In a prior post, we discussed the Federal Trade Commission’s (“FTC”) lawsuit against U.S. Anesthesia Partners (“USAP”) and the private equity firm Welsh, Carson, Anderson & Stowe (“Welsh Carson”). Most recently, the U.S. District Court for the District of Texas denied USAP’s motion to dismiss the case while at the same time denying the FTC’s request for a permanent injunction against Welsh Carson and granting Welsh Carson’s dismissal motion.

This decision is important for a number of reasons. For one, it provides an in-depth look at how courts may consider and decide requests by the FTC for an injunction in cases involving alleged violations of Section 2 of the Sherman Act and Section 7 of the Clayton Act especially where the FTC has not commenced an administrative proceeding.

As (if not more) importantly, it provides insight into how courts may treat private equity firms accused of violating antitrust laws on account of their “roll-up” acquisitions. This is an especially important question given the volume of private equity acquisitions in the healthcare sector and given the FTC’s expressed concern about them and commitment to policing them.

In that regard, this past March, the FTC, along with the Department of Justice (“DOJ”) and the Department of Health and Human Services, announced it was launching a cross-government public inquiry into private equity’s increasing control over healthcare. At the same time, FTC Chair Lina Khan stated that “[w]hen private equity firms buy out healthcare facilities only to slash staffing and cut quality, patients lose out….” Most recently, the DOJ announced the formation of a task force to guide its enforcement approach in healthcare and explained that it will consider widespread competition concerns including those relating to serial acquisitions.^[1]

What follows is a detailed discussion of the case and certain of its implications.

Background

In the suit, the FTC alleges that Welsh Carson created USAP, executed a multiyear anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and boost its profits.

In its complaint, the FTC states that this involved a three-part strategy to consolidate and monopolize the Texas anesthesiology market:

• USAP and Welsh Carson executed a roll-up scheme, systematically buying up nearly every large anesthesia practice in Texas to create a single dominant provider with the power to demand higher prices;
• USAP and Welsh Carson further drove up anesthesia prices through price-setting agreements with remaining independent practices; and
• USAP sidelined a significant competitor by striking a deal to keep it out of USAP’s territory.

The FTC alleges that this anticompetitive strategy and resulting conduct amounts to unlawful monopolization, unlawful acquisitions, a conspiracy to monopolize, unfair methods of competition, and unlawful restraints of trade, and as such violates Section 5(a) of the Federal Trade Commission Act (the “FTC Act”) (prohibiting unfair methods of competition) and Section 7 of the Clayton Act (prohibiting mergers and acquisitions where the effect may be substantially to lessen competition or tend to create a monopoly).

In its complaint, the FTC requests that the court issue a permanent injunction under Section 13(b) of the FTC Act (15 U.S.C. Section 53(b)) to remedy the impact of the alleged anticompetitive conduct and prevent its recurrence, and to do so notwithstanding that it had not yet commenced an administrative proceeding. Section 13(b) authorizes the FTC to obtain, in proper cases, an injunction in federal court against any person, partnership, or corporation that it believes is violating, or is about to violate, any provision of law that the FTC enforces.

USAP and Welsh Carson denied the allegations and requested the case be dismissed.

In requesting dismissal, Welsh Carson argued that the FTC cannot bring this suit under Section 13(b) because it is not violating antitrust laws and is not about to do so.

USAP made the same argument, adding that Section 13(b) requires a concomitant administrative proceeding which the FTC had not begun. USAP further asserted that the FTC is itself unconstitutional because its commissioners are not removable at will by the President. Finally, USAP argued that the FTC’s claims are based on a myopic market definition (i.e., commercially-insured, hospital-only anesthesia services) and that it has not raised prices above competitive levels.

The FTC responded that:

• Both Welsh Carson and USAP are currently violating antitrust laws and are about to violate those laws;
• Section 13(b) does not require an administrative proceeding before a suit for a permanent injunction can be filed;
• Regarding the argument that it is an unconstitutional agency Fifth Circuit precedent holds otherwise;
• Its market definition of commercially insured hospital-only anesthesia is correct because non-hospital-based anesthesia is not an available substitute for hospital-based anesthesia; and
• It has adequately alleged super-competitive pricing due to USAP’s and Welsh Carson’s uncompetitive behavior.

The Court’s Analysis and Conclusions

The Scope of Section 13(b)

As noted above, in asserting its right to seek a permanent injunction under Section 13(b) in advance of it conducting an administrative proceeding, the FTC argued that both Welsh Carson and USAP are currently violating antitrust laws and are about to violate those laws and that Section 13(b) does not require an administrative proceeding before a suit can be filed under such circumstances.

The court, citing various prior court decisions, agreed that the FTC was not required to initiate an administrative proceeding where, as was the case here, it was seeking a permanent injunction as opposed to a preliminary injunction.^[2]

That said, in order to bring suit in district court to enjoin allegedly unlawful conduct, the FTC was required to show that it had reason to believe that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the FTC.

Applying Section 13(b) to Welsh Carson and USAP

Having set forth its interpretation as to the proper reach and application of Section 13(b), the court then applied those principles to Welsh Carson and USAP and concluded that the FTC had failed to adequately allege that Welsh Carson is either currently violating or about to violate antitrust law resulting in the dismissal of the suit against it; and

As to USAP:

• The FTC need not bring a concomitant administrative proceeding prior to seeking an injunction where only injunctive relief is sought;
• The FTC has adequately alleged ongoing violations by USAP;
• The FTC is not an unconstitutionally constituted entity; and
• USAP’s arguments that the FTC improperly defined the anesthesia market and failed to adequately allege monopoly power were such that they did not rise to the level of granting a dismissal motion at this stage of the litigation.

As to Welsh Carson

The court concluded that the FTC had not adequately pleaded that Welsh Carson is currently violating the antitrust laws. Here, the court rejected the FTC’s assertion that Welsh Carson’s continued holding of stock in USAP and receipt of profits distributions caused it to be violating the law.

The court noted that the FTC had not cited any authority for the proposition that receiving profits from an entity that may be violating antitrust laws is itself a violation of those laws.

As to the FTC’s assertion that Welsh Carson’s mere holding of stock in USAP was itself a current antitrust violation, the court pointed out that since 2017 only one of Welsh Carson’s entities had owned stock in USAP – a 23% ownership interest that empowered it to appoint only two of the 14 directors to the USAP board and that the FTC had not explained how that minority stake—as distinct from USAP’s acquisitions of anesthesiology practices—is a violation of Section 2 of the Sherman Act or Section 7 of the Clayton Act.^[3]

Similarly, the court rejected the possibility that Welsh Carson could somehow be deemed to be currently violating the law on account of acquisitions by USAP that had occurred many years ago. Section 13(b) 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.^[4] According to the court: “Such a construal of Sections 7 and 13(b) would expand the FTC’s reach further than any court has yet seen fit; it would also expand liability to minority investors whose subsidiaries reduce competition. This Court will not adopt this novel interpretation.”

With respect to whether Welsh Carson was “about to violate” the antitrust laws, the court rejected the FTC’s argument 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.” Here, the court stated that “long-past conduct does not raise a fair inference that Welsh Carson will soon do so again, even if such conduct were an antitrust violation.” The fact that Welsh Carson, as alleged by the FTC, might have the “blueprints, finances, and personnel to continue this scheme” and was also investing in the emergency medicine and radiology markets was not sufficient to satisfy Section 13(b)’s “about to violate” standard.

Finally, the court quickly addressed and dismissed two more FTC arguments — namely that comments from Welsh Carson executives indicating a desire to consolidate other healthcare markets and Welsh Carson’s “lack of contrition” showed that Welsh Carson is about to violate antitrust laws.

As to USAP

As to USAP, the court first dispensed with USAP’s threshold argument — namely that, putting aside the question whether there were ongoing violations of the law by USAP or whether USAP was about to violate the law, the FTC was barred from seeking injunctive relief at this stage having not commenced an administrative proceeding. In rejecting USAP’s argument, the court pointed to language in the Supreme Court’s decision in AMG Cap. Mgmt., LLC, v. Fed. Trade Comm’n, 593 U.S. 67 (2021): “The Commission may use § 13(b) to obtain injunctive relief while administrative proceedings are foreseen or in progress, or when it seeks only injunctive relief.” Id. at 78. And the court noted that the FTC was seeking only injunctive relief in this case.

The court next concluded that USAP’s acquisitions do constitute ongoing conduct for purposes of Section 13(b). USAP had acquired at least 15 anesthesia groups over the last 12 years and continues to hold these companies. Even though the acquisitions themselves have closed, USAP’s maintaining the assets of these companies could constitute ongoing activity and plausibly contribute to the monopoly power and unfair competition that the FTC’s complaint alleges (along with the allegations of price-fixing and market allocations). Accordingly, the FTC is within its statutory authority to bring these claims.

As to the constitutional challenges asserted by USAP involving the question whether the FTC is unconstitutionally structured because its commissioners exercise executive authority but are not subject to removal by the President, which is arguably in violation of Article II of the Constitution (an issue thoroughly explored in prior posts: Challenging the Constitutionality of the FTC’s Fundamental Structure/Processes; The Supreme Court Hears Oral Argument in Axon v. FTC; Supreme Court Unanimously Rules in Favor of Axon: Challenges to Constitutionality of FTC Structure/Process May Proceed in Federal Court; and FTC Abandons Axon Challenge Following Supreme Court Loss) the court declined to decide the issue pointing to the Fifth Circuit’s recent decision in favor of the FTC in Illumina, Inc. v. Fed. Trade Comm’n, 88 F.4th 1036, 1047 (5th Cir. 2023), and the fact that the issue may ultimately be decided by the Supreme Court.

Finally, the court rejected USAP’s arguments that an injunction was inappropriate because the FTC had failed to allege a proper market for purposes of assessing whether USAP had monopolized the market in violation of Section 2 of the Sherman Act and had failed to properly allege that USAP had monopoly power.

Final Thoughts

The FTC has clearly stated on numerous occasions that private equity “roll-up” transactions in healthcare are often problematic and that it will take enforcement action where it believes that those transactions illegally suppress competition and unfairly drive-up prices.^[5] [6]

Often those enforcement actions will involve the FTC seeking a court-ordered permanent injunction under Section 13(b) of the FTC Act to stop a transaction without having to first proceed with an administrative action.

The district court’s analysis and decision in the USAP case makes it clear that in order to obtain an injunction under those circumstances the burden is on the FTC to demonstrate that the party against whom the injunction is sought is either violating, or is about to violate the law and that this requires more than simply showing that there may have been prior illegal conduct or that there might be in the future based simply on speculation.

Its decision also suggests that it may be difficult for the FTC to meet that burden in the case of a passive private equity investor which (i) is not involved in operations, (ii) holds a minority ownership interest and does not control the governing body of the operating company, and (iii) has not clearly signaled that it is about to do so. Moreover, this result may obtain notwithstanding “long-past” conduct on the part of the passive private equity investor and notwithstanding that illegal conduct is occurring at the operating company level where an injunction is more easily obtained.

That said, given the FTC’s focus on private equity in the healthcare market, it can certainly be expected that FTC enforcement efforts will continue to apply to private equity firms with minority ownership along with those more “actively” involved.

Finally, it can be expected that the FTC will file an appeal in the present case.

Note:

On May 23, the FTC and DOJ jointly launched a public inquiry to identify serial acquisitions and roll-up strategies throughout the economy that according to the agencies have led to consolidation that has harmed competition.

In a joint request for information (“RFI”, the agencies are seeking information from the public on serial acquisitions and roll-up strategies in all sectors and industries in the economy.

The RFI complements the cross-government public inquiry announced in March (referenced above) into private equity’s increasing control over healthcare.

In announcing this latest RFI, the DOJ and FTC note that it “builds on the agencies’ efforts to ensure federal antitrust enforcement tools keep pace with changes in how firms do business.” The agencies point out that they have proposed amending the HSR’s premerger notification form to require firms to disclose more information about each party’s prior acquisition history.

In addition, the FTC and DOJ point out that their 2023 Merger Guidelines recognize that serial acquisitions have the potential to violate the antitrust laws and that the FTC’s Section 5 policy statement “makes clear” that serial mergers, acquisitions and joint ventures can be anticompetitive.

^[1] Around the same time, Chair Khan, at a workshop on private equity in healthcare, offered that while private investments can sometimes be an important source of capital especially for small and mid-sized firms and where some firms take a long-term view and focus on real operational efficiencies, “we’ve also seen some private equity firms take a different approach, where they load up companies with enormous amounts of debt, strip valuable assets and sell them off to enrich the private equity owners ….”

^[2] See e.g., United States v. JS & A Grp., Inc., 716 F.2d 451, 456 (7th Cir. 1983) (“The statutory language of section 13(b) limits the availability of preliminary injunctive relief to situations ‘pending issuance of a complaint by the Commission.’ No similar language is found in the second proviso relating to permanent injunctive relief …”)

^[3] At USAP’s founding, Welsh Carson had owned 50.2% of USAP’s stock and had the right to elect a majority of its board.

^[4] With respect to prior conduct, the court noted that the FTC is authorized to conduct its agency actions through Section 5(b) of the FTC Act, which is a “much broader grant of antitrust authority, and looks backward, while Section 13(b) looks forward.” If the FTC “wants to recover for a past violation where an entity has been violating the law, it must use Section 5(b) of the FTC Act.” Section 5(b) prohibits unfair methods of competition.

^[5] In many instances “roll-up” acquisitions are not subject to the pre-merger notification requirements under the Hart-Scott Rodino Act because the individual acquisitions do not meet the thresholds for reporting. Because the FTC is concerned about the possibility of creeping monopolization, its proposed amendments to the HSR filing rules discussed in our prior posts would require parties engaged in transactions that do require filing to report serial acquisitions.

[6] Parenthetically, even before filing the case against USAP and Welsh Carson, in August 2022, the FTC entered into a consent decree with private equity firm JAB Consumer Partners, pursuant to which the FTC imposed strict prior approval and prior notice requirements on JAB’s future acquisitions of specialty and emergency veterinary clinics as a condition of its proposed acquisition of a specialty and emergency veterinary services company and also required it to divest veterinary clinics in California and Texas.

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