Bay Guardian sues New Times chain for predatory pricing

By Tim Redmond

THE BAY GUARDIAN filed suit Oct. 19 against the SF Weekly, the East Bay Express, and New Times Newspapers, the Phoenix-based chain that owns the two local weeklies, charging that the nation's largest alternative newsweekly chain had illegally sold advertising below cost in an effort to put the family-owned Bay Guardian out of business.

The suit, filed in San Francisco Superior Court, marks the latest step in a lengthy struggle to stop the New Times papers from using predatory pricing to injure the Bay Guardian.

"We don't dislike competition. We thrive on it," Bay Guardian editor and publisher Bruce B. Brugmann said in a statement. "But we believe that competitors should play fair – and New Times, like many big corporate chains, is breaking the law and using its considerable national resources in an effort to destroy a locally owned competitor so it will have the San Francisco alternative market to itself."

The Bay Guardian is represented by E. Craig Moody and Richard P. Hill of the San Francisco firm Moody and Hill.

Specifically, the lawsuit alleges that New Times has repeatedly sold ads at less than the cost of producing them – a violation of California Business and Professions Code Section 17043. The Bay Guardian is also charging that New Times papers offered secret deals to some advertisers in an effort to keep them from advertising in the Bay Guardian – a violation of B&P Section 17045.

The state's unfair-business-practices law, which dates back to the 1930s and has its roots in the progressive-reform era of Gov. Hiram Johnson, was designed in part to prevent this exact sort of behavior. "Since the competitor who will lose in any price war is the smallest competitor, and the ultimate loser is the consumer, this variation of the profit motive cannot be tolerated," University of San Francisco law professor J. Thomas McCarthy wrote in a seminal 1968 USF Law Review article titled "Whatever Happened to the Small Businessman?"

The law bars companies from selling any product "at less than the cost to the vendor for the purpose of inuring competitors or destroying competition." It allows for treble damages.

New Times, the Bay Guardian lawsuit notes, has a "history of intentionally undertaking anticompetitive actions." In 2003 the U.S. Justice Department and the attorneys general of California and Ohio charged that New Times and Village Voice Media had conspired to shut down competing papers in Cleveland and Los Angeles and create illegal monopoly markets.

A year earlier the Bay Guardian formally warned New Times that it was engaging in illegal predatory pricing.

"The Weekly, using the money and power of a national chain, is trying to crush a locally owned competitor so it can have the San Francisco alternative-weekly market to itself," the Bay Guardian wrote at the time.

Thomas Burke, an attorney with Davis Wright Tremaine, detailed the problems in a Jan. 11, 2002, letter to Weekly publisher Troy Larkin, which noted that "the evidence ... demonstrates, vividly and unambiguously, the degree to which SF Weekly and New Times remain desperate to drive the Bay Guardian out of business."

The letter listed a series of specific instances in which the Weekly had offered steep discounts to advertisers, selling ads at far below the normal market rate, in an effort to keep them from advertising in the Bay Guardian.

The warning followed a legal agreement in which a former Bay Guardian sales manager agreed to pay the Bay Guardian $10,000 to settle charges that she stole proprietary sales information from the paper after she was secretly hired by the SF Weekly. The June 2001 agreement put New Times and the Weekly under a permanent injunction barring them from using the stolen information (see "The Predatory Chain," 10/13/02).

But the Weekly's anticompetitive behavior hasn't changed, the lawsuit asserts. For the past four years, it states, the Weekly (and later the Express, after its purchase by New Times) has sold ad space at a loss in an effort to undermine a local competitor. "The defendants ... knew that by offering and selling advertising space at below-cost prices, they could cause the Guardian to lose money on its advertising space and eventually be forced out of business, while defendants would be able to subsidize their own losses caused by that practice through profits derived from other newspapers in the New Times publishing chain that do not face significant competition," the complaint charges.

New Times owns alternative papers in 11 cities – Cleveland, Dallas, Denver, Fort Lauderdale, Houston, Kansas City, Miami, Phoenix, and St. Louis as well as San Francisco and Berkeley – and owns a national advertising sales firm, the Ruxton Group, which sells ads for 28 alternative papers around the country. The chain's total revenues in 2001 were approximately $104 million, according to the U.S. Justice Department complaint.

This is not the first time the Bay Guardian has taken legal action to fight anticompetitive behavior. In 1970, on the day after President Richard Nixon signed into law the Newspaper Preservation Act exempting daily newspapers from the antitrust laws, the paper filed suit against the San Francisco Newspaper Agency, which at the time ran the San Francisco Chronicle and the San Francisco Examiner under a joint-operating agreement. The JOA allowed the two papers to fix prices, pool profits, and share markets, eliminating daily newspaper competition.

The suit challenged the legality of the JOA and asserted that the monopoly daily combine was using its market power to destroy smaller competitors. The JOA paid $500,000 to settle the suit, money the Bay Guardian used to go from twice a month to weekly publication.

Brugmann said the Bay Guardian simply can't tolerate this sort of illegal activity any longer. "For years, we have warned New Times, repeatedly, that if this anticompetitive behavior does not stop, we will have no choice but to take legal action," he said. "The Bay Guardian has been a part of this community for 38 years, and is a leading voice for small, locally owned independent businesses, and we take this step as part of the ongoing struggle to prevent chain domination in the news media.

"We are confident the courts will find New Times in violation of state law and will order the chain to start playing by the rules of fair competition."

The suit does not specify damages, but Brugmann said New Times' liability could be well into the millions of dollars.

Neither Michael Lacey, executive editor of New Times, nor Jim Larkin, the chain's CEO, returned calls seeking comment.

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