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The Webbing of the College Cartel: Interlocking Directorates

Cartels run on collusion like a rocket runs on fuel. Therefore, if we can destroy the infrastructure that enables collusion, we can greatly deconcentrate markets. This begs the question: what exactly is that infrastructure?    

For a cartel to collude, it needs to have channels of communication among its constituents. For example, OPEC routinely holds meetings. Many publicly traded companies often preview pricing in earnings calls, potentially facilitating collusion. These types of channels are the infrastructure of collusion. Without infrastructure to enable it, collusion becomes more difficult. Of course, the more concentrated the market, the less infrastructure is needed for collusion. Instead, in very concentrated markets, even some inflation in inputs is enough of an excuse for parallel and disproportionate markups in prices. 

If we analogize a cartel to a many-legged spider, then consumers and workers are flies, and communication channels are the webbing on which consumers and workers are sacrificed for the nourishment of that spider. One explicit example of this phenomenon is the elite college cartel; scandalously, this cartel is a spider with a very strong web. This article examines a part of the webbing that enables sordid collusion among elite schools. This article then generalizes the lessons we can learn to markets beyond education.      

As you might already know, the elite college cartel has been exposed periodically in lawsuits. For example, there was the famous Ivy Overlap case of the 1990s where the DOJ accused the Ivy League and MIT of colluding on financial aid offers. Then there was the 568 class-action lawsuit of 2022 which accused an even broader cartel of elite colleges of colluding on financial aid. Most recently, merely days ago, there was another class-action lawsuit that accused the Ivy League of suppressing financial-aid for college athletes. Even beyond the lawsuits that have already been filed, there are all sorts of anticompetitive practices that have gone unchallenged. For example, in my upcoming book The College Cartel, I allege a hub-and-spoke cartel that creates an artificial scarcity of new seats at elite colleges. Yet the question remains: how do these collusive schemes get conceived?

It’s a hard question to answer. So, let’s start with a related but different question: how does a collusive scheme get aborted prior to deployment? In theory, a firm’s governance board is supposed to step in to check any corporate misconduct and criminality. Boards of directors are supposed to set the management team straight. But what happens when the governance board is asleep at the wheel? In these instances, the check against corruption and collusion disappears.

This key insight about the abortive power of governance boards might have been why Congress sought to legislate board makeup in the Clayton Act, specifically by prohibiting the same person from serving on the boards of two competing companies. It might also be why enforcing Section 8 of the Clayton Act, the provision that bans interlocking directorates, is such a big priority for Assistant Attorney General Jonathan Kanter. As one recent DOJ press release quoted Kanter as saying: “Enforcement of Section 8 will continue to be a focus for the division just as Congress intended…We will continue to enforce the antitrust laws when necessary to address illegal board interlocks.” Of course, Kanter has done more than issue press releases—the DOJ enforcement efforts have led to the resignations of at least thirteen directors from ten boards.

Importantly, the Clayton Act is a civil statute. Section 8 cases can be filed by anyone, and interlocking directorates are a per se violation of the Clayton Act. In other words, any of us, in the new antitrust movement, can find and file against interlocking directorates. We needn’t wait for the DOJ. This is why I’m working with a group of law students to deconcentrate the governance boards of elite colleges. In the case of the elite college cartel, persistent anticompetitive conduct has gone on for far too long. Enough is enough, and the elite college cartel needs to be purged of interlocking directorates, even if such a purge is only a partial solution.

I’m a student at Columbia Law School, and Columbia’s board of trustees has an interlock. Lu Li, chairman of the multibillion-dollar investment firm Himalaya Capital, is presently on the governance boards at both Columbia University and CalTech. By the way, remember the financial-aid price-fixing class-action I mentioned earlier? Well, both Columbia and CalTech are defendants in that litigation. Of course, it’s not just one man on two boards. Instead, interlocking directorates are a widespread problem in the elite college market. Take James S. Frank for another example. He concurrently serves on the Board of Trustees at both UChicago and Dartmouth. Again, both institutions are currently being sued for price-fixing. But my personal favorite example is none other than Carlyle founder David Rubenstein. He’s an interlocking director at three competing institutions: Mr. Rubenstein is on the governance boards at the UChicago, the Harvard Corporation, and Johns Hopkins. What’s more is that Mr. Rubenstein even used to be chairman of the board at Duke University. Coincidentally, Duke, UChicago, and Johns Hopkins are all being sued for price-fixing, and Duke has previously settled a no-poach wage-fixing case.

Lu Li, James Frank, and David Rubenstein are just a selection of the very many interlocks that exist in the elite college market. When it comes to elite colleges in America, we have a clear problem. In fairness, I’ll concede that these trustees are very accomplished and upstanding individuals. I’m not remotely arguing that they masterminded the allegedly collusive schemes for which elite colleges currently find themselves in court. Instead, my argument is more subtle. Their membership on multiple boards may have made them less likely to do anything to abort those allegedly collusive schemes precisely because they may have evaluated conduct from a more industry wide perspective. If any one of their presences made collusion even one percent more likely, then we need to act. This is why I’m working with other law students to bring these shadowy interlocks into the light. We’re going to file Section 8 civil cases. 

Of course, elite colleges are merely one market where interlocks are a problem. There are many others too. Biotechnology companies seem to have particularly incestuous boards. Interlocking boards might be a reality in myriad other sectors in which you have more expertise than me. In those sectors, I’d encourage you to take similar civil action on your own, for at least three reasons.  

First, interlocking directorates create a conflict of interest. When a board member sits on the board of two companies that compete in the same industry, they are likely to prioritize the interests of one company over the other. This creates a situation where one company has an unfair advantage over its competitors, and it can use this advantage to suppress competition. For example, Eric Schmidt was on the board of Apple, while Google secretly developed an Android alternative to the iPhone. This might have been an example where unfair access to information harmed one company while benefiting another. At least, Steve Jobs thought so

Second, interlocking directorates often lead to collusion. When board members of competing companies work together, they can use their positions to coordinate their actions and manipulate the market in their favor. This can take the form of price-fixing, wage-fixing, market-sharing, bid-rigging, or other such collusive practices. For example, while then Google CEO Eric Schmidt was on the board of Apple, Google agreed not to hire certain workers from Apple, thereby suppressing wages. This eventually led to a massive settlement by Apple and Google, which compensated workers at those firms.  

Third, interlocking directorates can limit innovation. When board members of competing companies work together, they may be less likely to invest in research and development that could lead to new products or services. Instead, they may focus on maintaining the status quo, which can stifle competition and limit innovation. This is especially grave in biotechnology, where less innovation means lives lost.

I encourage everyone reading this to find more interlocks and to file more cases. Change won’t come from anywhere else. The truth is that we are the ones we’ve been waiting for.

Sahaj Sharda is a first-year law student at Columbia Law School. He is the author of the forthcoming book The College Cartel.

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