News America Whistleblower Robert Emmel’s Testimony

In the ongoing trial between News America Marketing and Valassis, former News America whistleblower Robert Emmel appeared via video deposition to provide testimony against News America.

Emmel Video Deposition - According to Jim Edwards of BNET, Emmel testified that News America paid excessive amounts to retailers for exclusive in-store advertising rights in order to exclude competitors. News America paid Eckerd drug stores substantial guarantee payments because they wanted to exclude Insignia. News America allegedly lost money on the contract, as News America was unable to sell enough ads to cover the payments.

Similarly, News America allegedly overpaid for placement rights in Ahold stores. Mr. Emmel reportedly testified that he was told by News America President Dominick Porco that excluding Insignia and Floorgraphics was a key objective that justified the huge guarantee payments.

Mr. Emmel also testified that News America falsely claimed that Insignia and Floorgraphics failed to install the majority of the ads that they contracted to place, and that News falsely claimed a dedicated sales force in excess of 10,000.

Prior Emmel Testimony - Mr. Emmel made similar statements in the Floorgraphics trial. (Transcripts of that testimony are available here). During testimony on March 5, 2009, Mr. Emmel testified that News America provided a letter to a number of retailers and manufacturers ("CPGs") falsely claiming that Floorgraphics and Insignia had a poor compliance rate, and that the letter influenced retailers to do business with News America rather than Floorgraphics.

He also testified that News America ripped Floorgraphics ads to hurt Floorgraphics' image with retailers, and that News America sometimes removed Floorgraphics' ads from stores to hurt its compliance rate.

In News America's sales materials, the company claimed to have a field force of 10,000, but Emmel testified that he was told by News America personnel that it was closer to 3,500 or 4,000.

Some of the testimony provided by Emmel in the Floorgraphics trial was not reported by BNET as being repeated at the Valassis trial, probably because the focus in the Valassis trial is on FSIs and sales to manufacturers. For example, at the Floorgraphics trial, Emmel testified that he was assigned to certain accounts that were identified as "target accounts" by News America to take away from Floorgraphics as part of a project that News America dubbed "Operation Retailer Freedom." These included smaller retailers – dubbed tier 3 and tier 4 retailers. According to e-mails introduced at the trial, Emmel was instructed to make it a top priority.

This was a reversal of the policy in place before Floorgraphics began competing with News America. Emmel testified that in 1999, News America eliminated revenue share payments to smaller "tier 4" retailers. Jeff Jensen allegedly sent a letter to a large group of small retailers stating that News America no longer possessed their contracts in the file, and that unless they responded otherwise, their revenue share rates would be reduced to zero.

In late 1999, after News America started a floor ad program to compete with Floorgraphics' program, News America demanded that retailers including BI-LO accept a bundled bid for both floor and shelf advertising programs. When BI-LO refused, News America refused to continue providing shelf programs.

Mr. Emmel also testified about colorful language used by Paul Carlucci:

One vivid comment that I recall that he said to express
his displeasure on the call was that if there were individuals
that were concerned about doing the right thing, bed wetting
liberals in particular was the description that he used, then
he could arrange for those individuals to be out-placed from
the company.

Emmel testified that News America falsely announced that they had obtained contract rights for floor ads in Kroger Atlanta before they had actually obtained such rights, and that the goal of the announcement was to undermine Floorgraphics' efforts to obtain funding for its business.

Finally, Mr. Emmel testified that News America charged CPGs for ads in grocery stores that it did not have the right to place ads in. News America's store list included, for example, Fleming stores after News America lost the right to place ads in those stores, and included an inflated number of Winn Dixie stores when a significant number of Winn Dixie stores closed. CPGs were charged for advertisements that were to be placed in these stores, but the ads were never placed.

Related posts.

Supreme Court to Hear Case Regarding Exclusive Sports Team Licensing: American Needle v. NFL

Supreme Court to Hear American Needle Appeal - On June 29, 2009 the Supreme Court agreed to hear an appeal of the Seventh Circuit's decision in American Needle, Inc. v. NFL, previously discussed here, in which the Seventh Circuit found that the NFL, NFL Properties, and the NFL teams could collectively negotiate an exclusive license with apparel manufacturers for the use of their individually owned trademarks without violating the antitrust laws.

Section 1 of the Sherman Antitrust Act normally prohibits groups of competing individuals or businesses from coordinating on prices or negotiating collectively, but an exception is made when the alleged competitors are all part of a "single entity." The single entity doctrine was announced in the 1984 Supreme Court case Copperweld Corp. v. Independence Tube Corp., where the Court held that a tubing company and its wholly-owned subsidiary were just one entity for antitrust purposes, reasoning that there was a "unity of interest," and that coordination between the two entities did not represent a "sudden joining of two independent sources of economic power previously pursuing separate interests."

NFL Teams Collectively Licensed Apparel Rights - In American Needle v. NFL, the issue was whether the 32 separately-owned NFL teams were independent competitors, or whether they were part of a "single entity" under the Copperweld doctrine. Plaintiff American Needle Inc. was a manufacturer of headwear, and had a non-exclusive license to produce NFL-branded headwear for over 20 years. In 2001, the 32 NFL teams authorized NFL Properties to solicit bids and enter into an exclusive 10-year license with Reebok for headwear and other apparel. American Needle filed an antitrust suit alleging that the NFL, NFL Properties, and the individual NFL teams had conspired in restraint of trade in violation of Section 1 of the Sherman Act.

The trial court and the Seventh Circuit both found that the NFL teams acted as a single entity when they made the exclusive license deal with Reebok. The Seventh Circuit pointed out that the teams "share a vital economic interest in collectively promoting NFL football," and that the NFL teams have collectively promoted NFL football since 1963 under the auspices of NFL Properties.

Supreme Court Review - Lower courts on several previous occasions had rejected attempts to extend the single entity defense to professional sports leagues, and American Needle asked the Supreme Court to hear its appeal, partly to resolve the conflict between the Seventh Circuit's decision and the other lower court decisions. The NFL Defendants also requested that the Supreme Court review the decision, which is unusual for a prevailing party. The NFL hopes that the Supreme Court will rule in its favor and grant it broad protection from future antitrust challenges to coordinated action by the 32 member NFL teams.

Commentary - The NFL is already enormously profitable, and it is unclear how joint licensing of apparel rights to manufacturers is consistent with competitive interests. Unlike the parent and wholly-owned subsidiary in Copperweld, it appears that the NFL teams do not have a "unity of interest," but are independently-owned economic entities that compete for fans and for customers of their team's apparel. Evidence provided by American Needle indicates that prices of the licensed NFL apparel increased significantly after Reebok was granted an exclusive license, to the detriment of football fans across the country.

Similarly, while manufacturers such as Coke and Pepsi have a shared economic interest in category promotion, e.g., promoting the consumption of cola products, they could not credibly invoke a Copperweld defense if they chose to jointly negotiate agreements with customers.

Thus, instead of adopting the Seventh Circuit's shared vital economic interest analysis, the Supreme Court should consider sending the case back to the trial court for a determination of whether the NFL Defendants were in fact acting as a single economic unit, or whether they competed with each other for customers of their team's apparel.

Related post: Antitrust Implications of Exclusive Deals by Groups of Sports Teams.

News America CEO Admits Making Mafia References -- Valassis v. News America Trial

BNET reported today that News America Marketing CEO Paul Carlucci's video deposition was played in the Valassis v. News America trial in Michigan state court, which included Valassis' efforts to portray Carlucci as a mob-like boss.

Carlucci admitted showing a scene from The Untouchables as a motivational tool at a sales meeting (previously described in a 2005 Forbes article), which Forbes and other sources suggest was the scene in which Al Capone kills a man at a sit-down black-tie dinner with a baseball bat. Carlucci also admitted to using several mafia references, such as "Capo di Tuto Capo," or boss of all bosses, and stating that "the mafia would refer to our General Sales managers as 'good earners.'"

But according to another source, Carlucci denied during the video testimony that the scene he showed was the baseball bat scene:

Question: It is accurate that you showed a clip from the film the Untouchables to a sales meeting?
Answer: That aspect is accurate.
Question: And it is the portion of the film in which Robert Deniro playing Al Capone gives a speech about baseball and then kills a man with a baseball bat?
Answer: I did not show that portion of the video clip.
Question: Which portion did you show?
Answer: I showed the speech that was based on -- and it was done, along with several other movie clips that were discussing attributes that we were presenting to the sales staff. I believe the Capone's speech had a title -- and it was-- it probably was in 1992 or 1993 or 1991 that had a title of loyalty. And it was shown just in jest as something of loyalty. We also showed films from Mary Poppins and we showed Daddy Long Legs with Fred Astaire dancing on the ceiling at the same -- at the same sales function, if my memory serves me correctly.

At the Floorgraphics trial, it was alleged that Carlucci made a threat to "destroy" Floorgraphics at a meeting with Floorgraphics executives in New York. In the video testimony, Carlucci reportedly denied making that threat.

But a knowledgeable (but unconfirmed) source informed me that Valassis is in a very strong position in their case, with the last several days of testimony going well for Valassis. He stated that the testimony from consumer packaged goods manufacturers ("CPGs") has been extensive and convincing.

He also told me that News America made strenuous objections to the introduction of testimony from Robert Emmel, including an accusation that some of the money that was being paid by Floorgraphics and Insignia for his attorneys fees was being paid directly to Mr. Emmel in return for his testimony. The Court rejected the argument, agreeing to admit the deposition testimony.

Related posts.

Revised June 29, 2009.

Valassis Presents Evidence of Bundling by News America Marketing

Jim Edwards of BNET news has posted several stories about the ongoing Michigan state court trial between Valassis and News America.

According to Edwards' June 16 story, News America's VP of Business Operations Tom Leprine admitted that News America bundled its in-store adverting with FSIs, charging consumer packaged goods manufacturers ("CPGs") higher prices for in-store advertising (where News holds a virtual monopoly over coupon, shelf, and floor ads) if they did not purchase their free-standing inserts ("FSIs") from News America. Some CPGs, such as Nestle, complained about News' America's "punitive pricing." As reported in a June 17 follow-up story, Mr. Leprine admitted that a number of CPGs agreed to pay millions in increased in-store pricing because of the bundling policy, including, for example, Sara Lee, S.C. Johnson, Novartis, and Reckitt Benckiser. Other CPGs agreed to place all their ads with News America to avoid the price increases (to the detriment of Valassis), though at least a few other CPGs refused to agree to News America's rates.

A former Sara Lee employee testified that she requested a proposal on in-store advertising, but was instead presented with a joint FSI / in-store bid that News refused to change, as Edwards reported on June 12. Representatives from Pepsi and Heinz also reportedly complained about News' monopoly on in-store to force them to purchase FSIs from News.

In the June 17 story, Edwards reported that News America's attorneys played a video of a sales speech in which News America Marketing CEO Paul Carlucci said that News Corp CEO Rupert Murdoch encouraged News America Marketing to "really go after [Valassis]." Carlucci also asserted that Valassis' loss of market share was caused by its executives' unwillingness to cut prices to match News because the Valassis' executives stock options gave them an incentive to increase short-term profits. According to News America's attorneys, Valassis' loss in market share was caused in part by their decision to raise prices in 2002, reported Edwards on June 13, not anticompetitive bundling.

Edwards coverage is limited, making it hard to tell what the likely outcome will be. On the other hand, it appears to be the only coverage available because of a ban on cameras at the trial.

Transcripts from Floorgraphics v. News America Marketing Trial

Trial transcripts related to the Floorgraphics v. News America Marketing trial are now available, including testimony from the afternoon of March 4 (.pdf), the morning of March 5 (.pdf), and the afternoon of March 5 (.pdf).

In the lawsuit, Floorgraphics alleged that News America engaged in anticompetitive activities with the stated intention of destroying Floorgraphics' business. The trial ended in a settlement and News America's acquisition of Floorgraphics' retailer contracts. The testimony from the case could have a broader impact, however, as the allegations are similar to those made against News America by Insignia and Valassis.

March 4 Henderson P.M. Testimony - Floorgraphics first witness was Gary Henderson, a former employee of Floorgraphics who went to work for News America. Gary Henderson testified regarding a letter and chart (similar to this one) used by News America in claiming that its services were better than the services provided by competitors Floorgraphics and Insignia. Specifically, News America addressed compliance rates: When in-store advertisers agree to place a certain number of ads, compliance rates measure the number of ads that are actually in the store during the relevant time period, or advertising cycle. For example, if an in-store advertiser contracted to place 100 ads, and an auditor could only find 85 ads during an audit, the compliance rate would be 85%.

In the sales documents that News America shared with manufacturers, News claimed that it "consistently deliver[ed] average compliance rates of 90-95%." By contrast, News claimed that Floorgraphics' compliance rates were 49%, and Insignia's were 16%. Henderson admitted that News America made these claims even though they had not performed an audit of their own floor advertising program, instead assuming that their floor ad placement rates were similar to shelf and cart ads. A document introduced by Floorgraphics showed that the alleged compliance rate for Floorgraphics was based on an audit performed by News America Marketing (which may not have known which stores the ads were supposed to be in, making an audit potentially unreliable), and not a third party. It was further suggested that the audit did not comport with News America's own internal audit guidelines.

Henderson testified that the sales force was instructed to use the documents about compliance rates aggressively with all accounts, that they provided the documents to various manufacturers such as Tropicana and Kellogg's, and that the documents became a topic of interest among many clients. At the same time, Henderson admitted that News America had its own compliance problems and that "Floorgraphics could make a great case to customers" about News America's compliance problems.

Henderson was confronted with several documents suggesting that he shared confidential information with News America that he obtained while working at Floorgraphics. Henderson hired several sales representatives away from Floorgraphics to work with him at News America, and it was suggested that they also may have used confidential information against Floorgraphics.

I'll try to summarize the other transcripts in future posts.

Related posts.

Whistleblower Emmel Seeks to Lift Bankruptcy Stay to Pursue Appeal of Injunction

Robert Emmel, a whistleblower who has previously testified against News America Marketing, has moved to lift a stay that is currently preventing him from pursuing an appeal of an injunction against him. The injunction bars him from sharing confidential News America information, and may prevent his participation as a live witness in lawsuits brought by Valassis and Insignia Systems against News America Marketing.

According to court filings, when Mr. Emmel was employed at News America Marketing, he learned that News America was engaged in anti-competitive activities, which he has subsequently sought to expose. After he was fired, Mr. Emmel sent documents to officials in Congress, testified about News America's activities in a lawsuit brought by Floorgraphics, and is a potential witness in lawsuits brought by Valassis and Insignia against News America.

Based on a non-disclosure agreement that Mr. Emmel signed after he was terminated by News America, a federal district court issued an injunction against him, finding that he had improperly disclosed confidential information when he sent it to officials in Congress. Mr. Emmel has filed a notice of his intention to appeal that ruling, but his recent bankruptcy filing caused an automatic stay of those proceedings.

Mr. Emmel has asked the bankruptcy court to lift the stay, which News America opposed in a filing yesterday. News America argues that "Emmel's desire to expend the limited assets of his bankrupt estate to challenge an injunction that merely requires him to comply with an agreement that he signed preventing his disclosure of News America's confidential information does not constitute 'cause' for lifting the automatic stay."

Exhibits to News America's filing include e-mails from Mr. Emmel to government officials, including a December 2006 e-mail to a Congressional staffer, expressing concern that "this Non-Disparagement document could . . . be strategically serving the purpose of News America to preclude my testimony to support the aforementioned charges."

Even if the stay were lifted, an appeal of the injunction would take many months to resolve, by which time the Valassis and Insignia trials will have already occurred.

Related posts.

Whistleblower’s Deposition Video Permitted in Valassis v. News America Lawsuit

Deposition testimony from News America Marketing whistleblower Robert Emmel will be admitted in the Valassis v. News America Marketing trial currently being conducted in Michigan state court, reports BNET.

Over News America's objection, Judge Sapala ruled that the videotaped deposition testimony would be allowed into the trial. Mr. Emmel testified in the Floorgraphics trial that News America engaged in an anti-competitive campaign to take contracts with retailers away from competitors, and charged manufacturers for ads that were never placed. He also testified that News America's CEO threatened to fire any employees who were uncomfortable with News America's aggressive tactics.

According to one source, the deposition testimony that will be played in the Valassis trial comes from the Insignia v. News America lawsuit, in which Insignia has made similar allegations of anti-competitive tactics by News America.

News America has gone to great lengths to suppress Mr. Emmel's testimony, suggesting that News America is very concerned about its potential impact in the Valassis and Insignia litigation. As reported previously, News America sued Mr. Emmel in federal court in Atlanta for violating a non-disclosure provision of a separation agreement, and won an injunction preventing him from making any further disclosures of confidential News America information to third parties. Mr. Emmel is appealing that ruling.

Related posts.