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Wednesday, June 11, 2008

Weekly to Judge: Time to Put Things Right

Posted By on Wed, Jun 11, 2008 at 1:02 PM

Newspaper asks court to reverse Guardian verdict

By Andy Van De Voorde

Hoping to derail a runaway case that could have sweeping repercussions for the newspaper industry in California, SF Weekly has asked a judge to overturn the verdict in the Bay Guardian’s below-cost sales lawsuit.

Barring such a ruling, the Weekly asked Superior Court Judge Marla J. Miller to order a new trial.

The motions filed earlier this week argue that the Guardian received a huge money verdict despite not having offered any actual evidence of an illegal below-cost pricing conspiracy. They also make the case that, if allowed to stand, the unprecedented $15.9 million verdict violates the Weekly’s First Amendment and due process rights. Further, the Weekly argues that the trial was riddled with legal error that unfairly shifted the burden of proof onto the defense and allowed the Guardian to make grossly exaggerated damage claims.

If allowed to stand, the verdict threatens to usher in a new era in California publishing, creating a climate in which struggling newspapers would be susceptible to lawsuits from more profitable competitors simply because they are losing money in a difficult economy.

In fact, immediately after the verdict was announced, Guardian owner Bruce Brugmann, who has a history of taking his competitors to court, stated that he hoped the suit would inspire publishers to follow his lead in taking advantage of a Depression-era statute that allows newspapers to sue rivals who are allegedly selling advertisements “below cost.”

The verdict and ensuing publicity campaign by the Guardian comes at a time when American newspapers are suffering record losses and laying off employees by the hundreds. Dozens of articles and now-daily posts on industry blogs paint a picture of an industry struggling to survive as advertisers flock to the Internet, where prices are far lower than they have traditionally been in print.

Yet in March, after an eight-week trial, the jury in the Weekly case awarded the Guardian $6.4 million as compensation for “lost profits” between 2001 and 2008. The allegation was that those profits rightfully belonged to the Guardian, but had been siphoned off by the Weekly’s low prices. The judge then trebled that amount and even took the additional step of tacking on pre-judgment interest after initially opining that such an additional penalty would be improper.

The result was a $15.9 million judgment against the Weekly and its parent company, New Times Media (now Village Voice Media). New Times last week asked Judge Miller to stay the judgment until ten days after a July 8 hearing at which its new motions will be argued, in part so that it can more effectively arrange the multi-million-dollar bond necessary for an appeal. However, the judge agreed to wait only until June 18, a date suggested by the Guardian.

Despite the relatively small size of the newspapers, both of which have shrunk in recent years, the jury returned a verdict that exceeds the total damages awarded and affirmed in every reported California sale-below-cost case in the past seven decades.

The windfall verdict also far exceeds the total profits earned by the Guardian throughout its entire 42-year history and assumes that, if not for the Weekly, the Guardian would have posted record earnings during an era when profits at nearly all American print newspapers declined precipitously.

In their motion for a judgment notwithstanding the verdict, Weekly attorneys Forrest A. Hainline, H. Sinclair Kerr Jr., Ivo Labar and Don Bennett Moon told Miller she should overturn the verdict not just because it is “grossly excessive,” but because the Guardian simply never proved its case.

To begin with, they argued, the Guardian failed to prove that the Weekly could ever have recouped the costs associated with a sweeping predatory scheme.

Although California’s Unfair Practices Act doesn’t specifically require proof of recoupment, the Weekly lawyers told Miller it is “well established under United States Supreme Court precedent” that plaintiffs can’t prevail on predatory pricing claims if they’re unable to prove the defendant had a realistic chance of getting his money back.

That common-sense test is applied by federal courts in an effort to prevent frivolous litigation, and as a method of ensuring that aggressive competition isn’t penalized, since below-cost pricing can just as easily be a sign of pro-competitive behavior as anti-competitive behavior.

In the few published cases involving the UPA, argued the Weekly, California courts have followed the reasoning expressed by the Supreme Court in Matsushita Electrical Industrial Co. v. Zenith Radio Corp., a 1986 case which said that successful predatory pricing claims must include proof that the defendant could recoup its losses and also achieve monopoly power that would allow it to raise prices and “harvest some additional gain.”

The point is to avoid placing irrational conspiracy theories before a jury; and throughout the trial, the Weekly argued it was absurd to think it could monopolize the print advertising market in San Francisco, even if the Guardian ceased to exist.

The Weekly also argues that Judge Miller compounded the problem with a trio of jury instructions that were “fatally wrong.”

First, Miller ruled that the Guardian didn’t have to provide evidence of recoupment—and then exacerbated the error by giving jury instructions that shifted the burden of proof in the case to the Weekly.

Jury Instruction No. 21 told the jury, “If you find that any defendant sold advertising space below cost and any below cost sales injured the Bay Guardian as a competitor, it is presumed that defendant’s purpose was to injure competitors or destroy competition. But this presumption may be overcome by other evidence.”

That instruction gets the law wrong, argued the Weekly’s legal team, which pointed out that established California case law clearly says that defendants are merely required to produce evidence that they didn’t act with an improper purpose, not to affirmatively “overcome” other evidence by proving their own innocence, which in this case would have required proving a negative.

And in fact, the Weekly presented a large amount of evidence about its pro-competitive purpose—such as the fact that its average prices rose from $12 an inch when New Times purchased it in 1995 to $19 an inch in 2007, and that its advertising representatives working on commission always had an incentive to get as much as they could for their ads.

According to the Weekly lawyers, that evidence should have been sufficient to meet the legal standard required of defendants under the UPA. Instead, they wrote, it was ignored, and Miller then compounded the problem with another jury instruction that told the panel it should consider editorial expenses as part of the Weekly’s costs.

The Guardian never proved the Weekly had an unlawful purpose, says the Weekly’s motion, and in the end the Weekly was found in violation of the “below cost” statute largely because it had chosen to shoulder higher costs by spending more money on editorial employees and expenses.

Indeed, evidence at trial established that both papers had roughly the same annual revenues in recent years, but that the Weekly chose to spend far more than the Guardian on salaries and benefits for reporters and editors. Given that it can’t magically force advertisers to pay more for ads in a struggling economy, argued the Weekly’s attorneys, the only way for the paper to remain in compliance is to cut editorial costs—an intrusion that the lawyers alleged violates the paper’s First Amendment rights.

Miller’s rulings also violated the Weekly’s due process rights, argued the Weekly, because, absent a recoupment standard, it’s impossible for a defendant to know which below-cost pricing is lawful and which isn’t.

“Without recoupment there is no objective way for the jury to divine purpose and distinguish between acts that are pro-competitive or anti-competitive, forcing the jury to make its decision on nothing but its biases,” wrote the Weekly attorneys.

Furthermore, they added, the standard suggested in open court by the Guardian—that the Weekly simply charge the same rates as its competitor to avoid violating the law—is a brazen request for government-sanctioned price fixing.

“In other words, the only way the SF Weekly can know whether it violates the UPA, as this court has interpreted it, is to violate federal anti-trust laws,” noted the Weekly lawyers. “A due process violation could not be more glaring.”

The Weekly motions also enumerated other flaws in Miller’s handling of the case.

The judge erred, they said, when she ruled that the Guardian did not have to produce expert testimony defining the product and market in the case: “Instead, plaintiff’s lay employees were permitted to opine that there was a discrete ‘display advertising’ product in the Bay Area market in which the SF Weekly and [former New Times paper] East Bay Express were the Guardian’s only real competitors.”

In other words, only witnesses who stood to gain financially from a monetary judgment against the Weekly were put on the stand to claim that the Weekly was engaged in a pricing conspiracy.

Miller also committed reversible error when she allowed the Guardian’s damages expert, Clifford Kupperberg, to change his damage models on the eve of trial, argued the Weekly--and then refused to grant a continuance that would have allowed the defense to absorb 21,000 pages of data that was dumped on it at the last minute.

Further, said the Weekly, Kupperberg shouldn’t have been allowed to offer wildly inconsistent damage estimates, none of which was linked to specific lost customers.

In fact, the Guardian didn’t call a single advertiser to testify on its behalf.

Instead, the Guardian’s entire damage theory was predicated on Kupperberg’s claims that, if not for the Weekly, the Guardian would have achieved profit levels comparable to newspapers in other markets.

In pre-trial proceedings, the Guardian had promised to specifically identify all lost customers and sales, the Weekly attorneys noted, but Judge Miller allowed them to renege on that vow at trial.

“Neither logic nor case authority supports the assertion that the plaintiff in a predatory pricing case can measure sales lost to a competitor by using a model that does not consider—in any way—any of the actual lost sales,” wrote the Weekly.

The lawyers also implored Miller to stop indulging the surreal logic of Kupperberg’s models, which imagined a magic bubble under which the Guardian would have realized record profits while newspapers around the country were hemorrhaging cash.

“Kupperberg just assumed that, but for the SF Weekly’s below cost prices, none of the Bay Guardian’s customers would have left it and SF Weekly would have gained no new customers…so that the two papers’ relative sizes and revenue would remain frozen since 2000,” wrote the attorneys. “That is an absurd, illogical and fundamentally anticompetitive assumption.”

The Guardian’s damage claims also were not tethered to reality, noted the Weekly, and led to a jury verdict that was grossly unfair.

Evidence produced at trial showed that the Guardian earned a total profit of $3.3 million for the twelve-year period from 1988 to 2000—in other words, the period before the Weekly was allegedly stealing its business. That represents an average of $257,000 per year, or a profit margin of roughly 3 percent during a period that by any estimation was a boom period for alternative weeklies.

By comparison, Kupperberg’s models assumed average Guardian profits between 2002 and 2007 of between 6 percent and 18 percent during a dismal economy.

That resulting jury award came despite voluminous evidence that a variety of factors unrelated to the Weekly—from aggressive Internet competition to the dot-com bust to 9/11—influenced the local economy.

Kupperberg completely ignored those factors, noted the Weekly attorneys, and even admitted on the stand that “nobody knows what the damages are.”

Large portions of the Weekly motions are devoted to recounting evidence and testimony presented at trial, none of which, the paper argues, came close to substantiating the Guardian’s vision of a pricing conspiracy.

Guardian sales representatives Jody Colley, Mary Samson and Jennifer Lachman’s attempts to cite specific customers allegedly lost to the Weekly because of price failed miserably under cross-examination, the attorneys said, and Guardian controller Sandy Lange, who the judge allowed to offer opinions about her hated competitor’s costs based on a tiny sample of its account ledgers—just 1 percent of all ads during the affected period-- wasn’t even able to prove the Weekly sold ads below cost, let alone that those sales violated the law.

The Weekly lawyers also asserted that the Guardian’s “purpose” evidence was laughably thin. The only evidence Brugmann’s paper produced of the Weekly’s alleged unlawful intent were comments made by New Times executive editor Michael Lacey in 1995 and a series of emails and publishers’ letters in which Weekly publishers discussed their intense competition with the Guardian.

Three former Weekly employees—two of whom were fired by New Times—testified that Lacey talked tough during his first-ever meeting with the paper’s staff.

One former employee testified that Lacey said he wanted the Weekly to be “the only game in town,” while the other two said they couldn’t remember the editor’s exact words but remembered thinking he wanted to drive the Guardian out of business.

That sort of verbal bravado hardly establishes an unlawful purpose in the world of business, argued the Weekly, especially when uttered by an editorial boss who has nothing to do with the newspaper’s sales operations.

As for the emails and publishers’ letters, which among other things mentioned the Weekly’s habit of tracking its performance relative to the Guardian, and occasionally referred to “kicking the Guardian’s ass,” the Weekly team said the documents simply reflect a normal, competitive atmosphere. What’s more, they note, “The Guardian’s own witness, editor Tim Redmond, admitted to the fierce competition between the two papers that led some Guardian staffers to look for ways to ‘kill the SF Weekly.’”

(Had the Guardian succeeded in that effort, there apparently would have been no spiritual significance, as Redmond also testified that the Weekly “had no soul.”)

Finally, the Weekly attorneys asked Miller to consider the implausible nature of the Guardian’s claim that New Times and the East Bay Express (a paper New Times sold at a loss in 2007 to owners who are not party to the lawsuit) were acting as agents for the Weekly.

Rather than try and prove New Times and the Express were directly liable, the Guardian chose to present the agency theory to the jury--despite the fact it had earlier argued that New Times was liable as a principal for the behavior of its subsidiary. The agency theory is illogical, said the Weekly attorneys, because New Times and the Express clearly weren’t acting at the direction of the Weekly.

“The notion that New Times as the parent was acting in a subservient agency capacity to the SF Weekly is more than simply illogical, it finds no basis in the evidence at all,” wrote the attorneys.

And, they argue, the jury’s ruling that the Express and New Times are liable for the exact same damages as the Weekly is simply illogical.

Among other things, said the Weekly lawyers, the Express was sold in May 2007, while the damages period in the case extended into 2008. Given that fact, they added, it is absurd to think the Express could be liable for precisely the same damages as the other two defendants.

If Judge Miller denies the Weekly’s new motions, the newspaper intends to take the case to the California Court of Appeals, which in turn would trigger a process expected to take up to eighteen months.

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