Discovery is scheduled to continue in Insignia Systems' multi-million dollar lawsuit against News America Marketing until July of this year, with trial to follow sometime thereafter.
News America Marketing is the player to beat in the free-standing insert ("FSI") and in-store marketing arenas, as mentioned in my earlier post regarding a billion-plus dollar lawsuit brought by Valassis against News America regarding FSIs. News America is part of Rupert Murdoch's conglomerate News Corp, which was the subject of the recent article: Murdoch Issues World Takeover Update. News America, which is worth over a billion dollars, is described by News Corp as "a portfolio of consumer marketing services," and it not only includes FSIs and direct mail, but also a full range of in-store marketing products.
Insignia Systems - News America's expansion has come at the cost of smaller competitors, including Insignia Systems, which has a total market cap of about $42 million, just a fraction of that of News America. Insignia Systems introduced in-store price-based signage to CPGs in 1997, and recently printed its 25 millionth sign. Insignia boasts that its POPSigns provide double-digit sales lift because they are point-of-purchase, product-specific signs that advertise the price of the product, and are customized for each store.
News America's Alleged Threat to Insignia - Insignia saw its share price rise over 11 dollars in 2002 before plummeting to under 30 cents in 2005, and Insignia blames the drop on unfair competition by News America. In February 2000, News America approached Insignia about a possible partnership agreement. News' Executive VP and CFO David DeVoe Jr. proposed in a letter to Insignia's CEO, Scott Drill that News would purchase up to 40% of Insignia, and proposed that News would act as Insignia's agent in negotiating contracts with retailers. In return, News would ensure that prices paid to retailers would decline, while prices charged to CPGs would increase. According to Insignia, News "threatened to sue and drive Insignia out of the market if Insignia did not agree to News America's monopolistic plan." (Amended Complaint ¶ 18).
Alleged Unfair Competition and Lawsuits by News America - Insignia spurned News' proposal to collaborate, and News America introduced a competing product a few months later. News sued Insignia in November 2002, accusing Insignia of interfering with its exclusive contracts with retailers by misrepresenting to retailers the scope and nature of News America's exclusivity rights, and of interfering with News America's contracts with retailers and CPGs by making false statements about the superiority of its advertising products to News America's products. See Complaint, News America Marketing In-Store, Inc. v. Insignia Systems, Inc., No. 00-CV-5843 (S.D.N.Y. filed Aug. 7, 2000). Insignia made antitrust counter-claims, and the lawsuit was settled in 2002 with no monetary payments by either side.
News filed another lawsuit making similar allegations in 2003. See Amended Complaint, News Am. Marketing In-Store, Inc. v. Insignia Sys., Inc., No. 03-8555 (S.D.N.Y.). Insignia counter-claimed, alleging that News America engaged in a campaign to exclude Insignia and other competitors of News from the in-store industry by, e.g.: bundling its various advertising programs to prevent Insignia from effectively competing; threatening retailers to stop doing business with News America's competitors; and offering uneconomically large payments to retailers to exclude News America's competitors.
News America's Alleged Tactics - In addition to News' aggressive legal tactics, beginning no later than 2001, News America allegedly began an anti-competitive campaign to drive Insignia from the market through various illegal tactics, including: dissemination of false and misleading statements about Insignia's ability to perform on its contracts; falsely claiming authority to remove Insignia advertisements from stores; bundling its various advertising programs to prevent Insignia from effectively competing; threatening retailers to stop doing business with Insignia; and offering uneconomically large payments to retailers to exclude Insignia from the business. (See Amended Complaint, Insignia Sys., Inc. v. News Am. Marketing In-Store Servs., Inc. & Albertson's, Inc., No. 04-cv-04213, at ¶¶ 2-3 (D. Minn. filed Sept. 23, 2005)).
For example, News America provided a letter to CPGs stating that Insignia installed less than 20% of the signs CPGs paid Insignia to install, when, in fact, their installation rate was much higher. News America has also entered into long-term exclusive contracts of up to ten years with major retailers for in-store coupon, floor, and shelf advertising and promotions, including price-based shelf advertising. These contracts allegedly excluded Insignia from over 87 percent of the relevant market. (Id. ¶ 26). Further, News America allegedly colluded with Albertson's and other retailers to exclude Insignia so that News could increase its monopoly power and increase prices charged to CPGs, which would then be shared with retailers.
Insignia's Lawsuit Against News - In 2004, Insignia filed suit against News America in federal court in Minnesota making these allegations. After News' motion to dismiss the complaint was granted, Insignia in 2005 filed an Amended Complaint. A motion to dismiss the amended complaint was denied in 2006.
In December 2006, the State of Minnesota intervened (download order granting intervention) and alleged that News had engaged in deceptive trade practices, adding further credibility to Insignia's case.
News' Counter-claims - News filed counter-claims alleging that Insignia wrongfully induced retailers to breach contracts with News, and that Insignia CEO Scott Drill made untrue disparaging statements about News. For example, Drill allegedly stated that News was on a mission to destroy in-store competition, appeared to be getting more aggressive in its sales tactics, and engaged in illegal anticompetitive conduct. News' 2003 New York lawsuit was consolidated with the Minnesota action in February 2007, and News reasserted its New York claims as counterclaims in the Minnesota suit, including tortious interference and unfair competition. Insignia's motion to dismiss the counterclaims was denied. See Insignia Sys., Inc. v. News America Marketing In-Store, Inc., No. 04-4213, 2007 WL 2893374 (D. Minn. Sept. 28, 2007). The ruling, as it pertained to the alleged false statements, is discussed in detail in this post on another blawg: False Advertising About Advertising.
Insignia's lawsuit against News America is still pending, with discovery scheduled to end in July 2008. I'm watching the lawsuit with interest, and will post any major developments.
Insignia's Business Survival - Despite News' lawsuits against Insignia, and its aggressive competition, Insignia's business has recovered from its lows, and Insignia renewed contracts with retailers such as Kroger and Safeway. Drill gives credit to the lawsuit against Albertson's for giving Insignia leverage with retailers in negotiating such contract renewals. While many businesses shy away from suing their potential business partners, in Insignia's case it seems to have paid off. After three years of losses, Insignia posted a profit in Q1 2006, and its stock has rebounded from 25 cents to about $2.50 today. One article has described Insignia as The Minnesota Company Rupert Murdoch Couldn't Kill. In June 2006, Insignia entered into a partnership with Valassis in which Valassis agreed to promote and sell Insignia's products. That partnership has since been extended to 2017, with Valassis receiving warrants to purchase Insignia stock, as well as commissions on sales. The mutually beneficial arrangement allows the companies to offer a bundled product similar to the bundle of products offered by News -- though News still offers products that neither Valassis nor Insignia offer, such as in-store floor ads and non-price-based shelf advertising.
While Insignia has spent over $7 million on the lawsuits, a verdict in favor of Insignia could be very large. How large? One equity analyst called that "the $100 million question," observing that the decline in market cap for Insignia between 2003 and 2005 was more than that amount.