In a decision with significant implications for private equity firms and minority investors, on May 13, 2024, the US District Court for the Southern District of Texas dismissed1 the Federal Trade Commission's (FTC) suit against a fund of private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson) that is a minority investor in US Anesthesia Partners, Inc. (USAP), and the other Welsh Carson entities named as defendants.2 The FTC primarily alleged that USAP engaged in anticompetitive "roll-up" acquisitions to make USAP the dominant provider of anesthesia services in certain Texas cities, allowing it to raise prices, and that certain Welsh Carson entities founded USAP and created the roll-up strategy.3 The court rejected USAP's motion to dismiss in the same opinion and order. WilmerHale represented Welsh Carson during the litigation and associated investigation, alongside co-counsel.
Implications
FTC Chair Lina Khan has been a vocal critic of private equity investment in healthcare.4 This opinion demonstrates that, in cases where the FTC challenges conduct by a portfolio company in federal court, the FTC will need to point to current or imminent anticompetitive conduct by the private equity investor itself to state a claim against the investor under Section 13(b), at least in situations where the private equity firm is a minority investor and does not control the portfolio company – merely holding an investment in an entity is not sufficient to allege an ongoing or future violation of antitrust laws.
The Court's Decision on the Welsh Carson Entities' Motion to Dismiss
The FTC brought its claims under Section 13(b) of the FTC Act, which permits the FTC to file a claim in federal court to enjoin anticompetitive conduct if there is "reason to believe" that the defendant "is violating, or is about to violate" the antitrust laws.5 The court determined that, as to the Welsh Carson entities, the FTC was impermissibly seeking to use its Section 13(b) authority to address allegations of "long-past conduct" without alleging facts suggesting a current or future violation.6
The FTC claimed that the Welsh Carson entities were currently violating the antitrust laws because a Welsh Carson entity continued to hold a 23 percent interest in USAP and received profits from USAP's allegedly ongoing anticompetitive conduct. The court rejected this theory:
- Sharing profits. The court held that the FTC's allegation that USAP "shares its profits with Welsh Carson" is insufficient to support a claim that the Welsh Carson entities were committing an ongoing violation of the antitrust laws.7 The court noted that "profits, sales, and other benefits accrued as the result of an initial wrongful act are not treated as 'independent acts'" and cannot be an "ongoing antitrust violation."8
- Holding assets. Although "holding assets can constitute an ongoing violation of antitrust laws," the court noted that the FTC did not cite a single case where a "minority, noncontrolling investor—however hands-on—is liable under Section 13(b) because the company it partially owned made anticompetitive acquisitions."9 The court highlighted that such an interpretation would carry significant ramifications for "minority investors whose subsidiaries reduce competition."10
- With respect to the Welsh Carson entities, the court noted that since 2017, only a single Welsh Carson fund has held a 23 percent ownership interest in USAP and, with that, the right to appoint only two of 14 directors on USAP's board, which the court described as "disproportionately small compared to its almost one-quarter ownership."11
- Critically, the court stated that in order for Section 13(b) to authorize an action against the Welsh Carson entities in federal court, "Welsh Carson's ongoing conduct must reduce competition."12 But the FTC only alleged that Welsh Carson's indirect acquisitions of certain anesthesia practices through USAP violated the antitrust laws—not that Welsh Carson's investment in USAP was itself a violation.13 The court distinguished Welsh Carson's minority investment in USAP from the facts of Community Publishers, Inc. v. Donrey Corp.,14 a case in which an indirect acquisition was found to violate Section 7 of the Clayton Act. There, a parent company "indirectly" acquired stock through its subsidiary because the parent and subsidiary were nearly wholly owned by the same trust and all the entities were run and controlled by the same individual.15
The FTC claimed that the Welsh Carson entities were "about" to violate the antitrust laws because allegedly nothing prevented the Welsh Carson entities from acquiring control of USAP in the future and because other Welsh Carson funds had more recently invested in other physician services businesses. The court disagreed:
- The court held that allegations of "long-past conduct do[] not raise a fair inference that Welsh Carson will [violate the antitrust laws]" in the future.16 The court noted that the last plausible allegation of any anticompetitive conduct by a Welsh Carson entity in the complaint was six years old.17
- The court also rejected the FTC's allegations that "nothing 'prevent[s] Welsh Carson from re-upping its investment in USAP, retaking formal control of the company, and directing yet more anticompetitive positions,'"18 that Welsh Carson had "indicat[ed] a desire to consolidate other healthcare markets,"19 and that it had the "blueprints" to do it again. The court held that "the mere capacity to do something does not meet the requirement that the thing is likely to recur."20
- The court also rejected the FTC's theory that the Welsh Carson entities were about to violate the antitrust laws because of a "lack of contrition" over the FTC's claims, noting that "the law does not require defendants to admit liability and apologize in order to avoid an injunction."21
Footnotes
1. Memorandum Opinion and Order, Federal Trade Commission v. U.S. Anesthesia Partners, Inc., No. 4:23-cv-03560 (S.D. Tex. May 13, 2024) (hereinafter "Opinion"), https://static01.nyt.com/newsgraphics/documenttools/075c0f0919be89f8/75c6d502-full.pdf.
2. Seven Welsh Carson entities were named as defendants, including Welsh Carson Fund XII, which is a minority investor in USAP.
3. Opinion, at 11; see also Complaint, Federal Trade Commission v. U.S. Anesthesia Partners, Inc., No. 4:23-cv-03560 (S.D. Tex. Sept. 21, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/2010031usapcomplaintpublic.pdf.
4. Khan has focused heavily on the "growing role of private equity" and "how these business models may distort ordinary incentives" in her 2021 Strategic Memorandum laying out her vision for the FTC. Memorandum from Chair Lina Khan, Fed. Trade Comm'n, to Commission Staff and Commissioners (Sept. 22, 2021), https://www.ftc.gov/system/files/documents/public_statements/1596664/agency_priorities_memo_from_chair_lina_m_khan_9-22-21.pdf; see also Lina M. Khan, Chair, Fed. Trade Comm'n, Remarks at the Private Capital, Public Impact Workshop on Private Equity in Healthcare (March 5, 2024), https://www.ftc.gov/system/files/ftc_gov/pdf/2024.03.05-chair-khan-remarks-at-the-private-capital-public-impact-workshop-on-private-equity-in-healthcare.pdf.
5. 15 U.S.C. § 53(b).
6. Opinion, at 8.
7. See id. at 9 (citing Z Techs. Corp. v. Lubrizol Corp., 753 F.3d 594, 600 (6th Cir. 2014)).
8. Id.
9. Id. at 12.
10. Id. at 13.
11. Id. at 11. The FTC also conceded during oral argument that Welsh Carson's only "ongoing conduct" is its ownership stake in USAP.
12. Id. (emphasis in original)
13. Id. at 11–12.
14. 882 F. Supp. 138 (W.D. Ark. 1995).
15. Id. at 139.
16. Opinion, at 14.
17. Id.
18. Id. at 13.
19. Id. at 14–15
20. Id. at 15.
21. Id.
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