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Federal Trade Commission Sues Private Equity Firm

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Last fall, the Federal Trade Commission (“FTC”) sued a private equity firm and U.S. Anesthesia Partners (“USAP”), alleging a years-long anticompetitive scheme to acquire and consolidate anesthesia practices in Texas. We covered the complaint, which alleged that the private equity firm and USAP jointly executed a roll-up scheme that drove up prices for hospital-only anesthesia services by first acquiring the largest anesthesia practice in Houston and subsequently pursuing a series of “tuck-in” acquisitions across the state.

A federal judge in the United States District Court for the Southern District of Texas recently dismissed the private equity firm, Welsh Carson, from that case because, among other reasons, the FTC had not adequately alleged that Welsh Carson was currently violating the antitrust laws. Judge Kenneth M. Hoyt noted that the FTC had not cited a case imputing antitrust liability on a minority investor with a non-controlling interest for anticompetitive acquisitions made by a partially-owned company. Thus, the court held that construing Section 7 of the Clayton Act and Section 13(b) of the FTC Act to “expand liability to minority investors whose subsidiaries reduce competition” would be a novel interpretation of the antitrust laws.

The FTC contended that a PE sponsor holding assets which result in reduced competition is an ongoing violation of antitrust law, and therefore was subject to the court’s jurisdiction under 13(b). The Court disagreed, emphasizing that Welsh Carson’s current ownership in USAP was limited to a minority interest and a right to appoint one-seventh of the board. The court also noted that the FTC had not alleged that Welsh Carson’s acquisition of USAP itself was anticompetitive, as distinguished from the series of allegedly anticompetitive roll-ups USAP itself pursued and closed across Texas since 2012. Judge Hoyt further reasoned that Welsh Carson’s past conduct and the FTC’s insistence that Welsh Carson had the “blueprints, finances, and personnel to continue this scheme” was not enough to raise a fair inference that Welsh Carson was “about to violate antitrust law.”

Importantly, the court denied USAP’s motion to dismiss, so the suit will proceed against USAP under the themes of competitive harm alleged by the FTC back in September: that the series of acquisitions of Texas anesthesia practices over the years grew USAP’s market power and negotiating leverage with commercial payors, allowing it to raise prices which resulted in patients and their employers paying more for anesthesia each year than they would otherwise. In doing so, the court rejected USAP’s arguments that a) the FTC needed to bring a concomitant administrative proceeding to maintain the court action; b) the FTC sufficiently alleged ongoing violations under Section 13(b) of the FTC Act and c) the FTC is an unconstitutionally constituted entity.

As to the attack on the sufficiency of the FTC’s merits allegations, the court held that the “FTC has plausibly alleged acquisitions resulting in higher prices for consumers, along with a market allocation and price-setting scheme. It would be premature to dismiss these claims at this stage.” In short, the FTC’s challenge to the appropriateness under the antitrust laws of a private equity roll up will continue on to the merits against USAP.

This dismissal is significant because of the current FTC Democratic Commissioners’ vocal interest in private equity transactions in healthcare, including Chair Khan’s position that private equity firms “load up companies with enormous amounts of debt, strip valuable assets and sell them off to enrich the private equity owners, and pursue financial engineering tactics that leave the underlying firm weaker and worse off.” After elimination of the private equity sponsor from this lawsuit, the case survives against USAP as the FTC majority attempts to incorporate and advance some of its theories of competitive harm from the 2023 Merger Guidelines (see, e.g., Guidelines 7, 8, and 11). Industry participants should be aware that the FTC is looking at transactions across the spectrum of healthcare and private equity that may not have individually been HSR reportable or tripped competitive concerns but, as a whole, increase market concentration.

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