Recent FTC Enforcement Action Signifies Increased Scrutiny of Private Equity Acquisitions and Imposition of More Onerous Settlement Terms

On June 13, 2022, the Federal Trade Commission (“FTC” or “the Commission”) announced a consent agreement resolving concerns with a private equity acquisition, incorporating novel prior notice and approval requirements accompanied by statements from the Democratic majority of commissioners making clear that the FTC will continue to raise new concerns regarding private equity involvement in healthcare and roll-up acquisitions more generally.¹

The transaction at issue involved private equity firm JAB’s acquisition of Sage Veterinary Partners (“Sage”), a business that operates specialty and emergency veterinary clinics.² JAB’s proposed acquisition of Sage follows two other JAB acquisitions in the veterinary clinic space, its acquisition of Compassion-First Pet Hospitals in 2019³ and National Veterinary Associates (“NVA”) in 2020⁴. The FTC required JAB to divest three veterinary clinics in order to complete the 2020 NVA acquisition.⁵

The JAB/Sage consent order’s requirement that the parties divest six veterinary clinics in various markets is not unusual.⁶ According to the FTC’s complaint accompanying the consent order, the parties operate competing veterinary clinics in several geographic areas, and the proposed transaction would leave the combined company as one of only three or fewer providers of certain services in those geographic areas.⁷ In other words, the FTC required divestitures where the transaction was a 4-to-3 or worse. 

Also unsurprising is the consent order’s requirement that the parties receive prior approval for future proposed acquisitions in close proximity to the divested clinics. Prior approval provisions flip the default burden of proof with respect to merger reviews. Under the HSR Act, if the FTC believes a transaction is anticompetitive, it has the burden of bringing a lawsuit and obtaining an order from a federal or administrative court to prevent parties from closing a transaction. However, if a transaction is subject to a prior approval provision, the FTC must approve the transaction and, therefore, can prevent a merger simply by withholding approval. 

Similar provisions known as prior notice provisions require parties to give the FTC prior notice of particular transactions. A required notice subject to such provisions in a consent order consists of the same information that is required to be provided in an HSR filing. Thus, as a practical matter, prior notice provisions require parties to make HSR filings for certain transactions that otherwise would not require an HSR filing (e.g., the value of the transaction is below the size-of-transaction threshold, which is currently $101 million).

While prior approval and prior notice provisions were exceedingly rare in the 25 years following the FTC’s 1995 policy statement limiting their use, the FTC reversed that policy statement in July 2021⁸  based on heavy criticism by Commissioner Rohit Chopra⁹ and Chair Lina Khan.¹⁰

The novel aspect of the JAB/Sage consent is the scope of its prior notice provisions. Historically, including since the FTC’s reversal of the 1995 policy statement, prior approval and notice provisions have been limited to the geographic and product markets where divestitures were required. For example, in the October 2021 Davita/Total Renal Care consent, the FTC required a divestiture of three dialysis clinics in the greater Provo, Utah area, and the prior approval provision covered future acquisitions of dialysis clinics in Utah.¹¹ But in the JAB/Sage consent, the prior notice provision is not limited to the six geographic areas where divestitures are required. Rather, it requires that JAB provide prior notice of an acquisition of a veterinary clinic anywhere if located within 25 miles of any existing or future clinic in JAB’s portfolio.¹² In a statement regarding the JAB consent order, Chair Khan recognized the novelty of this provision, touting it as “the first of its kind in a Commission order.”¹³

The Commission previewed that it would demand such broad provisions in its statement reversing the 1995 policy: “In some situations where stronger relief is needed, the Commission may decide to seek a prior approval provision that covers product and geographic markets beyond just the relevant product and geographic markets affected by the merger.”¹⁴ It identified six factors where broad provisions might be sought: 1) the transaction is similar to a previous transaction that was challenged by the FTC; 2) the market is concentrated or has seen consolidation in the previous ten years; 3) the transaction increases concentration; 4) one of the parties has market power; 5) one of the parties has a history of acquisitiveness in the market; and 6) evidence of anticompetitive dynamics. Despite this warning, to date, all of the FTC’s prior approval and notice provisions were tied in some way to the markets where divestitures were required.¹⁵

This expanded provision follows Democratic commissioners’ criticism of private equity firms in general and acquisitions in healthcare in particular. In July 2020, now former FTC Commissioner Rohit Chopra issued a statement addressing roll-ups, arguing that “[t]hrough these strategies, private equity sponsors can quietly increase market power and reduce competition.”¹⁶ He warned of “significant consolidation through roll-up transactions not subject to HSR reporting,” and noted that he was “especially concerned about the unreported roll-ups in the healthcare sector,” proposing that the FTC “closely scrutinize any HSR filings by private equity firms to gain insight on their future acquisitions that may be non-reportable.”¹⁷

Likewise, in announcing that the FTC and DOJ were considering changes to the merger guidelines, FTC Chair Lina Khan asked whether “the guidelines [are] adequately attentive to the range of business strategies and incentives that might drive acquisitions [such as] roll-up plays by private equity firms.”¹⁸ Chair Khan’s JAB/Sage statement further criticized some private equity acquisition strategies as “stealth roll-ups,” noting that “serial acquisitions or ‘buy-and-buy’ tactics can be used by private equity firms and other corporations to roll up sectors, enabling them to accrue market power and reduce incentives to compete, potentially leading to increased prices and degraded quality.”¹⁹ Chair Khan further commented that private equity firms may “seek to strip and flip assets over a relatively short period of time” and can be “focused on increasing margins over the short-term, which can incentivize unfair or deceptive practices and the hollowing out of productive capacity.”²⁰

Moreover, Chair Khan registered concern with private equity’s role in health care in particular:

Private equity firms have been particularly active in healthcare, including anesthesiology, emergency medicine, hospice care, air ambulances, and opioid treatment centers. A focus on short-term profits in the healthcare context can incentivize practices that may reduce quality of care, increase costs for patients and payors, and generate appalling patient outcomes. Research and reporting suggests these effects are especially pronounced in specialty practices, such as elder care and disability care facilities. Research has shown that private equity ownership of elder care facilities is correlated with increased deaths at those nursing homes, potentially owing to cost-cutting measures like staffing reductions. In another case, as one firm consolidated ownership of group homes for people with disabilities, media reporting revealed repeated failed inspections, overworked staff, and even deaths.²¹

While a number of current and past FTC commissioners have been leveling criticism of private equity and its role in healthcare for several years now, the JAB/Sage consent represents the first manifestation of these criticisms and is likely a sign of more to come. It is no coincidence that this latest enforcement action comes on the heels of the confirmation of Commissioner Bedoya earlier this month, which gave the Commission a 3-2 Democratic majority for the first time since the Obama administration. It would not be surprising if the Commission begins to seek similar broad approval and notice provisions more frequently, especially in private equity healthcare transactions. Private equity firms pursuing a series of smaller, non-HSR reportable acquisitions should keep this potential in mind when considering transactions with potential competitive issues that may require divestitures or other remedies.