[co-author: Ora Nwabueze]

The Federal Trade Commission’s (FTC) push against private equity roll-ups has hit a snag. On May 14, 2024, US District Judge Kenneth Hoyt of the Southern District of Texas granted a motion to dismiss filed by Welsh, Carson, Anderson & Stowe (Welsh Carson), while denying the motion to dismiss filed by co-defendant US Anesthesia Partners (USAP). Judge Hoyt found that the FTC had not adequately alleged that Welsh Carson “is violating” or “is about to violate” antitrust laws, as required under Section 13(b) of the FTC Act.

More specifically, the court focused on Welsh Carson’s mere 23% ownership stake in USAP, finding that the minority stake was not a strong enough hook for an “ongoing violation” under Section 13(b). The court noted that the FTC had not provided “a case in which a minority, noncontrolling investor – however hands-on – is liable under Section 13(b) because the company it partially owned made anticompetitive acquisitions.” Judge Hoyt also rejected the FTC’s argument that Welsh Carson was about to violate the antitrust laws. The court held that any ongoing scheme would be the actions of USAP, and that even if Welsh Carson had the “blueprints, finances, and personnel to continue this scheme,” “the mere capacity to do something does not meet the requirement that the thing is likely to recur.”

The FTC’s litigation against Welsh Carson embodied the Commission’s renewed interest in stopping private equity roll-ups. Only a few months ago, FTC Chair Lina Khan referenced the Commission’s complaint against Welsh Carson as an example of a roll-up’s anticompetitive effects. This recent ruling indicates that courts may be unlikely to accept the FTC’s legal conclusions and enforcement against private equity roll-ups, particularly with respect to entities in which a private equity firm holds only a minority interest.

The FTC can, of course, appeal the district court’s decision to the Fifth Circuit, and could also pursue a claim against Welsh Carson in its in-house administrative court.

Key Takeaways

• Federal courts may not be willing to hold private equity firms with minority stakes liable for alleged anticompetitive roll-ups.
• Private equity firms should consider minority status as part of their acquisition strategy amidst increased regulatory scrutiny.

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