Writer's Block from DOJ Antitrust Suit

what is the goal of this merger? Well, the goal of the merger, according to what the companies are saying now, is to become more efficient. I mean, essentially if it's what most big merging parties would say, but in order to provide better cloud or better leverage as against Amazon, you know, which is a big seller of books out there, and also just to become more efficient as some of the advances that go to the really big top selling

authors have gone up. The Justice Department is suing and it says if the merger went ahead, the deal would give Penguin Random House nearly half the market for publishing rights to blockbuster books, while it's nearest competitors will be less than half its size. Tell us about why the

Justice Department is suing here. Well, it's an interesting theory because usually when two companies come together, what the Justice Department is looking at is whether they are too competing sellers of products, and as a result of the merger, the price of those products they sell will go up because they'll have more market power and they'll have the ability to increase the price. This is what's called them

ansony case. They are buyers of products, so essentially they are paying authors for the rights to publish those authors works their books. And the concern here is that if they come together and they have that much leverage, they're that much bigger than all the other publishing houses that could be bidding for these top selling books, that authors

will start getting paid less. And as authors start to get paid less, fewer can afford to write, and the upshot would be fewer books for consumers to buy, less innovation, less variety. So the concern here is the fees that get paid to authors to write books, and they're mostly focusing on big, top selling authors. They're arguing that a top selling author, the competition will be less because it

will be down to four large publishers instead of five. Argument. Yes, so it's four rather than five, which a five to four merger. You know, it depends on the industry, it depends on market shares. Sometimes these kinds of cases have been successful for the d o J and sometimes not. Five to four is sort of borderline, But in this case it looks like the market would be very weighed

toward the merged entity. What the d o J is saying here, they don't give exact market shares, but what they're saying is that together they be far larger than the other three that are left, So even unilaterally, they'd have this ability to depress the wages being paid to authors. And they do, actually, June have a lot of examples in the complaint of bidding that occurred that drove these

advances way up. That was just bidding between these two companies Penguin Random House and Simon and Schuster that ultimately up some of these advances by sometimes even in the millions of dollars. So they do have examples of where the two of them go head to head and compete to increase those prices. So theoretically, as a result of this merger, that might not happen anymore because the other three that are left just may simply not be able

to play in the same ballpark. Does any part of the Justice Department's intent to hear concern the fact that one of these companies is German. Oh no, I don't think so at all. You know, if there was any kind of concern about a German buyer, it would actually be dealt with the Committee on Foreign Investment in the US over the Department of Justice, that they'll look at foreign buyers and ask whether there's a US national security

issue in this case. I don't think that is of concern or even being contemplated by the d J. I think the main issue here is a new interest, particularly pushed by Merritt Garland and promoted by Spiden's July executive order, to look at the impact of mergers on labor and on prices that are paid. It's always been a theory of harmon anti trust, but not used often and rarely is there a lawsuit brought based on this theory. So it's kind of novel. I just say kind of because

it is a valid antitrust theory. There have been mergers that have settled in the past and not gone to litigation on the basis of this kind of depressing the wages or monopsony type theory, particularly in agriculture. But what we haven't seen as a lawsuit on this basis, so it's going to be very interesting to see what happens

in court here. The Author's Guild, which supports the d j's complaints, said, the DJ statements recognized the burden book authors currently face, and we hope that today's decision is a signal that the do J may be finally expanding the definition of antitrust to consider the impact don creators. Do you think that's what's going on here? Well, I think it's meant to describe what I just talked about.

I have seen a lot of references to the concept that they're expanding ideas an anti trust and expanding the harms. I don't so much see it as an expansion because impact on creators, or not just creators, but impact on any kind of a wage earner, let's say, has been an issue in anti trust in the past. It just doesn't come up a lot, and we haven't seen a lawsuit, so I think to some observers this seems very novel.

But in the agriculture markets, for example, the Department of Justice will always look at the prices paid to the small farmers by lets say, meat processors that are trying to merge. And in fact, there have been the antitrust price fixing lawsuits in the past related to the fixing of wages paid to creators in Silicon Valley. So it's not the first time that this has been considered an anti trust harm. It's just the first time we're going to see a merger that is challenged in court on

the basis of that theory. So J and the published just say they'll fight this lawsuit. What are their arguments against it? Right, Well, I think they have a lot of different responses here. There's some very interesting issues. I think first they say, look, this is going to create efficiencies and allow us to deal or have better cloud against Amazon and deal with this, you know, entity that

drives the price for books down. They also say that the relevant market is defined by the DJ is not correct. So the DJ is considering here only publishing by the Big five. As you noted, they're calling it a five to four. But there are other publishing houses, there are smaller publishers, there are independent publishers, and there's also self publishing. And I think if you include all of those in the market, what it means is that the market shairs

of these two merging parties would be lower. And I think they can argue that they're not looking at the right market and they also face competition from some of these smaller publishers, and therefore it's not really a five to four, you know. They can argue that as well. How much does Amazon play in year as a factor.

The Amazon issue is interesting because the Amazon defense I think is used fairly often nowadays in mergers because it's become so big and such a conglomerate and involved in in so many different areas in industries, UH, particularly in the types of items that itself and so the need to come together to fight against Amazon, I think is

a common defense. What I'll say about it in the case, it's interesting because the d o J does fight to one document where one of the executives from one of the company says, well, I don't really buy into that defense. I get that that's what our defense is now, but I don't really buy into it. And and they've also cited two documents that show that the intention post merger would be to align more with Amazon, and not necessarily

to have better leverage against Amazon. So I think the evidence is going to have to show how the Amazon factor really weighs in here. But the only other thing I'll say is that an argument that we need to come together to fight against some of a really big b m off in in the M and A world is never really a great argument. Um, It's made a lot, it doesn't usually work. So Um, what will be the main question here? Is it mainly what the market is?

What the market is is a big question, and what the shares are and whether this is truly a five to four. I think where the efficiencies are and what they are will be a big question, and that's obviously going to depend on the documents and the facts. These companies obviously studied the efficiencies that they expect to be generated, and it will be important to see what they're saying

about it and why they really need to merge. If they have documents that just simply say, look, we'll take over the market will be this enormous number one by virtue of this deal, obviously that's going to be unhelpful to them. Are they still unaware of what emails and documents like that due to a case. You know, emails and documents like that always exist, and and the issue is really what is the bulk of the evidence show?

What is the bulk of the evidence say? It's easy to take emails and documents and sort of cherry pick and make a company look bad. And certainly what the DJ sites in his complaint is going to be some

of the better documents that support its case. But it depends what else is out there, and it may be that there are an overwhelming number of documents to talk about the efficiencies to be derived, pro competitive efficiencies to be derived from the deal, or the need to come together to be able to better distribute books by publishers, you know, provide better backing for the book so that they sell better, which would be a benefit to authors. So you know, as much as they understand what those

documents say. In these big companies, you can have a compliance program, but you can't control what all of those documents say. But if you have a handful of bad documents out of a very large mass, I don't think that's necessarily going to sway a judge. Is this lawsuit a sign of more aggressive antitrust enforcement in the Biden administration. I do think it is June. Yes. I mean they're going to court with what is a new theory to

be tested in court. That's always a little bit risky. Um, they're going to court and what they're calling a five to four merger, which again isn't you know, it's one of these borderline situations. You know, six to five is rarely ever going to be challenged, A four to three is probably often going to be challenged. That five to four is right in between. It's sort of as sometimes will be challenged. And it was your very first impression

when you said, look, it's the five to four. Do they really think that there will be harm in the market. I think a judge will be asking the same thing. So it's not the easiest case for them. It's not necessarily a slam dunk. And and because of that, and and it has focuses on labor, which which again is somewhat new. So because of all that, I would say, yes, it is showing that they intend to be more aggressive.

So in the past, we've talked about, you know, the push for more aggressive antitrust enforcement, particularly with the tech companies. Do you see any focus of the Biden administration. I think the Biden administration is focusing across the board on industries that they believe in the past twenty years of consolidated quite a bit and have probably hit what they view as what should be the peak of their consolidation. Now,

they haven't really talked about publishing. They generally tend to talk about agriculture, airlines, some of the big tech areas, you know, social media platforms of course, with Facebook having bought Instagram and WhatsApp, even beer markets. They talk about pharmaceutical certainly. So I haven't really heard them talk about publishing. But it is a market that has seen quite a bit of consolidation, and it is down to five. There used to be quite a few bigger entities you saw.

Let me just pull it up. I have a list here. And by the way, there also is a past history of collusion amongst the Big five. In two thousand twelve, there was a lawsuit in which a district court determined that they'd engaged in a price fixing conspiracy. So the end of these companies are not necessarily completely in the clear on this stuff. But you've seen Random House and

Schuster haven't done. I think a lot of acquiring but HarperCollins Publishers recently acquired Houghton Mifflin Hardcourt and had Chet recently acquired Workman Publishing. So and I think before those two deals that were also a few smaller deals. And I think generally what the d o J and FTC want to do at this point is just stem the tide of further consolidation in industries that are fairly consolidated.

And I say fairly consolidated, because again we're talking about five here and maybe more depending on how you define the market. But there has been so much criticism from the antitrust bar, from academics, from economists in the last ten years, and so many studies done showing that across the board that lacks antitrust enforcement has allowed for too much consolidation just in general, not a specific industry, but

just in general. So I think now the focus for the d o J and FTC just generally we're just going to stem the tide. So every time we get a merger in front of us that is in an industry where we've seen quite a bit of consolidation in the last ten or twenty years, we're going to look more closely at that industry and possibly challenge that deal. I just wonder how many books really have competitive publishing.

You know, you have a couple of big titles a year, you have former President Obama, you have, but how many of these books really have this kind of competitive auctioning and stuff. It seems like it's just a handful. Really. Yeah, you know, they don't really get into volume, and to be perfectly honest, for antitrust purposes, volume doesn't really matter.

You know, two big companies can come together and even if it's just a tiny segment of their businesses representing a very small percentage of their own revenues um that could create harm in the market, the DOJ or the FTC will still go ahead and challenge that because it's not like, well, if there's only harms a handful of consumers, are small group of consumers, well then you know, we'll let it go. If it could harm you know, any small group of consumers, they will go ahead and challenge

the deal. And I think that at least what they talk about in this case is that the advances, even if it is a fairly small group of authors in the scheme of all publishing, that the advances that have been extended by the Big Vibe are are huge in the last couple of years, you know, in the billions, and that supports the writing. So Penguin, Random House and Simon and Schuster said that they fight this lawsuit vigorously, noting that the government had not alleged that the deal

would harm competition in book sales. Where does that factor in. Yeah, they're pointing to the fact that this is a monopsony case and not a monopoly case. They're saying, Look, they're not saying that book prices for consumers like you and me will go up, that when you go to buy a book, the prices are going to be higher. That what they're doing isn't going to impact those prices, and

that's the more traditional anti trust harm. So but I think that's really just smoking mirrors because you know, again, this is a monopsony case and what they're alleging is harm to what's paid to the authors, and we can't just ignore that. I mean, that is an antitrust harm, even if we're not talking about harm to the people who buy the book. As always, it's great to have you on the show. Agin that's Bloomberg Intelligence senior litigation

analyst Jennifer Ree. A case over a center at a Texas community college found its way to the highest court in the land this week. David Wilson had a rocky relationship with other trustees during his tenure on the Houston Community College System board. So when the board centered Wilson for his constant criticism and took steps to limit his legislative privileges, Wilson sued, alleging of violation of his First Amendment rights. Jonesice is on both sides of the ideological spectrum,

seemed ready to side with the college. Here at jonestice is Samuel Alito and Sonya. So to Mayor, this is a very easy case. One person says something derogatory about another person, and then the other person responds by saying something derogatory about the first person. That's that's not a violation. Nobody's free speech rights are violated. There, You've got an

easy case on censure. Historically joining me his First Amendment law expert Eugene Valla, a professor at u c l A Law School, Eugene tell us about Wilson's relationship with the board. So David Wilson was an elected member of the community College Board and was a critic of other board members. He voiced concerns that the trustees were violating the boards by laws. He arranged robo calls regarding the

board's action. He filed the lawsuit against the individual board trustees and against the community college system, and he hired a private investigator to determine whether one of the trustees resided in the district in which he was elected. He had a website where he was criticizing fellow trustees and the Houston Community College System, so they thought he wasn't playing with others, and they censured him. They publicly chastised him, and they also suspended a few of his privileges having

to do the reimbursement for various expenses and such. But the key question facing the U. S. Supreme Court is whether this censure, this public censure for Wilson's speech, is a violation of Wilson's First Amendment right. Explain why the

Fifth Circuit allowed the case to proceed. So the Fifth Circuit concluded that censure is essentially a form of official action, that it's a retaliation for constitutionally protected speech, and that therefore it is presumptively unconstitutional because it's a violation of the First Amendment to retaliate for peach. And if you think about it, in other contexts, censers are seen as more than just government criticism. They're seen as a kind

of formal disciplinary action. For example, generally speaking, before a lawyer can be formally censured by the bar, not even suspended or debarred, but just formally censured. They're generally speaking, have to be here rings if he is being censured for his constitutionally protected speech, there might well be a First Amendment violation. So the circuit concluded that likewise, this sort of censure is more than just government speech criticizing a member, but rather it is essentially a form of

discipline reaction of subject of First Amendment constraint. The question before the US Supreme Court is whether that's indeed so, or whether that it's either just government speech the government can engage in under any circumstances, or perhaps whether more specifically, there's just a tradition of government bodies being able to censure their own members indeed as a discipline reaction, and that that makes it quite different from situations where there

are employees. Let's say, are students or members of the bar or doctors being censured by administrative board. What were the main concerns that Justice has had, Well, there were a couple. One was that they were skeptical that just a label censure is really that significant. Here they pointed out that, of course the government can speak out in all sorts of ways, including about particular people, especially in

the context of political fights among elected officials. So they were skeptical that there is really a sharp divide between censure and ordinary government speech again, at least when it comes to speech about government officials. And the other concerns that they had is just there's a pretty long standing tradition of government bodies being able to center their own members.

Houses of Congress are entitled to and often do, censure their own members, and sometimes they do so for the members speech, and the justices care a lot about tradition. Occasionally they do invalidate longstanding traditions, but they're quite hesitant

to do so. Did some of the justices express concerns about ruling on clashes between politicians and getting into that area, right, But I think specifically what they were concerned about was interfering with what they understand to be a very specific kind of class, which is a class which is a war of words. Somebody says something sharply criticizing his colleagues, then they say something sharply criticizing him. I think there are many of them. Took the view that that's really

something that's kind of normal in politics. Now. Not all clashes among politicians are immune from constitutional scrutiny. So the Supreme Court, as for example, held that UM Congress is limited in its ability to just exclude members from Congress. That's a tangible action, and that needs to be consistent

with the specific rules for expulsion that the Constitution sets forth. Likewise, accord in another case that that you can't just a state legislature can just exclude an elected member based on his speech. But when it comes to these kinds of essentially mutual public criticisms, I think the justices I think that that's something that ought to be left to the political process. So both liberal Justice Sonia Sotomayoran conservative Justice Samuel Alito said this was an easy case on censure.

Does that tell you where the Court is going? Yeah. It founded from the argument that the justices would reverse the Fifth Circuit and say that this kind of political censure is basically immune from first amoment's scrutiny. The interesting question is how broad the opinion will be. So, for example, you can imagine an opinion that says, well, any kind of center is just government speech, and the government is

entitled to say what I want. That would suggest that the bar could censure a lawyer simply because it doesn't like his politics, or that the government as employer, let's say, university could formally censure a faculty member for the faculty member's research. Let's say that would be quite a broad ruling in might unduly interfere with First Amendment rights in some situations, because in any context, the law does recognize that censure formal reprimand is a form of discipline reaction,

kind of a form of employment action. That's not quite the same, of course as firing or demotion, but that's in that same category. Or it could decide in a narrowor theory, which is simply that this is a form of government speech that has long been recognized as within government power, precisely because it's politicians who are fighting at out with each other, and all of them have political power, and as a result that should be left to the

political process. Justice Kavanaugh said, do we have to get into any of this in this case? Does it seem as if they're more likely to issue a narrow ruling? That's always difficult to predict. A lot depends on who's assigned that to right, the opinion of what position they're inclined to take, uh, of course, what they think they can convince their colleagues of. But colleagues are often are often willing to differ in some measure to the authoring justice.

Very hard to predict. For more Lark, do you think that if they don't rule in Wilson's favor that it could have a chilling effect on speech at these you know, school boards? Well, again, I think the question is how broad the decision is going to be. If they say, hey, government speech, government can centure anybody who wants, and then as a result, the government does start um formally censuring again, let's say university faculty members, students, uh, doctors, lawyers for

their speech. Then I think a lot of people would be chilled because it's the kind of formal government action that goes into your file that might be used as a basis in the future for increasing punishments in other situations, it will be understood by the public as kind of a disciplinary measure. So yes, I do think that would

be quite chilling. On the other hand, if all they say is well, government elected officials are entitled to censure their colleagues, I don't think it will be particularly chilling because these are political actors. You have to have a

thick skin if you're going to be a politician. Even somebody who just is elected elected to a relatively lower level office like community college trustees board, presumably who are familiar with sharp criticism from voters, from the media, and from your colleagues, and presumably you're not going to be much deterred by it. Do you think they took this case because the Fifth Circuit was way out of line or they just like interesting free speech cases. You know,

it's an interesting question. Houston Community College Systems petition claims that there is a disagreement among lower courts as a so called circuit split, with a fifth Circuit taking one view and other circuits taking another, and that's that's often an important ground for for the court to hear a case to resolve the disagreement among lower courts first of them. It is supposed to be the state throughout the country. Thanks Eugene. That's Professor Eugene Volk of u c l

A Law School. Coming up next, the Supreme Court signals it will strike down New York's gun control law. I'm June Grosso and you're listening to Bloomberg. Thanks Eugene. That's Professor Eugene Vallak of u c l A Law School. And that's it for this edition of The Bloomberg Law Show. Remember you can always get the latest legal news on

our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify, and at www dot Bloomberg dot com, slash podcast Slash Law, and remember to tune into The Bloomberg Law Show every week night at ten pm Wall Street Time. I'm June Grosso and you're listening to Bloomberg.