Welsh Carson Files Motion to Dismiss FTC Charges

On May 13, a federal judge granted private equity firm Welsh Carson’s motion to dismiss in an FTC lawsuit alleging that the company’s initial involvement in planning to “increase the number” of anesthesia practices in local Texas markets exposed it to continuing liability on that basis, that it continues to have a minority interest in, and profits from, the practice business after it has been brought to market.

Go-To Guide:

The fact that Welsh Carson, which sold its majority stake in the company six years ago, retains only a 23% stake through a single fund and two of the 14 board seats was not enough for the court to find that there was an “ongoing” or “probable future” antitrust violations by Welsh Carson, which is the standard required by the FTC to obtain a Section 13(c) injunction. b) the FTC Act.
A company’s minority interest in a company is different from the M&A activities of the company itself, and the latter activity may be contested.
The judge did not generally address the merits of Welsh Carson’s prior conduct or roll-up strategy and allowed the case against the company to continue, only releasing Welsh Carson from the lawsuit because it was not involved in the ongoing infringement.
Welsh Carson’s conduct may be challenged in federal court in the future if the FTC can rely on specific facts controlled a company that is actively involved in ongoing violations or is otherwise directly involved in another attempted violation “beyond mere speculation and conjecture” and can still bring an internal administrative case against the private equity firm.
Because the court’s ruling on the FTC’s request for an injunction under Section 13(a) b) of the FTC Act was based on a lack of control from the minority investor suggests that the sponsor has he left Its investment in a portfolio company is unlikely to be recognized in similar proceedings under Section 13(a). b) for “current” or “likely future” antitrust violations.

On May 13, a federal judge in the Southern District of Texas dismissed private equity firm Welsh Carson from an injunctive action brought by the Federal Trade Commission (FTC), seeking, among other things, a declaration that Welsh Carson’s conduct in developing a plan to use its large anesthesiology practice – US Anesthesia Partners (USAP)¹ – as a platform to increase its market share through serial acquisitions in various local markets in Texas, violated various federal antitrust laws; and that it be permanently prohibited from engaging in similar alleged anti-competitive serial takeovers.

On September 21, 2023, the FTC filed a 106-page complaint against private equity firm Welsh Carson and its affiliates,² and USAP Southern District of Texas. The FTC alleged that Welsh Carson and USAP engaged in anticompetitive conduct through (a) a series of “roll-up” acquisitions by USAP over several years, (b) pricing arrangements between USAP and at least three of its competitors, and ( (c) an agreement between USAP and one of its competitors to share markets.³

This lawsuit marks the first time enforcement has focused on a so-called “roll up” strategy often used by private equity firms investing in space as part of a potentially anti-competitive scheme. The FTC alleged that Welsh Carson’s continued ownership interest in USAP exposed it to liability for continuing antitrust violations, which the relevant order sought to stay pending a full administrative investigation on the merits.

In including Welsh Carson in the lawsuit, the FTC argued that even after Welsh Carson’s ownership fell below 50%, the private equity firm retained control of USAP through its two board members, its ownership of voting rights in some of USAP’s remaining shareholders, and because it “regularly provided USAP strategic, operational and financial support.

The court disagreed. In the memorandum and order dismissing Welsh Carson, the judge found that the mechanism through which the FTC brought the lawsuit, Sec. 13 lit. b) of the FTC Act, “addresses the specific problem of stopping apparently unfair practices while the (FTC) determines their legality (through its own administrative proceedings)” and that Section 13(b) b) allows the agency to file a lawsuit only if it has “reason to believe.” . . that any person, partnership or corporation is violating or intending to violate any law.” The fact that other Welsh Carson entities that do not own USAP shares helped create both USAP and the acquisition strategy, coupled with the minority interest still held by the fund managed by it, does not constitute continuing infringement. A different reading of the law, the judge said, “would expand the FTC’s reach more than any court has yet found appropriate; It would also extend liability to minority investors whose subsidiaries restrict competition.”

The judge noted that the FTC “has not cited a case in which a minority, non-controlling investor – no matter how much direct influence the investor has – is liable under Section 13(a). (b) because the company he co-owns has made anti-competitive acquisitions. According to the court, the FTC failed to meet its burden of showing that Welsh Carson continued to control and direct USAP.

The FTC also alleged that Welsh Carson has “the plans, finances, and personnel to continue this program,” concurrent investments in emergency medicine and radiology, and/or the ability to increase investment in the future meet the requirements of Sec. ) for an “imminent breach”, but the judge also dismissed this claim, stating that “the mere ability to do something does not satisfy the test of likelihood of recurrence”.

Application

The court’s ruling is good news for private equity firms that have withdrawn or partially withdrawn their investments because they may not be liable for a portfolio company’s anti-competitive conduct after exit. However, roll-up strategies continue to be subject to antitrust enforcement, and agencies may still have the ability to investigate, based on other facts, continuing violations by PE firms that allegedly use minority-owned portfolio companies to implement alleged anti-competitive policies. takeover solutions.

Moreover, the FTC could, outside federal court, conduct its own internal review of Welsh Carson’s past conduct in designing its acquisition strategy. Such an action would be brought under Art. 5 of the FTC Act, which covers “unfair methods of competition in or affecting commerce” and, as the judge in that case noted, “represents a much broader grant of antitrust power and looks back, whereas Section 13(b) looks forward.” In November 2022, the FTC issued a policy statement regarding its intended enforcement of Section 5, specifically including in its definition of unfair competition methods “a series of mergers or acquisitions that tend to result in harms that the antitrust laws were intended to prevent, but individually could not violate the antitrust laws.”⁴

The FTC is expected to appeal this decision, the outcome of which should also be communicated to the scope post-hoc PE Firm Liability.

¹ For the purposes of this document, USAP includes all corporate predecessors, successors, parents, subsidiaries and affiliates of USAP.

² As used herein, Welsh Carson includes all named defendants, including Welsh, Carson, Anderson & Stowe XI, LP, WCAS Associates XI, LLC, Welsh, Carson, Anderson & Stowe XII, LP, WCAS Associates XII, LLC, WCAS Management Corporation, WCAS Management, LP and WCAS Management, LLC.

³ Please refer to the GT Notice published at the time of your complaint for further details.