U.S. Anesthesia Partners and Welsh Carson File Motions to Dismiss FTC Antitrust Case

As reported in a prior blog post, the Federal Trade Commission (FTC) filed suit in federal district court in September alleging that U.S. Anesthesia Partners, Inc. (USAP), and the private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson), which created USAP, executed a multi-year anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and boost their own profits. The FTC sought injunctive relief.

The Motions to Dismiss

On November 20, USAP and Welsh Carson each filed motions to dismiss. Significantly, in addition to refuting the allegations made by the FTC, Welsh Carson in its motion also asserts that the case should be dismissed because the FTC’s exercise of executive authority (e.g., deciding whether to bring an enforcement action on account of an alleged violation of federal law) violates Article II of the Constitution.

Additionally, on the same day the motions to dismiss were filed, and as more fully explained below, two self-funded employee health benefit plans filed a class action suit against USAP and Welsh Carson alleging substantially similar antitrust violations.

The FTC’s Complaint

In its complaint, the FTC alleges that USAP and Welsh Carson carried out a three-part plan to consolidate and monopolize the anesthesiology market in Texas.

First, the FTC alleges that USAP and Welsh Carson executed a roll-up scheme, systematically buying up nearly every large anesthesia practice in Texas to create a single dominant provider with the power to demand higher prices and extract monopoly profits.

Second, according to the FTC, USAP and Welsh Carson further drove up anesthesia prices through price-setting agreements with remaining independent practices.

Third, USAP entered into a market allocation arrangement pursuant to which USAP and Welsh Carson secured a promise from a large competing anesthesia services provider to stay out of USAP’s territory.

The FTC alleges that USAP and Welsh Carson’s conduct amounts to unlawful monopolization, unlawful acquisitions, a conspiracy to monopolize, unfair methods of competition, and unlawful restraints of trade.

The FTC requests that the court issue a permanent injunction to “remedy the impact of USAP and Welsh Carson’s anticompetitive conduct and to prevent the recurrence of such conduct.”

USAP’s Motion to Dismiss

USAP makes various arguments in support of its motion to dismiss. These include:

Authority to Bring the Lawsuit

USAP first asserts that the FTC lacks authority to maintain the suit. This is because Section 13(b) of the FTC Act is the sole source of authority the FTC invokes to bring the case. That statute, however, authorizes the FTC to proceed in federal district court only when doing so would aid parallel proceedings in the FTC’s own administrative court. In a case such as this case in which the FTC has bypassed its own administrative process, it has no power to bring a permanent injunction action in district court.

Further, Section 13(b) focuses narrowly on empowering the FTC to stop ongoing or imminent legal violations. It does not authorize the FTC to sue in federal court to remedy past conduct such as is the case here. The FTC is challenging acquisitions that closed, and contracts that expired, years ago.

Market Definition

USAP next asserts that the FTC’s claims require dismissal because they depend on a market defined to exclude readily and reasonably interchangeable and substitutable services. Most notably, it excludes anesthesiology performed in ambulatory surgical centers and therefore represents “an attempt by the FTC to ‘gerrymander’ its way to an antitrust victory without due regard for market realities.”

Monopolization Claim

Even accepting the FTC’s market definition, USAP argues that the FTC’s monopolization claims fail because it does not allege that USAP restricted output, reduced quality or charged or has the power to charge a supra-competitive price—i.e., exercised monopoly power. According to USAP, its rates were set by its predecessor without monopoly power, and the FTC has failed to allege any price increase above the competitive level and makes no other claim of consumer harm.

Clayton Act Claim

The FTC’s claims under Section 7 of the Clayton Act require it to allege a probability of anticompetitive results flowing from the challenged acquisitions. Here, according to USAP, not only was there no such probability, but the acquisitions are long since past, and the FTC points to no anticompetitive results that have actually materialized.

Price-Fixing Claims

USAP argues that the FTC’s claims that USAP’s practice of handling administrative billing and payor relations  on behalf of certain small anesthesiology practices constituted illegal price-fixing fail because the complaint does not allege an agreement among competitors to fix prices. Rather, the complaint alleges that USAP’s administrative services clients assigned it their right to payment from insurers in exchange for compensation at rates other than USAP’s. According to USAP, ‘[e]ven as alleged, that bargain bears no resemblance to price fixing, and those claims should be dismissed.”

Conspiracy Claims

The FTC’s conspiracy claims require dismissal because USAP and Welsh Carson are legally incapable of conspiring under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). In order for there to be a conspiracy.  USAP and Welsh Carson would need to be separate economic actors capable of conspiring as competitors (or even market participants). The FTC does not allege that Welsh Carson had interests that diverged from USAP’s, or that Welsh Carson and USAP are or were actual or potential competitors.

Welsh Carson’s Motion to Dismiss

Welsh Carson joins in USAP’s motion to dismiss and makes certain additional arguments.

It asserts that even if the FTC could plausibly allege antitrust violations directly by USAP, “its attempt to sweep Welsh Carson into the litigation ignores basic and long-settled principles of corporate separateness and agency law, constituting an unprecedented overreach.” It further asserts that the case should be dismissed on constitutional grounds.

Corporate Separateness

According to Welsh Carson, at all times, its funds acted as a financing source. No Welsh Carson entity acted as a market participant and no Welsh Carson entity can be a monopolist in a market in which it does not participate.

The alleged conduct by the Welsh Carson entities, it asserts, is typical of the relationship between an investor and the entity in which it invested: advice, financial support and oversight that has been repeatedly rejected as a basis to impute liability to the investor as a matter of settled corporate law.

The FTC fails to plead sufficient facts showing that any of USAP’s conduct (including the conduct of USAP’s directors designated by one of the funds) can be properly attributed to any particular Welsh Carson entity, or that any Welsh Carson entity independently engaged in such conduct.

The FTC cannot establish “independent conduct” based on its allegations that Welsh Carson:

  • held varying ownership interests in USAP along with associated shareholder rights, including the right to nominate directors to USAP’s board of directors;
  • assisted USAP by identifying acquisitions, helping secure funding, and assisting in negotiations with insurers;
  • hired most of USAP’s original management team;
  • provided USAP with strategic, operational, and financial support; and
  • continued to play an oversight role.

Welsh Carson argues that these allegations of basic stockholder rights and advisory assistance are plainly insufficient to show independent participation, much less management of USAP’s day-to-day operations.

Constitutional Violation

If not dismissed on other grounds, Welsh Carson argues that the case should be dismissed because the FTC’s exercise of executive authority (e.g., deciding whether to bring an enforcement action on account of an alleged violation of federal law) violates Article II of the Constitution.

Article II provides that all executive authority shall be vested in the President. In the case of the FTC, however, the agency wields executive authority granted to it by Congress while at the same time being an independent agency. Congress has limited both the President’s power to appoint FTC commissioners of his choice (no more than three commissioners may be members of the same political party) and the President’s power to remove them (a commissioner may be removed by the President only for inefficiency, neglect of duty, or malfeasance in office).

The result according to Welsh Carson is a violation of Article II and, accordingly, the FTC’s power to bring enforcement lawsuits for injunctions in federal court must be stricken and, this case dismissed.

The Health Plans Suits

On the same day that the motions to dismiss were filed, Electrical Medical Trust and Plumbers Local Union No. 68 Welfare Fund, each a self-funded employee health benefit plan, (the “Plans”) filed a class action suit against USAP and Welsh Carson asserting that the plans and the proposed class have paid artificially inflated reimbursement rates for anesthesia services on account of antitrust violations.

The complaint alleges substantially the same violations as alleged by the FTC: monopolization, attempted monopolization and conspiracy to monopolize in violation of Section 2 of the Sherman Act; unlawful acquisition in violation of Section 7 of the Clayton Act; price-fixing and market allocation in violation of Section 1 of the Sherman Act.

The Plans, on behalf of themselves and the class, request an order certifying the action as a class action, declaring that the defendants’ acquisitions were an unlawful merger of assets and  that the defendants engaged in price-setting and market allocation agreements that constituted unlawful restraints of trade, and further request the issuance of an injunction enjoining the defendants’ transactions and requiring them to divest assets sufficient to restore competition and the awarding of treble damages.

Motions to dismiss will presumably now follow.