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Friday, June 11, 2010

SF Weekly Appeal Finally Heard, But No Decision Yet from the Court

Posted By on Fri, Jun 11, 2010 at 4:03 PM

Twenty-seven months after a San Francisco jury levied a gargantuan $16 million judgment against SF Weekly and its parent company for allegedly trying to "injure" the Bay Guardian, the California Court of Appeal heard oral arguments in the case Friday morning.

The brief session before a three-judge panel at the courthouse at 350 McAllister began with Presiding Justice James J. Marchiano's observation that the panel had paid careful attention to what he called "this interesting case."


What followed was a rapid-fire proceeding characterized by lively questions from the justices, most of them centering on SF Weekly's argument that the trial court erred by not forcing the Guardian to prove a critical element of its case: that SF Weekly was charging below-cost prices as part of a scheme to create a monopoly in the San Francisco display advertising market.

The fireworks started when Justice Robert L. Dondero brusquely interrupted SF Weekly attorney Dennis P. Maio's opening remarks to ask whether the California legislature could pass a law protecting a single business from another competitor.

It was a telling question, because SF Weekly's appeal in part is based on its assertion that antitrust laws should be interpreted for the benefit of consumers, not businesses.

When Maio said lawmakers could theoretically pass such a law, Dondero fired back a second query: Does California's Unfair Practices Act (UPA) refer at all to "recoupment"?

That question went to the heart of SF Weekly's primary argument: its assertion that, in order to prevail in a below-cost pricing case, the Guardian should have been required to prove that SF Weekly actually had a reasonable chance of "recouping" its losses via monopolistic pricing.

The UPA doesn't specifically refer to a recoupment requirement, Maio acknowledged. But neither, he noted, do federal antitrust laws and similar statutes in other states. And all of those courts that have considered the issue, from the United States Supreme Court on down, have ruled that recoupment must be proven for a below-cost pricing case to succeed.

Dondero later pressed Maio yet again on the issue of recoupment, noting that no California case had ever held it to be a necessary element of a plaintiff's claim. "And no case has ever said it's not required," Maio said.

Maio also bantered with Dondero on the question of what constitutes "injury" in such a case. While Dondero emphasized that the state legislature appeared intent on protecting small businesses when it passed the Depression-era UPA, Maio asked the justice to look at it another way: "Simply causing a competitor to lose money," he said, should not constitute antitrust injury: "As the California Supreme Court and the United States Supreme Court have told us several times, low prices are good."

Justice Sandra L. Margulies focused her questioning mostly on the issue of how the recoupment issue has been handled in other states. "I think what I'm asking is, have any out of state courts inferred recoupment ability in statutes similar to California's?" she wanted to know.

They have, answered Maio, who then proceeded to tack on a provocative aside. In one portion of the Guardian's brief, Maio told Margulies and the other justices, "there's an insinuation that ... you oughtn't to recognize recoupment ability because it's a right-wing Trojan horse" led by conservative justices such as Antonin Scalia and John Roberts.

In fact, Maio said, a wide range of U.S. Supreme Court justices on all sides of the political spectrum have ruled that plaintiffs have to prove recoupment ability, for the simple reason that, absent such a requirement, basic competitive behavior -- charging lower prices and trying to take business away from a competitor -- can be mistaken for something illegal.

Not only that, he said, but the states that have subsequently aligned themselves with the federal standard include such "progressive" havens as Wisconsin, New Jersey, and Massachusetts.

The quick discussion of internal Supreme Court politics wasn't the only colorful detour from the recoupment argument.

Another potentially sensitive moment came when Marchiano questioned Maio about the UPA's history. Like Dondero, Marchiano noted that, when the legislature passed the law in 1935, it did seem intent on protecting individual small businesses, not just competition in general.

For close observers of the Guardian lawsuit, it was a familiar refrain. After all, the specter of a "small business" being hounded by an out-of-town chain was raised repeatedly by the Guardian during the 2008 trial against SF Weekly.

Many times during those proceedings, Guardian attorney Ralph C. Alldredge -- the avuncular advocate who also argued the paper's case before the appeal court -- plied the jury with homespun appeals to the virtue of "independent businesses."

His client, Alldredge liked to say, was just a poor merchant struggling to "live within its means" while being preyed upon by an out-of-state octopus.

But Maio asked Marchiano and the other justices to remember that, despite the Guardian's tendency to worship at the altar of self-described "progressive" legislation such as the UPA, there was more at work in the California of the 1930s than an effort to protect mom-and-pop stores.

In those days, Maio noted, "antichain" was often a euphemism for anti-Semitism, because of the popular perception that chain stores represented "Jewish monied interests."

His point was that laws need to be considered in their full historical context, and courts need to be prepared to keep up with the times.

In today's world, people who shop at chain stores such as Costco appreciate the lower prices, and lower prices are good, Maio reiterated: "If I sell below cost," he said before ceding the floor to Alldredge, "I may be a mean, hateful competitor, but the consumer only benefits."

While Maio faced Dondero's wrath moments after opening his mouth, Alldredge received a decidedly more friendly reception. "We don't see a Trojan horse here, I can assure you of that," Marchiano told Alldredge, prompting a round of good-natured chuckling.

And just as fervently as Maio had pushed the panel to bring California's antitrust laws up to date, Alldredge asked that they remain firmly anchored in the halcyon days of the Great Depression.

Alldredge quaked at Maio's claim that, because it clearly was written for the benefit of consumers, the UPA must be interpreted to require recoupment. "If you allow that argument to be made," he said, "then every statute becomes this changing thing ... to meet the needs of modern times."

Aldredge freely admitted that the U.S. Supreme Court has embraced recoupment, noting that it "changed the law" to that end in 1987 when it decided a case known as Utah Pie. "That's what they're asking this court to do, to change the law," he said. "The UPA is the Utah Pie."

There was ample irony in an attorney for the proudly progressive Guardian making such a reactionary legal argument. However, it was consistent with the case Alldredge has made from the beginning: that the UPA sets a very minimal burden of proof in below-cost pricing cases, and it must not be changed.

In fact, he said repeatedly at trial that if a jury finds even one instance of below-cost pricing that takes business away from a competitor, it is required to assume that all below-cost sales by the defendant were made with nefarious intent, and the defendant must then prove that it does not have unclean hands.

Like it or not, that's the law in California, Alldredge told the justices, and "the issue for this court is a plain and simple question of statutory interpretation."

The Guardian's states'-rights stance did draw some mildly skeptical questioning from the justices. For instance, Dondero wondered aloud why, given that the UPA has been around since the days of Tom Joad, so few below-cost-pricing cases have been filed if recoupment isn't a required element.

Margulies wanted Alldredge to address the fact that at least a section of the UPA is, in fact, "concerned with monopolistic impact."

The law may care about monopolies in the long term, Alldredge replied. But in the "short term," he told Margulies, it's also concerned with protecting individual competitors from low prices they can't match without going out of business.

When Maio rose for a brief rebuttal, he asked the judges to consider the implications of Alldredge's argument. "For our opponent, the market doesn't matter," Maio said. In this case, he explained, that means that while SF Weekly's low prices may have taken business from the Guardian, they greatly benefited mom-and-pop retailers in San Francisco.

Maio also sought to deflect Alldredge's claim that SF Weekly was asking the appeal court to write new law. "We're not asking you to rewrite the statute," he said. "That isn't your job. But it is your job to look at consequences."

Those consequences now include a judgment that has ballooned to a whopping $22 million with interest, a fact alluded to by Marchiano at the beginning of the hearing. In fact, the presiding justice made a point of noting the "enormous amount of the damages." He and his colleagues found it "interesting how [the alleged damages] were presented, the models they used, the assumptions they made, and the testimony that was given."

Despite those intriguing remarks from the presiding justice, the question of damages never came up again at Friday's hearing. However, the subject gets a great deal of attention in SF Weekly's briefs, which note that the Guardian's expert witness was allowed to woo the jury with a buffet of damage models, none of which actually tied alleged "lost customers" to specific advertising transactions.

And it likely was the prospect of a $22 million windfall that prompted Guardian owner Bruce Brugmann and his cohorts to stage an unseemly photo session on the courthouse steps following the hearing.

Whether Brugmann will have cause for further celebration won't be clear for up to 90 days, which is the Court of Appeal's deadline for issuing a formal ruling.

A number of outcomes are possible: complete victory for either side, or a split decision that could throw out the recoupment argument but remand the case for a new trial based on the damages question or other errors alleged in SF Weekly's appeal.

Regardless of who wins at the appeals-court level, both sides have said they will ask the California Supreme Court to review the case.

If and when such a request is made, the Supreme Court would have approximately 100 days from the date of a ruling by the lower court to announce whether it will agree to hear the case.

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Andy Van De Voorde


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