The parent company of the San Francisco Examiner today filed a complaint against the Hearst Corporation in San Francisco Superior Court, accusing its San Francisco Chronicle of illegally targeting Examiner advertisers with secret, below-cost rates in an attempt to bleed the smaller daily paper.
The San Francisco Newspaper Company, which owns the Examiner, SF Weekly, and the San Francisco Bay Guardian, alleges that the Chronicle offered prime ad space to advertisers for a tiny fraction of its actual cost on the condition that the advertisers refrain from buying space in the Examiner.
"Hearst has demanded and obtained agreements from key advertising customers, which preclude those customers from purchasing any advertising space from the Examiner for a period of a year or more," the complaint said. "In many cases, these discounts were specifically conditioned on the advertiser agreeing to purchase advertising services exclusively from Hearst and requiring it to stop doing business with the Examiner."
The suit calls for an injunction prohibiting the Chronicle from selling below-cost ads offered at "discriminatory prices that are not publicly known." The "prayer for relief" also requests financial damages "in an amount to be proven at trial." Per the law, that dollar figure could then be tripled.
The suit claims the Chronicle's alleged practice of underselling the Examiner with below-cost ads coincided with the paper's 2011 sale to the San Francisco Newspaper Company.
The California Unfair Practices Act limits a business' ability to sell goods or advertising below cost. It also prohibits secretly offering varying rates to different customers for the same services, or doling out "loss leaders," which are giveaways or deep discounts on additional services used as incentive to sweeten a separate deal. The suit specifically charges that the Chronicle threw in $200,000 worth of ad space in a deal with one advertiser, free of charge.
The SFNC claims that Hearst has engaged in all three of these activities, which are proscribed by the state's Unfair Practices Act.
This is the same state law that SF Weekly's former owner, New Times, was found to have violated in selling ads below cost with a purported intent to sink the then-independent Bay Guardian. The Guardian ultimately was awarded $21 million with interest -- though later accepted a much smaller, undisclosed settlement. Ironically, both the Weekly and Guardian were subsequently obtained by the San Francisco Newspaper Company.
The Guardian-New Times conflict "was a fairly notorious lawsuit under the same statute that captivated the attention of most California newspaper people," says Greg Gilchrist, an SFNC attorney. "So, [the Chronicle's] absence of regard for rules that were clearly articulated in that case is disturbing -- and somewhat unexpected, I'd say, given how visible that case was."
The allegations against the Chronicle are reminiscent of those made against New Times: The larger company is accused of using profits from its other cash-generating properties to subsidize below-cost competition against the Examiner, which lacks similar resources. Some of the players are even the same: The Examiner's lead counsel, Ralph Alldredge, helmed the Guardian's successful case.
In 2010, the judgment against the New Times was driven at least in part by the behavior of New Times' then-executive editor, Michael Lacey. Witnesses recalled the ever-profane Lacey stomping on a copy of the Guardian while talking about his company's "deep pockets" and his desire to "bury the Guardian." That worked for the jury as evidence of intent to harm.
In this case, Gilchrist claims The Examiner can produce material evidence proving the Chronicle not only targeted current or potential Examiner advertisers with deep discounts -- as low as $1,000 "or even less" for full-page ads listed at between $59,000 and $92,000 on the Chronicle's publicly stated rates -- but, on occasion, demanded exclusivity in return for secret and preferential rates.
"We believe they are backing up their below-cost pricing with exclusivity obligations -- and that makes it very hard to compete," says Gilchrist. What's more, he continues, the clandestine nature of these deals with advertisers means that one ad-buyer may be paying pennies on the dollar compared to another, for near-identical benefits. Who's getting a deal and who's paying retail isn't coincidental, alleges the suit. "We believe when discriminating and charging secretly low prices, they were particularly apt to do that when they were identifying past, current, or prospective Examiner advertisers," Gilchrist says. "We don't believe it's just a pricing initiative."
When advertisers purportedly informed Examiner executives that they'd received Chronicle offers too good to refuse -- and they could no longer work with the Examiner -- management at the papers started talking. Last October, SFNC President Todd Vogt met with the Chronicle's Frank Vega, Mark Adkins, and Jeff Bergin. The suit claims that the Chronicle executives professed ignorance of the alleged scheme.
In mid-May, Adkins, the Chronicle's former president, was transferred to Hearst's paper in Beaumont, Texas. This move was characterized as a "promotion" by Vega, the paper's publisher -- who abruptly retired one week later. Bergin remains the paper's vice president of advertising. All three are named as co-defendants in the case.
Messages left for Adkins, Bergin, and Hearst counsel Eve Burton have not yet been returned. Calls to Vega's listed numbers went unanswered.