U.S. v. Brown University in Providence in State of R.I.

Page 658

5 F.3d 658

62 USLW 2170, 1993-2 Trade Cases 70,358,

85 Ed. Law Rep. 1027

The UNITED STATES of America v. BROWN UNIVERSITY IN PROVIDENCE IN the STATE OF RHODE ISLAND and Providence Plantations; the Trustees of Columbia University In the City of New York; Cornell University the Trustees of Dartmouth College; President and Fellows of Harvard College, Massachusetts; Massachusetts Institute of Technology; the Trustees of Princeton University; the Trustees of the University of Pennsylvania; Yale University Massachusetts Institute of Technology, Appellant.

No. 92-1911.

United States Court of Appeals Third Circuit.

Argued June 22, 1993.

Decided Sept. 17, 1993.

Robert B. Nicholson, David Seidman (argued), Robert E. Bloch, U.S. Dept. of Justice, Antitrust Division, Washington, DC, for U.S.

Andre L. Dennis, Stradley, Ronon, Stevens & Young, Philadelphia, PA, Thane D. Scott (argued), Palmer & Dodge, Boston, MA, for Massachusetts Institute of Technology, appellant.

Donald K. Joseph, Wolf, Block, Schoor & Solis-Cohen, Philadelphia, PA, Association of Alumni and Alumnae of the Massachusetts Institute of Technology, for amicus-appellant.

A. Leon Higginbotham, Jr. (argued pro bono publico), Paul, Weiss, Rifkind, Wharton & Garrison, New York City, School Dist. of Philadelphia, Urban League of Philadelphia, Greater Philadelphia Urban Affairs Coalition, Hispanic Bar Ass'n of Pennsylvania, Barristers Ass'n of Philadelphia, Inc., Asian American Bar Ass'n of the Delaware Valley Nat. Bar Ass'n, Nat. Bar Ass'n Women Lawyers Div., Philadelphia Chapter, for amicus-appellants.

Melvin A. Schwarz, Dechert, Price & Rhoads, Philadelphia, PA, Rockefeller Bros. Fund, Inc., for amicus-appellant.

Eugene D. Gulland, Covington & Burling, Washington, DC, the American Council on Educ., the Ass'n of American Medical Colleges, the Ass'n of American Universities, the Ass'n of Catholic Colleges and Universities, the Ass'n of Jesuit Colleges and Universities, the College Board, the Council of Independent Colleges, the Nat. Ass'n of Independent Colleges and Universities, the Nat. Ass'n of State Universities and Land-Grant Colleges, the Nat. Ass'n of Student Financial Aid Administrators, the Nat. Ass'n of Student Personnel Administrators, the United Negro College Fund, for amicus-appellants.

Before: MANSMANN, COWEN and WEIS, Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

The Antitrust Division of the United States Department of Justice ("Division") brought this civil antitrust action against appellant Massachusetts Institute of Technology ("MIT") and eight Ivy League colleges and universities. The Division alleged that MIT violated section one et seq. of the Sherman Anti-Trust Act, 15 U.S.C. Sec. 1 et seq., by agreeing with the Ivy League schools to distribute financial aid exclusively on the basis of need and to collectively determine the amount of financial assistance commonly admitted students would be awarded.

The district court entered judgment in favor of the Division. United States v. Brown University, et al., 805 F.Supp. 288 (E.D.Pa.1992). We agree with the district court that the challenged practices implicate "trade or commerce" within the meaning of section one, and should be accorded more inquiry than a conclusory rejection under the per se rule, given the institutional context. However, we hold that the district court erred by failing to adequately consider the procompetitive and social welfare justifications proffered by MIT and by deciding the case on the basis of an abbreviated rule of reason analysis. We therefore will reverse the judgment of the district court and remand for further proceedings consistent with this opinion.

I. FACTUAL AND PROCEDURAL BACKGROUND

MIT, founded in 1861, is a private nonprofit institution of higher education offering undergraduate and graduate programs. According to MIT's charter, it exists to maintain a school of industrial science and to advance the practical application of science. Its governing body, the MIT Corporation, is comprised of distinguished leaders in science, engineering, industry, education and public service. By virtue of its educational mission, MIT qualifies as a charitable, tax-exempt corporation under the Internal Revenue Code. See 26 U.S.C. Sec. 501(c)(3).

MIT has vast resources. It has an operating budget of $1.1 billion and an endowment of $1.5 billion, among the ten largest in the nation. It receives in excess of $200 million annually in tuition and room and board payments. Although the annual student budget (tuition, room and board, books and incidental expenses) is approximately $25,000, MIT still operates its undergraduate educational program at a significant loss. Alumni contributions and investment income from the endowment heavily subsidize the cost of MIT's educational services.

Each year, MIT receives between six and seven thousand applications for admission to its undergraduate program. MIT then evaluates applicants' grades, class rank, standardized test scores and personal accomplishments, and admits approximately 2,000 students. Approximately 1,100 of the accepted students ultimately matriculate at MIT. MIT accepts only exceptionally talented students. In the 1991-92 academic year, eighty-three percent of the first-year class were in the top five percent of their high school class and eighty percent had math SAT scores over 700. MIT's principal competitors for these high quality undergraduate students are Harvard, Princeton, Yale and Stanford. In 1988, eighty-two percent of all students admitted to MIT chose to attend either MIT, an Ivy League school or Stanford.

Although MIT could fill its entire entering class with students able to pay the full tuition, it utilizes a need-blind admissions system under which all admission decisions are based entirely on merit without consideration of an applicant's ability to pay tuition. Because financial status is irrelevant, very intelligent but needy students are preferred over less accomplished but more affluent ones. To provide admitted needy students with a realistic opportunity to enroll, MIT also is committed to satisfying the full financial aid needs of its student body. This commitment is expensive. In the 1991-92 academic year, fifty-seven percent of the entering class received some financial aid. The combination of need-blind admissions and full need-based aid allows many students to attend MIT who otherwise could not afford to attend. For the 1991-92 academic year, minorities comprised forty-four percent of the entering class, while thirty years earlier minorities represented only three to four percent of the undergraduate class.

Before explaining how MIT calculates financial assistance packages, we provide an overview of the financial aid process. Under the federal financial aid program, students and their families must use their combined assets to pay for the students' college education. See 20 U.S.C. Secs. 1087kk, 1087mm. When family assets are insufficient to meet expenses, the student is eligible for federal loans and loan guarantees. See id. To qualify for federal financial aid, students and their parents must disclose financial information to the College Scholarship Service ("CSS"). CSS processes this information and distributes the results to the United States Department of Education, which calculates each aid applicant's expected family contribution using the "Congressional Methodology" formula. The family contribution is the amount the student and his or her family may reasonably be expected to contribute annually toward educational expenses. See id. Sec. 1087mm. CSS then forwards these results to participating institutions.

Under the Congressional Methodology, schools may increase or decrease the family contribution determination using their professional judgment. See id. Sec. 1087tt(a). Professional judgment may be used only on a case-by-case basis when special circumstances exist. See id. Through the exercise of professional judgment, schools may have differing family contribution determinations for the same applicant. If a student receives any federal aid, however, he or she may not receive supplemental aid from an institution that would exceed his or her need as computed under the Congressional Methodology.

In 1958, MIT and the eight Ivy League schools ¹ formed the "Ivy Overlap Group" to collectively determine the amount of financial assistance to award to commonly admitted students. The facts concerning this Agreement are essentially undisputed. The Ivy Overlap Group expressly agreed that they would award financial aid only on the basis of demonstrated need. Thus, merit-based aid was prohibited. To ensure that aid packages would be comparable, the participants agreed to share financial information concerning admitted candidates and to jointly develop and apply a uniform needs analysis for assessing family contributions. ² The Ivy Overlap Group conducted their needs analysis pursuant to the "Ivy Methodology," which differed from the Congressional Methodology in several significant respects. For example, when a family has two or more children simultaneously attending college, the Congressional Methodology evenly apportions the parental contribution while the Ivy Methodology apportions the contribution based on the relative cost of the colleges. When a student's parents are divorced, the Congressional Methodology expects a parental contribution only from the custodial parent while the Ivy Methodology expects a contribution from both the custodial and noncustodial parents. Each deviation resulted in less generous aid packages than under the Congressional Methodology.

Although each Ivy Overlap institution employed the same analysis to compute family contributions, discrepancies in the contribution figures still arose. To eliminate these discrepancies, the Overlap members agreed to meet in early April each year to jointly determine the amount of the family...