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Law360 (July 27, 2020, 5:59 PM EDT) --
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| Jon Tomlin |
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| Hassan Faghani |
One category of damages plaintiff students seek in these cases is "the difference in value between the live in-person classes for which students enrolled compared to the lesser online versions of classes that Defendant has provided to them."[1] However, plaintiffs typically have not defined the value of online versions of classes.
In Ryan v. Temple University in the U.S. District Court for the Eastern District of Pennsylvania, Temple recently argued that determining the difference in value between in-person and online instruction would involve impermissible speculation.[2] Other colleges and universities will likely make the same argument. Will damages experts be able to develop models that are not inherently speculative?
Similar to the college tuition refund cases, consumers in numerous other recent class actions have sought restitution in the form of the difference between the price they paid for a product or service and the market value of the allegedly inferior product or service that they received. In some cases, courts have found the damages models proposed in these cases sufficient for class certification.
However, as we explain below, the vast majority of these consumer class actions differ from the college refund class actions in at least two substantial ways.
First, the defendant in the typical consumer class action is a profit-seeking entity presumably setting prices to maximize its profits. Second, the product or service at issue is typically sold with and without the particular product feature that class action plaintiffs allege they did not receive — e.g., an organic food or an automobile without a particular part defect.
Most colleges and universities are nonprofit entities, and in-person classes have generally not been an option offered to or demanded by students after the onset of the COVID-19 pandemic. The unique nature of college tuition pricing and the circumstances surrounding the switch to online learning will raise substantial hurdles for plaintiffs looking for a reliable classwide damages model in the college tuition refund cases.
As we explain, two methods commonly employed for calculating damages in consumer class actions, hedonic regressions and conjoint analysis, will be difficult, and perhaps impossible, to apply reliably in these cases.
The Unique Economics of College Tuition Pricing
Most colleges and universities are nonprofit entities. Economists often assume that they set prices in order to obtain such goals as the pursuit of excellence and not to maximize their profits. This pursuit of excellence manifests itself in tuition pricing in several ways.
Even at colleges and universities that are not the most selective or prestigious, there is often an excess demand for the available student spots.[3] In other words, the price that some colleges and universities charge for tuition is below the price that these schools could charge and still fill up the available number of spots in each class.
In addition, the price of school tuition is typically below the actual cost incurred by colleges and universities to provide the education that students receive — with donations, investments and government funding making up the difference.[4]
Colleges and universities also engage in what economists call price discrimination, meaning that different students can pay very different net prices for tuition at the same school. A school's listed tuition price is, in effect, a sticker price and represents the maximum amount that a student will pay for tuition.
Because peer quality is a factor in the production of college education, students and their parents tend to seek out colleges where the student body consists of high-quality peers. Colleges recruit students who contribute to improving peer quality and use different pricing mechanisms to attract these students.[5]
While some scholarships and grants are intended to help low-income families, other scholarships and grants primarily serve to attract students with particular attributes desired by a school. In both cases, discounting the tuition sticker price helps schools assemble the best freshman class while helping generate revenues.[6]
In the context of the college tuition refund class actions, this means that putative class members paid different prices for tuition, and the market price for online education they received would likely be different as well.
Online Pricing
In economic terminology, in-person higher education production technology is an old one. Knowledge is transferred from professors to students and from students to other students. Colleges and universities in the U.S. have used this fundamental technology for hundreds of years.
One essential feature of this technology is that there is a capacity constraint, meaning that a limited number of students can attend in-person classrooms. In online learning, knowledge is obviously transferred without use of a physical classroom.
Therefore, online education doesn't necessarily face the same capacity restrictions as in-person education and schools offering online classes may be more able to increase the number of students they serve compared to those offering in-person classes. All else being equal, the average cost incurred by a school per student for online classes will tend to decline as class sizes grow.
On the other hand, providing online courses requires different investments and different costs than in-person education. In the context of schools scrambling to respond to an unanticipated pandemic, these investments have been made in a short time period and, thus, may not have been optimal.
Ultimately, whether the cost of providing online education has been higher or lower than providing in-person education for defendant colleges and universities during the COVID-19 pandemic is a priori uncertain and requires analyzing the costs of individual schools.
Over the past decade, more colleges and universities have begun providing online courses and online degrees — i.e., a degree based on all or mostly all of the courses being taken online.[7] Previous studies have found that the difference between the price of online classes and in-person classes is dependent on the school and is not consistent across schools.[8]
Prior to the COVID-19 pandemic, some universities charged lower prices for online versions of their classes. Other universities actually charged the same or even higher prices for the online version of their classes. For example, Forbes reported that Arizona State University was twice as likely to charge higher tuition prices for an online course compared to an in-person course than it was to offer a lower tuition price for the online version of a course.[9]
Moreover, past differences between the pricing of online classes and in-person classes alone are not a reliable gauge for determining the appropriate market value of online classes in the current college refund class actions. This is due to the fact that the market value of online classes must be determined in the context in which this coursework was offered, which was in response to the pandemic.
In the past, a school offering online coursework would set its prices knowing that students had an option to choose instead another school offering in-person education. This competition would tend to put a constraint on the prices of online classes. In the current environment, few colleges and universities are offering in-person coursework and, presumably, for safety reasons, few students prefer in-person classes to online versions.
Will Damages Models Be Up to the Challenge?
Based on the factors explained above, plaintiffs in the college tuition refund cases face multiple challenges in determining the difference in value between the live in-person classes and the online versions. One of these challenges is that it is uncertain how a sudden switch to online instruction has impacted the costs of schools.
Online instruction hasn't necessarily decreased the costs incurred by colleges and universities. Another challenge is that the demand for online education during the COVID-19 pandemic must be evaluated in the context of students who likely prefer online education to in-person education and in the context of few competing schools offering in-person education.
In addition, colleges and universities are generally nonprofit entities and cannot be assumed to set prices in order to maximize profits when faced with a change in costs and demand. Yet another complexity is that colleges and universities charge very different net tuition prices to their students.
In recent consumer class actions, plaintiffs experts often propose applying one of two potential damages methods to determine the market value of the goods or services received by consumers.[10]
One is a conjoint survey, which is a survey of consumers, and attempts to isolate the value of an attribute at issue in a case — for example, the value of organic foods for consumers alleging they purchased a product that was advertised as organic but was not. The other is a hedonic regression in which an expert attempts to form a statistical model of transaction prices as a function of a product's characteristics.
It will be difficult or impossible to apply a conjoint survey by itself to calculate damages in the college tuition refund cases. First, conjoint surveys typically attempt to calculate the value of an attribute by having survey respondents effectively choose between a higher-priced product with a presumably desirable attribute (e.g., organic, GMO-free, real vanilla) and a lower-priced version without that attribute.
However, in the college tuition refund cases, in-person education is generally not a desirable attribute during the COVID-19 pandemic and it is not an option generally available to students. In addition, a conjoint survey attempts to measure consumer demand. Any reliable model of tuition pricing in the college tuition refund cases must incorporate the complex ways in which colleges and universities actually set prices.
A hedonic regression attempts to measure the statistical relationship between prices of a good or service and the characteristics of that good or service. In terms of college tuition, one might imagine a hedonic regression in which a plaintiff expert would attempt to measure the relationship between tuition prices and various measures of the quality of education (e.g., student-faculty ratio). The expert may use a variable to indicate whether schooling was online or in-person to attempt to quantify the monetary value of in-person classes — as compared to online classes.
Such a model would then presumably attempt to calculate the impact of online schooling on tuition prices after controlling for other important factors that might impact tuition prices. Such a model, however, would overlook the fact that during the COVID-19 pandemic, in-person education is not a characteristic that is highly demanded by students, even if it is a desirable characteristic outside of the pandemic.
As the dozens of college tuition refund cases proceed, college and university defendants will undoubtedly argue that calculating damages based on the difference between the price students, or their parents, paid for tuition and the value of the online education they received is speculative. The damages models that plaintiffs experts frequently employ in consumer class actions will face high hurdles to yield nonspeculative damages measures.
Jon Tomlin, Ph.D., is a senior managing director and Hassan Faghani, Ph.D., is a senior director at Ankura Consulting Group LLC.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Gociman v. Loyola University Chicago, case number 1:20-cv-03116, U.S. District Court for the Northern District of Illinois.
[2] Ryan v. Temple University, case number 5:20-cv-02164, U.S. District Court for the Eastern District of Pennsylvania.
[3] For an economic explanation of this pricing see, e.g., "Subsidies, Hierarchy and Peers: The Awkward Economics of Higher Education," Gordon C. Winston, Journal of Economic Perspectives, Winter, 1999.
[4] See, e.g., "Trends in College Pricing 2019," College Board, November 2019.
[5] See e.g., "Tuition and Financial Aid Policies in the Market for Higher Education," Dennis Epple and Richard Romano, Econometrica, July, 2006.
[6] See, e.g., "The Anatomy of College Tuition," Robert Archibald and David Feldman, American Council on Education, 2012.
[7] See, e.g., the data available from the National Association for Education Statistics (https://nces.ed.gov/ipeds).
[8] See, "Can Online Learning Bend the Higher Education Cost Curve?," David J. Deming, Claudia Goldin, Lawrence F. Katz, and Noam Yuchtman, American Economic Review: Papers and Proceedings, 2015.
[9] "What's Really Driving Tuition in Online College Programs?," Derek Newton, Forbes, June 26, 2018.
[10] See, e.g., "Reliability of 'Price Premium' Calculations in Class Actions," Jon Tomlin, Law360, October 10, 2017.
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