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.

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

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