On 13 May, a federal district court judge dismissed the Federal Trade Commission’s (FTC) antitrust case against private equity firm Welsh, Carson, Anderson & Stowe and affiliated entities (Welsh Carson). This matter has been closely watched as a barometer of courts’ willingness to accept the FTC’s theories of liability against private equity roll-ups. The FTC’s case alleged that Welsh Carson, along with its portfolio company, US Anesthesia Partners, Inc. (USAP), engaged in an anticompetitive roll-up strategy to monopolize the market for “commercially insured hospital-only anesthesia services” in Texas. In dismissing the case against Welsh Carson, the judge rejected the FTC’s contention that Welsh Carson, by virtue of its minority stake in USAP, was liable for USAP’s alleged unlawful conduct. The decision shows that courts continue to check attempts by the FTC and the Department of Justice (DOJ) to push the boundaries of antitrust enforcement. While the decision marks a victory for Welsh Carson (and perhaps minority investors more broadly), the court still allowed the FTC’s case against USAP to proceed, keeping alive antitrust claims that go to the heart of the private equity business model. Notwithstanding the court’s decision, we expect that the agencies’ aggressive enforcement approach towards private equity—especially in the health care sector—will continue.

FTC Lawsuit Versus USAP and Welsh Carson

In September 2023, the FTC sued USAP and Welsh Carson alleging that they engaged in an anticompetitive scheme to consolidate and monopolize the anesthesiology market in Texas, drive up the price of anesthesia services, and increase their profits.¹ The case marked a culmination of the US antitrust agencies’ ongoing campaign against private equity, following years of escalating rhetoric and regulatory efforts to strengthen their ability to reach private equity transactions.

According to the FTC’s complaint, Welsh Carson launched USAP in 2012 “for the purpose of rolling up anesthesia practices in Texas” through an “aggressive strategy to consolidate practices with high market share in a few key markets.”² At USAP’s founding, Welsh Carson owned 50.2% of the company, had the right to appoint the majority of its board, and directed its corporate strategy and decision-making, including mergers and acquisitions. In 2017, Welsh Carson sold roughly half of its stake in USAP, leaving it with a minority interest of 23% and just two out of fourteen board seats.³ 

The FTC alleged that USAP and Welsh Carson’s “anticompetitive scheme” had three key elements. First, they alleged they executed a roll-up strategy, acquiring more than a dozen anesthesia practices in Houston, Dallas, and across Texas in order to create a dominant provider with the power to demand higher prices.⁴ Second, the FTC alleged USAP entered into “price-setting arrangements” with certain independent anesthesia groups that were serving the same hospitals. Under these agreements, the FTC alleged that USAP would charge insurers its own higher prices for services actually provided by the non-USAP providers, then pay the non-USAP providers a portion of the total higher price.⁵ Third, the FTC alleged USAP entered into an illegal market allocation agreement with a rival provider, which agreed not compete in Dallas for five years in exchange for US$9 million.⁶ 

Both USAP and Welsh Carson filed motions to dismiss the FTC’s lawsuit. In its motion, Welsh Carson argued that (1) the FTC lacked authority to bring a case under Section 13(b) of the FTC Act to address past conduct, rather than ongoing or imminent violations;⁷ (2) any FTC allegations that Welsh Carson was about to violate the antitrust laws were purely hypothetical;⁸ and (3) the FTC complaint conflated—and disregarded the corporate separateness of—USAP, Welsh Carson, and various Welsh Carson entities, and failed to allege that any particular Welsh Carson entity engaged in anticompetitive conduct.⁹ Welsh Carson also challenged the FTC’s constitutional authority to bring enforcement actions in federal district court.¹⁰ 

Dismissal of FTC Case Against Welsh Carson

On 13 May, Judge Kenneth Hoyt of the Southern District of Texas issued an order granting Welsh Carson’s motion to dismiss. The judge construed Section 13(b) as a forward-looking statute that “does not permit the FTC to bring a claim based on long-past conduct without some evidence that the defendant is committing or is about to commit another violation.”¹¹ The court held that USAP’s mere ownership of a minority, non-controlling interest in USAP could not constitute an ongoing violation.¹² Moreover, the FTC’s allegations that Welsh Carson could re-up its investment in USAP, had previously designed an anticompetitive scheme, and had the “blueprints, finances, and personnel” to continue the scheme did not raise an inference that it was about to violate the antitrust laws.¹³ The court noted that it “will not be the first to use this specialized statute to expand antitrust liability to reach active investors in companies that are alleged to violate antitrust law.”¹⁴ 

While the court dismissed FTC’s case against Welsh Carson, it allowed the case against USAP to proceed based on allegations that USAP was engaged in ongoing anticompetitive conduct.

Key Takeaways and Practical Considerations

Agency Focus on Minority Holdings Checked but Likely to Continue

The dismissal of the FTC’s case against Welsh Carson pushes back against the agencies’ increasing scrutiny of potential anticompetitive conduct stemming from minority holdings. This enforcement focus has been evident in (1) the agencies’ vigorous efforts to identify and challenge interlocking directorates under section 8 of the Clayton Act; (2) the new 2023 Merger Guidelines, which provide that “[p]artial acquisitions that do not result in control may nevertheless present significant competitive concerns”; and (3) new proposed HSR Rules that would require filing parties to provide deep transparency into minority shareholdings, fund structure, and board representation. Despite the FTC’s setback in the USAP case, the agencies are likely to continue to probe minority holdings for conduct that may violate the antitrust laws. Moreover, the judge’s decision leaves open the question of whether a minority shareholder with greater authority over strategy, decision-making, and acquisitions than Welsh Carson had over USAP might be liable for the anticompetitive conduct of its portfolio company.

Private Equity Roll-Ups Remain in Enforcement Crosshairs

The agencies will likely continue to wage an aggressive enforcement campaign against private equity M&A. After all, the FTC’s case against USAP claiming that its roll-up strategy was an anticompetitive scheme survived. The FTC’s arguments in the case echo key provisions in the 2023 Merger Guidelines covering anticompetitive strategies involving multiple acquisitions¹⁵ and proposed HSR Rules that would capture information on prior acquisitions (including nonreportable transactions) going back 10 years.¹⁶ In a recent workshop discussing private equity and health care, FTC Chair Lina Khan captured the agencies’ skepticism towards roll-ups, stating that “by consolidating power gradually and incrementally, through a series of smaller deals, firms have sometimes sidestepped antitrust review,” and “[i]n the aggregate, these roll-up plays can eliminate meaningful competition and allow new owners to jack up prices, degrade quality and neutralize rivals without competitive checks.”

Enforcement Focus on Private Equity Continues

All signs point to continuing efforts by federal and state enforcers to closely scrutinize private equity involvement in the health care industry. In early March, FTC, DOJ and the Department of Health and Human Services announced a “cross-government public inquiry into private equity and other corporations’ increasing control over health care.” Meanwhile, more than a dozen states have implemented premerger notification requirements for health care transactions, many specifically targeting private equity. And just last week, DOJ announced the formation of the Antitrust Division’s Task Force on Health Care Monopolies and Collusion, which “will consider widespread competition concerns shared by patients, health care professionals, businesses and entrepreneurs, including issues regarding payer-provider consolidation, serial acquisitions, labor and quality of care, medical billing, health care IT services, access to and misuse of health care data and more.” These developments signal that health care remains at the front and center of the antitrust enforcement agenda. 

Understand the Complex Enforcement Landscape

With new rules, guidelines, and regulatory regimes coming online in rapid succession, companies—especially private equity firms—are operating in a complex and shifting antitrust enforcement environment. Against this backdrop, firms must have a real-time understanding of the regulations, timetables, and standards that apply to transactions they are considering.

Consider Antitrust Risk Early and Holistically

In light of the ongoing scrutiny around private equity, serial acquisitions, and health care, parties should consider antitrust risk early in the transaction process. Antitrust considerations can fundamentally drive overall transaction risk and deal timelines. In this regulatory environment, substantive antitrust risk can be more than meets the eye and may exist even in situations that previously did not raise such concerns. In evaluating risk, dealmakers should consider factors such as private equity involvement; whether a transaction touches “hot zones” such as health care, life sciences, or technology; potential portfolio overlaps or adjacencies; market concentration and estimated shares, including in narrow segments (as alleged against USAP and Welsh Carson); and recent trends towards industry consolidation, including roll-ups involving the parties.

The firm’s Antitrust, Competition, and Trade Regulation group has extensive experience advising clients on antitrust issues impacting private equity firms, including in the health care industry.