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Long Story Cut Short: Court Blocks Merger Reducing from Five to Four the Number of Competitors for the Purchase of Book Publishing Rights

Antitrust and Competition Law Alert® | November 14, 2022

Authors: Bernard (Barry) A. Nigro Jr., Nathaniel L. Asker, Renee E. Turner.  Special thanks to Madison Chajson for her valuable assistance in the research and drafting of this client alert.

A recent decision enjoining the proposed merger of Penguin Random House and Simon & Schuster, two of the largest book publishers in the U.S., marks a significant victory for the Antitrust Division of the Department of Justice, following three recent court losses in its efforts to block the mergers of UnitedHealth/Change Healthcare,[1] U.S. Sugar/Imperial Sugar, and Booz Allen/EverWatch. In remarks by Assistant Attorney General Jonathan Kanter following those losses, he emphasized that the DOJ is “committed to bringing difficult cases” and declared that “[i]mprovements to antitrust enforcement will not happen if the Antitrust Division is unwilling to challenge aggressively anticompetitive conduct and unlawful market consolidation.”[2] This case, which the DOJ challenged on the basis that the transaction would create undue buyer or “monopsony” power (i.e., lower compensation for authors of anticipated top-selling books), will likely serve as a road map for future DOJ and Federal Trade Commission attempts to challenge transactions based on potential harm to workers. To that end, the DOJ touted the decision as “reaffirm[ing] that the antitrust laws protect competition for the acquisition of goods and services from workers.”[3]

Highlights from the Opinion

In an 80-page opinion, Judge Florence Y. Pan found that the proposed merger of Penguin Random House (“PRH”) and Simon & Schuster (“S&S”) “violates Section 7 of the Clayton Act because it is likely to substantially lessen competition in the market for the publishing rights to anticipated top-selling books.”[4] This decision follows nearly two years after the signing of the transaction in November 2020.

In challenging the deal, the DOJ argued that the proposed consolidation of two of the “Big Five” book publishers in the U.S. would lessen competition for the purchase of rights to “anticipated top-selling books” and lower the advances paid to those authors. After a 13-day trial, the court agreed with the DOJ, finding that the elimination of head-to-head competition between PRH and S&S and the ability of the merged firm potentially to coordinate with the remaining competitors would likely lead publishers to pay authors of anticipated top-selling books lower advances.[5]

The court explained that “competition between PRH and S&S benefits authors by increasing advances paid for their books” and stated that “industry participants predict that the loss of that competition would be harmful to authors.”[6] In an overall market in which five competitors accounted for only 60% of the sales of “trade books” published for general readership, the DOJ alleged harm in a narrow submarket—anticipated top-selling books—where market concentration is much higher. The court found this narrower market to be supported by the “practical indicia” factors set forth in Brown Shoe Co. v. United States,[7] which the court explained reveal a market of distinct sellers, for whom the Big Five publishers are uniquely attractive and the only realistic option for large advances for anticipated top-selling books.[8] The court found strong evidence that “whenever a publisher submits a bid of $250,000 or more for a book, that publisher has determined that the book is likely to be a top seller and knows that the competitors for the book are likely to be limited to the Big Five.”[9] The court also relied heavily on the findings of the DOJ’s expert economist, as well as evidence showing that the elimination of direct, head-to-head competition between the merging parties is likely to harm authors, noting numerous examples where the firms were the two highest, or the only two, bidders in auctions for anticipated top-selling books.[10]

In addition, the court found that the transaction was likely to result in harm through “coordinated effects,” which occur when competitors align their behavior in concentrated markets.[11] The court referenced the Second Circuit decision in United States v. Apple, Inc., in which six book publishers, including Penguin Books (before its acquisition of Random House) and S&S, were found to have colluded with Apple to raise prices for e-books.[12] The court stated that “it is significant that in a market already prone to collusion, where coordinated conduct already appears to be rampant, PRH’s acquisition of S&S would reinforce the market’s oligopsonistic structure and create a behemoth industry leader that other market participants could easily follow.”[13]

The court rejected every argument advanced by PRH/S&S rebutting the presumption established by the DOJ that the merger would harm competition. First, the court found unpersuasive the argument that the combined firm would be constrained by the remaining three large publishers and other smaller competitors. Second, the court dismissed as not credible the promise of PRH’s CEO to allow internal competition by imprints owned by PRH in auctions to acquire publishing rights. The court found this promise to be against PRH’s economic incentives, unenforceable, and easy to revoke.[14] Third, the court rejected the argument that self-publishing would be a viable option for authors of anticipated top-selling books, noting that “self-publishing is not a reasonable substitute for traditional publishers in the market for anticipated top-selling books.”[15] Next, despite efforts by firms such as Disney and Amazon to expand into the publishing industry, the court rejected the argument that low entry barriers would prevent the merged firm from seeking to lower advances to authors, noting that “[n]o publisher has entered the market and become a strong competitor against the Big Five in the past thirty years”[16] and “the Big Five still consistently acquire the publishing rights for 91 percent of anticipated top-selling books.”[17] Finally, the court precluded any evidence of efficiencies that would limit the merger’s anticipated harm, noting that efficiencies “play[ed] no role” in its analysis because “the defendants had failed to verify the evidence, as required by law.”[18]

Labor Focus

In the DOJ’s announcement of the victory in this case, AAG Kanter noted that “[t]he decision is…a victory for workers more broadly.”[19] Supported by this precedent, we expect that the DOJ and FTC will seek to bring more labor “monopsony” cases—i.e., cases where the agencies allege that a merger will result in the combined firm accounting for a large share of purchases of a particular type of labor. More generally, the case is notable in that the harm to competition focused on the buying side of the market rather than the selling side. Indeed, there was no claim that the deal would have resulted in higher book prices for consumers.

Conclusion

Although PRH has announced that it plans to seek an expedited appeal of the decision, this decision signifies the emphasis the DOJ and FTC will continue to place on using the antitrust laws to prevent harm to suppliers, including workers. In accounting for the current regulatory environment, companies considering mergers are wise to consider the potential impact of the deal on a range of constituencies, beyond just customers, and engage counsel early to plan for a successful antitrust review of their transaction.   



[1] For a detailed discussion about the decision in UnitedHealth/Change, see our client alert, Federal Court Decision in UnitedHealth/Change Highlights Challenges to Antitrust Agencies’ Aggressive Enforcement Agenda: A Win for Merger Remedies and Private Equity Divestiture Buyers (Sept. 23, 2022).

[2] See Speech, DOJ, Antitrust Div., Assistant Attorney General Jonathan Kanter of the Antitrust Division Testifies Before the Senate Judiciary Committee Hearing on Competition Policy, Antitrust, and Consumer Rights (Sept. 20, 2022).

[3] Press Release, DOJ, Antitrust Div., Justice Department Obtains Permanent Injunction Blocking Penguin Random House’s Proposed Acquisition of Simon & Schuster (Oct. 31, 2022).

[4] Mem. Op. at 80, United States v. Penguin Random House, LLC, et al., Civil Action No. 21-2886-FYP (D.D.C. Oct. 31, 2022).

[5] See Mem. Op. at 64.

[6] Id. at 51.

[7] Brown Shoe Co. v. United States, 370 U.S. 294 (1962)

[8] See Mem. Op. at 26 (quoting FTC v. Whole Foods Market, Inc., 548 F.3d 1028, 1038-39 (D.C. Cir. 2008) (internal quotation marks and alterations omitted)).

[9] Mem. Op. at 38.

[10] Mem. Op. at 51.

[11] See id. at 57 (citing United States v. AT&T, Inc., 310 F. Supp. 3d 161, 246 (D.D.C. 2018)).

[12] See United States v. Apple, Inc., 791 F.3d 290 (2d Cir. 2015).

[13] Mem. Op. at 61.

[14] See Mem. Op. at 68-69.

[15] Id. at 70.

[16] Id. at 72.

[17] Id.

[18] Mem. Op. at 77.

[19] Press Release, DOJ, Antitrust Div., Justice Department Obtains Permanent Injunction Blocking Penguin Random House’s Proposed Acquisition of Simon & Schuster (Oct. 31, 2022).


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