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Penguin, Simon & Schuster Deal Triggers Author Risk Probe at DOJ

Nov. 5, 2021, 4:10 PM

The Justice Department’s bid to block Penguin Random House’s proposed acquisition of rival Simon & Schuster reflects its recent focus on individual worker protection in antitrust enforcement.

The $2.18 billion deal, which would combine two of the “Big Five” publishers, would create a market dynamic in which just a few publishers would control the prices paid to workers—or authors in this case—who produce books, the DOJ’s complaint said.

Total author advances paid for anticipated top-selling books by Penguin and Simon & Schuster—the largest and fourth largest U.S. publishers, respectively—together exceeded $500 million in 2020, more than double the amount paid by the next closest rival, the DOJ said. The deal would reduce authors’ options for shopping their books for higher advances, it said.

“This merger will cause harm to American workers, in this case authors, through consolidation among buyers—a fact pattern referred to as ‘monopsony,’” the DOJ said in a statement Tuesday following the filing of its complaint.

Antitrust regulators rarely use monopsony claims to challenge mergers, said Benjamin Sirota, an antitrust lawyer with Kobre & Kim LLP who previously worked in the DOJ’s Antitrust Division. They are often more concerned with how deals would directly harm consumers by increasing costs or reducing their options.

But the DOJ’s lawsuit is a signal that the Biden administration is willing to look beyond the consumer welfare standard to ensure healthy competitive dynamics between and among producers, suppliers and workers.

“It’s flipping on its head the traditional view that looks at how sellers adversely affect buyers of goods and services and instead looks at how companies are using their buying power to somehow penalize the sellers,” Sirota said.

Penguin and Simon & Schuster say the tie-up would help strengthen their ability to compete against Amazon.com Inc., according to the complaint. They also claimed that combining operations would generate synergies.

Penguin is a subsidiary of Germany-based Bertelsmann. Simon & Schuster is owned by ViacomCBS.

Buying Power

Once the Big Five industry is reduced to Big Four as a result of the deal, the large publishing companies would force authors to give up more publishing rights or pay smaller increments of advances over longer periods of time, the DOJ argued. Contract terms, like royalty rates and audio rights, already have become standardized among the Big Five publishers, the DOJ said.

“With fewer players and an obvious leader, the Big Four would likely find it easier to reach and sustain a consensus that harms authors through coordination,” the complaint said.

Authors can self-publish their books, including through online options offered by Amazon.com. But the number of authors who would prefer self-publishing isn’t big enough to deter a would-be monopsonist from lowering book advances, the DOJ said.

Penguin and Simon & Schuster attempted to remedy anticompetitive concerns by announcing in September that they would bid separately for publishing rights. But the DOJ said that solution “defies economic sense” and would be unenforceable.

“If a business is saying they’re going to keep parts of the business separate to simulate an open market as if the merger hadn’t occurred, then the question is—why are they merging?” said Robert Litan, a partner at Korein Tillery who previously served as principal deputy assistant attorney general for the Justice Department’s Antitrust Division.

Penguin and Simon & Schuster often are the final two bidders at auctions for book rights, the DOJ said. That competition resulted in higher advances and better terms for authors, the agency said.

The deal would enable “the merged firm to pay less and extract more from authors who often work for years at their craft before producing a book,” the complaint said.

The companies say they plan to fight vigorously to complete the merger.

“This is a pro-consumer, pro-author, and pro-book seller transaction, which will allow increased investment in the publishing programs of both S&S and PRH,” the companies said in a Nov. 2 statement.

The publishers’ reach into independent bookstores and specialty markets will boost book sales that would benefit authors and retailers, they said.

“The transaction will bring PRH’s superior order fulfillment services to S&S’s titles, benefiting consumers by making it easier to discover new titles and less likely that books will be out of stock, particularly at local retailers,” the companies added.

Labor Market Problems

The consumer welfare standard has underpinned antitrust law for decades. But the DOJ’s Antitrust Division and the Federal Trade Commission, under the Biden administration, have sought to scrutinize anticompetitive behavior that affects other factors—such as harm to workers and suppliers and environmental degradation—that go beyond consumer prices or choices.

“This case is of part of a larger trend of focusing on perceived problems in the labor market,” Sirota said. “This is a labor market case.”

The DOJ could face an uphill battle if the companies are effective in their argument that the deal benefits book buyers by reducing prices, practitioners said. That might satisfy the consumer welfare standard under antitrust law.

“There are interesting issues that this case might shed light on—like what are the elements required to prove it’s an anticompetitive merger under a monopsony theory of harm,” said Craig Minerva, counsel at Axinn Veltrop & Harkrider LLP, who formerly was a lead attorney with the DOJ’s Antitrust Division.

To contact the reporter on this story: Siri Bulusu in Washington at sbulusu@bloombergindustry.com

To contact the editor responsible for this story: Roger Yu at ryu@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com