Proceed with Caution: How Antitrust Law Affects Schools

Summer 2017

By Debra Wilson

For more than a decade, the heads of three different schools in one metropolitan area have met for lunch once a month. Every November they discuss their projected tuition and salary increases and the tight market. All three schools have had virtually the same percentage increases in tuition for the last 10 years. However, before they started meeting regularly, the schools had markedly different variances. Have these heads inadvertently entered into an implicit agreement? That’s not clear. Have they created a potential problem for themselves? As a matter of fact, yes.

And don’t think you need to be the head of a school to cross the line. Admissions directors agreeing not to recruit students from other schools, department chairs discussing not interviewing teachers for each others’ schools, all of these can also land your school in hot water.

Despite how much independent schools may work together to determine best approaches to manage risks, encourage cultural norms, and develop innovative ideas in curriculum, governance structures, fundraising strategies, and a variety of other areas important to the success of the independent school community, our schools are still competitors.

Competition, as it is for most marketplaces, is generally good for schools. In part, because of this, there are laws that require that healthy competition grow in the marketplace and forbid collusion between competitors. These antitrust laws—so named because they ensure that the public can trust the marketplace—work to keep competitors at arm’s length and not artificially affect the pricing or demand for the product. And these laws apply to independent schools.

For this reason, schools need to be aware of key areas that are off the table when it comes to collaboration and how the federal agencies charged with enforcing antitrust law see impermissible collaboration in basic everyday communications and meetings—including monthly breakfasts that bring together administrators from area schools, human resource professionals discussing teachers possibly moving to a competitor school, and even the collection and distribution of data. The casual nature of our industry makes it that much more important that schools are aware of the lines in the sand.

An Overview

Antitrust law is a specific niche within the legal landscape and not something lay people readily understand. That said, it can be reduced to a simple principle: Competitors must make significant business decisions individually rather than making them together.

This is true for any factor that can have a serious effect on competition, including tuition, salaries, which families to admit, and so on. This is true even if the collective whole and the individuals would come to the same conclusion. For example, several schools in the same market might decide that tuition remission has become too big of a budgetary burden and that providing for 50 percent tuition remission for a staff member’s first two children is an appropriate benefit. Individually, a number of schools could come to that conclusion. Collectively making that decision may be seen as impermissibly setting benefits between schools to level the competitive playing field when it comes to compensation.

This example illustrates the main principle behind the Sherman Act, which is the original and arguably most important antitrust law. This law prohibits agreements among competitors that unreasonably restrain commerce. By locking in staff benefits—or salaries—among competitors, the schools would be restraining the movement of staff among schools and taking away the ability for a competitor to use that important lever to compete against other schools.

Beyond the Sherman Act, the Federal Trade Commission Act provides the Federal Trade Commission (FTC) the authority to enforce the Sherman Act and the more broadly defined “unfair practices.” In theory, the FTC Act has authority only over profit-seeking entities. However, in recent years the FTC has become more engaged and interested in the nonprofit landscape. Schools should also be aware that the Department of Justice may bring investigations and actions under antitrust laws, and many states have antitrust and other unfair business practice laws as well. These generally follow the federal philosophies and enforcement paradigms and have the same objectives.

What Is an Antitrust Violation?

There are two main categories of antitrust violations: actions that are unlawful without regard to their actual impact on competition (called per se violations), and actions that are not necessarily unlawful, but may be so depending on their actual impact on competitive conditions (called Rule of Reason violations).

Actions that are most likely to be considered per se unlawful—often the easiest to spot—include the following:

  • Agreements fixing prices or fees or setting floors or ceilings on prices or fees. For example, schools agreeing not to go below a certain tuition amount in a market.
  • Agreements to boycott competitors, suppliers, third-party payers, or customers/clients. An example of this could be schools collectively agreeing not to take a family unless the family pays off its debts to all previous schools.
  • Agreements among competitors dividing or allocating markets or market shares. For example, schools agreeing not to take families from certain areas seen as another school’s “market.”
  • Agreements coerced by a provider with a dominant market position tying the purchase or provision of one product or service to the purchase or provision of another product or service, so-called “tying.” This particular agreement, while still within the law, has come under scrutiny by the courts and is less of a concern. 

“Agreements” to restrain competition can occur by mutual understandings or other informal arrangements falling far short of a formal contract or written resolution. It is more common for illegal agreements to be reached in informal settings than in the context of formal meetings. Individuals may violate the antitrust laws or implicate their schools in antitrust violations by using almost any venue to facilitate their undertaking anticompetitive arrangements among themselves.

The other category is much more complex to spot and argue and much harder for competitors to understand before they find themselves in it. This category includes any other agreement or action that may restrain trade under a Rule of Reason analysis. Under this analysis, the court looks at if there is an anticompetitive effect of the action or agreement, whether there is a balancing pro-competitive effect, and if there was another less restraining way to achieve that objective. This approach is more common under antitrust law but also more complex in terms of litigation and understanding.

What If You Get Sued and Lose?

Violations of the antitrust laws may be prosecuted by the state or federal governments, civilly or criminally, as well as by injured private persons or entities (i.e., applicants, students, staff, and other schools). Courts may award injunctive relief against violators (requiring them to stop what they are doing) and may require violators to pay victims three times the financial injury actually suffered, plus their attorneys’ fees.

Personal and individual liability under the antitrust laws is generally imposed only where the entity’s agents are actively and knowingly engaged in antitrust violations. Therefore, although an employee or volunteer of an independent school could be held personally liable for violations of the antitrust laws, that is likely only in the most extreme circumstances of an individual actively and knowingly encouraging or arranging anticompetitive conduct. Antitrust claims against a school rather than an individual, however, are potentially more likely.

So What Does This Mean to a School?

To know how these risks exist in the day-to-day life of schools, you need to understand what might trigger anticompetitive concerns. An action can be considered anticompetitive when an explicit or implied agreement among competitors artificially adjusts prices or fees or lowers the quantity or availability of goods or services.

Prices and fees are a particularly sensitive area. Any action of a group of schools that could be seen as “fixing pricing”—directly raising, lowering, or stabilizing prices or fees—has the highest risk of antitrust scrutiny and the greatest potential penalties. In the independent school context, prices and fees would include such items as tuition, program fees, camp fees, additional add-on fees, or financial aid allocation. Even actions that may only indirectly affect prices and fees, such as agreements on salaries, class size, limitations on the extent or type of marketing and promotion, and hours of operation or length of term, could attract antitrust scrutiny. The U.S. Supreme Court has ruled that it is illegal for two or more competitors to agree to lower or stabilize prices or fees, so if independent schools agreed among themselves that they would not raise tuitions, that, too, could run the risk of violating antitrust laws as it artificially influences the market. 

Sharing Data

In the aforementioned example of the heads of schools meeting for lunch monthly, administrators who are gathering information or sharing anecdotes about increased costs are not entering into agreements based on this information; the communications do not result in written contracts, or even written exchanges. However, the courts look for “implied agreements.” In these cases, if the individuals, information, and anticompetitive outcome are all present in the scenario, the court is not interested in the best intentions of the parties at hand. The mere discussion of anti-competitive conduct, followed by consistent and resulting joint action, can be considered an “agreement” to restrain trade. These cases are more ambiguous, but they do move forward. For schools engaging in this kind of information sharing, the risk of the litigation and its profound impact on the reputations of the schools involved is likely not worth the information exchanged.

Data collection among competitors can be a particularly hot topic with the FTC. One of the easiest ways for a school to stay out of trouble is to avoid collecting competitor data and sharing it. It’s one of the reasons that third parties like NAIS and other organizations help facilitate this work. The FTC and other agencies have laid out a “safety zone” of practices when it comes to the collection of competitively sensitive information among competitors:

  • The data is gathered by a third party (like a trade association or outside consultant).
  • The data is more than three months old.
  • The data involves at least five participants (and no one participant accounts for more than 25 percent on a weighted basis of the statistic reported).
  • The data is aggregated in such a way that it would not be possible to identify the data of any particular participant.

Recent Issues: Employees and Students

The topic of employees and antitrust issues has received a lot of attention in the last few years. Of particular interest to schools are two different actions. In the first, the FTC challenged the ethics principles of the Music Teachers National Association (MTNA). These principles provided that member piano teachers would not “poach” students of other teachers within the group. The FTC and the MTNA ultimately came to a settlement that provides that the MTNA would stop restricting or declaring it unethical for its members to solicit teaching work by any means. It also requires the MTNA to stop affiliating with other local groups that have codes of ethics that restrain their members from charging fees that are lower than the average in the community, offering free lessons or scholarships, or advertising free scholarships or tuition. In the independent school world, a similar restraint would be schools agreeing not to solicit or accept students from other independent schools, or prohibiting other schools from using their price levers through tuition-setting or various forms of financial aid.

More recently, a class action lawsuit and a Department of Justice criminal action were brought against a number of high-profile Silicon Valley technology companies. The class action lawsuit alleged, and ultimately proved, that the technology companies had agreed not to poach one another’s employees. The suit argued that this agreement ultimately lowered salaries of affected employees as the lack of mobility between employers undermined the salary negotiations for this class. Similarly, if independent schools in a particular market agree not to approach one another’s employees, the same result could be had. This kind of agreement is not allowed under antitrust laws. Staff members are generally allowed to seek employment in other venues and should not be artificially limited in their choices by leadership of schools agreeing not to provide such opportunities.

How to Stay Out of Hot Water

Although the potential for antitrust liability exists at every school, adhering to the following guidelines will minimize the risk:

  • Avoid group discussions, agreements, resolutions, or other actions—formal or informal, written or oral—that restrict: staff choices and recruitment; marketing or recruiting to certain students or families; tuition levels, salary levels, benefits, and other topics impacting financials; or limit other competitive levers within the schools.
  • Avoid any action that appears likely to have the effect of raising, lowering, or stabilizing tuition or fees for schools or related programs.
  • Avoid any action that appears likely to reduce the quantity, quality, or access to services of independent schools.
  • Follow the FTC safety zone when collecting sensitive data.
  • Seek legal counsel whenever there is a potential antitrust concern.

Before school administrators enter into conversations or agreements about anything that may impact pricing; business policies that may impact recruitment, acceptance, or retention of families; or items related to staff retention, recruitment, salaries, or compensation, they must think about whether the conversation is truly necessary in light of the available data, as well as whether the exchange or agreed-upon principles would be seen as fair and just to those that may be affected by it. Whenever schools or their overarching associations have a question about whether such an exchange should take place or a principle should be adopted, they should seek legal counsel.

Sidebar: Are You Safe?

Schools can—and often do—work together. If, for example, you are working together with other schools to grow the industry and the overall market for the schools in the area, consider the following checklist of topics to engage in and avoid. (Checking in with legal counsel or creating some safe parameters for your group is always a good option.) 

Stick to these common-good issues:

  • Marketing the industry (group marketing, events).
  • Organizing events to bring more families to local schools (open houses, admission fairs, etc.).
  • Working together to approach local government authorities on relevant issues.
  • Discussing challenges related to running schools (e.g., managing different kinds of risk, helpful policies and procedures related to noncompetitive topics, etc.).
  • Shared solutions (e.g., combining international trips, sharing bus routes, vendor information, etc.).

Stay away from competitive-landscape issues:

  • Restrictions on staff choices and recruitment.
  • Restrictions on marketing or recruiting students or families.
  • Restrictions or encouragement on tuition levels, salary levels, benefits, and other topics impacting financials.
  • Restrictions or limitations on other competitive levers within the schools.
  • Future business or strategic plans of competitive value.
Debra Wilson

Debra P. Wilson is president of NAIS. Previously, she was president of the Southern Association of Independent Schools and general counsel for NAIS.