Tuesday, December 18, 2012

The AALS Cartel

 Not Good Enough for the AALS?

Received Substandard Legal Education?

Over at Truth on the Market, Thom Lambert has taken issue with a rule, promulgated by the American Association of Law Schools, that forbids law schools from making lateral offers of employment to faculty at other schools after March 1.  To be more precise, the rule admonishes against such offers in cases in which the poached faculty member must begin teaching at the new institution that same fall.  Lambert asserts, and I know of no evidence to the contrary, that law schools fastidiously adhere to the rule, even though it is framed as a "best practice."

As Lambert points out, the rule in question is a horizontal restraint of trade between rivals of the sort that courts ordinarily condemn.  Indeed, he expressly (and properly) invokes the Department of Justice's recent suit against Ebay, challenging an alleged agreement between EBAY and Intuit whereby the two firms agreed not to poach each other's employees.  (The Department also entered a consent decree with Intuit forbidding the practice.)  If the EBAY/Intuit agreement violates Section 1 of the Sherman Act, and Lambert makes a persuasive case that it does, then so does the agreement between the member law schools of the AALS.  Such agreements, by their nature, reduce rivalry between companies (in the case of EBAY/Intuit) and member schools (in the class of the AALS rule).  At the same time, neither agreement appears to produce any "redeeming virtue" of the sort recognized as cognizable by case law applying the Sherman Act.  To be sure, the fact that a faculty member leaves her institution in, say, May, for another school, can impose substantial costs on the institution that loses the faculty member.   However, as Lambert notes, the costs will vary depending upon the faculty member, the courses she taught, and whether the school is located near other schools that might be sources of potential visitors who would not have to relocate.  As Lambert also points out, schools can protect themselves unilaterally against such harm by entering contracts forbidding their faculty from accepting offers after a certain date, contracts that contain liquidated damages clauses that compensate the school for the any damages suffered when the faculty member leaves late in the year.    (These damages could, for instance, compensate the school for the cost of hiring a visitor to cover the departing faculty member's courses on short notice.)  (By analogy, it should be noted that many universities unilaterally provide that a faculty member who receives a sabbatical must return to teach for at least one year before leaving for another school.)  As a result, Lambert contends, no agreement between law schools is necessary to combat the harms from late departures.

Of course, and as Lambert recognizes, the Sherman Act does not ban all horizontal restraints.  Instead, as previously noted on this blog, courts will allow those horizontal agreements that are necessary to overcome any market failures that would result from parties' reliance upon an unfettered, atomistic market to conduct economic activity.  A classic example is the formation of a partnership and restraints ancillary thereto.  Such restraints may, for instance, prevent individual partners from "moonlighting," that is, competing with the partnership, thereby eliminating horizontal rivalry that would otherwise occur.  Nonetheless, as William Howard Taft explained over a century ago, the common law encouraged such restraints, and properly so.   After all, Taft said, such agreements encourage partners to devote all of their efforts to furthering the business of the partnership, instead of diverting value from the enterprise to themselves or, as modern economists would put it, "free riding" on the larger partership.  See United States v. Addyston Pipe & Steel Co., 85 F. 271, 280 (6th Cir. 1898) (treating such restrictions as paradigmatic ancillary restraints that the law should "encourage"); Robert Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 75 Yale L.J. 373, 381-83 (1965) (explaining how such restrictions could prevent free riding by partners on the overall enterprise and thus enhance welfare).  Put another way, such agreements pass muster under the Sherman Act's "Rule of Reason," articulated in Standard Oil v. United States, because they do not restrain trade "unduly," but instead "advance" or "fructify" it. 

In short, horizontal cooperation between rivals is perfectly proper when reliance on the unfettered market would otherwise  result in a market failure and a misallocation of resources.  See Alan J. Meese, Price Theory, Competition and the Rule of Reason, 2003 Ill. L. Rev. 77.  Where, on the other hand, there is no such failure, that is, where unilateral decisions in an efficient market will produce efficient results, there is no rationale for such collective action, and courts should ban otherwise lawful restraints.   See Alan J. Meese, Monopoly Bundling in Cyberspace: How Many Products Does Microsoft Sell?, 44 Antitrust Bulletin 65  (1999).  As the Supreme Court explained in National Society of Professional Engineers v. United States, 435 U.S. 679 (1978), the antitrust laws rest on the assumption that consumers understand their own interests and can assess the virtues and relative prices of competing products.

At the same time, the "anti-poaching agreement" that Lambert has condemned may be the tip of the AALS cartel iceberg.   Even a brief perusal of the organization's membership requirements reveals various provisions that eliminate competition without any apparent market failure justification.  For instance, the AALS provides that Law Schools must have a full time faculty of a certain minimum size, so as to "provide ready professional relationships among the faculty and between the faculty and the students and to offer a reasonably broad curriculum."  The Nation's first law school, at William and Mary, would have flunked this standard, because the faculty consisted of Founding Father George Wythe, who taught, among others, John Marshall, who would later become Chief Justice of the United States.  So far as I know, however, no one would plausible argue that Marshall's legal education was "not up to snuff."

The same AALS standards also prevent a law school from de-emphasizing research so as to encourage more teaching,   The standards also mandate that each member school "shall seek to have a faculty, staff, and student body which are diverse with respect to race, color, and sex."  Finally, the standards require each school to have a library of a particular size.  The requirements of minimum faculty size, significant support for research and minimum library size, it should be noted, likely raise barriers to entry, by requiring a new school to enter at a particular scale to become a member.

Each of these standards seems inconsistent with the principle that Lambert espouses and, for that matter, the Supreme Court's antitrust case law.  One can stipulate that large faculties, significant research, diversity and large libraries are "good things" without thereby providing a justification of collective imposition of these objectives.  Put another way, there is no apparent market failure that prevents competition between member schools from resulting in appropriate attention to each of these attributes.  For instance, there is no apparent reason that potential law students are incapable of assessing the value that a diverse faculty will add to their education and thus preferring, other things being equal, those schools with diverse faculties.  That's the way competition in a free society is supposed to work.  Ditto for faculty size.  If a school believes that its large faculty provides a better educational environment than, other things being equal, than a smaller faculty and vice versa, each such school should be free to offer its product in the marketplace, subject to market competition from other products.  Who knows, one such school might educate the next John Marshall!