Private equity sidestepped a major threat earlier this week after a federal judge in Texas dismissed a landmark antitrust lawsuit brought by the Federal Trade Commission against Welsh Carson Anderson & Stowe (WCAS). The closely watched case was the FTC's first direct attempt to hold a private equity firm accountable for the alleged anticompetitive practices of one of its portfolio companies.
The lawsuit, filed by the FTC last year, had accused WCAS and portfolio company U.S. Anesthesia Partners (USAP) of engaging in a scheme to suppress competition and drive up prices for anesthesiology services in Texas—alleging that WCAS’ roll-up strategy sought to secure unfair pricing power by systematically acquiring nearly every large practice in the state. The agency also claimed that WCAS and USAP had negotiated price-setting agreements with independent providers, effectively eliminating competition in the market.
The case is one of the more aggressive antitrust efforts thus far by the Biden administration and FTC Chair Lina Khan, who has cited increased oversight of private equity as a top priority.
In Monday evening’s ruling, Judge Kenneth Hoyt of the U.S. District Court for the Southern District of Texas allowed the case to proceed against USAP, but dismissed WCAS as a defendant. That decision hands a meaningful setback to the FTC and essentially rejects the agency’s attempt to "pierce the corporate veil" by pursuing private equity owners for the alleged misdeeds of portfolio companies.
For private equity, the big win is the avoidance of an unwelcome precedent of firm-level liability for portfolio company actions.
In his decision, Hoyt cited WCAS’ 23 percent stake in USAP and minority representation on the company's board, reasoning that the FTC had failed to prove that WCAS continues to exert control over the business (despite the agency's arguments that the firm remains deeply involved in the company's operations).
According to filings, WCAS held around 45 percent of the business in 2017 before selling half of its stake to Berkshire Partners and GIC Capital. The remainder is held by the company’s physicians.
"The FTC did 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," Hoyt wrote in his opinion. He added that the FTC had not met its burden in demonstrating that WCAS' minority position was sufficient to establish control over USAP, regardless of how "hands-on" the private equity firm may be.
The FTC has not yet said whether it will appeal Hoyt's decision to dismiss WCAS from the case. Cited by The Financial Times, a source familiar with the agency's thinking described the ruling as a "vindication in a very conservative court of an important tenet of the new merger guidelines focused on serial acquisitions." This suggests that the FTC may view the outcome as a partial victory, even as it struggles with the challenges of directly targeting private equity firms.
Despite this week’s outcome, the agency’s positioning may also be indirectly advancing its cause—the heightened threat of antitrust action can be enough to stop certain deals before they’ve begun.