Merger & Acquisitions, Antitrust Litigation & Investigations

In a Welcome Win, Judge Blocks Penguin Random House / Simon & Schuster Merger

The DOJ’s Antitrust Division successfully prosecutes a monopsony case.

Finding the deal would substantially lessen competition in the U.S. market for publishing rights for potential top-selling books, U.S. District Judge Florence Y. Pan granted the Department of Justice Antitrust Division’s move to block Penguin Random House’s (PRH) proposed $2.2 billion acquisition of Simon & Schuster (S&S).

The ruling followed a 13-day bench trial in August. The government filed suit a year ago on Nov. 2, 2021 to block the world’s largest publisher, PRH, from acquiring a rival to create a “publishing behemoth” that would be able to “exert outsized influence” over which books are published and how much authors are paid for their work, DOJ said. Filed in the U.S. District Court for the District of Columbia, the suit claimed that the merger would substantially lessen competition in violation of Section 7 of the Clayton Act by creating a “monopsonist,” or dominant buyer, in the market for best-selling manuscripts. The government’s case benefitted from some star power. Best-selling author Stephen King, along with top publishing executives, testified the deal would decrease advances, harm newer writers, and curtail the range of books that are published.

The Antitrust Division cited its Horizontal Merger Guidelines which “lay out a straightforward framework to analyze monopsony cases, and under those guidelines this transaction is presumptively anticompetitive.” A monopsony occurs when only one or only a few buyers are present in the market. A monopsonist possesses the economic power to depress prices below the competitive level in order to pay less for necessary inputs.

The publishers enlisted a high-profile antitrust trial attorney with a track record of defending mega-mergers, Daniel M. Petrocelli of O’Melveny & Meyers, who called the suit “wrong on the facts, the law, and public policy.” Contending that the publishing industry is “highly competitive” and growing, he had expressed confidence in victory at trial because, he said, the government did not allege, nor would it demonstrate, harm to competition in the sale of books.

But, as I wrote in an earlier piece on this deal, focusing on retail book sales misses the point of the government’s case. While all successful antitrust prosecutions require some demonstration of harm to competition in a relevant product market, that market need not necessarily include consumers. Although it may be counter to common notions of antitrust law, direct harm to consumers is not a necessary element of an antitrust prosecution.

The Antitrust Division alleged two relevant “content acquisition markets” in which authors sell the rights to their works, one for general interest works and another for best-sellers. Harm to competition in those markets is borne not by consumers, but by the sellers of the content — the authors.

The government was not required to either allege or prove harm to competition in the retail book market, as the publishers had argued. That position skirts the true issue in the case: competitive harm in the market for the sale of book manuscripts.

Moreover, even though the retail book market would not have been harmed directly by the merger, consumers would likely be harmed indirectly if, as the government alleged, the merger would have reduced competition for authors’ works, which would impair the efficiency of book publishing and reduce the number and variety of new book titles published each year.

Assistant Attorney General Jonathan Kanter said Judge Pan’s decision “protects vital competition for books and is a victory for authors, readers, and the free exchange of ideas.” He said it also “reaffirms that the antitrust laws protect competition for the acquisition of goods and services from workers.” The publishers called the decision an “unfortunate setback for readers and authors” and pledged to pursue an expedited appeal.

The court’s decision has certainly lifted the spirits of the government attorneys who have been charged by President Biden to strengthen challenges to potentially harmful consolidations but have suffered a series of defeats in court. Two merger challenges brought by the DOJ were recently rejected: United States Sugar Corporation’s purchase of rival Imperial Sugar and United HealthGroup Inc.’s purchase of Change Healthcare Inc. The courts thwarted the DOJ’s opposition to both deals. Meanwhile, the DOJ, American Airlines, and JetBlue are awaiting a judge’s ruling after a bench trial in federal court in Boston over the competitive impact of the airlines’ “alliance.” (At the same time, Jet Blue is trying to acquire Spirit Airlines for $3.8 billion; Spirit and Frontier Airlines abandoned their proposed $6.6 billion merger in July.)

The Federal Trade Commission also suffered a setback when an administrative law judge on Sept. 1 dismissed the FTC’s attempt to block DNA sequencing provider Illumina, Inc.’s $7.1 billion acquisition of Grail, Inc., which makes a multi-cancer early detection test. FTC is appealing that decision.

The DOJ’s successful challenge to the Penguin Random House/Simon & Schuster merger must have been a most welcome legal victory. 

Edited by Tom Hagy for MoginRubin LLP.


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