Tuesday, February 8, 2011

Insignia Systems v. News America Marketing Trial Begins

Jury selection began Monday in Insignia Systems v. News America Marketing, No. 04-4213 (D. Minn.). Insignia Systems is seeking over $200 million in damages (before trebling). (BNET).

Insignia Systems alleges that News America engaged in a campaign to exclude Insignia and other competitors of News from the in-store industry by, e.g.: bundling its various advertising programs to prevent Insignia from effectively competing; threatening retailers to stop doing business with News America’s competitors; and offering uneconomically large payments to retailers to exclude News America’s competitors, such as Insignia and Floorgraphics.

Beginning no later than 2001, News America allegedly began an anti-competitive campaign to drive Insignia from the market through various illegal tactics, including: dissemination of false and misleading statements about Insignia’s ability to perform on its contracts; falsely claiming authority to remove Insignia advertisements from stores; bundling its various advertising programs to prevent Insignia from effectively competing; threatening retailers to stop doing business with Insignia; and offering uneconomically large payments to retailers to exclude Insignia from the business. For example, News America claimed in a letter and promotional materials to CPGs that Insignia installed less than 20% of the signs CPGs paid Insignia to install and Floorgraphics installed less than 50%, when, in fact, their installation rate was much higher.

A similar lawsuit brought by Floorgraphics, an in-store floor, shelf, and coupon advertising provider, ended in a settlement during trial of approximately $30 million. Floorgraphics alleged 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.

Another advertiser -- Valassis – brought suit against News America for engaging in similar anti-competitive tactics in the market for Free Standing Inserts (“FSIs”) – coupons frequently distributed in Sunday newspapers. 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. After trial in state court, a jury awarded Valassis $300 million, which News America appealed. Valassis also had a case pending in federal court, and News America eventually settled both cases for $500 million.

Some of the evidence elicited during the Floorgraphics and Valassis trials may prove damaging to News America in the Insignia trial as well. For example:

  • 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 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.” Mr. Garofalo also stated that News America intentionally erected barriers to entry by potential competitors, stating in the same video clip that “we also staggered the deals to prevent a large percentage of our network from being vulnerable at any specific point in time. . . . [T]his method . . . means a competitor who wants to develop a critical mass for their network would have to dedicate a lot of money over a considerable period of time in order to break into the in-store game in any significant way.”
  • 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 competitors, and overpaid for exclusive contracts with retailers. He also testified that they made false disparaging statements about in-store competitors Floorgraphics and Insignia.

The Court issued pre-trial rulings last week on the admissibility of a variety of evidence that was being challenged by News America or Insignia. The Court agreed to exclude: reference to the possibility of treble damages; certain expert testimony; evidence of layoffs at Insignia; and evidence of an alleged gift to a Winn-Dixie employee responsible for awarding the in-store advertising contract to News America, as described by BNET.

But the Court decided to allow: evidence of Insignia’s now-defunct Senior Management Litigation Incentive Plan, which would have rewarded Insignia executives with bonuses if the litigation is successful; evidence related to the Floorgraphics and Valassis lawsuits (but only to the extent that they are not offered for the truth of the matter asserted); certain CPG hearsay statements made to Insignia employees; testimony regarding News’ influence in the FSI market; evidence of News Corp’s size and wealth; testimony and notes of Debra Lucidi regarding News America, including notes about News’ price increases and poor service, in which she stated that it “[f]eels like they are raping us and they enjoy it.”

Last week, Insignia and News America engaged in lengthy court-ordered settlement discussions, but those discussions were apparently unsuccessful. As with the Floorgraphics lawsuit, a settlement during the middle of trial is a definite possibility.


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