Insights into a New Merger Review Priority: Impact on Workers

The Antitrust Division of the U.S. Department of Justice (DOJ) has lobbed a high profile complaint challenging a merger based primarily on the merger’s impact on a labor market. On November 2, 2021 the DOJ filed a complaint to block a merger between Penguin Random House and Simon & Schuster, asserting that the merger will eliminate head-to-head competition between the two firms for authors and that the merger “would make it harder for authors to earn a living by writing books, which would, in turn, would lead to a reduction in the quantity and variety of books published.”  

Parallel to the DOJ’s complaint, the Federal Trade Commission (FTC) has indicated its intent to also consider a transaction’s impact on the relevant labor market when reviewing a merger.¹ On December 6^th & 7^th the DOJ and FTC held a workshop, Promoting Competition in the Labor Market, where distinguished economists, antitrust and labor attorneys, and researchers discussed the best way for the agencies to proceed with antitrust enforcement of labor markets, including through merger review. The DOJ complaint, combined with the DOJ and FTC workshop, signifies the heightened regulatory rhetoric that mergers can harm American workers and offers insight as to what may make a transaction vulnerable to an investigation based on its negative effect on competition in a labor market.

DOJ’s Penguin Random House | Simon & Schuster Complaint

The DOJ’s complaint claims that Penguin and Simon & Schuster are two of the “Big Five” publishers in the United States and, if allowed to merge, the combined publisher would account for two-thirds of the “publishing rights to anticipated top-selling books” market. In this market, authors place the publishing rights for their work up for sale to the “Big Five” publishers and select the best price offered. According to the complaint, competition for the publishing rights of an author’s work often results in a bidding war between Penguin and Simon & Schuster, thereby increasing the payment to the author:

“the merger is likely to harm any author who views Penguin Random House and Simon & Schuster as close substitutes and would benefit from head-to-head bidding by these competitors. For example, Penguin Random House and Simon & Schuster were the final two bidders for a book by a freelance science journalist, and their direct competition drove the final advance up substantially above Penguin Random House's initial offer.”  

This loss of competition between the publishers, according to the complaint, reduces payment to authors for their work and therefore is anticompetitive.²

Insights

Greater Concern for Concentrated Industries

The Penguin/Simon & Shuster complaint suggests that competitors in a concentrated industry, such as the publishing industry, that are considering a merger should be mindful of any potential impact on competition for workers as a result of that merger. In particular, companies contemplating a transaction with a competitor in any of the industries identified in President Biden’s July 6 Executive Order (agriculture, technology, pharmaceutical, healthcare, telecommunications and transportation), should expect heightened scrutiny by DOJ and FTC, including an examination of the impact to labor markets when reviewing transactions in those industries.

Greater Concern for Specialized Workers

The Penguin/Simon & Shuster complaint concerns specialized workers—authors of “anticipated top-selling books” that would be of interest of the “Big Five” publishers. This focus on specialized workers is consistent with research³ that concluded that the more specialized an employee, the more concentrated the labor market for that employee. The more specialized a worker’s skills, the fewer alternatives that worker has to find a substitute employer, thereby empowering an employer to lower wages without losing workers. At the DOJ and FTC workshop, one panelist referred to markets for highly skilled workers as “the lowest hanging fruit” for enforcement because they tend to be concentrated, and restrictions on competition for those skilled workers are readily identifiable. Accordingly, companies employing highly skilled workers should be especially mindful when considering a transaction with a company that it competes with for similarly highly skilled workers.

Defining a Labor Market

In the Penguin/Simon & Shuster complaint, the parties are direct competitors in a concentrated product market (publishing) as well as competitors in a corresponding labor market (authors). However, being competitors in a product market may not always equate to being competitors in the corresponding labor market. For example, a DOJ complaint⁴ in 2013 concerned an alleged no-poach agreement between eBay and Intuit to not solicit or hire each other’s employees (skilled engineers and scientists). Unlike the Penguin/Simon & Shuster complaint, eBay, a leader in the market for online auctions, and Intuit, which sells TurboTax, do not compete in the same product market for customers. This lack of competition between eBay and Intuit in the same product market did not preclude the court from denying eBay’s motion to dismiss, finding that the alleged agreement, if proven, would constitute an illegal agreement between competitors to restrain trade in the form of reduction of competition for skilled workers. Panelists at the DOJ and FTC workshop also discussed how direct competitors in a labor market may not be competitors in a product market and advised the agencies not to limit a labor market to those competitors only in the corresponding product market. Panelists advised the agencies to look for evidence of a company’s labor market competitors by, for example, considering any no-poach or no-solicitation arrangements (like eBay), the terms of a company’s non-compete agreements,⁵ and identifying any companies that an employer recruits from or has its employees recruited by. As such, when trying to determine whether parties to a transaction compete in a labor market, parties should conduct a similarly expansive analysis.

Expected Layoffs and Redundancies

Interestingly, the Penguin/Simon & Shuster complaint concerns the impact to competition for authors of “anticipated top-selling books” but does not address any potential reduction in the number of workers already employed by the publishers as a result of the merger. Authors of a study⁶ encouraging labor market review of mergers indicated that an anticipated reduction in workers to cut costs post-merger may raise antitrust concerns, especially when the worker reduction is not offset by increased production or an improvement of wages, benefits, or conditions of the workers that remain. Without such offsets the reduction in the workforce should not be viewed as an efficiency. Similar considerations were echoed at the DOJ and FTC workshop with one panelist suggesting that the FTC and DOJ should not look at workforce reductions as a pro-competitive efficiency of a merger since research shows that workforce reductions rarely, if ever, result in lower prices to consumers. Until the DOJ and FTC issue guidance on how workforce reductions will be evaluated in the context of a merger, parties should no longer assume that cost efficiencies derived from a reduction of workforce will be seen as a pro-competitive justification.

State Enforcement

State Attorneys General (AGs) have been at the forefront of antitrust enforcement of labor markets and continue to evaluate the confluence of antitrust and labor.⁷ In addition, State AGs are often uniquely positioned to assess any potential impact of a merger on local labor markets. As such, parties should be particularly mindful to evaluate effects on labor markets when a State AG is investigating a transaction.

Takeaways

DOJ’s Penguin/Simon & Schuster complaint shows that the DOJ is prepared to block a transaction based primarily on its impact to labor markets and that transactions between businesses with highly specialized workers in concentrated industries are the most likely to be heavily scrutinized. Parties considering a transaction are advised to determine whether and to what extent they 1) operate in a concentrated industry and 2) whether and to what extent they compete for workers – especially highly skilled workers. These are the factors that the FTC, DOJ, and many State Attorneys General will be considering when assessing a transaction. Further, until some guidance is provided by the FTC and DOJ, companies should not expect that a reduction in workers will be viewed as a pro-competitive efficiency in support of the transaction.