Federal antitrust agencies under the Biden Administration have a stated focus on the private equity industry, and last week’s lawsuit filed by the Federal Trade Commission (FTC) against the private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson) and its portfolio company U.S. Anesthesia Partners, Inc. (USAP) is the latest example. In its complaint, the FTC alleged that the firm and its portfolio company engaged in a scheme of anticompetitive conduct to consolidate the market for anesthesia services in Texas, including a series of “roll-up” acquisitions of other anesthesia service providers.
The FTC’s complaint alleges various anticompetitive conduct spanning over a decade, including via acquisitions and price-setting agreements. The FTC alleges that the company’s series of roll-up acquisitions of other large anesthesia service providers created a dominant provider in Texas in violation of antitrust law. The FTC also alleges that USAP entered into price setting agreements and agreed to divide up geographic areas in Texas with another company, with the companies agreeing not to offer services in the same geographic area. Notably, for much of the relevant time period, Welsh Carson held less than 50% of USAP, but the FTC alleges that the private equity firm nonetheless directed its strategy and decision making in these illegal acquisitions and agreements.
While the FTC lawsuit puts private equity firms on notice that they are not immune from antitrust scrutiny, not every transaction or serial acquisition will be challenged. However, this complaint nonetheless provides some helpful takeaways for private equity firms and their portfolio companies seeking to comply with antitrust laws.
- Antitrust agencies are scrutinizing certain industries more heavily than others. In the focus on private equity, some industries, such as healthcare and technology, have received greater scrutiny, and it is unsurprising that the FTC’s first action against private equity serial acquisitions was brought in the healthcare space. Transactions and portfolio companies operating in these industries receiving higher scrutiny may be at greater risk of enforcement actions.
- Entering into anticompetitive ancillary agreements as alleged in this complaint can increase the likelihood of an investigation and subsequent enforcement action. This lawsuit was not brought in the context of a proposed acquisition, but rather as the result of a conduct investigation into price-setting and agreements not to compete in geographic areas with an independent practice. The alleged anticompetitive conduct combined with multiple roll-up acquisitions resulted in an alleged significant market share for USAP (approximately 70%+ by revenue in Houston and Dallas).
- Third party litigation or inquiries can spur separate investigations, including with respect to anticompetitive conduct, as documents are produced in discovery. In 2021, USAP sued another healthcare company regarding accepting USAP’s physician rates, which received a high-level of media attention, and this lawsuit was described in the FTC’s complaint.
- Choice of language in drafting documents and internal messaging can be a smoking gun. This lawsuit also emphasizes the importance of thoughtful drafting and messaging by private equity firms and their portfolio companies, as the complaint is littered with quotes from Welsh Carson internal documents. Private equity firms should consider training on best practices for document creation and messaging.
- Operational control may be more important than ownership percentage in the eyes of the FTC. Holding less than 50% of a portfolio company will not necessarily shield a private equity company from antitrust allegations. Based on the FTC’s approach in this instance, antitrust agencies will look beyond a private equity firm’s ownership stake and consider whether it directs the portfolio company’s operational strategy in evaluating the firm’s role in alleged anticompetitive conduct.
Antitrust Agencies’ Stance on Private Equity
This complaint marks the latest installment in ongoing regulatory activities seeking to apply greater scrutiny to the private equity industry. Earlier this summer, the agencies proposed revised merger filing instructions which, among other changes, would require companies to submit more detailed information on private equity firms’ ownership and prior acquisitions, including roll-up acquisitions. This additional information would supposedly allow for the antitrust agencies to more easily identify serial anticompetitive transactions, like the ones challenged in this complaint.
Buchanan’s antitrust and private equity teams can help private equity firms, sponsors and other providers of private capital to navigate these issues with respect to their portfolio companies and investment decisions.