Thursday, December 27, 2012

Dial Corp. Sues News America Marketing for Monopolization and Tying

Last week, Dial Corporation filed suit against News America Marketing for monopolizing the market for in-store advertising and free-standing inserts (“FSIs”) and engaging in unlawful tying in violation of the antitrust laws.

In its Complaint, Dial alleges that News America violated Sherman Act § 2 by engaging in “multifaceted and pervasive exclusionary strategies . . . over twenty years . . . [that] suppressed competitive promotion of a massive number of consumer goods in forty thousand retail stores, and scores of newspapers nationwide, to acquire and maintain two unlawful monopolies and earn large monopoly profits at the expense of its purchasers.”

Dial alleges that News America “sought to build contract barriers . . . to make it difficult for [competitors] to compete,” and engaged in other exclusionary actions, including:

  • Hacking into Floographics' computers to obtain customer lists and other marketing materials to solicit its accounts and lock them into News long-term and exclusive contracts;
  • Staggering the terms of the exclusive contracts so that in any given year a News competitor would not have any substantial opportunity to expand its competitive retail distribution network;
  • Enforcing aggressively contractual shelf exclusivity by removing competitors' services and telling customers that their promotions with competitors would not appear;
  • Using large cash guarantees unjustified by potential in-store promotional revenues to derail competitor contracts with retailers, a practice expressly designed to exclude competitors from these chains;
  • Disparaging and misrepresenting competitors' in-store advertising compliance rates, which are important to consumer packaged goods companies when they select a vendor;
  • Disparaging competitors' financial capacity and ability to pay the retail chains for necessary access; and
  • Defacing competitors' in-store advertisements and then disparaging the quality ofthe defaced promotions to the retail chains.

As detailed in earlier blog posts, between 2009 and 2011 News America Marketing paid over $650 million in settlements to three competitors – $500 million to FSI competitor Valassis, $29.5 million to in-store floor and shelf advertising competitor Floorgraphics, and $125 million to in-store shelf advertising competitor Insignia Systems.  Valassis had won a $300 million jury verdict against News America, and also had a separate federal lawsuit pending at the time of its $500 million settlement.

The evidence against News America was strong.  Consistent with Dial’s allegations, the evidence (described in earlier posts on this blog) included documents and testimony showing, for example, that:

  • News America hacked into Floorgraphics password-protected computer accounts at least eleven times and viewed competitively sensitive customer information.
  • 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." Several CPG representatives testified to being upset with the bundled pricing.
  • 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.”
  • 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.
Dial’s 32-page complaint details much of this alleged misconduct, and provides other examples.

It is surprising that the Dial lawsuit was brought only on behalf of Dial, and not as class action on behalf of all affected CPGs.  Given the high litigation costs of a monopolization lawsuit, the hundreds of potential class members, and the hundreds of millions of dollars that could be at stake for CPGs, a class action seems to be a more efficient vehicle for resolving the claims.  As it currently stands, CPGs other than Dial will not recover any of the alleged overcharges unless they file their own separate lawsuit.  On the other hand, if a class action is filed, all CPGs could be represented in a class action that would enable all affected CPGs to benefit from any recovery. 

The Law Firm of Kotchen & Low LLP - Civil Litigation, Counseling, and Representation Before Government Agencies

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