On November 2, 2021, the U.S. Department of Justice (DOJ) filed a lawsuit seeking to block Penguin Random House's proposed acquisition of Simon & Schuster. This lawsuit further demonstrates the Biden Administration's commitment to more aggressive merger enforcement. The DOJ's challenge departs from decades of precedent in which merger challenges have rested principally on evidence of consumer harm. While the complaint asserts that the transaction could result in consumers having fewer new books to choose from, the DOJ complaint focuses mainly on harm to authors of top-selling books, who will allegedly earn slimmer advances for their future works if the transaction is consummated.
The DOJ filed the lawsuit in federal court in Washington, D.C. The DOJ's complaint alleges that the transaction would give Penguin "outsized influence" over what material becomes published and author remuneration, by leaving authors with fewer choices and less leverage in selecting publishers for their works. Penguin and Simon & Schuster stated that they will vigorously contest the lawsuit, arguing that the publishing industry will remain highly competitive after the merger.
In November 2020, Viacom announced the proposed sale of its Simon & Schuster subsidiary to Penguin Random House for approximately $2.2 billion. As a result of the purchase, the German parent company of Penguin Random House, Bertelsmann, would account for about one-third of all the books sold in the U.S. Bertelsmann would add best-selling authors to its stable, including Stephen King, Anthony Doerr, and Bob Woodward.
The "Big Five" publishers in the U.S. include Penguin Random House, Simon & Schuster, Harper Collins Publishers, the Hachette Book Group and the Macmillan Publishing Group. Penguin Random House is currently the largest trade book publisher in the U.S., and Simon & Schuster is the fourth largest. All five compete closely with each other for publishing rights from authors of anticipated top-selling books, via advances and services for editing and marketing. There has already been some industry consolidation; Harper Collins recently acquired Houghton Mifflin Harcourt's trade publishing business, and Hachette Book Group recently acquired Workman Publishing.
Under the Clayton Act, mergers are unlawful if the effect may be substantially to lessen competition, or to tend to create a monopoly in a relevant product market. The relevant markets alleged by the DOJ are the markets for i) the acquisition of the U.S. publishing rights to books from authors, and ii) for the acquisition of the U.S. publishing rights to anticipated top-selling books. If it proceeds to trial, this will be the first litigated merger case in recent decades in which the DOJ has focused primarily on harm to sellers (rather than buyers)1 and possibly the first DOJ merger case in which a court will apply the hypothetical monopsonist test to define a relevant market.2
The primary harms alleged by DOJ are to authors of top selling books. The DOJ complaint alleges that Penguin Random House and Simon & Schuster are often the most aggressive bidders for potential top-selling books and that the head-to-head competition between the merging firms has allowed authors to secure higher advances and other favorable terms. The complaint contains several anecdotes of bidding competition resulting in author advances of several million dollars. Perhaps in recognition that the DOJ action could be criticized as mainly protecting the literary world's most famous and well-compensated authors, the DOJ also alleges that smaller authors have benefited from competition between the merging parties. In one anecdote, for example, the DOJ alleges that competition between the parties yielded sufficient additional advances for a freelance science author to afford her son's college tuition. The DOJ complaint contains a bare allegation that the transaction is likely to lead to fewer and less diverse books being published, but this assertion is unsubstantiated.
The DOJ appears to be carrying out the policy of President Biden's Executive Order, which highlighted monopsony3 power as a concern, stating: "… it is the policy of my Administration to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony."4 Although this action marks the latest chapter in a series of more stringent merger enforcement actions by the U.S. authorities (see, for example, this previous Wilson Sonsini Alert), this particular lawsuit raises novel questions about monopsony power and whether the U.S. must prove consumer harm or a reduction in output affecting consumers in order to obtain a court order enjoining a transaction. If this matter proceeds to trial, just like the best-selling titles that are its principal subject, it promises plenty of intrigue and the potential for numerous plot twists.
For more information, please contact Beau Buffier or another member of the antitrust and competition practice at Wilson Sonsini.
Liam Boylan contributed to the preparation of this Wilson Sonsini Alert.
[1] The DOJ has regularly settled merger investigations in which harm was alleged to sellers, typically in agricultural markets. See, e.g., Press Release, U.S. Dep't of Justice, Justice Department Requires Substantial Divestitures in Zen-Noh Acquisition of Grain Elevators from Bunge to Protect American Farmers (June 1, 2021), https://www.justice.gov/opa/pr/justice-department-requires-substantial-divestitures-zen-noh-acquisition-grain-elevators.
[2] The DOJ did make an argument using the hypothetical monopsonist test in the Anthem-Cigna litigation, but the court did not address this part of their case and found for them on other grounds. See Jacobs, J. B, Insurance Mergers: Efficiencies and Monopsony Power (May 17-18 2018), https://www.perkinscoie.com/images/content/1/9/v3/192912/2018-ABA-Antitrust-in-Healthcare-Insurance-Mergers-Efficienc.pdf at p.7.
[3] While a monopolist “uses its market power as a seller to restrict its production so that its customers have to bid a higher price per unit,” a monopsonist “uses its market power as a buyer to reduce the quantity it purchases so that sellers must reduce their prices in order to make a sale.” See Jacobson, J.M, Monopsony 2013: Still Not Truly Symmetric (December 2013), https://www.wsgr.com/a/web/173/jacobson-1213.pdf.
[4] See Executive Order on Promoting Competition in the American Economy (July 9, 2021): https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.
