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Wednesday, February 17, 2010

SF Weekly Asks Appeals Court to Nix Guardian Judgment

Posted By on Wed, Feb 17, 2010 at 7:29 AM

In an appeal brief filed last night, SF Weekly asks the California courts to overturn the Bay Guardian's $21 million judgment in a below-cost pricing case.

The filing is the last written document that will be entered into the record as part of SF Weekly's appeal.

In the brief, SF Weekly attorneys squarely define the issue before the court: Whether a larger, entrenched market player like the Guardian should be allowed to use state consumer protection laws to drive out a smaller competitor, thus allowing that larger player to raise prices for consumers and realize greater profits.

The Guardian sued SF Weekly in 2004, accusing the smaller paper of selling advertisements below the cost of producing them in an effort to "injure" its larger rival. After a three-week trial at which the Guardian didn't call a single advertiser to testify on its behalf, a jury handed down a $6.4 million judgment. After trebling and interest, that judgment has now swelled to more than $21 million -- more than twice the amount the company that operated the Cosco Busan had to pay after spilling tons of toxic bunker fuel into the bay.

In a response last month to SF Weekly's initial appeal brief, the Guardian made its position clear: that the California Unfair Practices Act exists to protect the interests of individual businesses which may be threatened by lower prices from a competitor.

SF Weekly's brief makes the opposite argument: That antitrust laws, by definition, represent the interests of consumers, not business interests. For that reason, SF Weekly says, lower prices should always be encouraged, unless a plaintiff can prove that the defendant could reasonably expect to recoup its losses by ultimately charging monopoly prices.

The reality is that San Francisco is one of America's most competitive media markets, as Guardian owner Bruce Brugmann has repeatedly told his board of directors. Beyond the numerous print publications, radio, and television, there are nearly three dozen digital outlets, including Craigslist, Yelp, and Open Table fighting for attention. Additionally, more than a dozen e-mail services such as Flavorpill, Thrillist, and City Dish have entered the fray. In fact, the Bay Area is so competitive that the daily newspaper that Brugmann ritualistically labels as a monopoly, the San Francisco Chronicle, has reported losses well north of $300 million.

In its lawsuit, the Guardian accused the Weekly of trying to create a monopoly on display advertising in San Francisco. But the Guardian never proved that element of the case, and, in fact, argued repeatedly that it wasn't required to present such evidence -- insisting that if the Weekly sold even one ad below cost with the intent of "injuring" the Guardian, the Weekly by definition was guilty of a criminal conspiracy.

The U.S. Supreme Court and every other state court that has addressed the issue has ruled that "recoupment" is a necessary element in below-cost pricing cases because, without it, there is no way to tell the difference between pro-competitive behavior and anti-competitive behavior.

The Weekly asks the Court of Appeal to rule that California does not stand alone on the issue -- that, in fact, its laws are consistent with the federal standard because they were written to benefit consumers. The Guardian, on the other hand, insists that California is indeed a legal island, and should retain a much lower standard of proof in such cases.

In part because of the sheer size of the judgment, which far exceeds the net assets of the Weekly and its parent company, New Times Media, the case has drawn attention nationally.

If upheld, the judgment would likely have a chilling effect on commerce in California, particularly in the publishing and Web start-up industries, where companies often lose money during their initial years of operation.

Indeed, one of more surreal aspects of the Guardian's case was the fact that it played out against the backdrop of the worst newspaper economies in American history. Even as dozens of publications were closing their doors or laying off large numbers of employees during the trial or in the years leading up to it, the Guardian persisted in its claim that its own drop in revenues was the fault of the Weekly and the Weekly alone. At trial, Brugmann even testified, under oath, that the rise of Internet competition had no substantial affect on his print revenues -- a position that set him apart from nearly every other publisher on the continent.

In its appeal brief, the Weekly notes that Silicon Valley tech companies also would become vulnerable should the Guardian's definition of fair play -- that selling a product below-cost is inherently evil if it's intended to take business from another company -- receives the courts' stamp of approval.

The Weekly's latest brief also points out other defects in the Guardian's case and asks the court to overturn the judgment on those grounds as well. For instance, Weekly attorneys note that the trial judge issued jury instructions that literally shifted the burden of proof from the plaintiff to the defendant.

Further, in an apparent effort to increase its odds of collecting a judgment, the Guardian went to the jury with the argument that New Times and a third defendant in the case, East Bay Express Publishing, were "agents" of the Weekly.

That argument is absurd, says the Weekly brief, because it is founded on the notion that the subsidiary in this case actually controlled the actions of its parent. That claim flies in the face of both established law and of the Guardian's principal argument: that New Times, an "out of state chain," was manipulating Weekly prices in an attempt to drive the Guardian out of business.

The Guardian made the argument in the first place, SF Weekly says, only because it couldn't prove that New Times was dictating the price of ads in San Francisco, and therefore resorted to a legal sleight-of-hand in an effort to spread the potential liability.

The California Court of Appeal is now expected to schedule oral arguments in the case. A final decision from the court will come in anywhere from five to 18 months.

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Andy Van De Voorde


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