Antitrust and Unfair Competition Law
Application Denied: The District of Oregon Denies The Common Application, Inc.’s Motion to Dismiss after Reversal by the Ninth Circuit
Harrison (Buzz) Frahn
Simpson Thacher & Bartlett LLP
On November 28, 2018, Judge Marco A. Hernandez of the District of Oregon denied The Common Application, Inc.’s (“the Common App”) motions to dismiss and transfer the antitrust suit against it to the Eastern District of Virginia. CollegeNET, Inc. v. Common Application, Inc. (CollegeNET II), No. 3:14-CV-00771-HZ, 2018 WL 6251366, at *1 (D. Or. Nov. 28, 2018). Judge Hernandez’s decision, on remand from the Ninth Circuit, reversed his previous dismissal of CollegeNET’s complaint for failure to plead facts sufficient to allege antitrust injury. CollegeNET, Inc. v. Common Application, Inc. (CollegeNET I), 104 F. Supp. 3d 1137, 1150 (D. Or. 2015), rev’d and remanded, 711 F. App’x 405 (9th Cir. 2017). In denying the Common App’s motions to dismiss and transfer, Judge Hernandez held that (1) CollegeNET, Inc. (“CollegeNET”), a competitor of the Common App, plausibly alleged seven antitrust claims for relief, and (2) the Common App failed to demonstrate that any factors outweighed the “great weight accorded to Plaintiff’s choice of forum.” CollegeNET II, 2018 WL 6251366, at *7, *17.
Plaintiff CollegeNET is an Oregon-based company offering various online administrative services to higher education and non-profit organizations. Id. at *1. Defendant, the Common App, is an association of 549 non-profit member colleges and universities, and was initially founded in 1975 to provide a single, standardized application for use at each of the member institutions. Id. The organization processed 3.45 million applications in the 2013¬ to 2014 application cycle and generated $14.5 million of revenue in 2014. Id. at *3.
CollegeNET filed a complaint in the District of Oregon in 2014, alleging that the Common App violated the Sherman Act by monopolizing the standardized college application process through its exclusive arrangements with its member colleges. CollegeNET I, 104 F. Supp. 3d at 1137. CollegeNET further alleged that the association restricted innovation and quality in the market through its membership terms and other restraints set out in member colleges’ mandatory annual agreements. Id. Judge Hernandez dismissed CollegeNET’s complaint in May 2015, finding that the organization failed to plead facts sufficient to support an allegation of antitrust injury. Id. at 1150. The court did not accept CollegeNET’s theory that colleges and applicants are harmed by a system that increases the number of applications regardless of an applicant’s likelihood of success. Id. at 1148 (“Plaintiff’s opinion about what is best for applicants and colleges cannot suffice to establish antitrust injury. The Court finds it equally probable that the ‘application churn’ is precisely what colleges and applicants desire—a system that facilitates increased applications in an efficient way.”).
In October 2017, the Ninth Circuit reversed and remanded, finding that the complaint had sufficiently alleged antitrust injury. CollegeNET, INC. v. Common Application, Inc., 711 F. App’x. 405, 406 (2017) (“The district court prematurely concluded that CollegeNET could not assert an antitrust injury from restraints that resulted in reduced choice, and lower quality and less innovative college application services.”).
II. The Court Found that CollegeNet Alleged Seven Claims for Relief
On remand, Judge Hernandez denied the Common App’s motion to dismiss. The court found that CollegeNET plausibly alleged all seven of its claims for relief: (1) Horizontal Restraint of Trade in the Admissions Markets; (2) Horizontal Restraint of Trade in the Online College Application Processing Market; (3) Exclusive Dealing; (4) Tying; (5) Monopolization; (6) Attempted Monopolization; and (7) Conspiracy to Monopolize. CollegeNET II, 2018 WL 6251366, at *7.
A. Horizontal Restraints on Trade (Claims One and Two)
CollegeNET’s first two claims addressed horizontal restraints. In its motion to dismiss, the Common App argued that CollegeNET failed to adequately allege (1) an agreement or (2) any unlawful restraint on trade that harmed competition, as required under Section 1 of the Sherman Act. Id. The court disagreed. First, the court found CollegeNET alleged a plausible agreement by arguing that when 549 competitor colleges “form an association . . . to adopt rules on how they will compete against each other, those rules constitute agreements under Section 1.” Id. at *8 (emphasis added). Second, the Court further found that the Common App’s “equal treatment” and “exclusivity” requirements as set forth in the annual agreement constituted unlawful restraints on trade because these restraints limited member colleges’ ability to “purchase higher-quality, more innovative, or lower-priced . . . services from rival providers,” and resulted in “a reduction in their ability to find good matches, poorer quality and innovativeness of the application process, and increased monetary costs.” Id. at *10.
B. Exclusive Dealing (Claim Three)
CollegeNET’s third claim addressed exclusive dealing, governed by Sections 1 and 2 of the Sherman Act. The Common App argued that CollegeNET’s complaint failed to allege either (1) an agreement to deal exclusively, or (2) substantial foreclosure of the market, each of which is required to prove exclusive dealing. Id. at *10.
Judge Hernandez disagreed and found that CollegeNET adequately alleged exclusive dealing. Id. at *11. First, the court found a de facto exclusivity agreement based on the Common App’s prohibition against offering non-Common App applications at a lower price in addition to its requirement that members exclusively use Common App processing services. The court explained that these requirements combined with the high switching costs associated with terminating membership “plausibly constitute[d] de facto exclusive dealing arrangements that in practical effect prevent purchasers from using the services and goods of competitors.” Id. (emphasis added). The court also found that CollegeNET adequately alleged a substantial foreclosure of the market. This finding was based on the Common App’s alleged control of 60 percent of the market as well as the serious consequences a member college faced in leaving the Common App association, which included a decline in national rankings resulting from the loss of access to the student applicant pipeline. Id. Consequently,“[p]laintiff plausibly allege[d] that potential purchasers [we]re removed from the market, making it difficult for other competitors to enter or remain.” Id.
C. Tying (Claim Four)
CollegeNET’s fourth claim was for unlawful tying, which is conditioning the sale of one distinct product on the purchase of a second distinct product. Id. at *12. The Common App argued that CollegeNET failed to plausibly demonstrate both (1) that two distinct products were tied, and (2) a coercive tying condition. Id. at *13. The Common App additionally argued that CollegeNET failed to demonstrate the Common App’s market power. See Def. Brief at 50. The court did not directly address this argument, but instead analyzed market power in conjunction with coercion. CollegeNET II, 2018 WL 6251366, at *13 (explaining that “coercion is likely if the seller has power in the tying product market.”).
Judge Hernandez found that CollegeNET had adequately alleged that the Common App sold two distinct products, its data services and its processing services. Id. at *13. He accepted as plausible CollegeNET’s argument that data services—i.e., the standardized application form itself—are inherently distinct from processing services. Id. The court also found that CollegeNET plausibly alleged a coercive tying condition. Id. at *13. Indeed, though the Common App’s agreements did not expressly condition access to data services on purchasing processing services, the court accepted as plausible the argument that the Common App “bundled together” its services “such that a school cannot purchase Data Services . . . without also purchasing Processing Services.” Id.
D. Monopolization (Claims Five, Six, and Seven)
CollegeNET’s final three claims for relief were for monopolization, attempted monopolization, and conspiracy to monopolize in violation of Section 2 of the Sherman Act. The Common App argued that CollegeNET wrongfully limited its definition of the market that was allegedly monopolized, thereby upwardly skewing its market share analysis. Id. at *14. The Common App specifically challenged (1) CollegeNET’s exclusion of other competitor application processing options such as in-house processing, and (2) its exclusion of two-year colleges and graduate schools from its defined market. Id.
Judge Hernandez found that CollegeNET had plausibly argued the markets it defined were not interchangeable, and that “the extent to which these markets are too narrow turns on issues of fact more appropriate for resolution at summary judgment.” Id. at *15. The parties also disagreed on how to appropriately calculate market share to determine dominance. The Common App sought to calculate market share as the total number of Common App members divided by the total number of colleges, which results in a non-monopoly 24 percent market share for the Common App. Id. at *16. CollegeNET, by contrast, sought to look to the number of undergraduate applications processed by the Common App divided by all applications. This calculation results in the Common App’s market share at a plausibly monopolistic 65 percent. Id.
Because the court could not state that “Plaintiff’s¬¬ calculation was incorrect as a matter of law,” Judge Hernandez found that CollegeNET “plausibly allege[d] monopoly power in the Online Application Processing Market.” Id.
Thus, on remand, Judge Hernandez found that CollegeNET plausibly alleged all seven of its claims for relief. The court’s acceptance of harm to member colleges may suggest that injury to association members themselves rather than the market as a whole can give rise to an antitrust claim. It remains to be seen, however, how this argument will fare at summary judgment and trial. Equally unclear at the moment is how this decision and subsequent proceedings will impact the college admissions process for future applicants.