Advisory opinion letter to Mr. Clark

August 4, 1994

Dear Mr. Clark:

On behalf of the Accrediting Commission of Career Schools and Colleges of Technology ("ACCSCT" or the "Commssion ), I hereby request an advisory opinion on the permissibility under the antitrust laws of ACCSCT's adoption and enforcement of an accrediting standard on tuition and fees. In order to ensure that this request is considered by the Department or agency with appropriate jurisdiction, we have also filed a request for a business review letter on the same subject with the Antitrust Division of the Department of Justice. We respectfully ask that the FTC and Antitrust Division coordinate a response to these requests.

Description of ACCSCT. The Commssion is a private nonprofit organization with exclusively educational purposes. It adopts and applies standards for the accreditation and evaluation of educational institutions with trade and technical objectives. The Commission is recognized by the U.S. Department of Education under the Higher Education Act of 1965 an a reliable authority as to the quality of education and training offered by its accredited institutions. (Pub. L. No. 89-329, 79 Stat. 1219, codified as amended in scattereclsections of 20 U. c.). As a result of this recognition, accreditation by the Commission, together with licensure by a state and certification by the Department, make a post-secondary institution of higher education eligible to participate in the student financial assistance programs authorized by the Act. (20 U. c. 1088). The Commission currently accredits approximately 950 schools located in all 50 states, the District of Columbia and Puerto Rico. These schools educate and train 450,000 students and employ 16 000 instructors. The Commission is a membership corporation. The Commissioners serve as the board of directors; five of the Commssioners are public members (i. they have no affliation with any of the schools accredited by the Commission), and six of the Commissioners are school members (i. they are owners or executives of accredited schools). The members of the corporation are the accredited schools; membership status is coterminous with accreditation. Further, thc rights of the members are restricted: They ACCREDITING COMMISSION ON CAREER SCHOOLS 987

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elect the school-affiliated Commissioners and two of five members of a nominating committee, receive various informational reports and approve (but may not initiate) amendments to the articles of incorporation and bylaws, mergers and other fundamental transactions, and dues and assessments. The Commission is unaffiliated with any trade association. It has applied for tax-exempt status under Section 50l(c) (3) of the Internal Revenue Code. Higher Education Amendments of 1992. In 1992, Congress reauthorized the student financial assistance programs of the Higher Education Act by enacting the Higher Education Amendments of 1992. (Pub. L. No. 102-325, 106 Stat. 448, codified in scattered Sections of 20 U. e.). This reauthorization formally provided for a "Program Integrity Triad" of accrediting agencies, the states and the Department of Education to control access to the student financial assistance programs. Although such a Triad effectively had existed prior to the 1992 reauthorization, abusive practices of some institutions of higher education impelled Congress to specify in greater detail the gatekeeping responsibilities of each leg of this Triad.

Thus, the statute specifies numerous requirements that accrediting agencies like the Commssion must meet in order to be recognized by the Department of Education. One of these requirements is that an agency s accrediting standards must assess 12 areas, including program length and tuition and fees in relation to the subject matters taught and the objectives of the degrees or credentials offered. " (20 U.se. 1099b(a)(5)).

The Department of Education has now completed the rule making to implement the statutory requirements for the recognition of accrediting agencies. In regard to accrediting standards, the regulations simply repeat the statutory provisions. (34 CFR 602.26(b)(7); 59 Fed. Reg. 22 250, 22 260 (April 29, 1994)). In the commentary accompanying the regulations, the Department noted that its original proposals, which elaborated on the statute, had prompted substantial adverse comment. Nonetheless , the Department s commentary stated that those proposals provided a sound framework" for an assessment of the 12 areas, and summarized them. The summar for program length and tuition and fees was as follows:

988 FEDERAL TRAE COMMISSION DECISIONS

Advisory Opinion J 19 FTC.

An accrediting agency s standard for assessing this area should generally address the appropriateness of an institution s program length and tuition and fees taking into account such factors as program objectives and content, the types and locations of instrctional delivery, the knowledge and skills necessary for students to reach competence in the field being taught, and generally accepted practices in higher education.

(Jd. at 22,273).

The Notice of Proposed Rulemaking ("NPRM") more extensively addressed how to judge the "appropriateness" of tuition and fees. It specified that, in developing a standard for tuition and fees , an accrediting agency should take into account the factors quoted above and "(fJor any pre-baccalaureate vocational education program, consideration of the remuneration that can reasonably be expected by students who complete the program. " (59 Fed. Reg. 3 578 , 3,597 (Januar 24 1994)). In the commentary accompanying the proposed regulations, the Department eXplained that the basis for this proposal was its concern that tuition and fees for pre-baccalaureate vocational education programs may be "excessive. (Jd. at 3 586). The commentar also suggested three possible approaches under which annualized tuition and fees for a program could not exceed: (I) a percentage of the annualized minimum wage; (2) a percentage of graduates' earnings for their first year of employment; and (3) a percentage of average annualized wages. (Jd. at 3 587). The NPRM provided no specifics on these various maximum percentage levels. Although the Department stated that an agency could still be recognized even if its standards depared from the original proposals it also stated that the agency would bear a burden of justifying the appropriateness of different standards. (59 Fed. Reg. at 22 273). Development of ACCSCT Standard. In order to comply with the statutory and regulatory requirements described above, ACCSCT will have to adopt and apply an accrediting standard that assesses tuition and fees. It has created a committee of Commissioners to study the issue and develop a proposal. In addition to the inherent diffculty of the task, the Commssion is concerned that any standard it adopts not be violative of the antitrust laws.

As explained above, the Commission is a private body consisting in substantial par of school-affiliated Commissioners who could be viewed as competitors. Further, the Commission is legally classifiable as a form of association , although it is not a trade association in the conventional sense that seeks to advocate and ACCREDITING COMMISSION ON CAREER SCHOOLS 989

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advance the interests of its members. (See Parsans Callege v. Narth Central Ass n. of Calleges and Sch. 271 F. Supp. 65, 70 (N.D. Ill. 1967); Transpart Careers v. Natianal Hame Study Cauncil 646 F. Supp. 1474 (N.D. Ind. 1986)). Thus, the Commssion would appear to be a combination subject to Section 1 of the Sherman Act. (15 c. I).

Association activities which limit or set maximum prices are vulnerable to attack as price- fixing. (Arizona v. Maricapa Caunty Medical Sac. 457 U. S. 332 (1982); McLean County Chiropractic Ass 5 Trade Reg. Rep. (CCH) '!23 , 524 (FTC Consent Order to Cease and Desist Complaint, Dkt-3491 , April 7 , 1994)). The nonprofit and educational nature of the Commission does not necessarily exempt it from such antitrust liability. (See United States v. Brown University, 5 F.3d 658 (3d Cir. 1993) (colleges and universities not immune from antitrust laws for price-fixing); Galdfarb v. Virginia State Bar 421 U.S. 773 (1975) (no "learned professions " exemption); American Sac. af Mechanical Engineers Inc. v. Hydrolevel Carp. 456 U.S. 556 (1982) (nonprofit nature of organization does not shield it from antitrust liability)). Moreover paternalistic aims, such as protection of students , which unduly restrict competition are not a defense to such liability. (See Natianal Sac. af Professianal Engineers v. United States 435 U.S. 679 (1978); Federal Trade Cammissian v. Indiana Federatian af Dentists, 476 S. 447 (1986)).

Of paricular importance to this request, the FTC recently issued an advisory opinion which found violative of the antitrust laws a physician fee review program proposed by the American Medical Association and state and local medical societies which provided for the imposition of disciplinar sanctions for "fee gouging" or fees that were deemed by peer review panels to be "excessive. (American Medical Ass n., 5 Trade Reg. Rep. (CCH) '! 23 602 at 23,284(FTC Advisory Opinion, Feb. 14, 1994). h., contrast, the FTC found permissible sanctions for abusive conduct in connection with fees, such as misrepresentation , deception, or the exertion of undue influence. (ld. at 23,284). Private, non-binding advice on fee levels, not based upon benchmarking of fees, and requirements , for disclosure of fee-related information were also found to permissible. (ld. at 23, 283; accard, lawa Dental Ass ' 99 FTC 648 (FTC Advisory Opinion, April 3 , 1982)).

990 FEDERAL TRADE COMMISSION DECISIO:'S

Advisory Opinion 119 FTC In view of the regulations promulgated by the Department of Education , the Commission appears to be obliged to consider adoption of an accrediting standard under which it would determine whether the tuition and fees charged by its accredited schools are too high and enforce this standard potentially by withdrawing accreditation. Such a standard might use one or more of the three approaches suggested in the NPRM with tuition capped at a percentage of expected earnings. Yet, such action by the Commssion could be viewed as price fixing under the antitrust laws since the Commission is arguably a combination which would be limiting the pricing discretion of competitors. It might be argued that Congress impliedly exempted accrediting bodies like the Commission from the antitrust laws when it conditioned recognition of accrediting agencies upon the adoption of a standard for the assessment of tuition and fees. (See Behagen v. Amateur Basketball Ass n afthe Uniled States 884 F.2d 524 (10th Cir. 1989) (private governing board for amateur basketball exempt when it set and enforced player qualifications pursuant to Amateur Sports Act)). However, this is an uncertain basis for actions which could have extremely severe consequences. Congress did not speak directly to the issue , and such exemptions are disfavored. (Silver New Yark Stack Exchange 373 U. S. 341 , 357 (1963)). The Third Circuit s holding in Brown University indicates that the rule of reason would be applied to evaluate a tuition and fees standard. Under the rule of reason, it might be argued that the standard is designed not to inhibit competition but to protect students who lack the knowledge and sophistication to make informed choices. However, such a paternalistic justification was rejected by the Supreme Court in National Society of Professional Engineers and Indiana Federation of Dentists. Further, less restrictive means may be available to achieve the pro-competitive aims of correcting information deficiencies in the market. (See Brown University, supra).

Alternatively, the Commission might collect tuition information from its accredited schools and analyze this information to determine how the tuition charged for a given program at a particular school compares to similar programs and schools. If the tuition were in the top tenth percentile of all similar programs , for example, the Commission might then require the school to explain why its tuition was so high and to provide this information to students and ACCREDITING COMMISSION ON CAREER SCHOOLS 991

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prospective students. Under this approach, the school would retain its pricing discretion and remain free to charge the tuition that it wished. A standard establishing this procedure would provide students with useful infonnation on which to base a decision to attend an institution and improve the functioning of the market. Even this approach may present difficulties under the antitrust laws. In its advisory opinions on the fee review proposals in American Medical Ass n. and Iowa Dental Ass , the FTC cautioned that the associations should not systematically collect fee data develop any explicit or implicit "benchmarking" scheme, or publicly disclose their review of particular fees. The alternative approach described above could be viewed as inconsistent with these conditions. The heart of the accrediting standard would be the systematic collection of tuition data and the disclosure to students of infonnation comparing and explaining the school's tuition in relation to other schools. Since schools may wish to avoid this disclosure because it could inhibit students' decisions to attend , the standard could be regarded as an implicit form of benchmarking, with the benchmark as the range of tuition levels where disclosure would not be mandated by the Commission.

A final possibility would be an accrediting standard which required schools to inform students in the catalog, enrollment agreement and other publications that they may obtain information about tuition charges for comparable programs from the Commission. The Commission would again collect tuition information from accredited schools about their programs, and assemble this information in a data base. Students could access this infonnation to detennne the cost of similar programs at other institutions. The data base might also contain other infonnation useful to consumer choice such as geographic location, size of the institution, and other programs and services offered at the school. This approach would avoid any benchmarking of acceptable tuition levels. Schools would retain full discretion to price their services. The accrediting standard would be formulated to address directly the underlying problem of lack of consumer infonnation by providing students with the data necessar to make infonned choices. By assembling, categorizing and providing context to the data, the commission would still meet the requirements of the Higher Education Amendments of 1992 since it would be "assessing " the tuition and fees of schools. The Antitrust Division recently released

Advisory Opinion 119 FTC.

a business review letter stating that a similar type of fee survey should not be subject to chal1enge under the antitrust laws. (Trade Regulation Reports (CCH), No. 322 at 3 (July 6, 1994)). Request for Guidance. The Commission respectfully requests guidance on the permissibility under the antitrust laws of the approaches to an accrediting standard on tuition and fees outlined above. The Commssion will in the near future begin the process to renew its recognition by the Deparment of Education. As par of that process, the Commission wil1 have to demonstrate its compliance with the statutory and regulatory recognition criteria, including the requirement for a standard to assess tuition and fees. Your review of the approaches under consideration by the Commission will be of substantial assistance as it seeks to continue to demonstrate that it is a reliable authority as to the quality of the education and training offered by its accredited institutions. Accordingly, we respectful1y urge expedited consideration of this request.

Sincerely,

Mark L. Pelesh Counsel to ACCSCT . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. ....... .. .. ..... ... ... ... ... ... ... ... ... ... ... ... ... ... .. ... ... ... ... ... ... ... ... ... ... .............. ... ... ... ... ... .. ..

T ABLE OF COMMODITIES

DECISIONS AND ORDERS

Page

Acupressure devices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421 Aerosol products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969 Aluminum polyester powders. . . . . . . . . . . . . . . . . . . . . . . . . . 258 Ammunition. . . . . . . . . . . . . . . . . . . . . . . . . . . 440 Arthritis pain treatments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Automobile dealerships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 891

Bath soaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 969 Bee pol1en products.

Cable television systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 593 Calcium. . . . . . . . . . 25 Canned fruits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483 Carpet deodorizer products. . . . . . . . . . . . . . . . . . . . . . . . . . . . 380 Catheters. . . . . . . . 549 Cemeteries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660 Children products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79, 96 Cigarettes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 532 Communication devices. . . . . . . . . . . .. . . . . .. . . . 316, 326 . . metallizers disc Compact Computer peripheral products. . . . . . . . . . . . . . . . . . . . . . . . . . 579 Cosmetic surgery procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . 930 Credit transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652

Crude oils. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Drugs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357, 815, 835

Educational programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 729 Explosives. . . . . . 440

Footwear products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Frozen yogurts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762 Fruits. . . . . . . . . . . 483 Funeral homes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660