Wednesday, September 18, 2013

Court Declares That Floorgraphics Cannot Pursue Fraud Claim Against News America

A federal court issued a declaratory judgment last week finding that Floorgraphics’ 2009 settlement with News America Marketing precludes Floorgraphics from pursuing fraud claims against News America based on alleged perjury by News America employee Gary Henderson falsely denying having a role in hacking into Floorgraphics’ computer systems.

In 1999, News America Marketing CEO Paul Carlucci allegedly threatened to “destroy” Floorgraphics’ business when it refused to be acquired by News America.  In 2003 and 2004, News America improperly accessed Floorgraphics' password-protected web site, and reportedly engaged in other anti-competitive acts that dramatically decreased Floorgraphics’ business, including making false disparaging statements about Floorgraphics, making false statements about its own performance, coercing retailers into not doing business with Floorgraphics, bundling in-store programs, and demanding a right of first refusal from retailers for future programs.  Floorgraphics filed suit against News America in 2004.  During discovery and at trial, Mr. Henderson denied any involvement in the computer hacking.  The lawsuit was settled during trial in 2009 for $29.5 million.  As part of the settlement, News America acquired assets from Floorgraphics, and the parties signed a mutual release of claims.  Floorgraphics agreed to release News America from “all claims . . . of every nature and description whatsoever, . . . whether known or unknown, concealed or not concealed.”

Not long after Floorgraphics settlement, another News America competitor, Valassis, won a $300 million judgment against News for similar anti-competitive conduct, and eventually settled that and another lawsuit against News America for $500 million.  A third competitor, Insignia, settled a lawsuit making similar allegations of anti-competitive conduct against News America for $125 million.  Some of the damaging evidence disclosed during the Valassis and Insignia lawsuits had not been disclosed to Floorgraphics, and Floorgraphics moved unsuccessfully to undo the settlement and reopen its lawsuit against News America based on the previously withheld information. 

Meanwhile, in December 2009, News America had sued Floorgraphics for breach of contract and fraud, alleging that a substantial part of the assets that were part of the settlement were invalid, unassignable, or non-existent.  In 2012, Floorgraphics sought to add counterclaims against News America for fraud and other claims based on newly discovered evidence that News America’s Gary Henderson had committed perjury when he had denied being responsible for hacking into Floorgraphics’ computers. News America responded by filing an action for declaratory judgment in federal court in New Jersey against Floorgraphics seeking a declaration that Floorgraphics is barred from pursuing its fraud claims by the 2009 Mutual Release, and seeking attorneys fees for Floorgraphics’ alleged breach of a covenant not to sue contained in the Mutual Release.

The court issued a ruling on News America’s summary judgment motion in that lawsuit on September 10.  The Court found that the release agreement could only be vacated if there were “clear and convincing proof of fraud.”  Far from meeting that high standard, the Court found that Floorgraphics “failed to present the Court with any facts tending to support its claim that Gary Henderson committed perjury.”  The Court therefore declared that it is “barred from asserting its Fraud Claims against NAM based on the alleged perjury committed by Gary Henderson.”

Floorgraphics' purported failure to present any such evidence is somewhat puzzling in light of disclosures in a New York Magazine article in 2011 that Gary Henderson had admitted to News America staffers that he had admitted to obtaining proprietary information about future Floorgraphics ads from inside Floorgraphics’ computer system, and that he had the blessing of his bosses.  While the article itself is inadmissible hearsay, presumably Floorgraphics could have procured evidence of the fraud if it had been allowed to depose the witnesses quoted in the article.

The Court rejected News America’s claim for attorneys’ fees based on Floorgraphics' alleged breach of the covenant not to sue, noting that the declaratory judgment action had been filed by News America, not Floorgraphics.

While Floorgraphics was unable to obtain any relief for Gary Henderson’s apparent perjury, News America is not entirely out of the woods, as there are two major lawsuits still pending against it: a putative class action lawsuit filed by consumer goods manufacturers for alleged overcharges they paid for advertising because of News’ anti-competitive scheme; and a shareholder lawsuit claiming that News’ improper actions cost shareholders $655 million for the Valassis, Insignia, and Floorgraphics settlements.

Monday, June 17, 2013

Canadians Indict Chocolate Companies for Price-Fixing After Lengthy Investigation

Criminal price-fixing charges were recently filed against Canadian affiliates of Nestle and Mars, a network of wholesale distributors, and three individuals, alleging that they conspired to fix chocolate prices in Canada.  In addition, Hershey Canada agreed to plead guilty to price-fixing related to conspiratorial communications with competitors in 2007.

According to recently unsealed documents, a price-fixing investigation of the chocolate companies began when Cadbury came forward as a whistleblower in July 2007 seeking to participate in an immunity program in return for its cooperation.  The chocolate companies allegedly fixed prices during meetings in coffee shops, restaurants, and at trade conventions, and through phone calls and e-mails beginning in 2002.  The conspiracy allegedly involved senior employees in both the United States and Canada.

Chocolate purchasers filed class action lawsuits in the United States against Hershey, Nestle, Mars, and Cadbury in 2008, and class certification was granted in 2012.  Those suits are ongoing.

I was asked in a recent media interview why chocolate in particular was subjected to price-fixing as opposed to some other product.  While a lot of other products are subject to price fixing agreements besides chocolate, products are more susceptible to collusion under certain economic conditions that are present in the chocolate industry.  These include an oligopolistic market, high barriers to entry, high fixed costs, a commodity product, many small customers, and inelasticity of demand (e.g., the absence of close substitutes for the product). 

As chocolate lovers (like myself) can attest, there is no close substitute for chocolate, which many people crave, and which is reported to provide certain health benefits when consumed.  In other words, one of the qualities that makes chocolate susceptible to price-fixing is that people love chocolate, and will continue to purchase chocolate even if prices are artificially inflated.

Update June 21, 2013: Hershey's received a fine of almost $4 million in connection with its guilty plea.  A trial date for Nestle and Mars is set for October 3.

Wednesday, June 12, 2013

Pension Fund Files Derivative Suit Related News America Marketing’s Anticompetitive Acts

On June 7, a pension fund filed a derivative suit against News Corp and its top executives for breach of fiduciary duty, and against the executives for waste of corporate assets and unjust enrichment.  These claims are based on News America Marketing’s illegal and anti-competitive business practices, including monopolizing the market for in-store promotion services and for FSIs.

News America has paid almost $655 million to settle lawsuits from three competitors related to its anti-competitive practices, and may be forced to pay millions more to resolve a lawsuit filed by customers such as Heinz and Dial, and by Foster Poultry Farms on behalf of a proposed class of customers.  In addition, News America was the subject of an FBI investigation related to News America’s computer hacking, and was allegedly investigated by the DOJ for possible antitrust violations.

According to the Complaint, News Corp acquired dominance in the market for advertising and promotion services geared toward CPGs “through various wrongful acts designed to impede competition, including: (i) entering into long-term exclusive contracts with retailers; (ii) paying large economically unjustifiable cash payments to retailers to derail competitor contracts; (iii) bundling and predatorily pricing its in-store advertising and promotion products and services with its FSIs; (iv) hacking into competitors’ computer files; (v) dishonestly disparaging competitors’ compliance rates and financial viability; and (vi) defacing competitors' advertisements.”

Defendants allegedly breached their fiduciary duties by “creating a culture of lawlessness within News Corp, and/or consciously failing to prevent the Company from engaging in the unlawful acts.”

As relief, the plaintiffs seek an order: requiring News to “reform and improve its corporate governance,” requiring disgorgement of benefits obtained by the defendants, and awarding fees and other appropriate relief.

Monday, April 29, 2013

Advertisers Expanding Case Against News America to Become a Class Action

An antitrust lawsuit brought by Dial Corporation and Heinz against News America Marketing is being expanded to include as Plaintiffs a proposed class of all domestic entities that purchased in-store promotions from News America.

Last December, I reported that News America Marketing had been sued for monopolization and tying by Dial Corporation.  Heinz joined the suit as a Plaintiff shortly thereafter.  Dial and Heinz alleged that News America engaged in a variety of exclusionary practices that allowed News America to create a monopoly and artificially inflate its prices.  Plaintiffs’ allegations about News America’s conduct included a number of allegations that were the subject of previous lawsuits against News America brought by its main in-store competitors -- Floorgraphics, Valassis, and Insignia -- that resulted in aggregate settlements totaling over $650 million.

For example, Plaintiffs allege that News America hacked into Floorgraphics’ password-protected computer system, made false disparaging statements about its competitors, improperly removed competitors’ ads, secured long-term deals with retailers and staggered the expiration dates to prevent any competitor from obtaining a critical mass of retailer contracts, overpaid for contracts with retailers to shut out its competitors, and unlawfully bundled in-store advertising with FSIs.  Using these exclusionary tactics, News America allegedly obtained an 84% market share of the in-store advertising market by 2009.  (Given the anti-competitive components of News America’s settlements of the competitor lawsuits, that share has presumably grown).

Last week, Plaintiffs sought permission to file a proposed Second Amended Complaint that expands the case to include class allegations (as predicted), and to add Foster Poultry Farms as a proposed class representative.  The proposed class is defined to include domestic entities that have “directly purchased in-store promotion services from News America” within the past four years.

News America is arguing that the relevant product market is not limited to third-party advertising in retail stores, but should be defined much more broadly to include other forms of advertising, including advertising placed by retailers.

News America counter-sued Dial and Heniz in January for allegedly breaching a forum selection clause in the parties’ contracts requiring that they litigate in New York, rather than in Michigan where the advertisers’ suit is pending.  News America is also seeking declaratory judgment in the New York suit that it did not engage in monopolization or tying.
If your rights may be affected by this case, please feel free to contact me or my firm for advice.

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