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FTC sues PE fund and its portfolio company, signaling continued and growing focus on PE funds and roll-up acquisitions

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Published Date

Sep 26 2023

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On September 21, 2023, the Federal Trade Commission (FTC) filed a groundbreaking complaint in federal court against PE fund Welsh Carson and its portfolio company, U.S. Anesthesia Partners (USAP), making good on its promise to ramp up enforcement against PE funds and roll-up acquisitions.

In its complaint, the FTC accuses Welsh Carson and USAP of engaging in a decade-long acquisition strategy and anti-competitive scheme to consolidate anesthesiology services in Texas. The case, which alleges multiple antitrust violations stemming from the defendants’ roll-up strategy, previews what is to come as the agencies enter a new era of merger enforcement with the refreshed Merger Guidelines and HSR notification form, both of which specifically facilitate greater scrutiny of serial acquisitions.

Key points

This is the first legal challenge brought by the U.S. agencies in the last several decades alleging that a roll-up strategy violates not only Section 7 of the Clayton Act, but also Section 2 of the Sherman Act and Section 5 of the FTC Act.
Even though Welsh Carson owned less than 50% of USAP during most of the acquisition period, the FTC alleges that Welsh Carson is equally as culpable as its portfolio company given its two board seats and control over hiring and strategy.
With the forthcoming changes to the Merger Guidelines and HSR Form, we can expect greater scrutiny of PE-backed serial acquisitions in the future.

The FTC’s lawsuit

The FTC alleges that Welsh Carson and USAP violated a host of antitrust laws, including Sections 1 and 2 of the Sherman Act, Section 7 of the Clayton Act, and Section 5 of the FTC Act, by engaging in a three-part anti-competitive strategy to consolidate and monopolize the anesthesiology market in Texas:¹

First, the FTC alleges that over a 10-year period, the defendants acquired 17 anesthesiology practices in cities across Texas including Houston and Dallas. According to the FTC, after each acquisition, the defendants were able to reduce competition in the relevant local market and raise reimbursement rates paid by insurers, and ultimately, patients. In support of these allegations, the FTC cited a number of internal Welsh Carson emails and documents in which the PE fund discussed the “synergies” to be achieved from its “value maximization plan” and “tuck-in acquisitions.”
Second, the FTC claims that USAP entered into a series of price-setting agreements in which USAP charged its own, higher prices for services rendered by anesthesia providers who chose to remain independent in markets such as Houston and Dallas.
Third, the FTC accuses Welsh Carson and USAP of entering into a market allocation agreement with a competing anesthesia provider in which the parties agreed to stay out of one another’s local markets.

The FTC is seeking a permanent injunction which would prevent USAP and Welsh Carson from engaging in the alleged anti-competitive activities in the future. In addition, the FTC is requesting additional equitable relief as deemed appropriate, including but not limited to “structural relief,” which could reference a potential unwinding of the prior transactions.

The complaint represents the first time in over five decades that a U.S. antitrust agency has alleged a violation of Section 2 of the Sherman Act, which prohibits monopolies or attempts to monopolize or conspiracies thereof using anti-competitive conduct, through the use of roll-up acquisitions. FTC Chair Lina Khan warns, “[t]he 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.”²

The case is also unique in its targeting of both the acquirer, USAP, and its private equity sponsor, Welsh Carson. Interestingly, since 2017, Welsh Carson’s stake in USAP has remained below 50%. Nonetheless, according to the FTC “[d]espite the changes in the degree of its formal ownership of USAP, Welsh Carson has actively directed USAP’s corporate strategy and decision-making, particularly with respect to mergers and acquisitions of anesthesia practices in Texas.”³ Critical to the FTC’s analysis was the fact that Welsh Carson had at least two seats on the USAP board, took the lead in hiring most of USAP’s management, and provided USAP with strategic, operational, and financial support.

PE funds under the antitrust microscope

While the FTC’s suit against Welsh Carson included some novel legal theories, it is not the first time the FTC has targeted PE-backed roll-ups. Last year, the FTC challenged PE fund JAB Consumer Partners’ acquisitions of two separate veterinary clinics, noting the “growing trend towards consolidation” in the industry.⁴ However, unlike the current case, the FTC did not bring Section 2 monopolization charges against JAB Consumer Partners but instead conditioned the acquisition on divestitures of veterinary clinics in certain local markets. The agency also imposed strong prior approval and notice requirements for any future acquisitions by JAB Consumer Partners in the vet clinic space.

Looking ahead, the U.S. agencies are continuing to sharpen their toolkits to identify and redress potential antitrust violations from roll-up acquisitions, which individually may not meet the reporting thresholds of the Hart-Scott-Rodino Antitrust Improvements Act. Specifically, in its proposed revisions to the HSR filing (which were published in June and are currently out for public comment until the end of September),⁵ the FTC expanded the scope of prior acquisitions that would have to be reported in the form, increasing the prior acquisition history from five to ten years and eliminating the dollar threshold. Coupled with these changes to the HSR form are the agencies’ latest set of draft Merger Guidelines,⁶ which provide heightened scrutiny of serial acquisitions that, in the aggregate, harm competition.

Roll-up acquisitions are not the only area of antitrust exposure for PE funds. The U.S. agencies have also significantly ratcheted up their enforcement of Section 8 of the Clayton Act, which prohibits directors and officers from serving simultaneously on the boards of competitors (i.e., “interlocking directorates”), subject to limited exceptions. Over the last year, the DOJ has caused the resignation of 15 directors from 11 boards due to concerns about Section 8. In August 2023, the FTC followed suit, bringing a Section 8 enforcement action against PE firm Quantum Energy and natural gas producer EQT Corporation, both competitors in the production and sale of natural gas in the Appalachian Basin, in light of Quantum’s seat on EQT’s board.⁷ Critical for PE funds, this case marks the first time the FTC has applied Section 8 to a non-corporate entity. FTC Chair Khan notes that the order “makes clear that Section 8 applies to businesses even if they are structured as limited partnerships or limited liability corporations,” warning PE and financial sectors in particular that they are not out of scope.⁸

Key takeaways

Following the FTC’s enforcement actions against Welsh Carson, Quantum Energy, and JAB Consumer Partners, and the finalization of the Merger Guidelines and newly expanded HSR form, we can expect greater enforcement against serial acquisitions, both in the scope of HSR merger review as well as behavioral (e.g., Section 2) enforcement, and Section 8 interlocking directorates.
PE funds will not be able to shield themselves from the anti-competitive activity of their portfolio companies, particularly if they have a board seat and retain a material level of strategic and operational control. Even minority positions, when coupled with such indicia of control, can attract scrutiny.
It is vital to exercise caution while drafting emails and other company documents, even if solely internal. Words can be easily mischaracterized or used in enforcement actions years down the line. Where possible, always have key deal and board documents reviewed by antitrust counsel before they are finalized.