In Back-to-Back Consent Orders, FTC Doubles Down on Private Equity and Non-Compete Enforcement
In a pair of unanimous decisions, the Federal Trade Commission this week issued consent orders resolving challenges to two acquisitions. Both enforcement actions focus on top priorities of the Biden antitrust enforcers highlighted in recent speeches. In particular, the orders double down on the Commission’s recent disdain for private equity buyers, non-compete agreements, and increased consolidation in key consumer markets.
Increased Skepticism of Private Equity Buyers
For the past year, there has been a steady stream of concern voiced by the DoJ and FTC about the potential harms to competition caused by private equity rolling up competitive assets and companies. The first hint of this priority was made by former Commissioner Chopra who said “the FTC must also increase its focus on non-reportable transactions, given the broader market trends. In particular, over the last decade, there has been significant consolidation through roll-up transactions not subject to HSR reporting.”1 In a September 2021 interview with the Wall Street Journal, Chair Khan made headlines declaring that concerns in private equity consolidation is a top priority of her FTC.2 Just recently, the Assistant Attorney General for Antitrust at DoJ announced in an interview with the Financial Times that he too intends to conduct a “fuller assessment” of buyout deals, calling the private equity business model “at odds” with competition.3
Now we have the first enforcement actions following through on these enforcement statements. On June 13, 2022, the five FTC Commissioners approved a Consent Agreement regarding the acquisition of SAGE Veterinary Partners, LLC (“SAGE”) by private equity fund JAB Consumer Partners SCA SICAR (“JAB”). A $55 billion fund whose investments include household names like Keurig, Dr. Pepper, Panera Bread, and Krispy Kreme, JAB recently expanded into pet care and pet health services and already owns Compassion-First Pet Hospitals and NVA Parent Inc. (collectively, “Compassion-First/NVA”). With the new acquisition of SAGE Veterinary Partners, JAB’s pet-related holdings will total nearly 100 specialty and emergency pet clinics in the United States. The FTC’s challenge centers on a concern that the deal establishes for JAB a dominant position in specific local markets in Austin, Texas and the California Bay Area. The FTC accordingly required JAB to divest several clinics in those targeted locations. If that were the extent of the remedies, this resolution might not merit particular attention. Divestitures are a common outcome in merger enforcement actions. What makes this deal noteworthy is the additional provisions included in the Consent Order and the dueling public statements issued by the Commissioners regarding the resolution.
The three Democratic Commissioners — Chair Lina Khan, Rebecca Kelly Slaughter, and newly confirmed Alvaro M. Bedoya — issued a public statement that, despite approval of the deal, blasted equity buyer JAB. Noting that this was not the first time that JAB and its entities proposed a deal that the Commissioners viewed as unlawful, Khan, Slaughter, and Bedoya accused JAB of “repeatedly” pursuing acquisitions that the Commission had reason to believe would be anticompetitive. In response to this alleged serial behavior, the Commission injected into the proposed order “key safeguards against future dealmaking that may also prove unlawful.”4 Specifically, the Consent Order addresses not only the specific anticompetitive aspects of the SAGE acquisition, but takes the extra step of prophylactically requiring:
- Prior FTC approval if JAB seeks to acquire a specialty or emergency veterinary clinic located within 25 miles of any JAB clinic anywhere in California or Texas. This prior approval restriction will be in effect for ten years.
- 30-day advance written notice to the FTC if JAB or any of its relevant entities attempts to acquire a specialty or emergency veterinary clinic within 25 miles of a JAB-owned clinic anywhere in the United States.
Both restrictions apply to clinics JAB owns at the time of the Order as well as any clinics JAB may acquire in the future. Touting the nationwide prior notice provision as “the first of its kind in a Commission order,” the three Commissioners’ statement proclaims that the restriction “ensures that the FTC will have advance notice of any unreported purchases that would ordinarily escape” the Commission’s review — thus guaranteeing future scrutiny for any JAB acquisition in pet health and services, regardless of size, scope or location, that meets the prior notice requirements.
Future resolutions involving private equity parties are likely to contain similar restrictions. According to Commissioners Khan, Slaughter, and Bedoya, provisions like the ones imposed on JAB are necessary to police how the private equity business model may “distort” competition post-acquisition. Warning of the dangers inherent in private equity “tactics,” such as leveraged buyouts, stripping production capacity, and “stealth roll-ups,” the three Commissioners made clear that they view private equity buyers with an increasingly skeptical eye.5
In a separate concurring statement, Republican Commissioners Noah Phillips and Christine Wilson objected to the scope of the prior approval and notice requirements and to the “invocation of rhetoric” in the Complaint and inherent in the extraordinary remedies imposed. In their view, the heightened state-wide and national remedies lauded by their Democratic colleagues are vastly overbroad given the Commission’s targeted finding that the proposed acquisition raised competition concerns in only very specific local markets in California and Texas. Additionally, they derided the FTC’s bias against private equity buyers as unwarranted — both in this deal specifically and more generally as an enforcement focus. Describing private equity as an example of a “disfavored group,” the Wilson/Phillips statement warns that imposing extra burdens on such groups “because of who they are rather than what they have done” is inconsistent with the rule of law.
Non-Competes are Non-Grata
Non-competes in business deals are also now an enforcement focus, as illustrated by a June 14, 2022 FTC action. In a non-reportable transaction (just under the HSR threshold) which closed in May 2021, GPM Petroleum, LLC and certain related entities (“GPM”) acquired 60 retail gasoline, diesel and convenience stores from Corrigan Oil Company (“Corrigan”). After investigation, GPM and the Commission entered into a Consent Order which provides that GPM must return five retail fuel outlets to Corrigan by June 28th as the Commission concluded that the sale reduced competition for fuel and/or diesel in those locations.
More interestingly, the Commission concluded that the non-competes in the merger agreement also posed competitive issues as they were overbroad. While this is not the first challenge to a non-compete in an energy deal, the FTC’s focus on this area has increased noticeably over the past year. The Consent Order requires that the non-compete provisions be narrowed in several ways:
- The non-competes should only apply to retail fuel businesses acquired by GPM and not the five locations being returned to Corrigan;
- The duration of the non-competes should be no longer than three years; and
- The scope of the non-competes should not be broader than three miles from each Express Stop location.
Also as part of the resolution, the parties further agreed not to enter into or enforce any non-competes “related to acquisitions of a retail business that restrict competition around a retail fuel business that GPM already owns or operates, as opposed to the acquired retail fuel business.”
Like the JAB consent order, the Commission required a pre-approval provision. Here, GPM is required to obtain the Commission’s approval before acquiring retail fuel assets within 3 miles of the five locations returned to Corrigan.
Chair Khan along with Commissioners Slaughter and Bedoya issued a separate statement which emphasizes that “firms may not use a merger as an excuse to impose over broad restrictions on competition or competitors. The Commission will evaluate agreements not to compete in merger agreements with a critical eye.”
Expect More Scrutiny
With Commissioner Bedoya recently joining the Commission, Chair Khan now has a 3-2 majority to pursue her agenda. It is notable that all five commissioners supported both the animal clinic and retail fuel station cases, even though the Commissioners had starkly different reasons for supporting the animal clinic case. Also, it is not clear that the Democratic commissioners’ criticism of private equity applies across the board. Those commissioners apparently had no objection to a private equity-based divestiture buyer in that case, for example. Indeed, the divested clinics were sold to United Veterinary Care, LLC, a major shareholder of which is European private equity investor Nordic Capital. This suggests that private equity buyers may find it to their benefit to present evidence as to the merits of their business strategy, in addition to explaining the merits of the particular transaction, in in-depth merger reviews. The retail fuel station case also illustrates that all five commissions are aligned in their concerns with overbroad non-competes. These decisions also underscore that merging parties attempting deals which raise competitive concerns may be burdened with prior approval provisions which will make future mergers and acquisitions more onerous.
1Statement of Commissioner Rohit Chopra, July 8, 2020, available at https://www.ftc.gov/system/files/documents/public_statements/1577783/p110014hsrannualreportchoprastatement.pdf.
2Chris Cumming, “Antitrust Regulators Fix Their Sights on Private Equity,” Wall Street Journal, Sept. 30, 2021. See also Khan Memo to Staff (Sept. 22, 2021) https://www.ftc.gov/system/files/documents/public_statements/1596664/agency_priorities_memo_from_chair_lina_m_khan_9-22-21.pdf.
3James Fontanella-Kahn, “Private Equity Moves into the Antitrust Spotlight,” Financial Times, May 23, 2022.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.