SAN FRANCISCO – For the 30th anniversary edition of The San Francisco Bay Guardian, founders Bruce B. Brugmann and Jean Dibble, his wife, posed for a cover shot in front of their home.
Dibble wore an apron and an overall-clad Brugmann held a pitchfork, recreating one of this country’s most famous paintings, Grant Wood’s 1930 “American Gothic.”
The photo was a nod to the couple’s Midwestern roots. Wood’s portrait depicted an Iowa dentist and his sister; Brugmann and Dibble came to San Francisco from Rock Rapids, Iowa, to start the Guardian in 1966.
But it wasn’t a pitchfork that got the unapologetically left-leaning newspaper going. It was a lawsuit.
In 1970, Brugmann sued the San Francisco Newspaper Agency, which operated the San Francisco Chronicle and the San Francisco Examiner under a joint operating agreement. Brugmann’s complaint asserted that the agreement constituted a monopoly.
The case settled for $500,000, and Brugmann used the money to increase the frequency of his publication.
Forty years later, Brugmann is back in court with another anti-competitive lawsuit.
This one, against SF Weekly and its parent chain, New Times Newspapers, asserts that the Weekly sold its advertisements below what it cost to produce them in an effort to push the Guardian out of business. Bay Guardian Co. v. New Times Media, 435585 (S.F. Super. Ct., filed Oct. 19, 2004).
Jury selection is set to begin Thursday in San Francisco County Superior Court, Judge Marla J. Miller’s courtroom.
Brugmann’s suit also claims below-cost ad sales or “predatory pricing” by the East Bay Express, which New Times bought in 2001 but sold last year. New Times merged with and became Village Voice Media in 2006. Its 17 publications make it the largest chain of alternative newsweeklies in the United States.
New Times executives and its attorneys deny that either the East Bay Express or SF Weekly sold ads below cost in an effort to rid the market of the Guardian.
Experts say predatory-pricing cases are interesting because of the inherently economic and somewhat theoretical aspect of the claims. What is cost, and how should it be determined? And, perhaps more important, does the plaintiff need to prove that the defendant would be successful post-predatory pricing?
In California, at least, the latter may be debatable.
SF Weekly launched in 1989. When New Times bought the Weekly in 1995, the Bay Area became one of three places New Times had a direct competitor in the market. In the second and third places, Cleveland and Los Angeles, New Times competed with rival Village Voice Media papers. In 2002, a “market-swap” deal between the chains eliminated head-to-head competition in those cities but caught the attention of the Justice Department. In January 2003, both companies signed a consent decree agreeing to aid competition by selling the rights to their former paper names. Neither admitted wrongdoing.
Brugmann points to that incident as evidence that New Times has a history of eliminating competition, but a pretrial motion from New Times barred any reference to the deal at trial.
The Weekly and the Guardian are both distributed free and depend largely on advertising revenues.
Although generally more politically moderate – and far less likely to take on such constant Brugmann targets as Pacific Gas and Electric Co. – the Weekly closely parallels the Guardian’s other qualities, including ubiquitous advertising for medical-marijuana clubs, “escort” services and bars and restaurants.
San Francisco Kerr & Wagstaffe attorneys H. Sinclair Kerr, James M. Wagstaffe and Ivo Labar represent New Times.
Labar said Brugmann is using the Weekly as a “scapegoat” for his own problems in dealing with new challenges in print media.
Michael Lacey, executive editor of the new Village Voice chain, agreed.
“[A lawsuit] is how Bruce got into the business, and now, in the twilight of his years, it’s how he’s hoping to maintain his business in a really tough media market,” Lacey said.
But Brugmann denies that’s the case.
“Of course that’s their story,” he said. “But from our point of view, the fact that the economy is not good and there are other problems in this business only makes this problem more acute.”
The problem Brugmann refers to began after New Times’ purchase of the Weekly.
According to Brugmann, his advertising staff started coming to him saying they were having problems making sales.
An exhibit in the Guardian’s court documents shows a list of dozens of advertisers, with Guardian employee notations alongside them: “Couldn’t match SFW,” “Great Deal with EBE [East Bay Express],” “Ludicrous deal from SFW,” “SFW giving away free ads,” “Will come back if match SFW,” “Match SFW or we’ll pull ads.”
Brugmann said he tried warning the Weekly about its practice. But when the ad rates didn’t go up, he sued.
“We had to sue them to get an even playing field,” he said.
Brugmann’s complaint asserts that the Weekly is using its parent company’s resources to lose money in San Francisco until the Guardian folds – like a broadsheet.
“This is a situation where a chain has decided that it could take over the market and either run a small family-owned company out of business or at least cripple them so they wouldn’t be an effective competitor,” said Ralph C. Alldredge, a San Francisco attorney who represents the Guardian.
E. Craig Moody and Richard P. Hill of San Francisco’s Moody & Hill also represent the Guardian.
In opposition to the Weekly’s motion for summary judgment (which was denied by San Francisco County Superior Court Judge Richard A. Kramer in October), the Guardian points out that Weekly executives knew their paper could make money in the Bay Area market if they raised their advertising rates.
The Guardian’s papers also cite evidence of wrongful intent. One piece of evidence is that, in a meeting with Weekly staff shortly after New Times bought the paper, Lacey told his employees he wanted the Weekly to be “the only game in town.”
Lacey points out that statement was made well before the period covered by Brugmann’s lawsuit and that he was speaking about editorial content, not advertising.
“I write for a living, and I edit for a living,” he said. “I have nothing to do with advertising. I never have.”
According to Lacey and attorney Labar, the Weekly would be no better off with the Guardian out of the picture.
“That doesn’t change our business profile here,” Lacey said. “I guarantee you, like mushrooms cropping up, there will be publications cropping up. Everybody takes a piece of the same sorts of actions.”
Labar agreed.
“This isn’t a city with two newspapers,” he said. “It’s a city with unlimited means to advertise.”
In papers, the Weekly point to several other newspapers or online advertising outlets that clutter the Bay Area market: a weekly supplement in the San Francisco Chronicle, the Chronicle itself, The Onion and craigslist, among others.
But the Guardian’s papers assert that New Times executives called the Bay Area advertising market a “zero sum game” with the Guardian and kept track of the number of advertising inches purchased by each Bay Guardian customer in a weekly “Guardian Report.”
Experts say predatory-pricing cases face very different odds depending on where they are filed. Attorneys say California superior courts generally are seen as more friendly to plaintiffs.
That’s largely because federal courts have been swayed by decades-old economic theory that is skeptical of the plausibility of predatory-pricing claims, some say.
“[The theory] was highly critical of the idea that predation could ever work,” said Daniel A. Crane, an antitrust professor at the Benjamin N. Cardozo School of Law. “For one, it’s extremely expensive. Then, you not only have to prevail, you have to recoup [recover your losses]. If another firm comes into the market, you don’t get to recoup. It’s almost a suicidal way of doing business.”
Crane, who has written about predatory-pricing cases, said economic theory also has developed in support of predatory-pricing claims. But in his view, the theories often don’t stand up in the real world.
Don T. Hibner, an antitrust attorney with Sheppard, Mullin, Richter & Hampton in Los Angeles, agreed.
“With enough ifs, we could put Paris in a bottle,” Hibner said, paraphrasing a French proverb. “We want to use economic theory to buttress facts and common sense. If we’re going out on a limb and all we have is economic theory, God help us.”
To protect competitors from purely theoretical claims, Hibner said federal courts have adopted tougher standards for plaintiffs in predatory-pricing cases. First, they’ve adopted a method of calcuutf8g cost that takes into account only variable costs.
California uses a method called “fully allocated costs,” which factors in all costs, both fixed and variable. That method generally yields a higher cost, making it easier for a plaintiff to show that any sale was below cost.
Second, federal courts require the plaintiff to prove that the defendant would in fact be able to recover or recoup its losses after the plaintiff was pushed out of the market. California courts have not directly addressed the issue of recoupment, making the recoupment prong debatable, attorneys say.
Cost and recoupment are the “two horns on which you can be hooked” in federal courts, according to Maxwell M. Blecher, of Blecher & Collins in Los Angeles. Blecher most often represents plaintiffs in predatory-pricing cases.
Hibner said the California statutes dealing with sales below cost “seem to mean what they say,” he said.
The primary statute at issue, Business and Professions Code 17043, reads, “It is unlawful for any person engaged in business within this state to sell any article or product at less than the cost thereof to such vendor, or to give away any article or product, for the purpose of injuring competitors or destroying competition.”
Hibner said literal readings of the statute sometimes can shift the protection of antitrust laws from consumers to “inefficient competitors.”
But according to Alldredge, the language makes the Guardian’s case simple.
“All you do is take all of their costs and divide that by the number of inches of advertising space they sold,” he said. “That tells you how much the cost is per inch. Whenever they sell below that cost, under California law, they’ve committed a violation.”
And, he added, under California’s Unfair Practices Act, with even one below-cost sale, a defendant’s negative intent is presumed.
That places the burden on the defense to show that they had another reason for selling below cost.
“Why were we selling below cost on certain advertisements?” Labar asked. “We couldn’t get a higher price.”
Labar said the triable issue of fact is intent.
“They’re trying to say a handful of documents and a couple of statements indicate we were trying to run them out of business,” he said. “We say, ‘No, they indicate we were trying to compete.'”
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