Sagers: The Antitrust Implications Of LSAC's Threatened Expulsion Of University Of Arizona Over Use Of GRE In Law School Admissions

Following up on my previous posts:

• The Empire Strikes Back: LSAC Threatens To Expel University Of Arizona Over Use Of GRE In Law School Admissions (May 1, 2016)
• 148 Deans Demand LSAC Rescind Threat To Expel University Of Arizona Over Use Of GRE In Law School Admissions (May 5, 2016)

TaxProf Blog op-ed:  Did LSAC Just Get Itself In Antitrust Trouble? Could Be; It’s Kind of Hard to Say, by Christopher L. Sagers (Cleveland State):

Here’s a story of a kind that’s been of acute interest to me, ever since my own absurdly dismal LSAT score nearly cost me entrance to any law school and unambiguously predicted I would flunk out of the one that grudgingly took me off its wait list. (That latter prediction was rather mistaken as it happens, thank you very much).

The Law School Admissions Council and its erstwhile member the University of Arizona College of Law got some headlines last week, and battle lines are forming quickly. LSAC ejected Arizona over its choice to permit applicants to submit GRE scores instead of LSAT scores. Arizona was the very first law school to do so, basing its decision on a study finding the GRE as predictive of first-year law school success as the LSAT. Dean Marc Miller said his goal is to “reach a broader pool of would-be applicants,” in order “to put together the best and most diverse class we can.” LSAC expulsion, he said, “seems like a pretty bald way to punish us for innovating.”

LSAC’s move looking rather like a collective act of its law school members to control the means by which they’ll sell the legal education product, and the industry being one that has generated a fair bit of antitrust litigation, a natural question is whether the expulsion could expose anyone to antitrust risks. Critics quickly said as much; as one of them put it, “I’m no antitrust expert, but this rule smells bad.”

I tend to agree, but an antitrust suit by either the government or disaffected law schools would be no slam dunk. It would be a long, expensive slog, and it’s hard to be too sure how it plays out.

LSAC is a free-standing, nominally independent, non-profit entity whose members are law schools. Member schools must require “substantially all” applicants to take the LSAT (see LSAC Bylaws § 1.) On one level, that organization and membership definitely counsel antitrust caution. However the members may see themselves and their work at LSAC, there is not too terribly much question that by its nature LSAC’s governing body constitutes a “contract, combination . . . or conspiracy” within the meaning of Sherman Act § 1, that neither its non-profit nature nor the educational character of its work take it outside the “trade or commerce” subject to that statute, and that its regulations affecting law school admissions are a “restraint” that could conceivably violate the law. It does not help that, despite its nominal independence, LSAC bears appearances of working closely with and having influence over the ABA’s law school accreditation body. Until Arizona was expelled, all ABA-accredited schools were LSAC members, and the only exam specifically identified as satisfying the ABA’s accreditation rules is the LSAT. The ABA body itself is pretty routinely sued in antitrust, including in one notorious case by the federal Justice Department.

But whether this particular case violates antitrust is not an easy question, and it’s a harder one than that famous Justice Department case of the late 1990s (in which the challenged accreditation rules actually restrained law professor salaries).

The key legal precedent would be Northwest Wholesale Stationers, Inc. v. Pacific Stationery and Printing Co., 472 U.S. 284 (1985), a case with effectively the same facts. Several small stationery stores built a purchasing cooperative to get themselves access to volume-discounted wholesale prices enjoyed by their larger competitors. A membership rule in its bylaws prohibited members from themselves being vertically integrated into wholesale. When one of them was acquired by a wholesaler, the other members expelled it for violating the vertical integration rule, and it sued, alleging that its expulsion was a “horizontal group boycott” of a kind sometimes held per se illegal in antitrust. The Court disagreed, and said the per se rule won’t apply to membership rules of a joint venture that produces some pro-competitive product, where those rules are plausibly related to serving the venture’s desirable purposes. In such cases a plaintiff can still sue, but must do so under the much more burdensome “rule of reason.” That means plaintiff must show not only that the restraint occurred (which is all that is required when the per se rule applies), but also that it restrained competition “unreasonably.” Generally speaking, that means a plaintiff has to show that the restraint caused the price of some good to go up or the output of it to go down.

I think University of Arizona v. LSAC would be a rule of reason case. That means it’s likely pretty hard, and it would depend to some large extent on figuring out the parties’ motivations and the effects of their actions. That in turn is a pretty fact-dependent matter driven by what the documents show and what the experts can demonstrate.

No doubt the objecting law schools see a big part of the narrative of any such case being LSAC’s frustration of their ability to innovate, which they consider critical in a time of falling applications and such competitive vigor in admissions. I think that’s relevant too, but I don’t think it would win them their antitrust case.

For what it’s worth, I’m no ed policy wonk or specialist on the LSAT or any such thing, but Arizona’s goals seem perfectly legitimate. On the one hand, I was initially surprised to hear that there would be so much desire to accept GREs. At least among lower-ranked schools, that sometimes face substantial bar-exam concerns—like mine—the LSAT’s prowess at predicting bar performance is a pretty substantial reason to rely on it. And it seems a non-trivial caution that Arizona’s sole evidence supporting the reliability of the GRE is a study performed by the Educational Testing Service, which just happens to be the GRE’s proprietor. But on the other hand, it surely seems at least plausible that in this time of drastic enrollment declines and fierce competition at the admissions level, the schools would want to remove all limits that they can on the size of their applicant pools. Demanding the LSAT probably does restrict the pool of applicants unnecessarily. The LSAT is still taken only on paper, it is less frequently administered, and it is not widely accepted by graduate or professional programs outside of law schools. Students less certain about what course of graduate study they prefer might well choose to take only the GRE.  And ETS’s study, whatever that group’s incentives might be, seems like it was a good one. They studied the nearly 100 current and recent Arizona students who took both the GRE and the LSAT, and found that both scores did a good job of predicting first-year law school success. It also seems significant that so many other law schools want to accept the GRE too and are planning similar studies of their own students.

But does that mean that keeping schools from expanding their applicant pools violates antitrust law? In and of itself, no. That Arizona’s plan might make good sense as a matter of its own admissions strategy does not mean that blocking that plan is an unreasonable “restraint” of “trade or commerce.” That requires asking what the effect of the restraint will be on some “relevant market,” and specifically whether it will cause price to go up or output to go down in such a market.

The relevant market of antitrust concern would probably be sales of higher education entrance testing, and though the law schools probably don’t consider harms in that market to be the real concern—excluding price competition by the GRE probably makes the price to applicants of taking the LSAT go up a bit, but that’s not what really bothers any law school—I think it would definitely be their best bet to define the market that way in an antitrust complaint. Whether or not the price effect in such a market would be big—I’d tend to doubt it—LSAC’s restraint is effectively total, and LSAC, with the support of the ABA’s accreditation rules, is overwhelmingly powerful in that market. The actual effect on the price of law school admission tests is an empirical question, but on its surface the restraint just looks bad.

Whether the restraint nevertheless makes the testing better also matters in any antitrust challenge. The defendant in a rule of reason case can raise as a defense to an otherwise anticompetitive restraint that it improves some aspect of the relevant market in a competitively relevant respect. That means it must somehow help get the consumers a better product or get it more cheaply. It is relevant in this sense if it can be shown that a restraint improves the product’s quality. But that just adds to the cost and complexity of the fact litigation that the case would likely entail.

So I guess in the end I’d say, in the unlikely event that LSAC asked my opinion, be careful. And in particular if your real reason for keeping the LSAT a monopoly is either to keep up revenues from the test or to chill competition to law school members from innovating mavericks, then I’d say, man, be kind of extra specially careful. But if Arizona asked my thoughts, I guess I’d have to tell them too that likewise a case against LSAC is no slam dunk, depends a lot on what the documents and depositions can show, and it’d be a long, slow, expensive case to bring at best.