Small business wins big

Pub date August 17, 2010
WriterTim Redmond

Six years after the Guardian filed a lawsuit accusing SF Weekly and its chain owner of illegal predatory pricing, the California Court of Appeals has issued a precedent-setting ruling that not only affirms the Guardian’s claims but strikes a dramatic blow for small independent businesses in California.

A three-judge panel concluded Aug. 11 that the state’s Unfair Practices Act protects businesses from cutthroat predators that sell a product below cost with the intent of injuring competition. The judges, Robert L. Dondero, who wrote the decision, and James J. Marchiano and Sandra L. Margulies, who concurred, directly rejected an argument that would have undermined the historic law and concluded that the state of California has every right to provide small merchants with greater antitrust protections than the federal government.

It marked the first time that a state appeals court had weighed in on whether California’s UPA should be enforced under the weaker federal standard. The ruling offers broad protections to small companies trying to survive against the market power of giant chains.

The Guardian sued SF Weekly and the New Times chain, now owned by Village Voice Media, in 2004, claiming that the Weekly was systematically selling ads below cost in an effort to put the local competitor out of business.

Evidence presented in a six-week trial in 2008 showed that the Weekly had lost money every single year since New Times bought the paper in 1995. The Phoenix-based chain poured tens of millions of dollars into propping up the Weekly, while the Weekly’s sales staff sold ads at a fraction of the cost needed to support the operation — all with the goal of taking business away from the Guardian.

“We have before us the case of an ongoing, comprehensive, below-cost pricing scheme instigated and executed conjointly by two parties,” the court concluded.

It was a classic case study in what the UPA, which dates back to 1913, was designed to prevent: a big, wealthy corporation using its deep pockets to cripple a local competitor. The court decision notes that shortly after New Times bought SF Weekly in 1995, New Times Executive Editor Mike Lacey announced that he would use the chain’s deep pockets to assault the Guardian. “The essence of Lacey’s message was that he wanted to ‘put the Guardian out of business,'<0x2009>” the ruling states. “The sales representatives were made aware that advertising could be ‘sold below cost’ if needed ‘in order to make a sale’ and the resources of New Times would cover the loses, even over a term of many years.”

The end result, trial records showed: SF Weekly and the East Bay Express, which New Times bought in 2001, lost a total of $24 million between 1996 and 2007. (The Express was sold in 2007 to local owners.)

A San Francisco jury ruled March 5, 2008 that the Weekly and New Times had violated the law and awarded the Guardian more than $6 million. The statute allows for treble damages, and Judge Marla Miller increased the award to $15.6 million. With interest and attorney’s fees, the verdict now exceeds $22 million.

New Times appealed, raising two central issues. The verdict, the chain argued, was invalid because the Guardian never demonstrated which individual accounts it lost because of which specific below-cost sales. And the law itself was dubious because it doesn’t require a plaintiff to prove that a predatory competitor had the ability to recoup its losses after driving the smaller outfit out of business.

Throughout the trial and afterward, Andy Van De Voorde, VVM’s executive associate editor, repeatedly belittled the suit on the grounds that the Guardian didn’t present individual instances of lost ads. But the court rejected that argument, saying that nothing in the UPA mandated a showing of individual below-cost sales; the fact that the Weekly lost money for 10 years, and that its overall ads prices were far below its total cost of operations, was plenty of evidence of illegal sales. The Guardian, the ruling states, was not “required to prove the precise amounts of damages attributable to the loss of individual customers or sales.” In fact, that standard would make predatory pricing cases of this nature — with thousands of sales over many years, almost impossible to pursue — particularly, the court noted, when “it is the wrongful acts of the defendant that have created the difficulty in proving the amount of lost profits.”

The recoupment argument was critical: New Times wanted the court to force the state to adopt a federal standard that since the 1980s has pretty much gutted federal antitrust law.

The appeals court justices resoundingly rejected that claim, ruling that the state Legislature has every right to pass laws protecting small businesses against acts that the federal courts may be willing to allow. And it’s clear that the UPA contains no mention of recoupment.

“We do not lightly imply terms or requirements that have not been expressly included in the statute,” the ruling states.

New Times argued, both in court and in its published reports, that laws against anticompetitive conduct must protect consumers, not businesses; if one company cuts prices, that helps consumers — and unless there’s evidence that a lack of competition in the future would cause prices to go up, then the law shouldn’t prohibit below-cost sales.

But the Appeals Court took a different approach, concluding that this particular state law was not only designed to protect consumers in the short term, but small businesses (and thus overall competition) in the long term.

That’s consistent with the history of the Unfair Practices Act, which was written during California’s progressive era, when reformers were concerned about large businesses (particularly supermarket chains) driving local markets out of business. It was, James R. McCall, a professor at UC Hastings College of Law, wrote in the Pacific Law Journal, “the first comprehensive modern state predatory pricing statute.”

In a 1997 article, McCall noted that federal courts had undermined much of the power of antitrust laws such as the Sherman Antitrust Act, such that “by 1980, the era of expansive application of antitrust acts in federal courts had ended.” However, the California law, later copied in six other states, “is precisely drawn to eliminate defined commercial practices such as predatory pricing.”

Joseph Hearst, an East Bay attorney and appellate specialist who helped write the Guardian’s appeal brief, noted that the court had taken the questions in the appeal very seriously. “It is obvious the court did an enormous amount of independent research — quoting cases neither side had mentioned in their briefs and demonstrating a mastery of the topic,” he said. “The court was clearly aware of the issues at stake, not only in this case but in future cases involving the Unfair Practices Act. They carefully explored how the UPA is different from federal predatory pricing law and pointed out that the UPA, in some respects, sets a much tougher standard than federal law, which is why they could confidently say that it does not require the federal ‘recoupment’ standard.”

Ralph Alldredge, the Guardian’s lead trial and appellate attorney, noted that “this is the most direct attack upon the viability of the UPA since its constitutionality was challenged unsuccessfully in the 1940s. By rejecting it, the Court of Appeal has confirmed that the UPA cannot be subverted by importing federal standards which have made below cost pricing claims impossible to win in federal court.”

He added: “Think of what that means for big-box retailers, which have used below-cost selling on some products to attract customers away from small, independently owned grocery, hardware, drug, and department stores.”

The Weekly has an entire section of its website devoted to the lawsuit, which it calls “stupid” and “absurd.” The trial, the Weekly argues, was “marred by judicial error and emotional anti-chain arguments.” At one point, the paper even argued that the Guardian was delaying its response to the New Times appeal briefs because we feared losing the appeal.

But as of press time, the Weekly had not published a word on the Appeals Court ruling. It’s the first time anything has happened in the case that the Weekly hasn’t covered. I e-mailed Van De Voorde to ask for comment, but he hasn’t gotten back to me.

PS The Guardian‘s legal team, which did a stunning job at every level, consisted of Richard Hill, E. Craig Moody, and Ralph Alldredge at the trial level, assisted by Joseph Hearst in the appeal and by Jay Adkisson and Travis Farnsworth on the collection efforts.