FTC loses landmark antitrust lawsuit against private equity in health care
A private equity firm accused of trying to build a monopoly in radiology was dismissed as a defendant in an ongoing lawsuit filed by the Federal Trade Commission against U.S. Anesthesia Partners in Texas.
A federal judge in Texas on Monday dismissed a private equity investor from the Federal Trade Commission’s lawsuit claiming the minority shareholder participated in a medical practice’s alleged anticompetitive acts.
In September, the FTC sued U.S. Anesthesia Partners and its private equity founder—Welsh, Carson, Anderson & Stowe—claiming they illegally consolidated and monopolized the anesthesiology market in Texas to drive up the price of anesthesia services to Texas patients, and boost their own profits.
In this first FTC legal challenge against a private equity purchase of medical practices, both defendants filed motions to dismiss. U.S. District Judge Kenneth M. Hoyt of the Southern District of Texas granted Welsh Carson’s motion but denied USAP’s request.
The FTC had argued that “USAP continues to hold the illegally acquired practices, uses the resulting leverage to raise prices, and shares its profits with Welsh Carson.”
But Hoyt, in dismissing Welsh Carson, wrote that the FTC “does not cite any authority for the proposition that receiving profits from an entity that may be violating antitrust laws is itself a violation of antitrust laws.”
Welsh Carson’s minority stake in USAP is “the FTC’s only hook for the ‘ongoing violation’” of the the FTC Act, Hoyt wrote. “It is not clear how owning a minority share in a company that reduces competition satisfies the statute.”
Welsh Carson, which owns a 23% stock interest in USAP, entitles it “to appoint two of the 14 directors to the USAP board: one-seventh of the board, disproportionately small compared to its almost one-quarter ownership,” Hoyt added. “The FTC has not cited a case in which a minority, non-controlling investor—however hands-on—is liable … because the company it partially owned made anticompetitive acquisitions.”
Related: Showdown! FTC chief gets tough on private equity’s takeover of health care
Welsh Carson hailed the dismissal of the FTC’s claim.
“We are gratified that the court dismissed the FTC’s case against Welsh Carson in its entirety,” a company spokesperson said. “As we have said from the beginning, this case was without factual or legal basis.”
Antitrust attorney Gerald Stein said the judge’s decision leaves unclear how private equity firms, such as Welsh Carson, will be treated in subsequent cases.
Stein cited the portion of Hoyt’s opinion stating that “the FTC has not cited a case in which a minority, non-controlling investor – however hands-on – is liable … because the company it partially owned made anticompetitive acquisitions.”
“How does the phrase ‘however hands-on’ … interplay later on with a non-controlling investor?” said Stein, a partner at Davis Wright Tremaine and a former attorney with FTC’s Bureau of Competition. “Is it form over substance now where you have certain percentages and no matter what the percentages are if you act a certain way, you can be liable, but if you don’t act a certain way, you’re not going to be liable?”
Hoyt’s decision to allow the FTC to proceed in its case against USAP enables the agency to present its argument that roll-up strategies—the acquisition of multiple smaller companies— can be unlawfully anticompetitive. USAP denies the agency’s allegations of wrongdoing.
“The FTC will continue to scrutinize and challenge serial acquisitions, roll-ups, and other stealth consolidation schemes that unlawfully undermine fair competition and harm the American public,” FTC Chair Lina Khan said last year in announcing the lawsuit against USAP and Welsh Carson.
The FTC declined to comment on the judge’s ruling.