Private Equity Firm Welsh Carson Dismissed from FTC Antitrust Action
Enforcement Matter Involves Alleged Healthcare "Roll-Up" Strategy
Highlights
- In Federal Trade Commission v. U.S. Anesthesia Partners, Inc. et al., a federal district court granted private equity firm Welsh, Carson, Anderson & Stowe's motion to dismiss it from the Federal Trade Commission's (FTC) lawsuit alleging an anticompetitive scheme to drive up the price of anesthesia services by orchestrating a decade-long "roll-up" strategy to consolidate anesthesiology practices in Texas. However, the court denied U.S. Anesthesia Partners' motion to dismiss.
- Section 13(b) of the FTC Act does not permit the FTC to seek injunctive relief on "long-past conduct" without some evidence that a defendant "is" committing or "is about to" commit another violation of the law.
- The ruling makes clear that Section 13(b) should not be used to expand antitrust liability to reach active minority investors in subsidiary companies that are alleged to violate antitrust law.
- The court decision provides important guidance on the framework for any potential liability of private equity sponsors involved in roll-up or serial acquisition strategies, particularly in the healthcare context.
In Federal Trade Commission v. U.S. Anesthesia Partners, Inc. et al., No. 4:23-CV-03560 (S.D. Tex. May 13, 2024), the court granted private equity firm Welsh, Carson, Anderson & Stowe's motion to dismiss it from the Federal Trade Commission's (FTC) lawsuit alleging an anticompetitive scheme to drive up the price of anesthesia services by orchestrating a decade-long "roll-up" strategy to consolidate anesthesiology practices in Texas. However, the court denied a co-defendant's motion to dismiss.
Summary of the Court's Ruling
Defendants Welsh Carson and U.S. Anesthesia Partners (USAP) filed separate motions to dismiss on Nov. 20, 2023, in a case challenging an alleged decade-long "roll-up" strategy to consolidate anesthesiology practices in Texas.1 After full briefing and a hearing,2 the court granted Welsh Carson's motion to dismiss, but denied USAP's motion to dismiss.3
Factual Background
In a suit filed in September 2023, the FTC alleged that Welsh Carson, a private equity firm, founded USAP in 2012 "for the purpose of rolling up anesthesia practices in Texas" and consolidated and monopolized the Texas anesthesiology market through a three-part strategy.4 This alleged three-part strategy carried out by Welsh Carson and USAP included: 1) executing a roll-up acquisition scheme, 2) negotiating with payers jointly with competitors Welsh Carson and USAP did not own, and 3) reaching a market allocation agreement with a large rival anesthesiology provider.5
The FTC's complaint petitioned the court "pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), for a permanent injunction and other equitable relief" against both USAP and Welsh Carson "to redress and prevent violations of Section 7 of the Clayton Act, 15 U.S.C. § 18, and Section 5(a) of the FTC Act, 15 U.S.C. § 45(a)."6
Analysis of Section 13(b) of the FTC Act, 15 U.S.C. Section 53(b)
"Section 13(b) allows the FTC to 'bring suit in a district court of the United Sates to enjoin' allegedly unlawful conduct only where it has 'reason to believe … that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the [FTC].'"7 The court held that "Section 13(b) is not a catch-all statute. Rather, Section 13(b) 'addresses a specific problem, namely, that of stopping seemingly unfair practices from taking place while the [FTC] determines their lawfulness [through its own administrative proceedings].'"8 Therefore, the court held that "Section 13(b) [ ] 'does not permit the FTC to bring a claim based on long-past conduct without some evidence that the defendant 'is' committing or 'is about to' commit another violation.'"9
The Court's Holding on Welsh Carson's Motion to Dismiss
On May 13, 2024, the court granted Welsh Carson's motion to dismiss. First, the court determined that the FTC had not adequately alleged that Welsh Carson "is violating" antitrust law.10 To that end, the FTC argued that 1) receiving profits from an entity that may be violating antitrust laws and 2) continuing to hold stock in USAP constituted ongoing antitrust violations.11
The court found that receiving profits from an entity that may be violating antitrust laws is not an ongoing antitrust violation.12 Instead, "profits, sales, and other benefits accrued as the result of an initial wrongful act are not treated as 'independent acts.'"13 As such, the court held that "the act of receiving profits from USAP is not an ongoing antitrust violation."14
The court noted that "holding assets can constitute an ongoing violation of antitrust laws," but found that "[i]t is not clear how owning a minority share in a company that reduces competition satisfies [Section 13(b)]."15 "[O]nly one of the Welsh Carson entities [ ] owned stock in USAP [and that fund's 23%] ownership entitle[d] it to appoint two of the fourteen directors to the USAP board: one-seventh of the board, disproportionately small compared to its almost one-quarter ownership."16 Furthermore, the court refused to construe Sections 7 and 13(b) to apply to "a minority, noncontrolling investor," because such a ruling "would expand the FTC's reach further than any court has yet seen fit," imposing liability on "minority investors whose subsidiaries reduce competition."17
Second, the court determined that the FTC had not adequately alleged that Welsh Carson is "about to violate" antitrust law.18 Here, the court held that "the mere capacity to do something does not meet the requirement that the thing is likely to recur."19
The Court's Holding on USAP's Motion to Dismiss
Although the court dismissed Welsh Carson, it allowed the FTC's claims against USAP to proceed. First, the court determined that the FTC did not need to bring an administrative proceeding alongside its federal court complaint.20 Second, the court determined that the FTC adequately alleged that USAP "is currently or about to violate antitrust laws."21 Here, the court relied on the fact that "USAP continues to own the anesthesia groups it unlawfully acquired and continues to charge high prices; USAP currently maintains two price-setting arrangements that result in higher prices; and USAP's overall monopolization scheme remains intact."22 The court held that "[b]ecause these acquisitions constitute ongoing activity and plausibly contribute to the monopoly power and unfair competition" at the heart of the FTC complaint, "the FTC is within its statutory authority to bring [these] claims."23 Ultimately, the court determined that the FTC's allegations raised factual disputes as to whether there was anticompetitive conduct under the Sherman Act or the Clayton Act.24 Because it would have been premature for the court to dismiss these claims at this stage, the court denied USAP's motion to dismiss.25
Takeaways and Practical Implications
The court's opinion provides guidance on the framework for any potential liability of private equity sponsors involved in roll-up or serial acquisition strategies, particularly in the healthcare context. Although Welsh Carson created USAP and actively participated in its past acquisitions, the facts surrounding its ownership and involvement in USAP at the time of the lawsuit were determinative in the court dismissing it from the case.
Specifically, Welsh Carson, through only one of its funds, owned only 23 percent of USAP and appointed only two of 14 board members. The dismissal of Welsh Carson makes plain that Section 13(b) of the FTC Act, 15 U.S.C. Section 53(b) should not expand antitrust liability to reach minority investors in subsidiary companies. However, firms should still be cognizant of Section 13(b) actions for long-past conduct, which can include the cumulative effect of past acquisitions. Although these actions will require evidence that a defendant "is" committing or "is about to" commit another violation, factors such as agency and control might impact the Section 13(b) analysis. In addition to consideration of the concentration and potential impact on competition of roll-up or serial acquisition strategies, firms should also consider their current ownership structure and involvement in light of the court's opinion in this case.
Holland & Knight's Antitrust Team is available to assist in a review of the potential antitrust risk involved in any transaction or series of transactions contemplated by private equity sponsors in the healthcare or other industries.
Notes
1 Dkts. 99-100.
2 Dkts. 119-120, 124, 126 & 133.
3 Dkt. 146.
4 Compl. at ¶ 34.
5 Compl. at 4-5.
6 Compl. at 1-2.
7 Memo. Op. at 8.
8 Id.
9 Id.
10 Id.. at 9.
11 Id.
12 Id.
13 Id.
14 Id.
15 Id. at 10-11.
16 Id. at 11.
17 Id. at 12-13 (emphasis added).
18 Id. at 13.
19 Id. at 15.
20 Id. at 16.
21 Id. at 18.
22 Id.
23 Id. at 20.
24 Id. at 23.
25 Id.
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