DOJ Blocks the Penguin Random House/Simon & Schuster Deal

By Lee F. Berger, Partner at Steptoe & Johnson LLP, and Travis West, Associate at Steptoe & Johnson LLP

In United States v. Bertelsmann SE, No. CV 21-2886-FYP, 2022 WL 16949715 (D.D.C. Nov. 15, 2022), the District Court of the District of Columbia blocked Penguin Random House’s $2.18 billion purchase of rival publisher Simon & Schuster.  The opinion endorses the Department of Justice’s (“DOJ”) monopsony theory of the case, and completely rejects the defendants’ counterarguments.  After a string of defeats, the case marks the first trial win for the DOJ under the Biden administration in a litigated merger challenge.

Penguin Random House and Simon & Schuster are two of the largest book publishers in the United States.  In November 2020, Penguin Random House agreed to buy Simon & Schuster in a deal that would make the merged company the largest publisher in the United States with a market share nearly three times that of its closest competitor. The DOJ sued to block the merger under Section 7 of the Clayton Act, arguing that the combined entity would tend to create monopsony power that would result in lower advance payments to authors.  An author’s agent will often shop a book to multiple publishers to achieve the greatest advance for their client.  The DOJ argued that by reducing the number of publishers, the deal would decrease the dollar amount of advances to authors, harming their ability to write books and reducing output.

In ruling for the DOJ, Judge Florence Y. Pan considered the defendants’ three primary arguments, that: (1) the DOJ’s use of a $250,000 threshold for defining the relevant market was arbitrary, (2) a price threshold, standing alone, should not be the market definition’s lynchpin since publishers value books along a continuum, and (3) that the transaction would have no anticompetitive effects if the market were defined at various other dollar thresholds.  In rejecting these arguments, Judge Pan noted that the Clayton Act prohibits mergers that may substantially lessen competition “in any line of commerce or in any activity affecting commerce.”  Thus, the court adopted the view that all attempts at defining a market require some degree of artificial line-drawing that cannot be measured “by metes and bounds” and, accordingly, should not stand in the way of examining the competitive effects of a transaction.  Indeed, she noted that there was precedent for focusing on the “high end” of a market, as it would likely be distinct from the other potential submarkets.

Second, Judge Pan observed that the industry has increasingly concentrated over the past four decades, but had reached a point of stability in the past three years that this merger threatened to undermine.  She also noted that none of the non-Big Five publishers had increased their market share and the aggregate share for the Big Five was “essentially flat.”  This counseled toward assigning more weight to the market shares of the merging companies, which reflected the dominance the combined entity would possess.  She also stated that the recent stability of the Big Five’s market shares demonstrated that the major publishers were already benefitting from diminished competition, and that new entrants like Amazon and Disney had not yet successfully entered and had no short-term plans to make a strong competitive entry. 

Judge Pan also found significant the competitive harms that would result from the merger.  For instance, Penguin Random House and Simon & Schuster were often each other’s most significant competitor and their separate presence in auctions for publishing rights could drive advances higher.  She also noted that there was some evidence of existing parallel behavior in the market as publishers could theoretically compete with each other by offering better contract terms for rights such as audiobooks, but had appeared to tacitly agree to compete only on advances, as the other terms were demanded on uniform terms more favorable to the publishers.

Finally, the court seemed skeptical of the defendants in general, as they made several arguments that she found “incredible,” “unsupportable,” “unreliable,” or even a “sleight of hand.”   For example, the court based its acceptance of the DOJ’s proffered “GUPPI models” (a “gross upward pricing pressure index” calculated to evaluate a merger’s potential for unilateral anticompetitive effects) in part on the fact that defendants’ economists had similarly used GUPPI models during the pre-complaint investigation.  The court criticized the defense’s efforts to present the independent publishers as a bulk 9% of the market, rather breaking out those publishers individually.  Judge Pan rejected as unenforceable—and suggestive of a “consciousness of guilt”—the unilateral promise by Penguin Random House’s CEO to allow Simon & Schuster legacy imprints to compete with Penguin Random House when there is no external bidder.  In all, Judge Pan’s opinion represents a comprehensive victory for the DOJ and breaks the Biden administration’s losing streak in merger trials.