Private equity (“PE”) firms should already be aware that the government is focusing on their acquisitions with increased antitrust scrutiny and for potential challenges. PE firms should also be concerned with private litigation, particularly class action suits where even if the PE firm ultimately prevails, the expense and exposure are considerable. A decision last week in a case pending in Tennessee underscores the point.
In that case, parents of competitive cheer athletes brought a class action in 2020 against Varsity Brands (and affiliates) (“Varsity”), a prominent host of competitive cheerleading competitions and camps and a manufacturer of cheer apparel. Jessica Jones and Christina Lorenzen on Behalf of Themselves and All Others Similarly Situated v. Varsity Brands, LLC, et al., 2:20-cv-2892 (W.D. TN). Defendant Jeff Webb had founded Universal Cheerleaders Association which ultimately became a subsidiary of Varsity. Varsity grew by acquiring other cheerleading businesses, apparel companies, and event producers. Varsity also helped start the cheer governing body, U.S. All Star Federation (“USASF”). The complaint alleged that Varsity built a monopoly in the cheer supply market through exclusive arrangements with gyms and also leveraged its market power to receive kickbacks from the fees that families are charged for participating in competitive cheerleading. In 2014, Varsity was acquired by PE firm Charlesbank. Then in 2018, Varsity was acquired by another PE firm Bain Capital. Last week, the district court ruled on several motions to dismiss in the matter.
Motions to Dismiss by Defendants Varsity, USASF, and Webb
The district court denied defendants’ motions to dismiss as to the federal Sherman Act Claims, and as to certain state claims. It granted defendants’ motions to dismiss under other state claims.
Plaintiffs seek to represent a class of indirect purchases of Varsity products and services. Plaintiffs alleged three markets in which Varsity, USASF, and Webb engaged: 1) cheer competitions, 2) cheer camps, and 3) cheer apparel. In these markets, plaintiffs alleged that Varsity offered exclusive agreements that resulted in cheer gyms attending only Varsity events. They also alleged that defendants engaged in an exclusionary scheme in all three markets.
On the Sherman Act Section 1 claim, defendants argued that plaintiffs failed to plead that there were exclusive contracts, that defendants are not capable of conspiring with one another under the Copperweld Supreme Court decision, holding that parents and subsidiaries cannot normally conspire with each other under the Sherman Act and that allegations of conspiracy were not sufficiently pled.
In a 61-page opinion, the district court denied the motion to dismiss on these claims. It found that plaintiffs sufficiently pled three exclusionary contracts: 1) Varsity’s Network Agreements are explicitly exclusionary, requiring consumers to buy apparel only from Varsity, 2) Varsity’s Family Plan is effectively exclusionary, making it infeasible for cheer gyms to attend events of Varsity competitors outside of the Varsity events they are obligated to attend, and 3) Varsity’s Impact Program is exclusionary, requiring exclusivity in exchange for purchases of services from Varsity.
Applying the Supreme Court’s teachings in Copperweld and its progeny, the district court also found that defendants are capable of conspiring with each other because they have divergent economic purposes. Varsity is a corporate entity competing in the market to maximize profits, whereas USASF is an independent nonprofit organization. The district court noted that although Varsity currently controls a majority of USASF’s board, that control does not change the lawful purpose of USASF to benefit its members. As to a conspiracy with defendant Webb, the court noted that although he correctly argued that he cannot conspire with Varsity as his employer, Copperweld does not bar is liability for an alleged conspiracy between himself, Varsity, USASF and others.
On the Sherman Act Section 2 claim, defendants argued that plaintiffs did not sufficiently allege monopoly power, relevant product or geographic markets, or willful anticompetitive conduct. Defendant Webb also argued that plaintiffs insufficiently plead a conspiracy to monopolize claim against him. The district court denied the motion to dismiss on these claims. It found that plaintiffs alleged that Varsity controlled approximately 80% of the cheer competition and cheer apparel markets, and 75% of the cheer camp market. The court also found that it is plausible that Webb, as CEO, was actively and knowingly engaged in Varsity’s alleged anticompetitive behavior. The court also found that plaintiffs plausibly alleged willful anticompetitive conduct through their claims of illegal exclusive dealings, anticompetitive acquisitions, and restrictions on competition.
Private Equity Defendants Bain Capital and Charlesbank Capital’s Separate Motion to Dismiss Also Fails
In a separate 17-page opinion, the district court denied PE defendants’ motion to dismiss as to the Sherman Act claims and the statute of limitations challenge.
Plaintiffs alleged that during the period of Charlesbank’s ownership, Charlesbank conspired with Varsity and Webb to consolidate Varsity’s market power by acquiring its biggest rivals. Plaintiffs further alleged that during the period of Bain’s ownership, Bain participated in the anticompetitve scheme by sitting on Varsity’s board of directors, funding their acquisitions of competitors, and conspiring with Varsity and Webb to continue and enhance the monopoly.
On plaintiffs’ Sherman Act claims, PE defendants argued that plaintiffs did not sufficiently allege their involvement in conduct unlawful under the Sherman Act, and that any causes of action based on Varsity’s acquisitions of competitors are time-barred. PE defendants also argued that under Copperweld, they were not capable of conspiring with Varsity as they are legally considered part of the same enterprise.
For the Sherman Act Section 1 claim, the district court held that a Copperweld defense requires that Charlesbank and Bain be considered as one enterprise with the other alleged conspirators. The district court agreed with PE defendants that Charlesbank and Bain are not separate actors from Varsity capable of conspiring under the Sherman Act. However, the district court found that plaintiffs could still pursue their claim based on their allegations that Varsity (considered as one enterprise with the PE defendants) and USASF engage in an unreasonable restraint of trade and conspired together. Hence, the court kept the PE defendants in the Section 1 claim.
On the Section 2 monopolization claim, the district court held that plaintiffs need only allege anticompetitive conduct by a single actor. Thus, by alleging Varsity’s exclusionary scheme, plaintiffs sufficiently alleged a claim in which PE defendants could be viewed as a shared enterprise with Varsity. On the Section to conspiracy to monopolize claim, the district court held that plaintiffs still needed to allege at least two participants. Finding for plaintiffs, the district court followed the same rationale as it used for the Section 1 claim; plaintiff’s allegations did include a separate entity—USASF.
The district court held that while Copperweld requires viewing the PE defendants as a joint enterprise with Varsity, plaintiffs asserting Sherman Act claims must still provide evidence that each defendant participated independently to be held liable, and that such participation must be more than mere ownership. The district court found that plaintiff’s sufficiently alleged independent participation. As to Charlesbank, plaintiffs alleged its involvement when it owned Varsity and provided necessary funding for Varsity to enhance and extend its monopoly power through acquisitions of competitors, and continued its involvement by remaining on Varsity’s board after it was sold to Bain. Likewise, Bain also provided funding for acquisitions of competitors, sat on the board, and maintained control of USASF.
Now that plaintiffs’ survived the motion to dismiss, it will be more difficult for PE plaintiffs to get out of the case unless they defeat class certification, as denials of motions to dismiss are normally not immediately appealable. And even if there is a settlement before class certification, it will have to be approved by the district court.
Government enforcement actions usually prompt immediate private treble damage class actions. This case demonstrates an illustration that private plaintiffs may have the circumstance in some cases to bring PE entities into cases even where the conduct involved would appear to be typical PE activities.
If you have any questions or concerns about antitrust enforcement activity with respect to private equity activity or otherwise, please reach out.
 At the American Bar Association’s Antitrust in Healthcare Conference in June, Andrew Forman, deputy assistant attorney general of the Antitrust Division of the U.S. Department of Justice delivered a speech on federal antitrust enforcement priorities, taking particular aim at PE activity. He said “[W]e are focused on potential antitrust enforcement on private equity ‘roll-ups,’ namely whether in particular circumstances a series of often smaller transactions can cumulatively or otherwise lead to a substantial lessening of competition or tendency to create a monopoly.” Similarly, Federal Trade Commission Chair Lina Khan said in a statement on a merger matter “Antitrust enforcers must be attentive to how private equity firms’ business models may in some instances distort
incentives in ways that strip productive capacity, degrade the quality of goods and services, and hinder competition.” See our alert on the matter, https://www.mintz.com/insights-center/viewpoints/2191/2022-06-17-vet-clinic-ftc-settlement-puts-private-equity-notice.