Texas federal district judge Kenneth M. Hoyt recently confronted the question of whether a person who had committed no violation should be held liable for the conduct of another. Hoyt answered in the negative. The case involved private equity’s investments in healthcare. Most notably, it produced another courtroom loss for the Federal Trade Commission (FTC) and the agency’s mission creep.
Last fall, the FTC filed a lawsuit to quash an allegedly anticompetitive roll-up of anesthesia providers in Texas. According to the FTC, there was a large-scale consolidation and associated price fixing. The defendants the agency named were U.S. Anesthesia Partners (USAP) — the alleged monopolist — and Welsh, Carson, Anderson, & Stowe, a private equity firm whose subsidiary maintains a 23 percent share in USAP.
Earlier this month, Hoyt granted Welsh Carson’s motion to dismiss while denying USAP’s motion. Whether USAP’s acquisitions violated the law remains to be litigated — but this question has little bearing on the Welsh Carson’s liability, the judge ruled. According to the FTC, liability for a business’s allegedly anticompetitive conduct might attach even to its non-controlling investors — a clear contravention of precedent. The judge dismissed this notion, writing, “The FTC has not cited a case in which a minority, noncontrolling investor — however hands-on — is liable…because the company it partially owned made anticompetitive acquisitions.”
The case has received little attention — likely due to the intricacies of private equity’s activities in the healthcare sector and the relevant antitrust law. However, amid the rather dry particulars, the FTC advanced a simple and quite sinister legal theory — one that would, if approved by the courts, stunt economic growth and erode bedrock tenets of American justice.
The agency sought to punish Welsh Carson not for engaging in objectionable business practices itself, but for its proximity thereto. It is a simple fact that the anticompetitive conduct alleged is not Welsh Carson’s investments — it is USAP’s purported rollups and price-fixing schemes. Enjoining the former would do nothing to ameliorate the latter. To satisfy the relevant antitrust provision, “Welsh Carson’s ongoing conduct must reduce competition,” Hoyt stated (emphasis his). “It is not clear how owning a minority share in a company that reduces competition satisfies the statute.”
Quite clearly, targeting Welsh Carson served only to gratify the FTC’s odd biases against private equity’s healthcare-sector investments. Its feeble legal arguments (which Hoyt debunked systematically) evidence this fact. Besides its attempt to transmute shareholding into an antitrust violation, the agency insisted Welsh Carson would likely “re-up[] its investment in USAP…and direct[] yet more anticompetitive positions.” The judge dismissed these claims, labeling them “mere speculation and conjecture.” Should Welsh Carson engage in anticompetitive conduct in the future, he wrote, the FTC could file a new suit.
Suing investors for conduct that is not their own bodes ill for the American economy in many ways. Consider one that should — but doesn’t seem to — concern the FTC’s neo-Brandeisian radicals. Progressive antitrusters talk much of promoting insurgent competitors against large incumbents. Yet, if successful, the FTC’s attempts to burden fund managers with new liability would have disincentivized free investment. This would especially impact upstarts and innovators, which often rely on external sources for liquidity. Litigation-averse investors, if implicated whenever the companies in which they hold equity violate the law, would likely slow rates of investment.
As Hoyt put it, the FTC’s “construal of [the law] would expand the FTC’s reach further than any court has yet seen fit.” Indeed, this case was just one small battle in the FTC’s broader revanchist campaign to extend the borders of its authorities. The agency’s larger object — to gain unquestioned authority to pursue enforcement actions against whomever, whenever, and for whatever reasons it sees fit — grates against the American legal tradition. Purely discretionary enforcement denies companies the knowledge of what conduct might attract scrutiny and subjects them to regulators’ fascinations and myopias.
At a recent conference, FTC chair Lina Khan touted her agency’s record. “Together we have gone up against some of the most powerful corporations in the country — companies with nearly infinite resources — and walked away with concrete policy wins for the American people,” she gushed. She stated correctly that her court cases have generally produced “concrete policy wins for the American people” — but they have taken the form of judges’ repeated rebukes of her radical legal theories.