Antitrust Compliance

This summary provides background information and explanation of the principles of antitrust law that are reflected in the University’s Antitrust Compliance Guidelines. For a copy of the Guidelines, click here.

Background. For over 100 years, Section 1 of the Sherman Act, 15 U.S.C. § 1, has prohibited “[e]very contract, combination…or conspiracy in restraint of trade or commerce….” The precise meaning and application of this proscription has emerged from court decisions over the past century. Conduct such as price fixing and horizontal market division that has the predictable effect of inhibiting competition and that appears unlikely to contribute to economic efficiency under any circumstances has been treated as illegal per se. Other activities, which are less destructive of competition and may contribute to economic efficiency, have been examined by courts under a balancing test called the “rule of reason.”

Although early court decisions indicated that the antitrust laws were not intended to reach the conduct of noncommercial entities, more recent decisions have applied the antitrust laws wherever goods or services are exchanged for money, whether for profit or in the service of some higher goal. Moreover, while other provisions of the antitrust laws, such as those dealing with mergers, have fallen in and out of favor over the years as economic theory and political attitudes have evolved, antitrust enforcement authorities have remained consistent in their devotion to the identification and prosecution of price-fixing and related conduct proscribed by Section 1 of the Sherman Act. Supplementing the enforcement efforts of the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission, which operate as the federal antitrust enforcement agencies, the states’ attorneys-general are increasingly willing to take the initiative in addressing issues of public concern, such as the cost of higher education, with all the tools at their disposal, including states’ antitrust laws.

Higher Education Investigation and Ivy Litigation. These trends brought antitrust to colleges in the late 1980’s in the form of an investigation premised on the Antitrust Division’s view that tuition is the “list price” of education, that financial aid represents a discount from that list price, and that the process by which both are determined is subject to scrutiny under Section 1 of the Sherman Act. In addition, the Antitrust Division charged that certain college practices, namely agreeing to award financial aid to undergraduate students only on the basis of need, commonly defining a methodology for determining need, and comparing and adjusting prospective individual aid awards of commonly admitted students (“overlap”) constituted a form of illegal price-fixing.

In 1991, the Ivy League schools (including Yale) entered into a settlement with the U.S. Department of Justice that ended the investigation. The settlement consisted of a judgment filed in the case of United States v. Brown University, et al. and a consent order (the “Consent Decree”), which expired in 2001. The consent decree acknowledged the applicability of antitrust principles to university activities. Although the initial focus was on student aid and admissions decisions, the Consent Decree applied to all forms of joint financial activity, such as discussions regarding salary levels for faculty and staff,

MIT chose to litigate the case, culminating in the Third Circuit Court of Appeals decision reported at 5 F.3d 658 (3rd Cir. 1993). The Third Circuit decision held, in essence, that the antitrust laws do apply in these spheres of college and university operations, but that the cooperation embodied in the Ivy “overlap” system was not to be treated as per se unlawful. Instead, the “overlap” practice must be analyzed under a full “rule of reason” analysis, taking into account the objectives articulated by MIT as justification for the practices, i.e., maintaining access to higher education for the neediest students.

Resulting Standards of Conduct. After the Third Circuit decision, MIT settled with the Government under terms that permit it (and other qualifying schools) to participate in making student financial aid arrangements in accordance with certain standards of conduct (the “MIT Standards”). These standards permit schools to agree to provide only need-based financial aid and to prohibit merit scholarships. They also permit agreements on methods of determining “need,” and they provide for certain limited sharing of student data through a central facility. They prohibit universities from comparing awards offered by different schools to individual students. The benefits of the MIT standards are available, however, only to colleges and universities that both admit United States citizens on a need-blind basis (except students admitted from a wait list) and provide financial aid to meet the full need of all such students.

In 1994, Congress enacted in the Elementary and Secondary Education Act antitrust protection that modified the terms on which the MIT standards were available to Universities. The Act made the core standards available to institutions of higher education that practice need-blind admissions in their regular undergraduate admissions but that do not meet in full the need of their admitted students. This change (“Section 568”) greatly expanded the number of schools that can benefit from the kinds of cooperation permitted by the MIT Standards. Section 568 is due to expire in 2008 unless again extended by Congress.

Although the Consent Decree has expired, except as specifically authorized (for example under Section 568), agreements among schools relating to tuition, financial aid, or salaries and the exchange of nonpublic information concerning these topics are suspect from the standpoint of federal and state antitrust laws, and could expose the University and its employees to government enforcement actions and/or private treble-damage claims. In particular, except as permitted under Section 568, Yale must continue to refrain from agreeing with other educational institutions on the basis upon which financial aid is to be awarded or the manner in which need is measured. Section 568 permits Yale and other qualifying schools to agree to award aid solely on the basis of need, to agree on methods for determining need, to agree to use common aid application forms and to engage in a one-time exchange of certain student data. A qualifying college group exercising these activities has been organized. The “overlap” procedure used before 1991 to compare individual aid awards to students admitted to more than one school, however, and any informal device to achieve similar aims, remain prohibited.

Yale Antitrust Compliance Guidelines. Consistent with Yale University’s established practices under internal guidelines adopted in 1987, the University's revised Antitrust Compliance Guidelines continue to proscribe communication to other schools of certain information concerning current or prospective tuitions, salary and financial aid levels and fees that is not otherwise public. The University, of course, remains free to maintain its own commitments to need-blind admissions and need-based aid and to advocate legislative action by Congress and administrative agencies. Those Guidelines have not been affected by the expiration of the Consent Decree.

Litigation since 1995. Continuing its interest in higher education, the Antitrust Division in 1995 opened an investigation of the Accreditation Committee of the American Bar Association’s Section of Legal Education and Admissions to the Bar (the “ABA Committee”). The next year, the Committee and the Justice Department entered a Final Judgment and Consent Decree in United States v. American Bar Association, pursuant to which the ABA Committee agreed to refrain from using law school compensation data and from adopting or enforcing any standards that have the purpose or effect of imposing requirements as to the base salary, stipends, fringe benefits or other compensation paid to law school deans, administrators, faculty, librarians or other employees. In addition, the ABA Committee agreed to cease collecting or disseminating such compensation data. The restriction on the collection or dissemination of salary data applies to historical data, as well as current data and projections.

The private plaintiffs’ antitrust bar has also pursued educational institutions and education-related organizations. In Law v. NCAA, 134 F.3d 1010 (10th Cir. 1998), three plaintiffs’ classes consisting of 1,900 athletics coaches sued the NCAA and obtained an injunction and a jury award of $22.3 million – automatically trebled to $67 million under the antitrust laws – based on a conspiracy to restrain coaches’ salaries under the “restricted earnings” rule. Seeking to reduce the athletics costs “without disturbing the competitive balance” among member institutions, the NCAA had adopted a rule that limited the number of coaches in Division I sports and required the designation of certain coaches as “restricted earnings coaches” with a salary cap. In affirming the District Court’s injunction and determination of liability, the Tenth Circuit Court of Appeals found that the NCAA had failed to prove that the salary restrictions enhance competition, level an uneven playing field or reduce coaching inequities, much less that these goals could not be pursued by less anticompetitive means.

In May 2002 a private antitrust suit was filed challenging the “match” program for assigning prospective resident physicians to positions operated by the National Resident Matching Program, the exchange of resident compensation information through a survey conducted by the Association of American Medical Colleges and the distribution of compensation information through the American Medical Association’s electronic database, and various accreditation policies of the Accreditation Council for Graduate Medical Education. The suit, which named as defendants 29 institutions sponsoring residency programs, including Yale-New Haven Hospital, sought injunctive relief and treble damages on behalf of the more than 200,000 persons employed as residents in ACGME-accredited programs since May 7, 1998.

In this situation, Congress intervened. In the Pension Funding Equity Act of 2004, it enacted Section 207, "Confirmation of Antitrust Status of Graduate Medical Resident Matching Programs," which provides that it is not unlawful under the antitrust laws to sponsor, conduct, or participate in a residency matching program. Following the enactment of Section 207, a final judgment was entered in favor of the defendant institutions in August, 2004. As of this writing, the plaintiffs were seeking to appeal.

Court decisions outside of the higher education context also continue to provide guidance as to the propriety under antitrust principles of information exchanges. In December 2001, the Second Circuit Court of Appeals, which includes the States of Connecticut and New York, ruled in Todd v. Exxon Corp., 275 F.3d 191 (2d Cir. 2001), that an exchange among leading firms in a concentrated industry (oil and petrochemical companies) of nonpublic data on managerial, professional and technical employees’ salaries could form the basis for an antitrust class action suit by employees of one of the firms, even in the absence of an actual agreement among the firms to fix salaries. Noting the observation of the U.S. Supreme Court in United States v. United States Gypsum Co., 438 U.S. 422 (1978), that exchanges of price data can sometimes “increase economic efficiency and render markets more, rather than less, competitive,” the Second Circuit nevertheless concluded that the concentrated nature of the industry and the character of the exchange of salary information among its leading firms – disaggregated data, no public dissemination and frequent exchanges – “are precisely those [factors] that arouse suspicion of anticompetitive activity under the rule of reason.”

In view of these trends, regardless of how individuals may feel about the issues, the antitrust laws, along with the Antitrust Compliance Guidelines, must govern our conduct. The civil and criminal sanctions available to enforcement authorities in the event of violations of these laws, as well as the threat of private treble damages actions, makes it imperative that those who make or recommend decisions on tuition, salaries and financial aid remain aware of the how these laws may apply.