What the verdict meant: Behind the Guardian's $15.6 million court victory
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The press coverage was impressive: The San Francisco Chronicle put the story on page one. KTVU-TV made it the third item on its 10 O'Clock News. Editor and Publisher, the newspaper trade journal, picked it up, as did Forbes magazine. The San Francisco Daily used a front-page bold banner headline: "Jury punishes chain."
And indeed, as anyone who follows the local news media is aware by now, a San Francisco jury March 5th ruled that the SF Weekly and its corporate parent, Village Voice Media, illegally sold ads below cost in an effort to harm the Guardian. The jurors awarded $6.3 million in damages, and since the law allows as least part of that award to be trebled, the Weekly and VVM could be liable for as much as $15.6 million.
VVM already announced it will appeal, which means it's unlikely the Guardian will see any cash award for several years as the case works its way through the legal system. But in the meantime, we will be asking Judge Marla Miller to issue an injunction barring any further below-cost sales.
Under state law, interest on the judgment will accrue at 10 percent a year. That means the Weekly and VVM will be paying $4,000 a day in interest for as long as they seek to dispute and appeal the jury decision.
The verdict alone sends a powerful message that goes beyond the newspaper industry. California's Unfair Practices Act, a Progressive-era measure, forbids a big chain with deep pockets from coming into town and using predatory pricing to run a locally-owned, independent operation out of business. A San Francisco jury has confirmed that the law can be a powerful weapon against the consolidation of news media and the chain-store assault on local merchants.
Not surprisingly, VVM's principals have said they are going to try to invalidate the law in the courts. In a written statement posted to the SF Weekly Web site, the chain says it doesn't think the law ought to apply to competitive markets.
Of course, the entire point of our lawsuit was that the Weekly and VVM wanted to end competition that the chain was trying to harm its only direct competitor in the San Francisco marketplace. And that's precisely what the law was written to prevent.
As James R. McCall, a law professor at Hastings, wrote in a 1997 article for the Pacific Law Journal, "the commercial practice of knowingly selling below cost with the intent to injure competitors or injury competition has long been considered unlawful by American courts and state legislatures."
The trial produced reams of evidence and extensive testimony on the business practices of both papers, and provided some remarkable insights into how the nation's largest alternative newspaper chain operates. Some highlights:
•VVM, which has built highly profitable papers in many national markets, fared very differently here. The chain bought two papers that were profitable concerns the SF Weekly in 1995 and the East Bay Express in 2001 and turned them both into huge money losers. Over the past 12 years, the company lost some $25 million in the Bay Area, and has pumped $13 million from corporate headquarters into propping up the Weekly.
Financial data presented in court showed that in markets where the chain faces no direct competition from a strong alternative paper, VVM is practically printing money. Profits in Denver and Phoenix were sky-high, sending some $40 million back to corporate headquarters over about 10 years. But in places where a strong competitor challenged the VVM paper San Francisco and Cleveland being the two most notable examples the chain was losing money or its profits were much thinner.
•The folks in Phoenix were obsessed with going after the Guardian. The record is littered with e-mails between VVM headquarters and the SF office discussing ways to get ads out of the locally owned paper. The Weekly publishers had to send a regular "Guardian report" back to Phoenix to show how the two papers stacked up. Weekly publishers admitted that they might have offered special bonuses to sales reps who took ads away from the Guardian.
In fact, three witnesses testified that on the day he bought the Weekly in 1995, Mike Lacey, one of the chain's two principals, threw a copy of the Guardian on the floor and vowed to put us out of business.
The jurors found that sort of behavior strong evidence of predatory intent. One panel member, Kerstin Sjoquist, a local business owner and graduate student, said in an interview that "it felt overly predatory on the part of the Weekly" and that "the predatory intent trickled down from the top."
You could see that same intent by the way the Weekly covered the trial. None of the local reporters at the paper were in the courtroom; instead, the chain brought in one of its top editorial executives, Andy Van De Voorde, from Denver to write about the case every day. And the blog posts he authored were about as personally vicious as anything I've seen in a long, long time.
Van De Voorde portrayed this entirely as an attempt by Guardian publisher Bruce Brugmann to shake down the Weekly and VVM for money. (And he never reported on the fact that the evidence clearly showed Bruce and his wife, Jean Dibble, had never taken big profits out of the paper and had instead reinvested money to improve the Guardian.) From the start, Van De Voorde called the suit silly and stupid and tried to make the case that the Guardian had no evidence at all to prove predatory pricing.
As the case wore on, he started to change his tune: by the last few days, he was tacitly acknowledging that there was a chance the Weekly would lose, and he started attacking the law itself. In the end, he told me he "wasn't surprised" by the verdict although for weeks his blog posts had taken the position that the Guardian couldn't possibly win.
•The Weekly's lawyers essentially argued that their own client was unable to handle pressure from the Internet and unable to adapt to a changing marketplace. Expert after expert on the VVM payroll testified that both the Guardian and the Weekly had seen revenues drop because of outside market forces in San Francisco that apparently were completely beyond the coping ability of a national chain that was making money hand over fist in the rest of the country. In his closing arguments, H. Sinclair Kerr, the Weekly's lead attorney, insisted that the market for alternative newsweekly advertising had shrunk and that both papers were, in essence, failing.
That contrasted dramatically with testimony from the only expert witness for either side who had actually run a weekly newspaper. Bill Johnson, publisher of the Palo Alto Weekly, testified that the Internet was not destroying alternative papers and that it was entirely possible to make money in the Bay Area, even during a tough economy. He pointed out that, unlike daily newspapers that rely increasingly on wire-service stories, alt-weeklies offer unique content that can't be found anywhere else. And the people who are looking for those stories make up a lucrative market for advertisers.
His conclusion, after attending much of the trial and viewing much of the economic evidence: the reason the Guardian was losing revenue was that the Weekly had systematically depressed the price of display ads in the alternative weekly marketplace. And the chain paper was able to do that because of its deep pockets.
Numerous witnesses agreed that the Weekly could have raised its rates and made a profit. But that would have made it possible for the Guardian to compete for those clients and VVM wanted the market to itself.
In the end, the jury got the message: the Guardian has been hurting badly all these years not because of any external factor but because a rich competitor was selling below cost.
That, Johnson testified, was exactly how predatory chains operate. "It happens," he said, "all the time."
The Guardian was (well) represented by Ralph Alldredge, Rich Hill and E. Craig Moody