Unfair Lawsuit Act

SF Weekly moves to dismiss the Guardian's lawsuit, which is light on witnesses and evidence

After New Times Media bought SF Weekly in 1995, Mike Lacey came to town to talk to the staff. Lacey, the co-founder of New Times, a chain of alternative newsweeklies across the country, was known as a guy who didn’t mince words. He grew up in New York and was famously unafraid of a fight in life or business.

What Lacey purportedly told his new employees that day wouldn't surprise anyone who knew the guy: He talked harshly about San Francisco's other main alt-weekly, the Bay Guardian, owned by the cantankerous Bruce Brugmann. For decades, Lacey and Brugmann, two pioneers of the alternative press, had been at philosophical odds.

While both men might have agreed that a weekly newspaper should raise hell, the two had very different visions of how to go about doing that: Brugmann preached a leftist brand of political purity, and his politics drove the paper’s news coverage; Lacey believed his reporters should write provocatively and have no sacred political cows (Full, if obvious, disclosure: Lacey is my boss.)

Aside from letting Weekly employees know his feelings about Brugmann at the 1995 gathering, Lacey also reportedly said he wanted his San Francisco paper to be "the only game in town," according to a former sales rep at the meeting.

Those alleged statements from 12 years ago are now front and center in the Bay Guardian’s lawsuit against this paper and its corporate parent, Village Voice Media (VVM), which merged with New Times last year. The unfair business practices lawsuit, which accuses the alternative newspaper chain of selling ads below cost in the Weekly to put the Guardian out of business, is coming to a head with a trial scheduled for October.

In order to win its case, the Guardian must do more than show that the Weekly sold ads below cost, because that in itself isn't evidence of an illegal scheme; businesses sell products under their cost all the time, especially in a competitive market. Under the state's unfair practices act, it must persuade a jury that the Weekly did so with the intended purpose of destroying the competition. In other words, the Guardian needs a legal smoking gun — a memo from a company executive directing ad reps to low-ball prices specifically in order to kill the competition, or they need an insider witness who switches sides (like Russell Crowe’s character in The Insider).

Jennifer Lopez is the Guardian’s insider, albeit not a very persuasive one. Lopez was an ad rep for the Weekly at the time New Times bought the paper; shortly afterward, she went to work for the Guardian. In her deposition, Lopez conceded that she couldn’t remember Lacey’s exact words the day he met with the Weekly staff, but she claimed she could "recall what I took as his meaning." "They were going to do what they could to put the Guardian out of business," she recalled Lacey saying.

Lopez also remembered Lacey throwing an issue of the Guardian on the ground and stomping on it. "[P]erhaps this was in a dream," she allowed, "but I don’t think so." Remembered visions usually aren’t allowed in as testimony.

Lacey, for his part, says his company has never had a plan or policy to put the Guardian out of business. As for what he said that day all those years ago, Lacey concedes there was probably some smack-talking about the Guardian, but that was by no means an indication of some on-going, evil business plan. He says he just thought the Weekly could journalistically beat a paper devoted to "the political obsessions and manias of Bruce Brugmann." "I thought we could put out a much better newspaper than theirs," says Lacey.

In Oct. 2004, the Guardian sued the Weekly and VVM’s predecessor, New Times — which then owned 11 newsweeklies around the country — for violating the state’s unfair practices act, written in the Depression era. The law prohibits businesses from selling product, such as ads, below cost for the "purpose of injuring competitors or destroying competition." The Guardian's lawyers accused the Weekly of selling ads below the average total cost of a printed page — a figure that includes a newspaper's overhead including reporters' salaries — even though the New Times paper was losing money. The implication: Profits from the chain’s other papers were keeping the struggling Weekly afloat while it tried to put the Guardian out of business by purposefully undercutting its sales.

"We don't dislike competition. We thrive on it," Brugmann said in a statement at the time. "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."

Last week, the Weekly filed a motion for summary judgment asking San Francisco Superior Court Judge Richard Kramer to dismiss the Guardian’s lawsuit before it goes to a jury. (The East Bay Express, which VVM sold in May, is also named as a defendant.)

The Weekly's motions argue that the Guardian hasn’t met the burden of proof for showing a conspiracy to put it out of business because there never was one. And while the Guardian blames the loss of 65 advertisers on the Weekly’s alleged predatory pricing scheme, that is a only a fraction of the 7,639 individual advertisers who bought space in the Weekly or Express since 2001, Village Voice Media’s attorneys say. Some of those ex-Guardian advertisers never even bought ads in the Weekly or the Express.

There’s no question the Weekly and Guardian have overlapping ad markets: Beer companies, record stores, concert promoters, pot clubs, escorts. But as Brugmann would have it, the market in which his paper competes is a duopoly consisting of the Guardian and the Weekly. The advertising market here is much more broad and competitive, but calling it a duopoly sounds good and it conveniently plays into Brugmann’s case: Village Voice Media is trying to put him out of business so the evil corporate giant can have a local monopoly.

But would the Weekly really rule the ad market in such a scenario? Who’s to say that if the Guardian goes out of business, the Weekly would get all their ad dollars and not, say, Craigslist, Lovings.com, Citysearch, the Onion, the Bay Area Reporter, or dozens of other outlets?

Lacey goes so far as to say he doesn't even consider the Guardian as the Weekly's top rival for news or ad dollars. The media market is too diffuse now, he says, with lots of players fighting for the same advertisers. He recalls recently seeing Weekly advertisers in the Chronicle's Sunday pink pages and its weekly supplement, "96 Hours."

The point is that it would make no economic sense for the Weekly to slash its own prices and suffer major losses, because there’s no guarantee the paper would get all the ad money in town if the Guardian went belly-up. In legal terms it's known as "recoupment," and the Weekly's lawyers contend it's a necessary element in proving a predatory pricing case. In an extraordinarily competitive market like the Bay Area's, recoupment just isn't guaranteed.

"The reality, unpleasant for [the Guardian] and [the Weekly] alike, is that both are trapped in a sea of alternatives that are eating away at newsweeklies' abilities to attract and hold advertisers at prices those newsweeklies would prefer," opines Joseph Kalt, a Harvard economist hired by Village Voice Media as an expert witness in the lawsuit.

Kalt suggests in a 35-page court brief that the Guardian should be more worried about losing advertising to the Internet in general and Craigslist in particular than to the Weekly. According to Kalt, in 2006 the Internet accounted for 12 percent of the overall U.S. ad market while newspaper classified sales dropped 8 percent since 1998 nationwide. Kalt argues that the combination of reduced demand for print advertising space, the dot-com bust, and the rise of online sites like Craigslist have created a "perfect storm" hurting Bay Area newspapers' bottom lines.

It's in the context of the Bay Area's hypercompetitive market and sluggish post-9/11 economy, the Weekly's lawyers say, that this paper sold ads below cost. However, they also say the paper's publishers did so for "pro-competitive" reasons like generating new sales and to "increase the customer base in a severely depressed market."

The strongest denial of any conspiracy from on-high to put the Guardian out of business came from VVM CEO Jim Larkin. In his court declaration, Larkin said he neither directed anyone to sell ads below cost to destroy the Guardian nor was he aware of any such strategy. "Such a scheme or strategy could not have existed without my knowledge," Larkin wrote.

The Guardian’s lawsuit also accuses the Weekly of offering "secret rebates" — basically kickbacks — to keep key advertisers from advertising in the Guardian. The original court complaint didn't cite any specific instances of these secret rebates. After three years of litigation, the Guardian has identified only two alleged instances of these ad kickbacks.

One involves a company named Golden Brands Distributing, a local beer distributor. The Guardian alleges that the Weekly offered Golden Brands a 33 percent discount in the form of free concert tickets. Josh Fromson, the group publisher for the Weekly and the Express (when VVM still owned it), said in his declaration that on occasion the papers provided free concert tickets to ad customers. "We do not discriminate between customers when providing these tickets. We do our best to provide tickets upon request to our customers when available," Fromson claims. "These promotional tickets are provided merely to increase or maintain the customer base and thank them for their business."

The other alleged secret rebate involves the controversial deal between the Weekly and concert promoter Bill Graham Presents (now LiveNation) for the naming rights to the Warfield Theater. The 2005 agreement — made nearly one year after the Guardian filed its lawsuit — immediately created controversy. The Guardian said Bill Graham Presents (BGP) — affiliated with media giant Clear Channel — pulled its advertising from the paper after the naming-rights deal went down. Tim Redmond, the Guardian's executive editor, told the Berkeley Daily Planet that BGP had been one of the paper’s top 10 advertisers.

As part of the sponsorship agreement, BGP agreed to make SF Weekly its "primary weekly newspaper advertising vehicle," according to the motion to dismiss the rebate claim. It did not, however, negotiate an exclusive ad deal with the Weekly, as the Guardian has reported in the past. BGP’s successor, LiveNation, continues to advertise in the Guardian. According to the motion, there was no "secret rebate," and the concert promoter has paid prevailing market rates for its ads in SF Weekly.

Perhaps the most intriguing argument to dismiss the lawsuit flips the David-versus-Goliath story pushed by the Guardian on its head: The Weekly's lawyers contend that Brugmann is using his lawsuit to unconstitutionally gut this paper’s news operation.

Unlike other alt-weeklies that rely heavily on freelancers, Village Voice Media relies heavily on local full-time editors and staff writers (who get health benefits) at each of its papers. And unlike many other news organizations, Lacey says writers are perhaps the most important component of his company. The result: His writers win lots of awards for their journalism.

He points to the Pulitzer Prize won this year by LA Weekly food critic Jonathan Gold, as well as having four young writers in the chain named as Livingston Awards finalists — the most of any news organization in the nation. Here in San Francisco, former SF Weekly writer Lisa Davis won the prestigious George Polk Award in 2002 for environmental reporting for her investigation of mishandled radioactive waste at Hunters Point Shipyard. "This isn’t fucking happenstance," Lacey says.

Happenstance or not, one thing is for sure: Paying salaried reporters costs a lot of money. Lacey says he and his longtime business partner Larkin believe the investment in editorial is worth it — even if a paper is losing money. "It’s our belief," Lacey says, "that if we stay with this and hang with it, eventually the readers will respond to it."

Lacey says that with this lawsuit, Brugmann is trying to force his own economic model on the Weekly — one that relies heavily not just on freelancers, but also unpaid interns, instead of full-time reporters. "Bruce can’t tell us how much to invest in putting out the newspaper we want to put out," Lacey says.

If the Guardian won its lawsuit, it would ultimately force this company to cut editorial costs, the Weekly’s lawyers argue. That, they say, would be a violation of the news company’s First Amendment rights to spend its money how it sees fit.

It’s a provocative — some may say exotic — argument, which requires some background: The Guardian alleges that the Weekly illegally sold ads below cost to kill the competition. The average "cost" of a newspaper page includes all the overhead expenses that go into printing it. One of the biggest expenses is the reporters' salaries and benefits paid to produce content for the page.

The Guardian is, in effect, demanding that the Weekly raise its ad rates in a depressed print-media market where even the San Francisco Chronicle — the only paid-circulation daily in town — is losing tens of millions of dollars. This would result in less advertising and income for the Weekly, thus forcing the paper to have to make cost cuts in personnel.

While newspapers aren't exempt from anti-trust laws, the attorneys say that California's unfair practices act was created in the 1930s and intended to "apply to commodities like bread and milk, and not fundamental rights like free speech." While they acknowledge that there's no exact case law on point, they cite a U.S. Supreme Court decision throwing out Florida’s "right to reply" law that gave politicians the right to respond to criticism from a newspaper in that newspaper. In that case, the high court decided that the law illegally interfered with editorial decision-making in the press by forcing newspapers to publish something they didn’t want to print.

The Weekly's lawyers write: "There is no free press distinction — none — between the application of a statute in a manner that requires an editor or publisher to 'publish that which he would prefer to withhold'" — like column space for a politician — "and the application of a sales below cost statute in a manner that would require that they 'withhold that which they would prefer to publish' simply because ad revenues are insufficient to offset editorial and distribution costs at the levels editors and publishers choose."

The argument may be intriguing but not persuasive, says Professor Daniel Farber, a free-speech expert at UC Berkeley’s Boalt Hall. After the Weekly described the argument and the case cited to him, Farber said, "It seems like a stretch to me."

Even if some may consider the First Amendment argument a stretch, Lacey is cautiously optimistic that the judge will see his side of things. Lacey and his partners say they have the facts on their side since they had never conspired to put the Guardian out of business. "I think Bruce’s case is nonsense, absolute nonsense," Lacey says.

The Weekly sent Brugmann and Guardian Editor Tim Redmond an e-mail asking them for a response to the summary-judgment motions the Weekly filed last week. Specifically, the Weekly asked if they had any other evidence of an intent to harm the Guardian aside from Lacey’s 12-year-old comments as recalled or dreamed by a former ad rep.

Redmond sent back a short e-mail saying, "Our attorneys are preparing written responses to every argument in the motion that the defendants filed late Friday, and they are confident that the motion will be denied and the case will proceed to trial this fall."

A hearing on the Weekly's motions is scheduled for Sept. 4. Maybe by then, the Guardian will have someone who did more than dream up a plot to put it out of business.

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