Examiner sues Chronicle, alleging predatory ad-pricing scheme

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Today the San Francisco Newspaper Company, which owns the Bay Guardian, announced it was suing the Chronicle, accusing it of below-cost competition. You can read the story, by Joe Eskenazi, below. --Ed.

The parent company of the San Francisco Examiner sued the Hearst Corporation Tuesday, accusing its San Francisco Chronicle of illegally targeting Examiner advertisers with secret, below-cost rates in an attempt to bleed the smaller paper.

The San Francisco Newspaper Company, which owns the Examiner, SF Weekly, and the San Francisco Bay Guardian, alleges that the Chronicle offered ad space to advertisers for a fraction of its cost on the condition that the advertisers not buy ads 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 suit 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. The suit also requests financial damages "in an amount to be proven at trial." Per the law, that dollar figure could then be tripled.

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. A loss leader is a giveaway or deep discount on additional services used as an incentive to sweeten a separate deal. In one such instance, the suit says the Chronicle threw in $200,000 worth of free ad space in a deal with one advertiser.

The Examiner claims that Hearst 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 $15.6 million — though later accepted a much smaller, undisclosed settlement. Ironically, both the Weekly and Guardian were subsequently obtained by the San Francisco Newspaper Company.

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.

Greg Gilchrist, another Examiner attorney, claims the paper can produce material evidence proving the Chronicle not only targeted 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 advertising rate card — 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," Gilchrist said. Who's getting a deal and who's paying retail isn't coincidental, the suit alleges. "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 said.

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. Examiner 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.