EDITOR’S NOTE: This story is reprinted with permission from the San Francisco Bay Guardian.
The Bay Guardian has presented enough evidence of predatory pricing by the SF Weekly that our lawsuit against the paper and its chain owners can go forward to trial, a judge ruled Oct. 25.
Judge Richard A. Kramer denied three separate motions by Village Voice Media, the Phoenix-based 16-paper chain, that sought to dismiss the case.
In a suit filed in 2004, the Guardian charged that the Weekly and the East Bay Express had engaged in a pattern of selling ads below cost in an attempt to put the locally owned alternative paper out of business.
VVM sold the East Bay Express this year to local owners.
The case was filed under the state’s unfair business practices law, which bars the sale of any good or service for less than the price of producing it if that cut-rate selling is aimed at hurting a competitor.
VVM’s motions for summary judgment argued that the Guardian couldn’t prove any intent by the Weekly or VVM to injure the local competitor. In briefs and oral arguments, VVM lawyers claimed that the chain’s CEO, Jim Larkin, had denied any predatory plans or intent. And VVM insisted that the evidence collected by the Guardian so far was inadequate to take the case to trial.
The chain lawyers also argued that the Guardian’s suit was a threat to the First Amendment rights of the Weekly, because if the paper was forced to quit selling discounted ads it might have to cut editorial space and staff.
Ralph Alldredge, a Guardian attorney, noted that the Weekly had admitted selling ads below cost. And he said the evidence collected so far in the case shows strong indications of predatory intent.
Alldredge acknowledged that selling below cost isn’t always illegal; start-up businesses, for example, often lose money at first trying to attract customers. But he said the Weekly has been losing money every year since New Times/VVM bought it in 1995, and those losses have only increased over time, to as much as $2 million a year. It’s hard to imagine any good reason why a business would set its prices so low that it operated at a loss every year for more than a decade, Alldredge argued, unless the goal was to use chain resources to starve out a locally owned competitor.
Alldredge cited a deal between Clear Channel, which owns the concert promoter Bill Graham Presents, and the Weekly under which the Weekly paid to have its name on the Warfield theater, a BGP venue - and in exchange, the Weekly would get almost all of the advertising money that once went to the Guardian. He cited a memo showing that the deal would give the Weekly 85 percent of the ads, and the Guardian would get “15 percent to zero.”
James Wagstaffe, arguing for the Weekly, said that forcing the chain paper to sell ads at a higher rate would be the equivalent of the government deciding how much of the finite space in the publication could be devoted to news. He said an economic expert hired by the Weekly, Harvard professor Joseph Kalt, had determined that the ad market in San Francisco was so soft that the only way to increase revenues enough to cover the Weekly’s operating costs was to cram more ads onto every page.
Alldredge countered that courts have always agreed that basic economic regulations can apply to newspapers without a First Amendment threat.
“One hundred years of cases say that the mere economic regulation of newspapers is not unconstitutional,” he said. “There is nothing in the First Amendment that says you can engage in predatory behavior.
He also noted that Jed Brunst, the top finance officer for VVM, had testified in a deposition that the chain had prepared projections in 2005 to present to investors. Those projections showed that the Weekly could become profitable - if it raised ad prices. The paper would lose some ad volume to the Guardian, but would be able to retain the same percentage of editorial space to ad space and would be a profitable operation, Brunst’s report to the investors said.
In other words, the top people at the chain knew they could make money by ending their below-cost sales - but they continued with the predatory practice. That, Alldredge said, created a pretty reasonable presumption that the chain was out to harm a competitor.
Kramer rejected all of the SF Weekly’s claims. He said that the First Amendment didn’t allow newspapers to engage in “impermissible anticompetitive” behavior. And the question of intent, he said, was a fact for a jury to determine—and “a denial of improper activity by itself is not enough” to dismiss this case.
New Times Executive Editor Mike Lacey and Executive Associate Editor Andy Van De Voorde came from Phoenix to attend the hearing, and Van De Voorde wrote a lengthy piece that appeared on the Weekly’s website calling the Guardian’s three-year-old lawsuit “looney.” The piece put the chain’s spin on the hearing and laid out the Phoenix operators’ opinions on the Guardian claim.
But in the end, only one opinion mattered, and that was the opinion of Judge Kramer—who didn’t buy one bit of the Weekly’s argument.
Trial is set to begin early in January 2008.
The Guardian is represented by Ralph Alldredge, E. Craig Moody and Rich Hill. Three VVM lawyers—Ivo Labar and James Wagstaffe of the San Francisco firm Kerr and Wagstaffe and Don Bennett Moon of Phoenix—were in the courtroom representing VVM.