DOJ Suit to Block Book Publishers’ Merger Indicative of New Antitrust Enforcement Regime’s Priorities
On November 2, 2021, the United States Department of Justice (“DOJ”) filed a complaint in the U.S. District Court for the District of Columbia to block the planned $2.175 billion merger between powerhouse publishing companies Penguin Random House, LLC and Simon & Schuster, Inc. This step is an early example of the antitrust landscape ushered in by the Biden administration’s new antitrust enforcers; a landscape in which effects on labor markets are front and center and alleged anticompetitive effects are not necessarily measured by an effect on prices. Our Antitrust team is closely monitoring the evolving antitrust enforcement frontier and offer the following observations as to how this case illustrates the enforcement authorities’ changing priorities.
Background on the Proposed Deal
Penguin Random House and Simon & Schuster are two of the biggest publishers of commercial literature in the United States. In late November 2020, the two companies announced that they planned to merge in the biggest deal in the history of the publishing industry. The two companies are part of the so-called “Big Five,” the group of the five largest publishers in the United States which include other giants such as HarperCollins, Hachette Book Group, and Macmillan Publishing Group. Under the deal, Penguin Random House’s parent company, Bertelsmann SE & Co., would acquire Simon & Schuster from its parent company, ViacomCBS Inc., for $2.175 billion.
DOJ’s Objections to the Proposed Deal
The complaint alleges that the merger would likely lessen competition substantially in violation of Section 7 of the Clayton Act1 and thus should be blocked. To support this claim, DOJ contends that the merger would “eliminate a major competitor to Penguin Random House, already the market leader, and create a firm that controls a substantial share of the relevant markets.”2 The complaint further asserts that the merger harms competition in the following ways:
- The merger would “result in authors earning less for their books” and “fewer and less diverse books being published.”3 The alleged harm here is two-fold. Authors, who often pit competing publishers against one another to obtain significant book advances, would have less leverage to do so post-merger. Less compensation for authors might then lead to fewer books being published, leading to less choice for consumers.
- The merger would “reduce competition by facilitating coordination between the remaining major publishers.”4 The complaint identifies the book publishing industry as already highly concentrated and rejects any countervailing factors as justification, claiming that high barriers to entry and a lack of transaction-related efficiencies add to the factors condemning the transaction.
As we have reported, a touchstone of the Biden administration antitrust enforcement agenda is to combat what it sees as excessive consolidation in many industries that harms competition. For example, the July 9 Executive Order on Promoting Competition in the American Economy (the “Executive Order”) lambasts consolidation as a source of pervasive harm — from making it harder for American workers to bargain for higher wages from powerful corporate employers, to making it too hard for small family farms to survive against agriculture conglomerates, to driving up the costs of healthcare, pharmaceuticals, and communication services like cable and internet. By filing suit to block the Penguin Random House/Simon & Schuster deal, DOJ’s actions are consistent with the Executive Order’s directive to “act now to reverse the dangerous trend” of consolidation.5
Focus on Labor
Effects on labor markets is one of the Biden administration’s top priorities in competition enforcement, continuing a trend from other recent administrations. In the Executive Order, President Biden identified, among other major themes, a focus on “the harmful effects of monopoly and monopsony — especially as these issues arise in labor markets.” DOJ’s complaint predicts that, if Penguin Random House is allowed to acquire its largest competitor, the post-merger entity will have unrivaled power to set the prices at which book authors will be paid, thus creating a monopsony and making it more difficult for authors to bargain for better compensation for their books, which might, in turn, drive authors out of the profession and reduce the variety of books being written and published.
The complaint explains the process by which authors are compensated through advances and royalties, with advances being an up-front payment that usually constitutes the entire compensation an author receives. The complaint alleges specific examples of Penguin Random House and Simon & Schuster competing aggressively with one another, and with a handful of other publishing houses, to bid on individual author contracts and deals. Under the DOJ’s theory, Penguin Random House and Simon & Schuster often end up as the two most powerful bidders, and that competition to pay larger advances would be lost by the merger.6
Moving Away from Price Effects
DOJ’s complaint also continues the Biden administration’s recent trend of moving merger review analysis away from a focus on price effects as the measure of competitive injury. The consumer welfare standard focuses on whether a proposed merger would harm consumers through higher prices or reduced output. Under that standard, experts create econometric models predicting whether quality-adjusted prices would rise after the merger. DOJ challenges to prior mergers have faltered when its economists could not confidently predict that prices would increase post-merger.7 Jonathan Kanter (President Biden’s nominee to be Assistant Attorney General for DOJ’s Antitrust Division, who has not yet been confirmed) and the other new antitrust enforcers have advocated for years that antitrust enforcement should not be limited to studying the price effects of a merger or competitors’ conduct.
DOJ’s complaint does not allege that the merger would have any effects on the prices paid by consumers. Instead, the complaint alleges that the decrease in author pay that would result from the merger would “lead to a reduction in the quantity and variety of books published”8 and that the merger would “likely reduce quality, service, choice, and innovation,” in the commercial literature market.9 Quality, variety, and innovation are all measures of output, but they are difficult to quantify. These types of concerns are exactly what the new enforcers have said should be the focus of antitrust. Indeed, new FTC chair Lina Khan has argued in the past that consolidation of the publishing industry combined with the power of online platforms like Amazon have reduced the “diversity and vibrancy of ideas in the book market.”10
Compliance Pointer: The Complaint’s Allegations are Aided by the Defendants’ Own Documents
As is often the case, DOJ’s complaint emphasizes the parties’ internal documents. While antitrust and economic theory can help predict the merger’s effects on competition, such debates can be dry and not always persuasive. Courts often find that the best way to assess real world competitive effects is through the eyes of the actors themselves. At the very least, contemporaneous documents can bolster the antitrust theory, as DOJ has done here. The complaint cites numerous statements by executives at both companies indicating that they understood that the merger would allow them to control author wages, win substantially more bids, and was not likely to be viewed favorably by DOJ. Purportedly quoting directly from company documents, the complaint states, for example, that Simon & Schuster’s CEO wrote to a best-selling author “I’m pretty sure that the Department of Justice wouldn’t allow Penguin Random House to buy us, but that’s assuming we still have a Department of Justice.”11 And the Chairman of Penguin Random House’s parent company reportedly wrote that Penguin Random House posed greater “antitrust risks” than any other potential buyer.12 We regularly counsel clients on antitrust compliance issues, including the importance of careful attention to internal documents created in the ordinary course of business.
DOJ’s lawsuit signals an early step in the Biden administration’s new antitrust enforcement agenda that has shifted the focus of competition from prices consumers pay to now include other considerations such as impact on labor and qualitative effects on the competitive process. As the Executive Order makes clear and this complaint confirms, effects on labor and other non-price concerns will no longer be overlooked in merger considerations and can provide ammunition for enforcers to block transactions.
1 15 U.S.C. § 18.
2 United States v. Bertelsmann SE & Co., et al, Complaint at ¶41.
3 Id. ¶51.
4 Id. ¶52.
5 Exec. Order No. 14,036 (Promoting Competition in the American Economy), 86 Fed. Reg. 36,987 (July 9, 2021), https://www.govinfo.gov/content/pkg/FR-2021-07-14/pdf/2021-15069.pdf.
6 Bertelsmann, Complaint at ¶¶44–50.
7 See , e.g., United States v. AT&T, Inc., 916 F.3d 1029 (D.C. Cir. 2019).
8 Bertelsmann, Complaint at ¶60.
10 Lina Khan, Note, Amazon’s Antitrust Paradox, 126 Yale L.J. 710, 767 (2017).
11 Bertelsmann, Complaint at ¶11.
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.