On May 13, a federal court in Texas ruled that the Federal Trade Commission (“FTC”) cannot seek an injunction against a private equity firm with a minority interest in a corporation for alleged ongoing or future antitrust violations committed by that corporation. It held that the FTC does not have the authority to seek an injunction against an investor simply for receiving profits from a company that may be violating the antitrust laws; something more than a minority stake is required to subject an investor to the possibility of injunctive relief under Section 13(b) of the FTC Act.
Biden Administration Puts Spotlight on Private Equity
Antitrust enforcers in the Biden Administration have targeted private equity firms for various potential antitrust harms and have taken steps to place pressure on firms in the sector.
- Officials at the FTC and Department of Justice (“DOJ”) Antitrust Division have heavily criticized private equity, with the chief of the Antitrust Division stating that the private equity business model is “very much at odds with the law and very much at odds with the competition we are trying to protect.”
- The DOJ has also targeted private equity firms as part of its commitment to reinvigorate enforcement under Clayton Act Section 8, which prohibits interlocking directorates.
- The FTC issued guidance in 2022 on its interpretation of Section 5 of the FTC Act, which broadly prevents “unfair methods of competition,” stating that the provision allows the agency to go after so-called “roll-up” acquisitions by private equity.
- The new 2023 Merger Guidelines also reflect the agencies’ intention to focus on “roll-up” acquisitions that form a pattern or strategy of consolidation.
- And finally, in March of this year, the FTC hosted a workshop on private equity in healthcare, further solidifying that private equity (and particularly private equity in healthcare) is a target for enforcement in this administration.
The USAP/Welsh Carson Allegations
In 2023, after a two-year investigation, the FTC filed suit against U.S. Anesthesia Partners (“USAP”) and Welsh Carson, a private equity firm. The FTC alleges that USAP is monopolizing the market for in-hospital anesthesia services in Texas. According to the complaint, Welsh Carson built USAP with a platform acquisition of an anesthesia practice in 2012 and soon expanded the business with bolt-on acquisitions of other anesthesia practices, starting first in Houston and expanding to Dallas and other locations across Texas.
The FTC alleges that, through these acquisitions, USAP gained control of nearly 70% of the Houston and Dallas hospital-only anesthesia markets and over 52% of the Austin hospital-only anesthesia market. This growth resulted in USAP physicians being responsible for treating nearly half of all hospital-only anesthesia cases in Texas and accounting for nearly 60% of anesthesia fees paid in Texas.
The FTC alleges that USAP’s aggressive acquisition strategy gave it negotiating leverage over insurers in Texas, allowing it to raise prices for in-hospital anesthesia services above the competitive level. The FTC also alleges that USAP paid a large anesthesia service provider $9 million to stay out of Dallas for 5 years.
While Welsh Carson initially had an ownership stake in USAP of just over 50%, Welsh Carson sold shares in 2017, leaving it with a 23% stake and the right to appoint two of USAP’s 14 directors.
Private Equity Escapes FTC Challenge
The FTC sued Welsh Carson and USAP under Section 13(b) of the FTC Act. Section 13(b) is a forward-looking provision that allows the FTC to seek an injunction to stop an entity from ongoing or future violations of the antitrust laws. The court agreed that USAP could be enjoined under Section 13(b) from operating the group of anesthesia practices that allegedly allowed it to charge higher-than-competitive prices for anesthesia services. But the court disagreed that the FTC could similarly seek an injunction against Welsh Carson.
The FTC argued that Welsh Carson is currently violating the antitrust laws through its ongoing, minority shareholding in USAP. The FTC alleged that “USAP continues to hold the illegally acquired practices, uses the resulting leverage to raise prices, and shares its profits with Welsh Carson.” However, because Welsh Carson is no longer a majority shareholder in USAP, the court held that Welsh Carson could not be subject to an injunction for USAP’s conduct. That is, the court rejected that a minority shareholder in an entity can be subject to an injunction under Section 13(b) for the current conduct of that entity.
Because Section 13(b) can only address present and future antitrust violations, the court also rejected the FTC’s arguments that Welsh Carson’s history of establishing USAP, staffing its executive positions and board of directors, and directing its acquisition strategy until 2017 are redressable by Section 13(b). The court further rejected as being too speculative the FTC’s arguments that Welsh Carson could reacquire a majority position in USAP and retake formal control of the company to further consolidate the anesthesia market, or that Welsh Carson could use its investments in other non-anesthesia markets (emergency medicine and radiology) to further consolidate those markets. According to the court, the capacity to do something “does not meet the requirement that the thing is likely to recur,” a requirement for an injunction under Section 13(b).
In sum, the court’s decision is relatively straightforward: a minority shareholder with no board control over an entity cannot be enjoined for that entity’s alleged ongoing and future antitrust violations under Section 13(b). The FTC cannot shoehorn a minority shareholding private equity firm into a Section 13(b) suit because it takes issue with the private equity firm’s business model, regardless of the private equity firm’s history with the entity.
Key Takeaways
- Private equity wins against the FTC: The FTC has had harsh criticism against the private equity business model in recent years but fell short when challenging Welsh Carson’s alleged roll-up strategy in connection with USAP. A federal district court ruled that as a minority investor Welsh Carson could not be subject to an injunction under Section 13(b) for USAP’s alleged antitrust violations.
- Courts remain a significant check on expanded antitrust enforcement: While the FTC and DOJ have become more aggressive in pursuing novel theories of harm, the federal judiciary remains a significant check on their efforts. The case against USAP is proceeding despite the series of acquisitions consummating years in the past, but the more aggressive and non-traditional attempt to target a minority private equity shareholder failed at least in this court. While the agencies remain successful pursuing traditional antitrust theories of harm, their more novel theories of harm and non-traditional enforcement actions continue to face heavy skepticism.
- Private equity should expect continued scrutiny: The agencies have indicated that private equity will continue to be an area of heavy scrutiny and focus for enforcement. The agencies remain skeptical of private equity acquisition strategies and will continue to place them under a microscope. The private equity and healthcare workshop in March and the USAP case show that the agencies will be especially focused on the health care sector. While many private equity transactions continue to be completed, it is critical for private equity firms to take early preparatory steps given the current level of scrutiny.
