LEGAL ISSUES

Court Sides With Small Business in Predatory Pricing Case

A California Supreme Court ruling that cracks down on predatory pricing is being hailed as victory for small businesses.
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In what is being hailed as victory for small businesses across California, the state Supreme Court Tuesday refused to review lower-court rulings ordering fines and damages for one newspaper chain's attempt to drive a scrappy rival out of business by selling ads below cost.

The saga began in 2004, when the locally owned California Bay Guardian newspaper sued the SF Weekly and the New Times chain, now known as Village Voice Media, accusing the Weekly of selling cheap ads in an attempt to harm the Bay Guardian's business. Both are distributed free and depend on ads for business, and both have lost revenue since 2000. But thanks to the deep pockets of the large company that owned it, the Weekly could stay in business despite losing money every year, and – the Bay Guardian charged – was using bargain-basement ads as a way to put the Guardian out of business.

"We have before us the case of an ongoing, comprehensive, below-cost pricing scheme," the justices on the Appeals Court concluded. They ordered Village Voice Media to pay the $16 million in damages lower courts had ordered.

The Phoenix-based company appealed to the state's highest court, arguing that the newspaper's cut-rate advertising was legitimate competition that benefited local businesses. Only one justice out of seven voted that the Supreme Court should hear the case. (A simple majority is required for a hearing.)

Previously, the company denied it was attempting a monopoly, and pointed to declining readership and an ailing economy for the Guardian's woes. But a San Francisco jury decided in March 2008 that the Weekly's pricing was predatory – and therefore illegal under California's Unfair Practices Act, which was designed to protect small business from big chains. Some 20 states have similar laws.

The jury awarded $6.2 million in damages, and a Superior Court judge bumped the figure up to $16 million. (Antitrust law penalties and interest add another $5 million, for a total of $21 million.)

In ordering the damages to stand, the Appeals Court cited evidence that after the New Times bought SF Weekly in 1995, the chain's executive editor announced his plans to starve the Guardian of revenue.

"The essence of [the editor's] message was that he wanted to 'put the Guardian out of business,'" 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 losses, even over a term of many years."

Observed the Guardian: "The appellate courts have made clear that predatory pricing is a violation of law – and the ruling can now be used by any merchant fighting big chains."  

Or as Ralph Alldredge, one of the newspaper's lawyers, said after the appeals court victory: "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 case still could be determined by a settlement. Lawyers for both publications declined to comment.

Last updated: Nov 24, 2010

COURTNEY RUBIN

Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.




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