On May 13, a federal district court in Texas dismissed private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson) from an antitrust lawsuit filed by the Federal Trade Commission (FTC). The lawsuit, which was originally filed in 2023, alleged that Welsh Carson and co-defendant U.S. Anesthesia Partners, Inc. (USAP) – an entity created by Welsh Carson in 2012 – engaged in an anticompetitive scheme to roll up anesthesiology practices in Texas and subsequently drive up the price of anesthesia services. The court ruled that the fact that Welsh Carson holds a minority stake in USAP was not, standing alone, enough to support the FTC's claim that Welsh Carson – as opposed to USAP – was violating the antitrust laws. In the same order, the court denied co-defendant USAP's motion to dismiss, holding the FTC had adequately alleged that USAP was violating antitrust laws. As this was a pretrial motion to dismiss, the court assumed for purposes of this ruling that all the facts alleged by the FTC were true. The FTC will still have to provide proof of the facts alleged against USAP in order to prevail on the merits.
Main Takeaways from Ruling for Private Equity
The court's ruling provides some clarity on the scope of potential antitrust liability for private equity firms involved in roll-up strategies, particularly in the healthcare industry. Below are the key points from the ruling:
Scope of Section 13(b)
The ruling largely focused on the requirements of the law that the FTC brought the lawsuit under – namely, Section 13(b) of the FTC Act. This law allows the FTC to sue in federal court against a defendant that "is violating, or is about to violate" the antitrust laws. Suing under Section 13(b) is the primary way that the FTC seeks monetary relief for antitrust violations. The court ruled that Section 13(b) is limited in scope and can only be applied to past conduct when there is evidence that a defendant is committing an ongoing offense or is about to commit another offense.
Receiving Profits or Holding Equity in a Company that Violates Antitrust Laws is Not, In Itself, Sufficient to Violate the Antitrust Laws
The court focused on the fact that only one of Welsh Carson's entities, Fund XII, has owned stock in USAP since 2017. Fund XII held a minority 23% ownership stake in USAP and was entitled to appoint to one-seventh of USAP's board. The court held that receiving profits from or holding equity in, an entity that may be violating antitrust laws is not itself a violation of the antitrust laws. Welsh Carson's ability to appoint a minority of the board members of USAP and its involvement with the company as an active shareholder did not change this analysis.
Portfolio Companies Remain Subject to Liability for Allegedly Anticompetitive Roll-Up Strategies
The court distinguished between USAP's acquisitions of anesthesiology practices and Welsh Carson's ownership, ruling that the FTC had adequately alleged a case against USAP itself based on its roll-up strategy, which the FTC alleged granted USAP a monopoly in parts of Texas.
Implications for Private Equity Firms & Portfolio Companies
The ruling shows that simply having a minority, non-controlling interest in an entity that is violating the antitrust laws is not enough to subject a private equity firm to legal action from the FTC under Section 13(b).
It is unclear how this case would have turned out if Welsh Carson had a controlling, rather than a minority, interest in USAP. Firms that have controlling investments in a portfolio company should continue to assess the risks of roll-up transactions. Private equity firms involved in roll-up or serial acquisition strategies may also face antitrust risk under a number of laws beyond Section 13(b) – including the FTC's ability to bring cease-and-desist actions before its in-house tribunal. The FTC will undoubtedly continue to seek to bring enforcement actions against private equity firms. Even with those caveats, this opinion was a significant victory for private equity and a significant setback for the FTC.
Additionally, portfolio companies executing roll-up strategies should carefully consider the antitrust risks. As this case demonstrates, roll-up strategies will be closely scrutinized by the antitrust agencies, and may result in enforcement action long after a deal is closed – even if the individual deals were relatively small.
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