Friday, December 11, 2009

Updates re: News America Marketing and Floorgraphics, Insignia, and Valassis

A few updates regarding the litigation involving News America Marketing:

Floorgraphics: As reported by BNET news, News America Marketing filed suit against Floorgraphics and its four principal corporate officers on December 1, 2009. As readers may recall, Floorgraphics settled its federal lawsuit against News America in the middle of trial for an undisclosed sum, which included the sale of Floorgraphics' remaining contracts with retailers to News America. In its complaint, News America disclosed that the amount that News America paid to Floorgraphics "in connection with its acquisition of the Floorgraphics business" was $29.5 million. It's unclear whether that amount includes attorneys' fees and any other amount related to the settlement of the lawsuit. News America claims in its new lawsuit that Floorgraphics fraudulently misrepresented the value of its retailer contracts. While $1.75 million was set aside in an escrow to address such issues, News America has alleged that the value of Floorgraphics' contracts and goodwill was overvalued by close to $12 million, in part because some of the contracts did not exist or could not be assigned to News America. While Floorgraphics could lose the $1.75 million that has been placed in escrow, it seems unlikely that Floorgraphics will be forced to pay any additional amount, as the agreement provides that News America can recover more than that amount only in the event of fraud or intentional breach.

Insignia: Insignia filed a motion to compel News America to produce additional discovery to be used at trial. That motion is set to be heard January 22, 2010. A settlement conference has been ordered by the Court to take place on April 12, 2010. The order requires the parties and trial attorneys to attend the settlement conference with full settlement authority, suggesting that the Court is strongly encouraging the parties to settle.

Valassis: The Court overseeing the federal Valassis v. News America case issued a pre-trial order today setting deadlines for certain procedural events prior to the February 2, 2010 trial date, such as the exchange of exhibit and witness lists, and the exchange of deposition designations. The order stated that trial is expected to last approximately two months.

Earlier this month, it was reported that News America lost a motion for a new trial in the state court case in which Valassis was awarded $300 million in damages.

Valassis also has an action pending against News America in California. According to one source, the court is not expected to set a trial date until after the federal trial is resolved.

As always, tips and insights from readers are appreciated, including those who may have been affected by News America's alleged acts.

Wednesday, October 14, 2009

Arctic Glacier Pleads Guilty to Criminal Antitrust Conspiracy

Arctic Glacier and three of its executives have pleaded guilty to a criminal antitrust conspiracy in the market for packaged ice.

The Department of Justice issued a press release on Tuesday announcing the plea agreement:

Minneapolis Packaged-Ice Company Agrees to Plead Guilty to Customer Allocation Conspiracy

Company Agrees to Pay $9 Million Criminal Fine

WASHINGTON – A packaged-ice company, headquartered in St. Paul, Minn., has agreed to plead guilty and to pay a $9 million criminal fine for allocating customers, the Department of Justice announced today. In addition, three of the company's former executives pleaded guilty for their roles in the conspiracy to allocate customers.

According to a one-count felony charge filed under seal on Sept. 10, 2009, and unsealed today in the U.S. District Court in Cincinnati, Arctic Glacier International Inc. engaged in a conspiracy to suppress and eliminate competition by allocating packaged-ice customers in the Detroit metropolitan area and southeastern Michigan, beginning Jan. 1, 2001, and continuing until at least July 17, 2007. Under the plea agreement, which must be approved by the court, Arctic Glacier has agreed to cooperate with the Department's ongoing investigation.

According to separate one-count felony charges, also filed under seal on Sept. 10, 2009, and unsealed today in the U.S. District Court in Cincinnati, Frank Larson, Arctic Glacier's former senior vice president of operations, and Keith Corbin, the company's former vice president of sales and marketing, participated in the same conspiracy beginning at least as early as March 1, 2005, and continuing at least until July 17, 2007. According to an additional one-count felony charge filed under seal on Sept. 10, 2009, in the U.S. District Court in Cincinnati and unsealed today, Gary Cooley, the company's former vice president of sales and marketing, also participated in the conspiracy from at least as early as June 1, 2006, until July 17, 2007. Under the three separate plea agreements, which must be approved by the court, the former executives have agreed to cooperate with the Department's ongoing investigation.

In court documents, the Department said that the three former executives and Arctic Glacier, conspired with another packaged-ice competitor to allocate packaged-ice customers in southeastern Michigan and the Detroit metropolitan areas. As a part of the conspiracy, Arctic Glacier, its former executives and other co-conspirators exchanged information for the purpose of monitoring and enforcing adherence to the agreed customer allocations and refrained from competing for the allocated customers.

Arctic Glacier, Larson, Corbin and Cooley are each charged with allocating packaged-ice customers in violation of the Sherman Act, which carries a maximum penalty of 10 years in prison and a $1 million fine for individuals and a $100 million fine for corporations. The maximum fines may be increased to twice the gain derived from the crime or twice the loss suffered by the victims if either of those amounts is greater than the Sherman Act maximum fines.

These charges stem from an ongoing antitrust investigation into the packaged-ice industry. As a part of the same investigation, Home City Ice Company pleaded guilty on June 17, 2008, for its participation in a conspiracy to allocate customers and territories in the packaged-ice industry. The investigation is being conducted by the Antitrust Division's Cleveland Field Office and by FBI offices in Ann Arbor, Mich.; Indianapolis, Ind.; Dallas, Texas; and Cincinnati and Toledo, Ohio.

One of Arctic Glacier's competitors, Home City Ice, previously pleaded guilty to allocating customers and territories. Several civil actions are pending against Arctic Glacier, Home City, and Reddy Ice.

Sunday, October 4, 2009

Court Denies News America’s Summary Judgment Motion in Insignia System’s Lawsuit

On September 30, the U.S. District Court for the District of Minnesota largely denied News America's motion for summary judgment and granted Insignia Systems' motion for summary judgment on News America's counterclaims.

Insignia had alleged that News America engaged in anticompetitive business practices in the market for in-store shelf advertising, while News America filed a number of counterclaims.

News America had asked the Court to dismiss Insignia's claims on the grounds that the undisputed material facts failed to prove the violations alleged by Insignia, including claims for monopolization, conspiracy, and false advertising. The Court ruled in favor of News America, however, on Insignia's claim that News America has monopsony power over retailers, pointing out that Insignia's own expert witness indicated that he did not believe that News had monopsony power.

Insignia filed a motion seeking dismissal of News America counterclaims, which the Court granted. The Court held that News America had failed to produce evidence of damages on six of its claims, and could not recover damages on those claims. The Court dismissed claims that were predicated on allegedly disparaging statements because those statements, which included statements expressing the opinions of Scott Drill, were not actionable, and there was no evidence to suggest that Drill believed his statements to be false. The Court found that News had failed to present sufficient evidence of tortious interference with contract, tortious interference with prospective business relationship, and unfair competition, and dismissed those claims.

In response to an unrelated discovery motion, the Court's order granted in part a motion to compel, and extended discovery for an additional 45 days, which could affect the trial date.

In light of the Court's order, News America will likely face two trials in federal court in early 2010 – Insignia's lawsuit, and Valassis's lawsuit, both of which raise similar allegations of News America's anticompetitive practices in the in-store advertising industry.

Related posts.

Sunday, September 20, 2009

DOJ Weighs in on Proposed Google Books Settlement

The Department of Justice Antitrust Division filed a statement of interest Friday, available here, opposing the Google Books settlement. DOJ's filing addresses concerns that the settlement: (1) fails to satisfy Federal Rule of Civil Procedure 23 (which governs class action lawsuits); (2) violates copyright law; and (3) violates antitrust law. DOJ's statement is a bit unusual in that it raises both antitrust and non-antitrust concerns; typically the DOJ's Antitrust Division confines public stances to antitrust issues.

DOJ states that the proposed settlement "is one of the most far-reaching class action settlements of which the United States is aware." Under Rule 23, DOJ raises concerns that the interests of one set of class members -- orphan works holders – conflicts with another set of class members – rightsholders, that the settlement resolves amorphous future claims, and that the class was not provided adequate notice of the settlement. A class member (and former colleague), Scott Gant, previously filed a lengthy and well reasoned objection to the settlement raising more detailed class action procedural concerns.

DOJ raises two main antitrust concerns. First, the proposed settlement appears to give book publishers the power to restrict price competition. Second, the settlement may "effectively preclude[]" competing distributors of digital books. Kotchen & Low recently co-authored an op-ed, along with the American Antitrust Institute, addressing the antitrust implications of the Google Books settlement, available here, raising the same concerns. The settlement provides a fixed royalty rate and creates a joint pricing mechanism. It also provides a monopoly over orphan works, which may create a substantial disadvantage for any potential competitors.

Despite these objections, DOJ recognizes that the settlement has great potential benefits, such as to "breathe life into millions of works that are now effectively off limits to the public," and to "open the door to new research opportunities."

In light of these issues, DOJ concludes that the Court should reject the proposed settlement, but should encourage the parties to continue negotiations to modify the settlement consistent with Rule 23 and the copyright and antitrust laws. Consistent with Kotchen & Low and AAI's recent op-ed, I agree, and encourage the Court to give substantial weight to DOJ's concerns.

Friday, September 18, 2009

Consolidated Complaints Filed in Packaged Ice MDL

Plaintiffs in the In re Packaged Ice Antitrust Litigation, MDL 1952, filed consolidated amended class action complaints this week alleging a conspiracy by the three major packaged ice manufacturers to allocate territories.

More than 70 separate complaints were originally filed last year against packaged ice manufacturers Reddy Ice, Arctic Glacier, and Home City Ice. The cases were transferred and consolidated by the Judicial Panel on Multidistrict Litigation before Judge Borman in the Eastern District of Michigan. After Judge Borman appointed lead counsel, plaintiffs' counsel filed their consolidated amended complaints.

Plaintiffs allege, inter alia, that:

The existence of the unlawful agreements and conspiracy is evidenced, inter alia, by admissions made by Defendants' officers and employees who directly participated in or witnessed acts in furtherance of the conspiracy, by a United States Department of Justice Criminal Information and guilty plea, as well as by the structure of the market and supporting economic data.

Defendants have 60 days to respond to the complaints.

The amended complaints were discussed in an article in the Dallas Morning News.

Tuesday, September 8, 2009

Valassis’ Federal Trial Set for February 2, 2010

Valassis issued a press release today announcing that a trial date for its federal antitrust lawsuit against News America has been set for February 2, 2010:

Valassis (NYSE: VCI), one of the nation's leading media and marketing services companies, announced that, on Thursday, Sept. 3, 2009, United States District Court Judge Arthur J. Tarnow formally scheduled Valassis' federal trial against News America Incorporated ("News America") for Feb. 2, 2010. Valassis originally filed the action in the United States District Court, Eastern District of Michigan on Jan. 18, 2006 alleging violations of the Sherman Act. Generally, the complaint alleges that News America has improperly leveraged and tied the purchase of its in-store promotion and advertising services to the purchase of space in its free-standing insert (FSI) and that News America has attempted to monopolize the FSI market. Judge Tarnow denied all motions for summary judgment and established the trial schedule.

"With a court date set, we are eager to move forward with the second of our three cases against News America to restore lost value to our shareholders and return to a fair and even playing field in the FSI marketplace," said Alan F. Schultz, Valassis Chairman, President and Chief Executive Officer.

As announced on July 23, 2009, a Wayne County Circuit Court jury awarded Valassis $300 million for compensatory damages in its first of three lawsuits against News America. News America was found liable for unfair competition and tortious interference. This award accumulates interest on a compounding basis beginning from March 9, 2007, the date the complaint was filed. The award is subject to the risks of post-trial motions, appeal and collection.

In addition to the Federal antitrust law claims, Valassis has a lawsuit pending against News America in the Supreme Court of the State of California for the County of Los Angeles raising claims under California's Cartwright, Unfair Competition and Unfair Practices Acts. This case is not currently scheduled for trial. Under the relevant Federal and California laws, any compensatory damages awarded in either of the remaining cases will be automatically tripled by the respective court.

Related posts.

Friday, September 4, 2009

Summary Judgment Denied in Valassis’ Federal Case Against News America

A federal judge in Michigan denied Valassis' motion for partial summary judgment today. Although Valassis submitted a supplemental brief with some powerful evidence from the recent state court trial, the court found that the recent state court verdict did not have a preclusive effect. Similarly, the court denied News America's motion for summary judgment:


Before the court are defendants' motion for summary judgment and plaintiff's motion for partial summary judgment. The court received supplemental briefing. The motions came on for a hearing on September 3, 2009.

For the reasons stated on the record, the motions are DENIED. The state-court trial before Judge Sapala does not have issue-preclusive effect on the proceedings before this court. Accordingly, there are genuine issues of material fact for a jury to consider.
. . . .

With the denial of the summary judgment motions (neither of which is surprising), I would expect that trial will commence in the next few months. After News America lost the first trial on unfair competition, and given the evidence presented in that case, they have reason to be
concerned about the federal case, which involves antitrust claims that would lead to treble damages.

Related posts.

Monday, August 17, 2009

News America Whistleblower Emmel Drops Bid to Lift Stay

I've posted several times about Robert Emmel, a whistleblower who has previously testified to evidence of wrongdoing by his former employer, News America Marketing. News America prevailed in a court case against him, and the court entered an injunction preventing Emmel from disclosing confidential News America information, effectively preventing him from testifying in person at the Valassis or Insignia trials. Emmel appealed the injunction, but his appeal was stayed after he filed bankruptcy. Over two months ago, he filed a motion in the bankruptcy court to lift the stay, but has recently withdrawn that motion. In his recent filing he laments the delayed resolution and News' tactics:

NAM's sole major objective in delaying Emmel's motion has been to prevent, for as long as possible, the Emmel live trial appearances as a witness at three pending trials against NAM so that he cannot testify to previously unknown and non-disclosed (except to government regulators and officials through previous Emmel disclosure) additional allegations in the areas of NAM's deceptive business practices, fraud, improper revenue recognition and other areas of wrongdoing concerning NAM's alleged criminal conduct against competitors, NAM's own sales clients and retailers under lease agreement contracts with NAM, and, lastly, the consequences of the wrongdoing to cause NAM actions detrimental to the shareholders of the public corporation News Corp. of which NAM is an operating entity. And, further, NAM desires to prevent Emmel from providing even greater detail --as Emmel was a former employee insider of almost 8 years at NAM—of alleged abhorrent NAM business practices and actions against its own customers and against competitors that has now entered the public record from emergence of discovery previously under seal, and now evidence coming into court proceedings and through trial testimony of Emmel and various other third parties at a recent trial that has concluded.
While live testimony by Emmel would be helpful to the plaintiffs, the recent Valassis verdict shows that it's not entirely necessary.

Friday, August 7, 2009

A Recap of Valassis v. News America Marketing

There was extensive media coverage of the $300 million jury verdict in favor of Valassis against News America Marketing, and BNET's Jim Edwards has provided detailed reporting on the trial testimony. Nonetheless, I thought a more detailed recap might be useful.

Valassis' Files $1.5 m. Complaint in January 2006 - Valassis originally filed its complaint against News America in federal court January 18, 2006. See Valassis Communications, Inc. v. News America Inc., et al., No. 2:2006-cv-10240 (E.D. Mich. filed Jan. 18, 2006). Valassis alleged that News America "created and implemented a scheme to obtain 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." For example, Valassis alleged that News America entered into long-term exclusive contracts with retailers, offering large guaranteed minimum payments to large retailers. Valassis asserted that News America threatened price increases on in-store ads if consumer packaged goods manufacturers ("CPGs") did not purchase their FSIs from News America. Valassis alleged that its damages exceeded $1.5 billion, and that the harm to the competitive marketplace and the consumer "is of equal or greater magnitude."

Valassis' Causes of Action - Valassis alleged violations of the federal antitrust laws for unlawful tying, attempted monopolization, and predatory pricing. Valassis also alleged state law tortious interference, and violations of state unfair competition laws under the laws of California, Connecticut, Nebraska, North Carolina, South Carolina, Utah, and Washington. A motion to dismiss was granted in September 2006, after which Valassis filed an Amended Complaint asserting the same causes of action. News answered the federal claims, but successfully moved to dismiss the state law claims. The Court held that the state claims "would substantially predominate over the federal claims and . . . would pose too great a threat of juror confusion."

State Court Claims - Valassis subsequently filed a state court case against News America in Michigan making similar allegations under Michigan law. Valassis amended the state court complaint on August 7, 2008, narrowing its claims in order to "separate and disengage the federal antitrust claims . . . from the claims pending in this court so that the claims are independent and not overlapping in legal theory or in the elements of the claims or defenses." Valassis sought to litigate the federal antitrust claims, for which it seeks treble damages, in federal court, while addressing the tort claims in state court. In the amended Michigan state court complaint, Valassis only alleged claims for unfair competition and tortious interference, and sought $915 million in damages. Valassis also filed suit in California Superior Court under California state law, alleging violations of the Cartwright Act, the Unfair Competition Law, and the Unfair Practices Act.

Floorgraphics Trial and Settlement - On March 3, 2009, a lawsuit brought by News America's in-store advertising competitor – Floorgraphics, Inc – went to trial. Floorgraphics originated in-store floor advertising, and also competed against News America for in-store coupon, shelf, and cart advertisements. Floorgraphics introduced evidence that News America explicitly threatened to "destroy" Floorgraphics, and tried to carry through on the threat through a variety of anticompetitive tactics, including making false disparaging statements to CPGs and retailers, making uneconomic payments to retailers to gain exclusive contracts, and even infiltrating a password-protected computer system to gain sensitive information. On March 10, 2009, in mid-trial, the case ended in settlement, and News America acquired Floorgraphics' remaining retailer contracts.

Valassis Trial - On May 27, 2009, the Valassis v. News America trial began. Valassis started its opening statement by asking:

"What happens when a powerful corporation crosses the line from fair to unfair competition? What happens when a corporation improperly interferes with the legitimate business interests of a competitor?"

Valassis and News America called numerous witnesses, including many witnesses whose testimony was introduced through deposition transcripts and videos. Among the highlights of the testimony referenced in prior posts and on BNET:

  • News America's CEO Paul Carlucci admitted showing a film clip to sales staff from the movie The Untouchables, and admitted to using several mafia references. A video clip was played at trial of Mr. Carlucci telling employees that News had pushed "Valassis to what we call the brink of utter desperation," and that "Mr. Murdoch was saying now you have to really go after them."
  • A News America executive admitted to bundling in-store advertising with FSIs, inflating prices to CPGs for in-store advertising if they did not also purchase FSIs from News America. A video clip was played of the sales executive describing "the game plan whereby we would use the in-store products to drive FSI volume and the FSI to drive in-store depending on which particular client."
  • News America executive Marty Garofalo, in a video clip of a sales summit that was played at trial, stated that News America intentionally sought out long-term exclusive contracts with retailers: "Our strategy is to secure long-term retail deals . . . . For instance, our current deal at Kroger is for seven years. Ahold agreement currently stands at eight years and we recently signed Safeway last year to a 10-year deal."
  • Several CPG representatives testified to being upset with the bundled pricing.
  • A former News America employee, Robert Emmel, testified that News America engaged in a campaign to target retail accounts to take away from Floorgraphics, and overpaid for exclusive contracts with retailers. He also testified that they made false disparaging statements about in-store competitors Floorgraphics and Insignia.

$300 Million Verdict - After two months of trial testimony, the eight member jury deliberated for one day, and on July 23, reached a unanimous verdict, awarding $300 million to Valassis, and finding that News had committed tortious interference and unfair competition. The verdict was reported as the largest in Michigan history, and the fifth largest nationwide so far in 2009. News America immediately promised to appeal, while Valassis stated that it was pleased with the result and pointed out that the federal antitrust case could result in treble damages if Valassis prevails.

Remaining Cases – News America still faces the federal case brought by Valassis. Summary judgment motions remain pending, and News America recently requested the opportunity to submit supplemental briefs to the court on summary judgment issues in light of the verdict and recent case law. Valassis' California case also remains pending.

In addition, there is a pending federal lawsuit brought against News America by Insignia Systems making similar allegations. Scott Drill, Insignia Systems' CEO, recently remarked that the Valassis verdict "bodes well" for Insignia. Given the evidence that came out against News at the Valassis and Floorgraphics trials, I have to agree.

Related posts.

Thursday, July 23, 2009

Jury Awards $300 Million to Valassis

After a lengthy trial, a jury in a Michigan state court awarded $300 million in compensatory damages to Valassis, finding that News America Marketing had engaged in unfair competition.

Valassis issued a press release on the verdict:

"We are pleased with the jury's verdict, and we look forward to moving ahead with our two other cases, including the antitrust case in the Eastern District of Michigan where any compensatory damages will be trebled," said Alan F. Schultz, Valassis Chairman, President and Chief Executive Officer. "Furthermore, I am very proud of the efforts of our employees who have been competing on this uneven playing field for nearly a decade."

Valassis has additional lawsuits pending against NAM in the United States District Court, Eastern District of Michigan, asserting violations of the Sherman Act, and in the Supreme Court of the State of California for the County of Los Angeles raising claims under California's Cartwright, Unfair Competition and Unfair Practices Acts. The Eastern District of Michigan case and the California case are currently not scheduled for trial, however, Valassis intends to aggressively pursue both remaining claims.

In addition to Valassis' remaining lawsuits, News America also faces a lawsuit from Insignia Systems, which asserts that News America engaged in similar anti-competitive tactics that harmed Insignia. Given the overlap between the cases, Insignia is probably feeling confident about its prospects.

The stock prices of both Valassis and Insignia jumped on the news of the verdict.

News America's President, Chris Mixson, stated, "[w]e are disappointed with today's decision." "[W]e will appeal this decision and are confident that we will prevail." As one grounds for News America's appeal, Mixson cited the Court's ruling to exclude evidence of a Federal Trade Commission complaint against Valassis, which alleged that Valassis had publicly invited News America to collude on the pricing of FSIs in an investor conference call. Valassis entered into a consent order with the FTC to resolve the case, agreeing not to invite competitors to collude. It seems that such evidence would be more prejudicial than probative in Valassis' case against News America, and that the Court's evidentiary ruling was likley correct. Even if that evidence had been admitted, it is unclear that it would have affected the verdict. Though News America will undoubtedly raise several additional issues on appeal.

Related posts.

Tuesday, July 21, 2009

Closing Arguments Heard in Valassis v. News America Marketing

Closing arguments were heard today in a Detroit courtroom in a battle between the two giants of the Free-Standing Insert business – Valassis and News America.

Valassis has the "home court" advantage as a Livonia, Michigan company, and has benefited from colorful testimony from unhappy manufacturers, a former competitor driven out of business by News America, and a former employee who had contacted government officials about News America's anti-competitive tactics. Nonetheless, BNET insists that it "should not be a surprise" if News America Marketing prevails, citing the fact that the case has been long, complicated, dull, and sometimes counter-intuitive. As reported by BNET, "the majority of the testimony has been an unstructured waltz through the arcana of CPMs, net effective rates and per-page costs. Much of it was impossible to follow, even for someone with knowledge of the business."

Once the jury reaches its verdict, which should be in the next couple days, I'll let you know whether BNET was correct.

Wednesday, July 15, 2009

FTC Announces $500,000 Settlement with Rite Aid Over False Advertising

Rite Aid agreed to settle FTC charges that the pharmacy deceptively advertised that its Germ Defense tablets and lozenges could prevent or treat colds and the flu.

Rite Aid touted its private label "Germ Defense" products as similar to the brand name products -- Airborne, which previously settled deceptive advertising charges with the FTC last year. Rite Aid agreed to pay $500,000 in refunds to consumers, and agreed not to claim that any private label food, drug, or dietary supplement can reduce the risk or severity of colds or flu unless the claims are truthful and substantiated by reliable scientific evidence. FTC Chairman Jon Leibowitz stated, "this is one 'cold remedy' that works."

Private label products have been a growing income source for retailers in the last several years. Claims made on the packaging of retailers' private label products often mirrors claims made by name brands. Retailers should be cautious, however, about situations like this one, in which the claims made by the brand name product are unsupported. This is especially a concern for health-related claims, which have come under increased scrutiny recently.

Related post: Litigation Forces Changes to Food Marketing; Kellogg Settles FTC Complaint Over False Advertising.

Thursday, July 9, 2009

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.

Wednesday, July 1, 2009

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.

Monday, June 22, 2009

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.

Thursday, June 18, 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.

Friday, June 12, 2009

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.

Thursday, June 4, 2009

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.

Sunday, May 31, 2009

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.

Thursday, May 28, 2009

Airline Passengers File Putative Class Action Lawsuit Against Delta Air Lines and AirTran Airways For Alleged Collusion Regarding Checked Baggage Fees

Delta Air Lines and AirTran Airways were served yesterday with a complaint filed by Kotchen & Low LLP accusing the airlines of colluding regarding the imposition of a $15 first checked bag fee. Plaintiffs Brent Avery and David Watson are Delta and AirTran passengers who paid the fee that both airlines announced in November 2008 for flights taken on or after December 5, 2008.

Delta and AirTran both have hubs in Atlanta and are each other’s primary competitors. Plaintiffs allege that the unilateral imposition of a first bag fee on consumers would have been against each airline’s economic self-interest, as the airline would have lost customers to its competitor if it increased fees. By acting in concert, however, both airlines benefited from increased revenues without any increased expenditures.

The complaint alleges that the scheme was initiated when AirTran invited Delta to collude in an investor conference call. AirTran’s CEO stated that he wanted to impose a first bag fee, that AirTran had put the technological capability in place to implement the fee, and that AirTran would follow suit if Delta enacted a first bag fee:

We have the programming in place to initiate a first bag fee. And at this point, we have elected not to do it, primarily because our largest competitor in Atlanta [i.e., Delta], where we have 60% of our flights, hasn’t done it. . . . I think we prefer to be a follower in a situation rather than a leader right now.

Robert Fornaro, AirTran Investor Call (Oct. 23, 2008). Just over a week later, on November 5, 2008, Delta announced that it would begin charging passengers a $15 first bag fee, which Plaintiffs allege was an acceptance of AirTran’s invitation to collude. As promised in the conference call, AirTran followed Delta’s lead, and announced the following week that it would impose the same $15 fee, effective the same date as Delta’s fee.

As a result of the collusion, Plaintiffs allege that passengers have been charged tens of millions of dollars in anti-competitive fees. “Because the airline industry has so few competitors, especially in specific markets, it is highly susceptible to collusion,” stated attorney Daniel Low, a partner with Kotchen & Low LLP, a law firm representing the Plaintiffs. Low added, “several cases have been brought against airlines in recent years accusing them of conspiring to raise prices by signaling future pricing intentions, and we hope that our lawsuit will help consumers by discouraging such unlawful practices.”

In addition to Kotchen & Low LLP, Plaintiffs and the putative class are represented by Richardson, Patrick, Westbrook, & Brickman, LLC, McCulley McCluer PLLC, and Conley Griggs LLP.

Related articles: Bloomberg, Atlanta Journal-Constitution, Orlando Sentinel, Orlando Sentinel Blog, Courthouse News, CompLaw360 (subscription).

Wednesday, May 27, 2009

Valassis v. News America Marketing: Trial Begins

Trial in a lawsuit between Valassis and News America Marketing is scheduled to begin today in Michigan state court, but Judge Sapala rejected a request for a television camera in the courtroom, reports BNET.

The trial is the first of three related lawsuits by Valassis against News America that collectively seek over $1.5 billion in damages for antitrust and related violations. The Valassis trial follows on the heels of a settlement in Floorgraphics v. News America, in which an in-store advertising company made similar claims of anti-competitive conduct by News America. The Floorgraphics lawsuit settled after the first few days of testimony, including damaging testimony from former News America employee Robert Emmel. Mr. Emmel reportedly will not testify in person at the Valassis trial, after News America won an injunction against him for disclosing confidential News America information to government officials.

Both parties requested the exclusion of cameras from the courtroom, which will impede media coverage of the trial.

Related posts.

Wednesday, May 20, 2009

Price Discrimination Law Violated by Manufacturer and Distributor

A federal court in Pennsylvania recently found that Michael Foods, Inc. (a food manufacturer) engaged in price discrimination in violation of the Robinson-Patman Act by selling eggs and potatoes at higher prices to Feesers, Inc. (a food distributor) than to Sodexho, Inc., which is Feesers' primary competitor. See Feesers, Inc. v. Michael Foods, Inc., No. 1:04-cv-576, 2009 WL 1138126 (M.D. Pa. April 27, 2009) (.pdf order). The court also found that Sodexho induced the discriminatory pricing in violation of the Robinson-Patman Act. The court reasoned that Sodexho received from Michael Foods substantially lower prices over time compared to Feesers, which put Feesers at a competitive disadvantage. The court ordered Michael Foods to no longer offer discriminatory prices and ordered Sodexho to no longer induce or receive discriminatory prices.

The Michael Foods federal court decision signals that the Robinson-Patman Act is alive and well and can be a powerful tool to ensure a level playing field for retailers, wholesalers, and distributors. Before Michael Foods, many in the industry have viewed the Robinson-Patman Act as outdated and relatively unenforced. As a result, compliance with the Act has grown lax. But the Michael Foods decision demonstrates that the Act continues to have teeth and can be used to remedy instances in which retailers, wholesalers, or distributors are put at a competitive disadvantage because they are not receiving manufacturer discounts and allowances at levels commensurate with their competition. In the wake of Michael Foods, industry stakeholders should expect to see more Robinson-Patman cases in the future.

Tuesday, May 12, 2009

Senate Antitrust Subcommittee to Hold Hearings on Minimum Resale Pricing

The Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights will hold a hearing next week on proposed legislation that would bar minimum resale pricing imposed by manufacturers.

The hearing will be held May 19 at 2:30 p.m., and is entitled: "The Discount Consumer Protection Act: Do We Need to Restore the Ban on Vertical Price Fixing?"

The House Judiciary Committee's Subcommittee on Courts and Competition Policy held a similar hearing on April 28, titled "Bye Bye Bargains? Retail Price Fixing, the Leegin Decision, and Its Impact on Consumer Prices." Testimony from that hearing is available here.

Saturday, May 2, 2009

Maryland Bans Minimum Resale Pricing

In a move that could affect retailers and manufacturers across the country, Maryland recently enacted a law prohibiting resale price maintenance. (WSJ).

The law was enacted April 14 and goes into effect on October 1, 2009. The law provides:

A contract, combination, or conspiracy that establishes a minimum price below
which a retailer, wholesaler, or distributor may not sell a commodity or service
is an unreasonable restraint of trade or commerce.

Md. Code, Commercial Law, § 11-204(B).

The new pricing law essentially restores the law regarding minimum resale pricing to how it existed prior to the Supreme Court's 2007 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., which held that it was not inherently anti-competitive for a manufacturer to dictate minimum pricing to retailers. Rather, minimum pricing could be acceptable under the rule of reason, as the effect could be to promote inter-brand competition.

While state antitrust law does not always follow federal antitrust law, Maryland is one of a number of states with a statute providing that state court interpretations of state antitrust law should be guided by federal courts' interpretations of federal antitrust statutes. See Md. Code, Commercial Law, § 11-202.

The Maryland law only affects retailers doing business in Maryland, but this includes transactions in which Maryland consumers make internet purchasers from out-of-state retailers. Thus, the impact of the law could have repercussions for manufacturers and retailers across the country.

Moreover, the implementation of the Maryland law could be a prelude to broader legislative reform, as there has been substantial criticism of the Leegin decision. The American Antitrust Institute sponsored a conference on December 4, 2008 criticizing Leegin as harmful to consumers (reported here), and the FTC recently held workshops regarding how resale price maintenance could harm consumers (reported here and here).

There is a bill pending in Congress – the Discount Pricing Consumer Protection Act, S.148 – that is similar to the Maryland law and is likely to receive hearings next month. That bill states that its purpose is "to correct the Supreme Court's mistaken interpretation of the Sherman Act in the Leegin decision."

Wednesday, April 22, 2009

News America Whistleblower Files for Bankruptcy; Moves for a Stay

Robert Emmel, a former News America Marketing employee and a key witness in litigation against News America, filed for Chapter 7 bankruptcy protection today, likely in response to News America's attempts to recover damages and $1.5 million in attorneys fees from him in a breach of contract action related to disclosure of confidential News America information.

As discussed in an earlier post, News America won summary judgment against Mr. Emmel in federal district court on a breach of contract claim based on Mr. Emmel's disclosure of confidential information (though News America lost on several other claims). Mr. Emmel admitted that he sent News America documents to the Counsel for the Senate Judiciary Committee because he believed that News America was engaged in unlawful activity. Mr. Emmel has filed an appeal of the summary judgment ruling to the Eleventh Circuit Court of Appeals.

Yesterday, Mr. Emmel filed a motion to stay the district court's order, which would enjoin Mr. Emmel from disclosing any confidential News America information and would require him to return all News America documents that are in his possession. In support of his motion to stay the ruling, Mr. Emmel argues that a well-established public policy exception favors non-enforcement of non-disclosure provisions in the context of disclosures of potential unlawful activity to government officials. According to one Georgia case cited by Mr. Emmel, "[r]eporting criminal behavior is expected and even demanded of the ordinary citizen, who should not be discouraged from reporting what he knows to the authorities and from lending his aid to secure evidence of a crime. Indeed, in Georgia it is the duty of one having such information to report it to those in authority."

As I have previously argued on this blog, whistleblowers should be provided positive incentives for reporting wrongful activity, not punished for doing so. While corporations like News America have legitimate concerns about avoiding the disclosure of trade secrets and other confidential business information, those concerns do not apply to disclosures to governmental authorities.

Mr. Emmel's case provides an example of the disincentives of becoming a whistleblower. The lawsuit against him has led to him filing bankruptcy, and he has devoted substantial time and energy to the litigation against him, as well as to testifying in litigation against News America. While some whistleblower laws, such as the qui tam statute, allow whistleblowers to reap financial rewards for their efforts, none of those laws appear to apply to Mr. Emmel, who should be commended for his efforts.

Related posts: News America Whistleblower Appeals; Court Grants Summary Judgment Against Whistleblower; All News America Marketing Posts

Tuesday, April 21, 2009

Kellogg Settles FTC Complaint Over False Advertising

The FTC announced yesterday that it has settled a dispute with Kellogg's over an advertising campaign that falsely claimed that Frosted Mini-Wheats were "clinically shown to improve kids' attentiveness by nearly 20%."

Kellogg's made the claims in a national advertising campaign, but the study it relied on found that children who ate the cereal averaged an increase of less than 11 percent in attentiveness compared to children who ate no breakfast at all. Only one in nine children showed an increase in attentiveness of 20% or more.

The settlement agreement prohibits Kellogg's from making similar claims in the future about any breakfast food or snack food unless there is reliable evidence that supports the claims.

Just like Kellogg's experience with Frosted Mini-Wheats, many consumer product companies that compete in mature markets are aggressive with advertising claims, which is often the principal means of product differentiation. In the consumer products industry, an aggressive advertising claim that lacks credible substantiation will typically be challenged by a competitor that risks losing market share because of the claim. A competitor can petition the FTC to investigate a company's claim (which is likely what happened in Kellogg's case), can file its own lawsuit against the company under the Lanham Act, or can challenge the claim within the National Advertising Division of the Council of Better Business Bureaus, an industry self regulating body that renders decisions on the legitimacy of advertising claims.

Credible claims substantiation is important for any advertiser, particularly consumer products companies that compete in mature markets and face intense scrutiny of claims by competitors. While the FTC consent concerning Kellogg's Frosted Mini-Wheats claim will likely not materially affect the success of the brand, Kellogg's marketers probably did a disservice to the brand by employing the aggressive claim: the FTC enforcement action is embarrassing, the advertising campaign will have to be stopped in mid-stream (which will be confusing to consumers), and Kellogg's costs will increase as the organization eliminates the claim from its packaging.

Related post: Litigation Forces Changes to Food Marketing

Wednesday, April 15, 2009

Richard Feinstein Accepts Position as the Federal Trade Commission’s Bureau of Competition Director

The Federal Trade Commission recently announced that Richard Feinstein, a partner at Boies, Schiller and Flexner LLP, has accepted the position as Director of the Bureau of Competition at the Federal Trade Commission. The FTC has two primary internal organizations: (1) the Bureau of Competition, which enforces antitrust laws and (2) the Bureau of Consumer Protection, which enforces consumer protection laws. As Director of the Bureau of Competition, Mr. Feinstein will oversee the antitrust enforcement arm of the FTC and help dictate federal antitrust enforcement policy. This will be Mr. Feinstein’s third “tour of duty” as an antitrust enforcer with the government. He started his career within the Department of Justice’s Antitrust Division and served as Assistant Director of the FTC’s Health Care Shop from 1998 – 2001.

Mr. Feinstein is an excellent choice for the Bureau of Competition Director. While at Boies, Schiller & Flexner, the founding partners of Kotchen & Low worked closely with Mr. Feinstein, and Daniel Kotchen reported to Mr. Feinstein at the FTC from 1998 – 2001. Mr. Feinstein is smart, experienced, fair, funny, and a terrific manager. Under Mr. Feinstein’s leadership, antitrust enforcement will be fair and balanced and morale within the FTC’s Bureau of Competition will be high. The one downside of his appointment is that FTC insiders and others who interact with him will have to suffer through Mr. Feinstein’s ardent and vocal support of any team from Pittsburgh: the Steelers, Penguins, Pirates, and Pitt Panthers.

Tuesday, April 14, 2009

News America Whistleblower Appeals

Robert Emmel, a whistleblower who formerly worked for News America Marketing, is appealing an order granting summary judgment against him for breach of contract based on his disclosures to government authorities.

Mr. Emmel filed a notice of appeal yesterday, seeking reversal of the court's order finding that he breached an agreement not to disclose confidential information about News America, and permanently enjoining him from disclosing such confidential information to third parties. Given that appeals typically take over nine months to resolve in the Eleventh Circuit, the appeal is unlikely to be resolved before the Valassis and Insignia trials, so the appeal is unlikely to affect those cases.

In the Floorgraphics case, the plaintiff subpoenaed Mr. Emmel, and he provided strong testimony in their favor, previously reported on this blog here and here. For example, Emmel testified that News America's former CEO, Paul Carlucci, told employees that if there were "bed wetting liberals" who were uncomfortable with News America's tactics, he could arrange for those individuals to be fired. He also testified, as BNET recently reported, that News America charged manufacturers for placements of floor and shelf ads in hundreds of supermarkets that did not receive ads.

Valassis and Insignia will try to use to Mr. Emmel's testimony in their own cases. While the injunction against him may prevent Mr. Emmel from voluntarily testifying in person (absent a court order allowing him to do so), testimony from Mr. Emmel is likely to be introduced at least through transcripts or deposition videos.

Posts related to News America.

Monday, April 13, 2009

Motions to Dismiss Antitrust Cases Against Chocolate Manufacturers Denied; Interlocutory Appeal Certified

Motions to dismiss were denied in the pending antitrust lawsuits against Chocolate manufacturers for allegedly conspiring to fix prices, as the court found that the Plaintiffs’ complaints alleged sufficient facts to plausibly suggest that the defendants had entered into an anti-competitive agreement.

Twombly Standard - The current standard governing motions to dismiss in antitrust cases was announced by the Supreme Court in 2007 in Bell Atlantic v. Twombly, 550 U.S. 544 (2007). The Twombly decision made it more difficult to survive a motion to dismiss, requiring that plaintiffs allege sufficient facts that, if true, demonstrate a plausible right to relief. This replaced the prior standard, which required that a complaint was not to be dismissed “unless it appear[ed] beyond doubt that the plaintiff c[ould] prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 46-47 (1957).

Plaintiffs’ Allegations - Judge Conner held that Plaintiffs’ allegations met the Twombly standard. Plaintiffs alleged a series of three parallel price increases, and “[t]he complaints depict a prototypical market susceptible to conspiratorial price-fixing.” For example, plaintiffs alleged “formidable entry barriers” in the form of high fixed costs, extensive marketing expenditures for launching new products and building brand loyalty, and a steep curve in acquiring technical expertise. Plaintiffs further alleged that costs remained stable because of futures contracts and placid supply markets, and demand was declining because of consumer trends favoring healthier snack options. In addition, Plaintiffs made more specific allegations regarding Defendants’ conspiratorial conduct in Canada, which the Court found “enhances the plausibility of the alleged U.S. price-fixing conspiracy.”

Interlocutory Appeal - Judge Conner found, however, that there is substantial grounds for difference of opinion as to whether the In re Chocolate allegations meet the requirements of the new test from Twombly. He found that Twombly “communicates ‘multiple linguistic signals’ about the standard of review.” While Twombly superceded Conley and required plausibility, the opinion also expressly rejected a requirement of heightened fact pleading of specifics. Thus, a narrow reading of Twombly “construes it as a formalistic change designed to give voice to a pleading standard that was already commonplace in many courts.” Because of the potential for disagreement, Judge Conner granted a motion to certify an interlocutory appeal of the following question to the Third Circuit:

Does Twombly, as a matter of law, authorize a court in a [15 U.S.C.] § 1 case to
draw an inference of conspiracy from the collective effect of repeated parallel
price increases, averments of anticompetitive activity in closely related
foreign markets, transnational management of corporate subsidiaries, opportunity
for collusion, and descriptions of anti-competitive conduct that are
economically sensible in light of mature market characteristics?

Analysis - I agree with Judge Conner’s decision that the In re Chocolate allegations satisfy the standard under Twombly, and believe that the Twombly decision should be narrowly construed. In antitrust cases, the allegations of conspiracy are often circumstantial, as the conspirators tend to be relatively diligent about covering up direct evidence of the conspiracy. The allegations here provide compelling evidence of a conspiracy, even if the evidence is circumstantial. The absence of specific allegations of an actual agreement reached among the defendants should not bar cases from proceeding to discovery when, as here, the factual circumstances suggest that the defendants conspired.

Related posts: Defendants Seek Dismissal of Price-Fixing Class Actions; Study Shows That Commodity Price Rises Don't Justify Chocolate Price Rises; Chocolate Price Fixing Cases Consolidated; Retail Grocery Chains File Suit Against Chocolate Makers; Investigation of Chocolate Makers Goes Global; Chocolate Makers Allegedly Fixed Prices.

Saturday, April 11, 2009

Litigation Forces Changes to Food Marketing

A recent Wall Street Journal article observed that consumer packaged goods manufacturers' marketing practices have been affected by recent litigation trends:

"As Americans have grown more health-conscious, the country has seen a surge in litigation against food companies for allegedly selling unhealthy products and for misrepresenting their products' nutritional value.

In the wake of litigation -- or the threat of it -- some food distributors in recent years have adopted a host of health-promoting steps, like reducing their use of trans fats, limiting marketing of sugary, high-calorie products to children, and toning down boasts about their products' nutritional value."

The lawsuits have not always been successful. For example, a lawsuit alleging that Aquafina's falsely created the impression that the water comes from a mountain spring was dismissed last year. And lawsuits seeking large damages for allegedly causing obesity have been generally unsuccessful, partly because of the difficulty of proving causation.

Recent lawsuits include claims against Coca-Cola for alleged misrepresentations about the nutritional value of VitaminWater, and for allegedly making unsubstantiated claims about calorie-burning properties of Enviga green tea, and a case against Gerber for putting images of a variety of fruits on its Fruit Juice Snacks, even though the fruits were not included in the product.

While plaintiffs' lawyers characterize their lawsuits as a mission about truth in advertising, defense attorneys complaint about the paternalistic approach of the lawsuits, and argue that regulation by the Food and Drug Administration should preempt such lawsuits.

The WSJ Law Blog summarized the article here, and the Consumer Law & Policy blog here.

Friday, April 3, 2009

Additional Details of News America’s Alleged Conduct Emerge

Floorgraphics Trial Transcript Excerpts. A few excerpts from the Floorgraphics trial transcript were posted today by Jim Edwards of BNET. The excerpts include testimony by a Floorgraphics executive that former News America CEO Paul Carlucci threatened to "destroy" Floorgraphics if it competed with News America, and a statement by Robert Emmel that, on an internal News America conference call, Paul Carlucci stated that "if there were individuals that were concerned about doing the right thing, bed wetting liberals in particular . . . , then he could arrange for those individuals to be out-placed from the company."

News America's Gift Card Deal with Safeway. Edwards also posted a story earlier about a lawsuit News America brought against two former employees in the Smart Source Direct ("SSD") division of News America. The former employees, much like Robert Emmel, were accused of breaching nondisclosure obligations to the company. Among the confidential information allegedly disclosed by the employees was that News America "gave up business from Ahold in order to obtain other business from Safeway." (Complaint ¶ 52). Sources indicate that, specifically, the allegation was that News America gave up an agreement with Ahold to distribute third-party gift cards through Ahold stores, relinquishing the Ahold opportunity to Safeway's Blackhawk Marketing Division, which is one of the leading companies in the third-party gift card market (along with InComm). Allegedly in return, Safeway awarded its in-store floor and shelf advertising program to News America rather than Floorgraphics. According to BNET, the case against the two former employees settled.

Update on Valassis and Insignia. Valassis' Michigan state court lawsuit against News America, which had previously been scheduled to begin in March, has been rescheduled for May 27, 2009 because of a conflict in the Judge's schedule. Valassis also has upcoming trials against News America scheduled in California for August 2009, and in federal court in Michigan, which is likely to take place sometime this year, but was delayed after the previous Judge recused himself in February.

In the Insignia lawsuit against News America, motions for summary judgment are scheduled for a hearing on May 11, 2009. Trial would likely occur several months after the hearing.

Related posts about: News America; Insignia; Valassis.


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