Judge dismisses FTC case against Welsh Carson | CENTER

On May 13, a federal district court judge dismissed the Federal Trade Commission’s (FTC) antitrust case against private equity firm Welsh, Carson, Anderson & Stowe and affiliates (Welsh Carson). The case has been closely watched as a barometer of the courts’ willingness to accept the FTC’s theories of liability in private equity roll-ups. The FTC case alleged that Welsh Carson, along with its portfolio company, US Anesthesia Partners, Inc. (USAP), engaged in an anticompetitive roll-up strategy designed to monopolize the market for “commercially insured hospital-only anesthesia services” in Texas. In dismissing the case against Welsh Carson, the judge rejected the FTC’s contention that Welsh Carson, by virtue of his minority ownership interest in USAP, was responsible for USAP’s alleged unlawful conduct. The decision shows that courts continue to review attempts by the FTC and the Department of Justice (DOJ) to push the boundaries of antitrust enforcement. While this decision represents a victory for Welsh Carson (and perhaps minority investors more broadly), the court still allowed the FTC v. USAP case to proceed, upholding antitrust claims that go to the heart of the private equity business model. Regardless of the court’s decision, we expect the agency’s aggressive enforcement approach to private equity – particularly in the health care sector – to continue.

FTC lawsuit against USAP and Welsh Carson

In September 2023, the FTC sued USAP and Welsh Carson, accusing them of engaging in an anticompetitive scheme designed to consolidate and monopolize the Texas anesthesia market, raise the prices of anesthesia services and increase their profits.¹ The case was the culmination of an ongoing campaign by U.S. antitrust agencies against private equity after years of increasing rhetoric and regulatory efforts aimed at strengthening their ability to reach private equity deals.

According to the FTC complaint, Welsh Carson launched USAP in 2012 “to expand the number of anesthesiology practices in Texas” as part of an “aggressive strategy to consolidate high-market-share practices in several key markets.”² At the time of USAP’s founding, Welsh Carson owned 50.2% of the company, had the power to appoint a majority of its board of directors, and led its corporate strategy and decision-making processes, including mergers and acquisitions. In 2017, Welsh Carson sold roughly half of its stake in USAP, leaving it with a minority stake of 23% and just two of its fourteen board seats.³

The FTC found that USAP and Welsh Carson’s “anti-competitive agenda” consisted of three key elements. First, they claimed to have pursued a roll-up strategy, acquiring a dozen anesthesia offices in Houston, Dallas and throughout Texas to create a dominant supplier with the ability to command higher prices.⁴ Second, the FTC alleged that USAP entered into “pricing arrangements” with certain independent anesthesia groups that served the same hospitals. Under these agreements, the FTC alleged that USAP would charge insurers its own higher prices for services actually provided by non-USAP providers and then pay the non-USAP providers a portion of the total higher price.⁵ Third, the FTC alleged that USAP entered into an illegal market allocation agreement with a competing supplier that agreed not to compete in Dallas for five years in exchange for $9 million.⁶

Both USAP and Welsh Carson filed motions to dismiss the FTC lawsuit. In his motion, Welsh Carson argued that (1) the FTC did not have the authority to bring a case under Section 13(a). b) the FTC Act to address past conduct rather than current or imminent violations;⁷ (2) any FTC allegations that Welsh Carson had intent to violate antitrust laws were purely hypothetical;⁸ and (3) the FTC’s complaint conflated—and ignored the corporate separateness of—USAP, Welsh Carson, and various Welsh Carson entities and did not allege that any particular Welsh Carson entity engaged in anticompetitive conduct.⁹ Welsh Carson also challenged the FTC’s constitutional authority to bring enforcement actions in federal district court.¹⁰

Dismissal of FTC case against Welsh Carson

On May 13, Judge Kenneth Hoyt of the Southern District of Texas issued an order granting Welsh Carson’s motion to dismiss the complaint. The judge interpreted Art. 13 lit. b) as a forward-looking statute that “prevents the FTC from bringing a claim based on past conduct without evidence that the defendant is committing or intending to commit further misconduct.”¹¹ The court held that USAP’s mere ownership of a minority, non-controlling interest in USAP could not constitute a continuing infringement.¹² Additionally, the FTC’s allegations that Welsh Carson could reinvestment in USAP, had previously developed an anti-competitive program and had the “plans, finances and personnel” to continue the program did not lead to the conclusion that it was about to violate the antitrust laws.¹³ The court noted that it “will not be the first to use this specialized law to expand antitrust liability to reach active investors in companies accused of violating antitrust law.”¹⁴

Although the court dismissed the FTC’s case against Welsh Carson, it allowed the case against USAP to proceed based on allegations that USAP had engaged in ongoing anti-competitive conduct.

Key conclusions and practical considerations

Agency focus on minority shareholdings proven but likely to continue

The dismissal of the FTC’s case against Welsh Carson is a backlash against the agency’s growing scrutiny of potential anticompetitive behavior resulting from minority ownership. This enforcement focus was evident in (1) the agency’s vigorous efforts to identify and challenge related directorates under Section 8 of the Clayton Act; (2) the new 2023 Merger Guidelines, which state that “(p)artial acquisitions that do not result in control may nevertheless raise significant competition concerns”; and (3) new proposed HSR Rules that would require filing parties to provide deep transparency regarding minority ownership interests, fund structure, and board representation. Despite the FTC’s failure in the USAP case, the agencies will likely continue to investigate minority holdings for conduct that may violate antitrust laws. Moreover, the judge’s decision leaves open the question of whether a minority shareholder with more power over strategy, decision-making and acquisitions than Welsh Carson has over USAP can be liable for its portfolio company’s anti-competitive conduct.

Private equity fund roll-ups remain in the crosshairs of law enforcement

Agencies will likely continue to pursue an aggressive enforcement campaign against private equity mergers and acquisitions. After all, the FTC’s case against USAP, which claimed its roll-up strategy was an anti-competitive scheme, has survived. The FTC’s arguments in this case reflect key provisions of the 2023 Merger Guidelines covering anticompetitive strategies involving multiple acquisitions¹⁵ and proposed HSR rules that would include information on prior acquisitions (including non-reportable transactions) dating back 10 years.¹⁶ At a recent workshop discussing private equity and health care, FTC Chair Lina Khan captured the agency’s skepticism toward roll-ups, stating that “by gradually and incrementally consolidating power through a series of smaller transactions, companies have sometimes evaded antitrust scrutiny.” and “(i) collectively, these roll-up activities may eliminate significant competition and allow new owners to raise prices, lower quality, and neutralize rivals without competition controls.”

Enforcement remains focused on private equity

All indications are that federal and state authorities are continuing their efforts to thoroughly investigate private equity involvement in the health care industry. In early March, the FTC, the Department of Justice, and the Department of Health and Human Services announced an “intergovernmental public investigation into the growing control of health care by private equity and other corporations.” Meanwhile, more than a dozen states have implemented pre-merger notification requirements for health care transactions, many of them specifically targeting private equity. Last week, the Department of Justice announced the creation of the Antitrust Division’s Health Care Monopolies and Collusion Task Force, which will “consider common competition concerns shared by patients, health care professionals, businesses and entrepreneurs, including issues regarding payer and supplier consolidation, serial acquisitions, labor and quality of care, medical billing, health IT services, access to and misuse of health care data, and more.” These developments signal that health care remains a central focus of antitrust enforcement efforts.

Understanding the complex law enforcement landscape

With new rules, guidelines and regulatory regimes emerging rapidly across the Internet, companies – especially private equity firms – operate in a complex and evolving antitrust enforcement environment. In this context, companies need to understand in real time the regulations, schedules and standards that apply to the transactions they are considering.

Consider antitrust risks early and holistically

In light of continued scrutiny of the private equity, serial takeover and healthcare markets, parties should consider antitrust risks early in the transaction process. Antitrust considerations may substantially impact the overall transaction risk and timing of the transaction. In this regulatory environment, significant antitrust risks may be greater than they appear and may exist even in situations that were not previously of concern. When assessing risk, deal makers should take into account factors such as private equity involvement; whether the transaction touches “hot zones” such as healthcare, life sciences or technology; potential portfolio overlap or adjacency; market concentration and estimated shares, including in narrow segments (as alleged by USAP and Welsh Carson); and the latest trends towards industry consolidation, including roll-ups involving websites.

The Antitrust, Competition and Trade practice has extensive experience advising clients on antitrust issues affecting private equity firms, including those in the healthcare industry.