Eleventh Circuit Affirms That Seller Does Not Have Antitrust Claims Against Buyer For Post-Closing Conduct That Avoided Earnout Payment01/25/2022On January 4, 2022, the United States Court of Appeals for the Eleventh Circuit affirmed a district court’s dismissal of an antitrust suit filed by the sellers of a healthcare risk adjustment service company. Ekbatani et al. v. Cmty. Care Health Network, LLC et al., No. 21-12322 (11th Cir. Jan. 4, 2022). The sellers alleged that the buyer, who was a direct competitor, violated federal antitrust laws by intentionally reducing the company’s revenue after closing. That conduct, allegedly, resulted in the sellers’ loss of an “earnout” payment that was contingent upon the company’s performance post-closing. The three-judge panel affirmed that plaintiffs, the previous owners of the acquired business, did not have antitrust standing to bring their Clayton Act claim.
Plaintiff-Appellants are former owners of HealthFair, a risk adjustment service provider to U.S. healthcare payors. Defendant-Appellees are Matrix Medical Network and its affiliates, which purchased HealthFair from plaintiffs in 2018. In exchange for the sale of HealthFair, plaintiffs received cash, shares in Matrix’s parent company, and a conditional “earnout” payment contingent on HealthFair profits meeting performance benchmarks in the year following the sale. Plaintiffs alleged that, after the acquisition, defendants took steps to minimize competition from HealthFair’s offering by reducing HealthFair’s workforce, appointments, and patients for its risk adjustment solution. According to plaintiffs, this caused HealthFair’s revenues to decline and profits to fall below the levels necessary for plaintiffs to receive their earnout payment. Furthermore, plaintiffs asserted that defendants simultaneously increased Matrix’s output and pricing for its own risk adjustment services, resulting in growth in Matrix’s revenue over the same period.
Plaintiffs sued defendants under Section 7 of the Clayton Act, alleging that defendants’ conduct in their post-acquisition and management of HealthFair’s business had the effect of substantially lessening competition in the U.S. market for risk adjustment services. Defendants moved to dismiss the case for failure to state a claim, and the district court granted defendants’ motion, holding that plaintiffs lacked antitrust standing. Plaintiffs then appealed to the Eleventh Circuit.
Reviewing the lower court’s dismissal de novo, the Court analyzed whether plaintiffs met the elements required to establish antitrust standing. The key element at issue was whether plaintiffs suffered an antitrust injury. The Court explained that antitrust plaintiffs typically establish that they suffered antitrust injury by participation in the market in which a defendant restrained competition. In this case, however, the Court reasoned that plaintiffs sold their company and therefore were no longer participants in the risk adjustment services market.
Next, the Court considered whether plaintiffs could alternatively establish antitrust standing as nonmarket participants by showing their injury was “inextricably intertwined with the injury the conspirators sought to inflict on . . . the . . . market.” Plaintiffs asserted their failure to receive earnout payments due to defendants’ actions was intertwined with the antitrust injury that defendants’ conduct inflicted. Citing longstanding Eleventh Circuit precedent, the Court explained that a plaintiff can meet this alternative standard for antitrust standing only if its injury is “a necessary component of the alleged anticompetitive purpose,” and not if it is “secondary to the goal of reduced competition or a mere effect of the anticompetitive behavior.” The Court rejected plaintiffs’ argument on this theory as well. It found that the earnout injury did not qualify as a necessary component of defendants’ alleged anticompetitive purpose because HealthFair plausibly could have failed to achieve the earnout threshold absent any anticompetitive behavior, or could have met these benchmarks despite engaging in such conduct. Thus, the earnout injury was “at most an incidental effect” of defendants’ alleged conduct with a “tenuous connection” to any claimed market-wide injury.
Ultimately, the Eleventh Circuit panel upheld the lower court’s decision and affirmed dismissal of the suit.