Private Equity Escapes on Motion to Dismiss but FTC Suit Against U.S. Anesthesia Partners Will Continue

Wilson Sonsini Goodrich & Rosati

The Federal Trade Commission’s suit alleging U.S. Anesthesia Partners (USAP) and Welsh Carson, a private equity fund that owns 23 percent of USAP and controls two of 14 board seats, engaged in an anticompetitive scheme to acquire and consolidate anesthesia practices in Texas partially survived motions to dismiss by the two defendants. The FTC brought the case, Federal Trade Commission v. U.S. Anesthesia Partners, Inc. et al, No. 4:23-cv-03560 (S.D. Tex. May 13, 2024), under Section 13(b) of the FTC Act, which allows the agency to bring suit in federal court to seek to enjoin unlawful conduct if there is "reason to believe" that the defendant is violating or about to violate any provision of law enforced by the FTC. Notably, the Southern District of Texas held that the FTC could not maintain a suit against Welsh Carson under Section 13(b) because it was a non-controlling investor and thereby not violating the antitrust law. Conversely it held the FTC had sufficiently alleged that USAP was violating the antitrust laws by continuing to hold the anesthesia groups it acquired and engage in related anticompetitive conduct, considering that a motion to dismiss requires the court to view the allegations in the complaint in the light most favorable to the plaintiff. It also held the FTC’s narrow market definition of “hospital-only anesthesia services” was plausible.

Granting Welsh Carson’s Motion to Dismiss

The court held that the FTC could not maintain a Section 13(b) suit against Welsh Carson because it was not violating, nor about to violate, antitrust law.

  • Welsh Carson Is Not Violating Antitrust Law: The court declined to stretch “antitrust liability to reach active investors in companies that are alleged to violate antitrust law,” noting that the FTC failed to cite a case in which a minor, non-controlling investor was liable under Section 13(b) for a company’s anticompetitive acquisitions. Indeed, the Court stated that since 2017, only one Welsh Carson entity has owned stock in USAP. That entity, Fund XII, owns only 23 percent. The Court expressed a worry that the FTC’s interpretation of antitrust law would “expand liability to minority investors whose subsidiaries reduce competition.”
  • FTC Did Not Adequately Allege Welsh Carson Is About to Violate Antitrust Law: The court rejected the FTC’s argument that Welsh Carson is about to violate antitrust law because 1) it can re-up its investment in USAP, 2) it can take formal control of the company, and 3) the anticompetitive scheme still exists. The court found that Welsh Carson’s capacity to engage in anticompetitive conduct did not mean it was likely to engage in that conduct. In addition, the court noted that comments from Welsh Carson executives indicating they want to consolidate other healthcare markets and its lack of contrition do not suggest an impending violation.

Denying USAP’s Motion to Dismiss

The court found that the FTC had sufficiently alleged that USAP was continuing to violate the antitrust laws on the grounds that USAP 1) continued to hold the anesthesia groups it unlawfully acquired, 2) maintained monopoly power to charge high prices, and 3) was still engaging in the monopolization scheme. The court also held that that FTC does not need to bring a concomitant administrative proceeding under 13(b).

  • FTC Is Within Its Authority to Bring a Section 13(b) Suit: The court held that the FTC is within its 13(b) authority to bring price fixing, market allocation, and overall monopolization scheme claims because it plausibly alleged that USAP is currently violating the antitrust laws. Specifically, the FTC adequately alleged the violations are ongoing because USAP continues to 1) own 15 anesthesia groups, 2) charge high prices, 3) maintain price-setting arrangements resulting in high prices, and 4) engage in an overall monopolization scheme.
  • FTC Alleged a Plausible Market and That USAP Has Market Power: The court rejected USAP’s argument that the FTC failed to allege anticompetitive conduct in a relevant market.
    • Market Definition: The court held FTC’s market definition of “hospital-only anesthesia services” was plausible because the FTC’s complaint indicated 1) patients do not choose their anesthesiologist, 2) “[p]atients requiring hospital care cannot switch to outpatient anesthesia regardless of price,” and 3) “out-patient anesthesia services do not adequately constrain prices for in-patient care.”
    • Market Power: The FTC plausibly alleged USAP had market power by alleging USAP’s actions resulted in higher prices for consumers and that USAP had engaged in a market allocation and price-setting scheme.
  • Court Rejects USAP’s Constitutional Argument: USAP argued the FTC is unconstitutional because the President cannot remove its commissioners at will. The court noted the Supreme Court held this structure was constitutional in Humphrey’s Ex’r v. United States, 295 U.S. 602 (1935). Moreover, the court noted that, in Illumina, Inc. v. Fed. Trade Comm’n, 88 F.4th 1036, 1047 (5th Cir. 2023), the Fifth Circuit stated that “the question of whether the FTC’s authority has changed so fundamentally as to render Humphrey’s Executor no longer binding is for the Supreme Court, not us, to answer.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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