid award to a specific individual.” Id.
The 568 Exemption was first included in the Improving America’s Schools Act of 1994 following a 1993 settlement between the Massachusetts Institute of Technology (“MIT”) and the Department of Justice (“DOJ”) in a lawsuit in which the DOJ alleged that MIT and the Ivy League universities “collectively determine[d] the amount of financial assistance commonly admitted students would be awarded[.]” United States v. Brown University, 5 F.3d 658, 661 (3d Cir. 1993). The 568 Exemption has been amended over time, and when the Exemption was renewed in 2015, Congress removed a category of agreements that had previously been covered by the Exemption: agreements among universities to exchange financial information submitted by admitted students, where the information is exchanged “through an independent third party,” and each university “is permitted to retrieve such data only once” with respect to a particular student.
The Court’s Decision
Denying the universities’ motions to dismiss, the court held that plaintiffs plausibly alleged that the defendant universities do not admit all students on a need-blind basis. Concluding the 568 Exemption applies only where the admissions process is need-blind, the court rejected defendants’ arguments based on the Exemption. The court concluded that the “clear” language of the Exemption means that “only agreements among schools where ‘all students are admitted on a need-blind basis’ are protected” (emphasis added). Accordingly, the court further held that even if plaintiffs had not alleged that each individual university is not need-blind, “because the plaintiffs plausibly allege that at least one (and possibly all) of the defendants admitted students on a need-aware basis, they plausibly allege that none of the defendants are protected[.]” In addition, the court rejected the universities’ argument that schools that are need-blind are protected by the Exemption if they did not have actual knowledge that the other universities are not need-blind. The court held that the universities’ argument “adds an actual knowledge requirement that does not exist in the text of the statute.”
Second, the court concluded that plaintiffs had plausibly alleged a violation of Section 1 of the Sherman Act. The court declined to decide whether to afford plaintiffs’ claims per se treatment or analyze them under the rule of reason because it determined that “plaintiffs state a claim for a section 1 violation even if the Rule of Reason applies[.]” As the court explained, under the rule of reason, a plaintiff must show that defendants’ agreement has an anticompetitive effect on a relevant market. Plaintiffs’ alleged market is the “Market for Elite, Private Universities,” defined as the market “for undergraduate education at private national universities with an average ranking of 25 or higher in the U.S. News & World Report rankings from 2003 through 2021.” The universities contended that plaintiffs’ alleged market is not plausible, but the court explained that “[a]lthough the defendants’ arguments suggest that the proper relevant market may differ from what the plaintiffs propose, they do not suggest that there is no plausible relevant market. All that is required, on a motion to dismiss, is for the plaintiffs to plead sufficient factual allegations that, when taken as true, make plausible the existence of a relevant market.” In support of its determination, the court cited Vasquez v. Ind. Univ. Health, Inc., in which the Seventh Circuit explained that the plaintiffs’ “complaint needed to allege only one plausible geographic market to survive a motion to dismiss.” 40 F.4th 582, 584 (7th Cir. 2022).
Third, the court held that plaintiffs had sufficiently alleged claims against Brown, Emory, and Chicago even though they alleged that those universities had claimed to withdraw from the 568 Group in 2012 and 2014. The court concluded that “the burden to show withdrawal in civil antitrust cases is the same as in criminal cases—it is on the defendant,” and that, contrary to the universities’ assertions, plaintiffs did not allege that the universities “have done what is required under Seventh Circuit law to actually withdraw,” including informing co-conspirators of their withdrawal and disavowing the criminal objectives of the conspiracy.
Similarly, the court refused to dismiss Johns Hopkins from the case despite the fact that plaintiffs alleged that Johns Hopkins joined the 568 Group in 2021, after the alleged illegal acts occurred. The court emphasized that a co-conspirator may be liable for the preceding acts of its co-conspirators if it joins the conspiracy with knowledge of the preceding acts and an intent to pursue the same objectives. The court decided that it need not determine the standard applicable to that knowledge requirement because it found that plaintiffs’ “amended complaint contains sufficient allegations to make plausible a contention that Johns Hopkins had actual knowledge of the illegal conduct of the 568 Group when it joined.” The decision therefore holds that while actual knowledge does not factor into the applicability of the 568 Exemption (since the statute does not include a knowledge requirement), knowledge does remain a requirement for showing that a defendant joined the alleged conspiracy.
Finally, the court rejected Yale’s argument that it did not use the Consensus Methodology, finding that plaintiffs’ allegation to the contrary was plausible. In any event, Judge Kennelly held, Yale, as an alleged conspirator, could be liable for the acts of its co-conspirators even if it did not use the Methodology.
We will continue to monitor this case and report back as it further develops.