Varsity Blues and Corner Boys: Defending The 568 Cartel
Twenty years ago, HBO premiered a gritty urban drug crime drama set in B’more called The Wire. It focused primarily on corner boys — the small fry hustlers, the inner city version of last mile delivery in a long distribution chain. The corner boys retailed pharmaceuticals from local retail shops set up at strategically located corners. They were rich relative to overall wealth of the neighborhood. They always had nice jeans, gold or silver jewelry and brand new Nikes or Lugs. Of course the real wealth resided uptown — Guilford, maybe — at the start of the distribution chain. More on that later.
In other news it looks like its all over but the crying in the Varsity Blues scandal. The mastermind, Rick Singer got 42 months for selling access to prestigious colleges and universities. Felicity Huffman and a few less well known wealthy moms and dads received from 2 to four months in jail. Lots of coaches got fired, too. If what Rick Singer and the coaches were selling were drugs, rather than admission to highly selective universities, they would have been corner boys. And if Rick and the coaches were corner boys, who would have been the kingpins, the ones getting rich at the start of the distribution chain?
THE TAX STUFF
Henry v. Brown University, et. al, an antitrust case working its way through the Northern District of Illinois, pretty much identifies the elite colleges themselves as the kingpins. At the same time, the complaint call into question whether those universities adequately serve the less wealthy. DOJ is on the side of the plaintiffs. And you can view all the pleadings and lots of media coverage here at plaintiff’s counsel’s website.
For now, here is the long and short of it: Colleges and Universities have, for about the past 20 years, enjoyed an antitrust exemption (the 568 exemption, which was allowed to sunset late last year) allowing them to fix prices by forming what the plaintiffs smartly label the “568 Cartel,” But the exemption required the kingpins implement and adhere to need-blind admission policies. Need blind admission policies means colleges can’t give preferences to wealthy parents or donors in the hopes that admitting those students will lead to more big donations. The complaint makes a serious case — with many examples — that elite universities, especially, practice affirmative action for the wealthy by giving rich kids preference. Some of the universities even implement “separate and equal” admissions procedures for children of wealthy donors. Here are a few snippets from the 61 page complaint (which has survived an onslaught of motions to dismiss):
1. Defendants are private, national universities that have long been in the top 25 of the U.S. News & World Report rankings for such schools. These elite institutions occupy a place of privilege and importance in American society. And yet these same Defendants, by their own admission, have participated in a price-fixing cartel that is designed to reduce or eliminate financial aid as a locus of competition, and that in fact has artificially inflated the net price of attendance for students receiving financial aid. Defendants participate in the cartel claiming the protection of Section 568 of the Improving America’s Schools Act of 1994 (the “568 Exemption”). This exemption from the antitrust laws, which otherwise prohibit conspiracies among competitors, applies to two or more institutions of higher education at which “all students admitted are admitted on a need-blind basis.” Section 568 defines “on a need-blind basis” to mean “without regard to the financial circumstances of the student involved or the student’s family.”
2. Defendants have not been entitled to the 568 Exemption. Under a true need-blind admissions system, all students would be admitted without regard to the financial circumstances of the student or student’s family. Far from following this practice, at least nine Defendants for many years have favored wealthy applicants in the admissions process. These nine Defendants have thus made admissions decisions with regard to the financial circumstances of students and their families, thereby disfavoring students who need financial aid. All Defendants, in turn, have conspired to reduce the amount of financial aid they provide to admitted students. This conspiracy, which has existed (with slightly varying membership) for many years, thus falls outside the exemption from the antitrust laws.
3. Defendants are members of the so-called “568 Presidents Group,” in which the members have agreed on “a set of common standards for determining the family’s ability to pay for college,” which the members describe as the “Consensus Approach.” Based on the Consensus Approach, in approximately 2003 the 568 Presidents Group (the “568 Cartel”) devised the Consensus Methodology, which is a common formula for determining an applicant’s ability to pay. Under the Consensus Methodology, an applicant’s ability to pay is a substantial determinant of the net price, which is the institution’s gross tuition plus fees for room and board, less institutional grant aid, charged to the applicant for attendance.
5. Defendants’ longstanding conspiracy would be immune from the antitrust laws only if they have all been complying with the 568 Exemption. In fact, however, at least nine Defendants (Columbia, Dartmouth, Duke, Georgetown, MIT, Northwestern, Notre Dame, Penn, and Vanderbilt) have been members of the 568 Cartel and have not qualified for the 568 Exemption throughout the Class Periods (defined below).
Essentially, the complaint alleges that the universities were never entitled to fix prices because they were hardly charitable, as that term relates to serving all without regard to wealth. I am not an antitrust expert, but I imagine price fixing hurts the poorest consumers the most. Which makes me wonder why Congress would ever sanction price fixing amongst charities. If the universities were honest (naturally they deny it all), they would argue that giving a relative few super wealthy people preference helps the charitable mission, even if the preference disadvantages a few less wealthy people,. Then we could have a serious debate acknowledging both sides of the issue. The private benefit to the super wealthy advantage so many other less wealthy people that its worth the trouble. Here is what I thought of to help me think of a plausible justification:
Suppose a soup kitchen had enough soup to feed ten hungry people per day. People queue every day for soup and every day at least five people don’t eat because the kitchen runs out of soup. Every once in awhile, the 10th person — Number 10 — is passed over in favor of somebody behind her. The unlucky Number 10 that day doesn’t eat. It doesn’t matter that Number 10 worked harder, waited in line longer, or was otherwise more legitimately deserving of soup that day. The person given preference — Number 11 — is someone who needs the soup and has lots of other assets that can help the soup kitchen feed more people per day. It doesn’t really matter that Number 11 didn’t work as hard, woke up late and got in line late. Because if Number 11 gets soup today, she may donate some of her other wealth to the kitchen and the kitchen will be able to increase the amount of soup available to 15 bowls a day maybe. The average number of hungry people per day decreases dramatically. Ultimately, the increase in charitable outreach — from 10 to 15 bowls of soup per day — outweighs the private benefit inuring to the preferred person able to afford to get to the front of the que, or at least ahead of number 10.
So it might be knee-jerk to condemn the universities or the soup kitchens. Maybe we can tolerate a little private benefit today, for much more public benefit tomorrow. We should think this through because Rick and the coaches were just corner boys.
darryll jones