After our July 22 pre-trial review went live on Friday, attorneys for both the DOJ and Penguin Random House filed a host of final briefs, including their individual pre-trial statements and reply briefs on a handful of lingering (but potentially significant) evidentiary questions likely to be settled early this week. Oral arguments in the case are set to begin on August 1 in Washington, D.C., before judge Florence Pan.
In a pre-trial conference set for this morning (Monday, July 25 at 10:00 a.m) Pan was set to discuss ground rules to protect third party confidentiality in open court (which, the court notes, could include transitioning to "a closed session" when addressing "specific concerns" raised by individual third parties). Pan also said she intends to rule on most pending motions without oral argument.
Below, PW links to and summarizes the parties’ pre-trial briefs and the remaining evidentiary disputes:
The DOJ’s Pretrial Brief
“Penguin Random House’s proposed acquisition of Simon & Schuster would further entrench the largest publishing giant in the United States (and the world) and give the merged company control of nearly half of the market to acquire anticipated top-selling books from authors,” the DOJ’s pre-trial brief states, adding that if allowed to proceed, “the proposed transaction would eliminate competition between two of the last remaining major publishers” likely resulting in "authors being paid less for their efforts and fewer authors being able to earn a living from writing.”
As reported, the brief confirms that the government’s case at trial will seek to define the “relevant market” as the market for book rights. At trial, the government’s expert witness, Nicholas Hill, is expected to testify that the combination of PRH and S&S would result in “a dominant publisher” that would control roughly half the market for “top selling” books, “with a combined 49% share” that is more than twice the market share of its next largest competitor, HarperCollins (24% market share) and “more than five times the market share of all publishers outside the Big Five combined.”
According to the brief, when the post-merger market for rights to top selling books is measured using the Herfindahl-Hirschman Index (HHI), a key tool for measuring market concentration under the government’s Horizontal Merger Guidelines, Hill will testify that the proposed merger would result in an 891-point increase in the HHI and a post-merger HHI of 3,113, making the merger presumptively illegal. An increase of more than 200 points in HHI and a post-merger HHI of 2500, is the threshold to trigger a presumption of illegality under the Horizontal Merger Guidelines.
Furthermore, DOJ attorneys argue, if the government can establish a prima facie case—that is, if they can persuade the court there is some cognizable harm to the market for rights to top selling books—that would sufficient to carry the day: “To be clear, the United States need not prove any harm to consumers to prevail in this matter.”
To that end, the government insists that the testimony of industry players will buttress its case, and that the testimony of various literary agents expected to feature in PRH’s defense will not be enough to get the job done for the defense.
“Agents are not powerful sellers that can counteract the anti-competitive harms from the merger,” the government brief argues. “Agents cannot control whether publishers are interested in a book. Agents cannot control a publishing house’s internal bidding rules, including whether it prohibits its imprints from bidding against each other for a book. Nor can an agent control how a publisher values a book. Agents cannot control how much a publisher bids for a book. Agents cannot even always control the scope of rights that they can sell; a recent example is that the Big Five publishers have all but refused to acquire books unless audio rights are included. Moreover, contrary to Defendants’ assertion, agents do not always have control over the process of selling the book rights. For example, a lack of interest in a book may leave an agent without the ability to conduct an auction and require the agent to accept an offer without the benefit of a competitive process (or no offer at all). Agents cannot manufacture competition.”
PRH’s Pretrial Brief
In their pre-trial brief, PRH attorneys insist the government’s theory of the case—that author advances, especially advances over $250,000 will be harmed—is fatally flawed.
“The government found no evidence that combining PRH and S&S would diminish competition in any consumer market,” PRH attorneys argue. “The government instead has narrowed its focus down to one very small segment of the market to acquire U.S. book rights: the set of about 1,200 books acquired annually for advances of at least $250,000, or about 2% of all books published by commercial publishers,” which the government “incorrectly” treats “as a sub-market.”
“The government tries to erase 98% of the market, shriveling it down to the small segment of books that are acquired for advances of at least $250,000. But that price segment is just that—a price segment, not a cognizable ‘market,’” PRH attorneys argue. “The advance for each unique book is driven primarily by how particular editors perceive that book’s potential success, and different editors have different expectations for any given book. The wide variation in advances that inevitably results is, if anything, the opposite of a clear, market-defining product categorization. The government’s failure to define a cognizable market is fatal to its claim.”
Furthermore, PRH attorneys will look to its own experts (including testimony from various editors, executives, and literary agents, as well as from its own economist, Edward Snyder) to shred the government’s case. Unable to show any negative consumer harm or any “substantial lessening of competition” for book rights overall, the government was forced to narrow its case to down to alleged harm in a “tiny” selection of books, PRH attorneys argue—which, even if the government could show some potential injury in this small subsection of books, fails to meet the legal standard necessary to block the merger.
“Based on the best available data, the type of transaction modeled by the government accounts for only approximately 85 books acquired annually, out of more than 55,000 total books published annually, and out of approximately 1200 books acquired annually for advances of $250,000 or more,” PRH lawyers state. “Alleged harm to 85 books does not constitute a substantial lessening of competition by any definition.”
In terms of the elephant in the room—the sheer size of the combined PRH/S&S—the brief downplays the government’s market concentration measurements.
“The government’s case assumes that the current market shares define the competitive landscape that will exist after the merger—the same participants and shares, except that PRH and S&S shares will be combined,” the brief states. “But when there are low barriers to expansion by existing rivals or entry by new rivals, it is error to rely on past market shares to draw inferences about post-merger competition…The evidence will show that existing Big Five rivals can easily expand and actively plan to do so. Other rivals among the top twenty also can easily increase their acquisitions—they already possess the needed talent, experience, and reputation. And entirely new publishers started by well-known editors have recently gained share and become increasingly effective competitors. Given this ease of expansion and entry, market shares are a highly unreliable predictor of post-merger competitive conditions.”
Rather, the merger between PRH and S&S will actually “enhance competition,” PRH attorneys argue. The deal will create “efficiencies that will enable the combined entity to make better offers to more authors,” and will “incentivize other publishers to compete harder to acquire the books they, too, need to win sales among consumers.”
In a statement released late on July 22, Dan Petrocelli, lead attorney for Penguin Random House and Bertelsmann, reiterated that point.
“Penguin Random House’s acquisition of Simon & Schuster will strengthen the already vigorous competition among publishers to find and sell the books readers most want to read," Petrocelli said. "More competition to sell books means more competition to acquire them from authors. The Department of Justice’s lawsuit misunderstands that competitive dynamic and many others. As trial will show, this acquisition will benefit readers, booksellers, and authors alike.”
Remaining Evidentiary Disputes
The court must still rule on a number of pre-trial motions that could impact the evidence presented at trial. Among them:
A dispute over expert testimony: The government is asking the court to block PRH's expert, Edward Snyder, from presenting an analysis on the proposed merger's efficiencies. PRH, meanwhile, is seeking to block the government's expert, Nicholas Hill, from introducing evidence from a second model, developed in response to a rebuttal report from Snyder. Hill’s second analysis relies on a model called the “Gross Upward Pricing Pressure Index,” or “GUPPI,” and PRH attorneys say the analysis was "unreasonably and unfairly delayed in this highly time-compressed case."
A dispute over printing capacity: PRH attorneys want the court to bar the government from raising PRH's printing capacity at trial, arguing, among other things, that its vertical printing interests have no bearing on the government's narrowly focused claims in this horizontal merger case. Furthermore, PRH argues that the DOJ has not shared important information on the printing sector which it gleaned in its investigation of Quad's proposed acquisition of LSC. Quad called off the purchase and shortly thereafter, LSC filed for Chapter 11 and in 2020 was acquired by a private equity company with other printing businesses. The government says it has provided appropriate discovery and the "printer capacity issues play a central role in the trade book publishing industry," and are part of this case.
A dispute over testimony from Jennifer Rudolph Walsh: Walsh, a successful veteran literary agent, is set to testify for PRH that “the merger will not adversely impact competition in the acquisition of books by publishers.” But Walsh is "not an economist, has never served as an expert, has no experience as a publisher acquiring books, has conducted no analysis of the publishing industry as a whole, and has provided no references to the record in support of her conclusions," the government argues. At most, Walsh’s testimony should be "limited to her understanding of the operation of the publishing industry up to her 2019 retirement along with any relevant lay opinions that the Court may find useful."
A dispute over PRH's vow to allow PRH and S&S editors to bid against each other post-merger: The government says that PRH CEO Markus Dohle's public announcement that PRH and S&S editors would be allowed to bid against each other is unenforceable and would be little more than a distraction at trial and should be barred from being raised. PRH attorneys insist that the policy has some probative value and should be allowed.
"To be clear, Defendants do not believe that the independent S&S bidding policy is necessary to avoid any anti-competitive effects, as confirmed by the fact that PRH announced the policy to its agent-partners without even knowing whether the merger would be challenged," PRH attorneys argue. "But to the extent the Court finds from the evidence above that PRH’s commitment is credible and thus such direct PRH/S&S competition will continue after the merger, the government’s whole case collapses on itself. Which is, of course, why the government does not want the Court to even consider the evidence—not because it is irrelevant, but because it may be too relevant."
Karp Shows Support for PRH Bid: In a letter to employees, S&S CEO Jonathan Karp provided a brief outline of how the trial will play out, noting a decision is expected in November. Karp is one of a number of publishing CEOs who will testify at the trial.
Noting that he had worked at Random house for 16 years, Karp said he remains "hopeful" that S&S will become part of PRH. “I know their culture is a lot like ours—wholeheartedly devoted to books and deeply committed to its employees and authors,” Karp wrote. “I strongly believe that Penguin Random House will be an excellent steward of Simon & Schuster’s legacy, and that we, and our authors, will benefit greatly from becoming a part of this superb publishing company.”
Karp also observed that S&S has changed ownership seven times in its history and he made the point that many in publishing are acknowledging: that even if the government blocks PRH’s acquisition, S&S will change hands again. Or as Karp put it regarding S&S's next owner: “we know there will be an eighth.”
Update: After a July 25 hearing, Judge Florence Pan largely resolved the pending evidentiary motions. In a set of orders delivered orally, Pan denied PRH's bid to limit the government's expert, Nicholas Hill, from introducing his so-called GUPPI analysis; Denied PRH's motion to block the government from raising PRH's printer capacity; granted the government's motion, in part, limiting the scope of agent Jennifer Rudolph Walsh's testimony; and denied the government's bid to bar discussion of PRH's proposed policy to allow PRH and S&S to bid against each other post-merger. The court is expected to issue written orders on the motions at some point, once the parties agree on the final language, and we will update this story at that time.