Monday, April 28, 2008

Oral Argument in Theme Promotions v. News America Marketing Addresses: Anti-competitiveness of Right of First Refusal Provisions, Lack of Expert Testimony on Market Definition

The Ninth Circuit heard oral argument on April 14, 2008 in Theme Promotions v. News America Marketing, 06-16230– a case I discussed in a recent post. An audio file of the oral argument is available here.

News America Marketing appealed the lower court's finding of antitrust violations, arguing that the right of first refusal ("ROFR") provisions in its contracts with consumer goods companies were pro-competitive. News America suggested that the ROFR's allowed News to offer volume discounts to consumer goods companies, and pointed out that pricing declined during the relevant time period. The court expressed skepticism, and quoted an internal News America memorandum that suggested that News' enforcement of its ROFR agreements to prevent Theme Promotions from placing its ads with Valassis had an anticompetitive intent. The memo stated, in part: "He is trying desperately to get us to state that he is a customer. Once he wins that premise, then our ROFR clients, e.g., Chef, wouldn't be required to run with NAM or V and he could auction these orders off for the lowest rates."

The panel also questioned the wording of News' ROFR provision, which made the discount contingent on compliance with the ROFR provision retroactive to the signing of the ROFR contract.

Theme Promotions was questioned by the court about its failure to elicit expert testimony regarding the market definition, describing it as "a very real issue in this case." Theme conceded that it would have preferred to have an expert on this topic, but did not use one because it would have been expensive, and suggested that sufficient evidence had been introduced of the market through other witnesses. News responded that the market could not be defined without expert testimony regarding the cross-elasticity of demand related to similar advertising products.

Theme contended that sufficient evidence of damages had been introduced, while News pointed out that the testimony on causation of damages was very limited.

On its cross-appeal, Theme argued, inter alia, that the lower court erred in denying its restitution claim, stating that Theme was entitled to recover profits earned by News on programs sold as a result of News' unlawful behavior towards Theme.

Related post: Court Denies Insignia's Request for Documents from Other Litigation Against News America

Sunday, April 20, 2008

Retail Bankruptcies Rise

Retail chains are facing the highest bankruptcy levels in three years, as consumer confidence and spending has fallen, and credit markets have tightened.

The New York Times reported that eight mostly midsize chains have filed for bankruptcy since last fall, including furniture stores Levitz, Bombay, Domain, and Wickes, electronics retailers Sharper Image and Harvey Electronics, housewares seller Fortunoff, and catalog retailer Lilian Vernon. Retailer Linens 'n Things is also considering filing for bankruptcy, and it recently deferred an interest payment to lenders. Linens 'n Things is trying to avoid bankruptcy, and was in talks with creditors on a possible capital restructuring, reports Reuters, and is also looking for a buyer, reports the NY Times.

Some retail chains are also closing a number of stores in response to the economic downturn, with up to 5,770 store closings expected nationwide in 2008, predicts the International Council of Shopping Centers. This is a 25% increase over 2007.

Retailers hope to benefit from the $105 billion in tax rebates that are being distributed beginning in May, though a survey by the National Retail Federation indicates that only $43 billion of the rebates are expected to be spent at the retail level.

Law firms are seeing an increase in bankruptcy work, and anticipate that bankruptcy filings will be brisk for some time to come.

Bankruptcy law changes in 2005 affected retailers by making reorganization more difficult, causing many troubled retailers to hold on longer than if they were able to file under the more debtor friendly laws that existed before. The changes may also force companies to pay suppliers before paying salaries or honoring customer obligations like gift cards.

UPDATE: Linens N' Things declared bankruptcy May 2. The bankruptcy court agreed to let it continue to honor customers' gift cards.

Friday, April 11, 2008

Court Denies Insignia’s Request for Documents from Other Litigation Against News America

I recently received several e-mails from a reader of this blog who was very interested in my posts on the Insignia and Valassis litigation against News America Marketing. He asked me about the status of two other lawsuits against News – one involving Theme Promotions, and the other involving FLOORgraphics.

A recent development in the Insignia case relates to those suits and others:

Insignia's Request for Documents from Related Litigation Against News - Last month, the court in Insignia Systems v. News America Marketing in large part denied Insignia Systems' motion to compel News America Marketing to produce documents from several other lawsuits against News America Marketing alleging similar anticompetitive conduct as that alleged by Insignia. The request for documents was limited to expert reports and documents referenced in those reports, deposition transcripts and exhibits, interrogatory responses and admissions, and unredacted papers filed regarding dispositive motions.

The related cases targeted by Insignia, each of which alleges anticompetitive conduct by News America Marketing, are: (1) Valassis v. News America Marketing, No. 2:2006-cv-10240 (E.D. Mich. Filed Jan. 18, 2006); (2) FLOORgraphics v. News America Marketing, No. 04-CV-3500
(D.N.J.); (3) Theme Promotions v. News America Marketing, No. C-97-4617-VRW (N.D. Cal. 1998); and (4) Menasha v. News America Marketing.

1. Valassis v. News – Valassis alleged that News "created and implemented a scheme to obtain and then exploit monopoly power in the in-store advertising and promotions market with the goal of utilizing that monopolistic power to gain an unfair advantage over Valassis in the FSI market." I previously posted about the $1.5 billion Valassis lawsuit over free-standing inserts here and here.

2. FLOORgraphics v. News – FLOORgraphics, Inc. ("FGI") alleges in its Fourth Amended Complaint that "News commenced a deliberate and malicious campaign against FGI so that News could have exclusive control of all major in-store marketing programs." For example, News has allegedly engaged in illegal computer espionage by breaking into FGI's password-protected computer system and obtained propriety FGI information, disseminated false and misleading advertising about FGI to CPGs, threatened retailers, and spread negative rumors about FGI. A summary judgment motion is pending. (Disclosure: While I was working at another law firm, I was an attorney for FLOORgraphics in this suit and in an arbitration against Safeway).

3. Theme Promotions v. News - Theme Co-op Promotions ("Theme") alleged in its complaint that News America attempted to force it out of business by including and enforcing exclusivity provisions in its FSI contracts with CPGs to prevent them from participating in special event promotions organized by Theme. While Theme had previously been able to purchase FSI event ads from either News or Valassis, News required that any promotion involving a CPG under exclusive contract with News be placed solely through News and not Valassis, even though Theme had signed a contract with Valassis. Theme also alleged that News disparaged Theme's name and reputation. Theme prevailed at trial, and News' appeal to the Ninth Circuit is scheduled for oral argument on April 14, 2008. On appeal, News argues that there was insufficient evidence to support the jury's verdict against News. Theme cross-appeals, seeking additional damages.

4. Menasha v. News – Menasha alleged that News violated federal and state antitrust laws by signing retailers to exclusive contracts and by monopolizing the market for at-shelf coupon dispenser. The trial court granted summary judgment against Menasha, finding that it had not proven that at-shelf coupon dispensers were a unique product market. 238 F. Supp. 2d 1024 (N.D. Ill. 2003). The Seventh Circuit affirmed, criticizing Menasha's unscientific survey research and "armchair economics." 354 F.3d 661 (7th Cir. 2004).

Insignia Court's Order – Despite the similarities of these suits to the suit brought by Insignia, the court largely denied Insignia's request. In its Order, the court required production only of deposition transcripts and exhibits of four individuals in other cases who have been deemed to be relevant custodians.

While it seems that many of the documents requested by Insignia but denied by the Court would be relevant to Insignia's claims, I've seen courts deny similar requests in other cases, reasoning that the information should be obtained in the case at hand rather than through discovery in the related cases, which may be duplicative and burdensome to produce.

Rock Chalk Champions and T-Shirt Trademark Issues

My hometown team, the Kansas Jayhawks, won the National Championship on Monday. Having grown up about two blocks from campus, my parents started taking me to basketball games when I was a small child, and I was ecstatic with their win.

In honor of their victory, the American Lawyer conducted an interview with KU's general counsel, available here. He discusses how he got the job, the game, and celebrations after the game, accurately stating: "It was just a tremendous, unbelievable game."

Among the legal issues currently being litigated by KU (though not discussed in the interview) is one lawsuit against a Lawrence, Kansas retailer that sells T-shirts – Many of the Joe College T-shirts have silly or irreverent slogans related to Kansas athletics, such as "Super Mario 15," Moody Maniacs," "Kansas," "Muck Fizzou," "Our Coach is Phat," or "Hawk KUTIE."

The university sued the retail store for trademark infringement and dilution, and unfair competition, alleging that over 140 shirts were in violation of the trademark laws. On a motion for summary judgment, the court ruled (download ruling as pdf) that a few of the shirts presented a likelihood of confusion with the licensed shirts as a matter of law, based on the color of the shirts, the font type, and the use of terms such as "KU" or "Kansas." For the remaining shirts, the court found that there remained factual issues for trial, which is set for June, as reported in the KC Star.

In setting forth a list of non-exhaustive factors in determining trademark infringement, the court listed: the degree of similarity between the marks, the intent of the alleged infringer, evidence of actual confusion, similarity of products and manner of marketing, the degree of care likely to be exercised by purchasers, and the strength or weakness of the marks.

By selling a product that is very similar to a popular brand, a retailer may increase the demand for its product. If the product is too similar, however, the retailer may open itself to potential liability. Most retailers try to steer well clear of potential liability. For Joe College, its business model of pushing the envelope on trademark law seems to have been successful in terms of sales, but if the jury finds that it has pushed a little too far, it will likely be forced to change its model.

Update 7/08 -- The jury found that some T-shirts infringed, while others did not, and it was unclear where they drew the line. A discussion of the decision and a link to the jury verdict is available here (LJW) and here (KC Star).

Wednesday, April 9, 2008

Chocolate Price-Fixing Cases Consolidated

The Judicial Panel on Multi-District Litigation issued an order dated April 7 consolidating the chocolate price-fixing cases for pre-trial proceedings.

The order, available here, consolidates the actions before Judge Kane in the U.S. District Court for the Middle District of Pennsylvania. This jurisdiction was chosen in part because it is the site of Hershey's worldwide headquarters, and relevant documents and witnesses are likely to be located in that area.

Over 71 federal lawsuits have been filed against the chocolate-makers so far, and additional lawsuits are likely to follow. The goals of pre-trial consolidation are to avoid duplication of discovery, prevent inconsistent pretrial rulings, and to conserve the resources of the parties, their counsel, and the judiciary.

The consolidated case is captioned In re Chocolate Confectionary Antitrust Litigation, MDL No. 1935.

April 11 UPDATE: Judge Kane recused herself from the case on April 11, ordering that the case instead be assigned to Judge Christopher Conner.

Related Posts: Retail Grocery Chains File Suit Against Chocolate Makers; Investigation of Chocolate Makers Goes Global; Chocolate Makers Allegedly Fixed Prices

Wednesday, April 2, 2008

Retail Grocery Chains File Suit Against Chocolate Makers

Retailers File Suit - A number of retail grocery stores have filed suit against major chocolate makers for alleged price-fixing, adding to an already large number of suits that have been filed since government investigations into alleged price fixing of chocolate was revealed.

According to a Wall Street Journal article on April 1, retailers filing suit against chocolate makers include Safeway, Kroger, Walgreen, Hy-Vee, Meijer, Publix, CVS, Rite Aid, Food Lion, Kash N' Karry, Hannaford Bros. (which itself became the subject of numerous recent lawsuits because of a data security breach), and Giant Eagle.

Complaints Rely on Canadian Investigation - Investigations have been launched by Canada, the U.S., and Germany, and the complaints are heavily reliant on the government investigations. For example, the Giant Eagle complaint (available on the WSJ Law Blog), alleges a number of facts taken from documents filed in the Canadian government investigation, including statements by unnamed cooperating witnesses about secret meetings and communications between chocolate makers. The complaint states that the party cooperating with the government is believed to be Cadbury because Cadbury is not named as a target of the Canadian investigation despite its large market share in Canada.

Other Allegations Limited - Without the factual allegations from the unnamed sources, the complaint would be unlikely to survive a motion to dismiss under the Twombly pleading standard. Other than the allegations from the Canadian investigation, the complaint makes only general allegations, such as the industry being "ripe for collusion" because: the industry is highly-concentrated; there are high barriers to entry; the product is an undifferentiated commodity; and the industry has faced decreasing demand and profits. The complaint also alleges that there were parallel price increases, and that the stated reasons for the price increases were pretextual.

Potential Gains for Retailers - If the government investigations pan out, the defendants may face substantial liability and retailers could reap a sizeable recovery.

While many businesses focus heavily on defensive litigation and see their legal departments only as a cost center, I encourage retailers (and other businesses) to also consider any possible plaintiff's litigation (like the chocolate antitrust lawsuits) that may recover money for the company, or that can provide the company with a competitive or strategic advantage. Plaintiff's litigation may provide an especially compelling risk/reward ratio to the company's business people when law firms are willing to bring their cases on a contingency basis.

Related Posts: Investigation of Chocolate Makers Goes Global; Chocolate Makers Allegedly Fixed Prices


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