A recently filed antitrust complaint against Duke University (Duke) provides a fresh reminder for colleges and universities that the state action immunity doctrine is unlikely to be a complete shield from antitrust liability even if a public university is involved. On May 29, a professor at the University of North Carolina (UNC) filed a complaint against Duke alleging that UNC and Duke had an agreement not to recruit each other’s faculty.
The alleged conduct came to light during discovery in a similar lawsuit, Seaman v. Duke University, brought in 2015 against Duke’s and UNC’s medical schools related to a no-poach agreement regarding medical faculty.
An important issue litigated in the Seaman case was the extent of protection afforded to UNC and Duke under the state action doctrine. In that case, UNC’s and Duke’s primary defense was that UNC’s state action immunity exempted any agreement by UNC from the antitrust laws. The state action doctrine in the antitrust context holds that states are immune from liability under federal antitrust laws when acting in their sovereign capacity because the Sherman Act was not intended to restrain a state’s sovereignty.
The immunity granted to a state’s direct actions – e.g., acts by the state legislature or supreme court – is sometimes called “ipso facto” immunity because it applies automatically as long as the state is acting directly and in its sovereign capacity. Courts have extended state action immunity to some actions by actors other than state legislatures and supreme courts, including state agencies, state institutions and private parties acting at the direction of a state, but only when (1) the state entity is “acting under a clearly articulated and affirmatively expressed state policy to displace competition, made by the state itself” and (2) “the conduct is actively supervised by the state.” These two requirements are known as the Midcal factors as they were laid out by the Supreme Court in California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc.
In Seaman, the defendants argued that UNC’s agreement was protected from antitrust laws under ipso facto immunity because UNC was established by the North Carolina constitution, and in the alternative, that UNC’s actions were protected because they met the Midcal factors. Though UNC settled out of the case before the issue was fully litigated, its qualification for state action immunity remained an issue at the summary judgment stage because Duke argued that UNC’s state action immunity protected the agreement as well as the parties to the agreement.
The Antitrust Division of the Department of Justice (DOJ) filed a statement of interest in the case taking the position that (1) state agencies such as UNC are not ipso facto immune under the state action doctrine, and (2) even if they were, UNC was acting purely as a market participant in this case, not as a regulator. The Antitrust Division also argued that UNC was not immune under the Midcal test because North Carolina has not clearly articulated a policy to displace competition in medical faculty hiring and the state had not actively supervised UNC’s actions. Shortly after the DOJ’s intervention, Duke agreed to settle the case.
Through its statement of interest in the Seaman case, the Antitrust Division made clear that the state action immunity applies narrowly to public colleges and universities. That is, in order to qualify for protection, public colleges and universities must demonstrate that their actions meet the two prongs of the Midcal test – that they were taken according to a clearly articulated state policy to displace competition, and that they were actively supervised by the state.
Colleges and universities should keep the DOJ’s position in mind as they address the crisis posed by COVID-19. In March, nearly every college and university in the United States sent students home and finished the semester with some sort of online learning. While most schools to some degree refunded money paid by students, few schools provided complete refunds for tuition. In response, students filed hundreds of lawsuits, many of them class actions. These lawsuits are seeking refunds at a time when colleges and universities are facing enormous financial challenges, including the possibility of decreased enrollment, with many students considering taking a gap year instead of returning to school in the fall.
These mounting pressures have created a crisis for colleges and universities both big and small, public and private. And in times of crisis, it is not uncommon for businesses and institutions to look to their peers for guidance on how to resolve existential problems. Reports indicate that college and university presidents and administrators from different schools are communicating frequently. One report indicated that 12 to 50 college presidents were meeting up to three times a week to “share best practices and talk about the strange circumstances forced upon the higher education sector.” Another report indicated that “representatives of several prominent universities discussed jointly canceling open houses for international students . . . so that rival schools would not gain a competitive edge with recruits.”
The antitrust laws prohibit colleges and universities from agreeing with each other to limit their competition as market participants, including with respect to any aspect of the recruitment of students and faculty. A major aspect of competition for students is tuition (or price), and because refunds are a component of tuition paid by students, colleges and universities must make decisions about their refunds independently of other colleges and universities. The antitrust laws may also prohibit colleges and universities from agreeing on other competitive aspects of their offerings to students, including when in-person classes will resume, gap year policies (i.e., whether students would need to reapply afterward) and recruitment of transfer students from other schools.
Given the scrutiny they are facing from students-turned-plaintiffs and their attorneys in the wake of the COVID-19 crisis, colleges and universities need to tread carefully in their communications and collaborations with competing institutions. The DOJ’s position in and the outcome of the Seaman case are good reminders that even public colleges and universities are unlikely to be protected from antitrust liability under the state action doctrine.
Complaint, Binotti v. Duke University, No. 1:20-cv-470 (M.D.N.C. May 27, 2020).
California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980).
445 U.S. 97, 105 (1980) (Midcal).
Collin Binkley, AP, “Unimpressed by online classes, college students seek refunds” (May 3, 2020) (available at https://apnews.com/f18a0a48925a19586e4d810f6e88eff3).
Wall Street Journal, “Incoming College Students Could Take Gap Year Over Covid-19 Uncertainty” (May 5, 2020) (available at https://www.wsj.com/articles/incoming-college-students-could-take-gap-year-over-covid-19-uncertainty-11588687598).