Untying the Guardian Knot

by Clyde Leland

While attorney Jay Adkisson tries to collect a multimillion-dollar judgment against a Bay Area alternative weekly, the legality of the jury award is being argued before the Court of Appeal (Bay Guardian Company v. New Times Media, LLC, et al.,) No. A122448 (Cal. Ct. App. 1st Dist., Div. 1 appeal filed Aug. 25, 2008)).

"When [a] case is on appeal, only a handful of issues are important," says Dennis Peter Maio, counsel in the San Francisco office of Reed Smith and New Times's appellate attorney.

Two and a half years ago jurors found that after New Times bought the SF Weekly in 1995, it set out to destroy the Bay Guardian. The panel found that SF Weekly systematically sold its display advertising space below cost with intent to injure a competitor, a violation of California's Unfair Practices Act (UPA) (Cal. Bus. & Prof. Code §§ 17000?17101).

In its appeal, New Times alleges that the trial court made two critical errors, first by leaving out one element of a cause of action for predatory pricing under the Act, and second by relieving the plaintiff of having to prove that element by giving an erroneous instruction to the jury.

According to its briefs, New Times asserts that a finding of predatory pricing requires a showing that the accused (1) sold advertising below cost; (2) acted with an intent to injure a competitor or competition; and (3) has "an economically rational plan that would likely enable it to later increase prices above a competitive level to recoup losses." Courts have found that the third element - a so-called recoupment requirement - is implicit in federal antitrust statutes but is not an element in California's UPA.

At trial New Times conceded that it sold ad space below cost, but it denied intending to injure its com-petitor. The jury unanimously rejected that claim; three witnesses testified that the media chain's founder, Michael G. Lacey, said during his first meeting with the staff of the newly acquired SF Weekly, "We don't want to just compete with the Bay Guardian; we want to put the Bay Guardian out of business ... We will bury the Bay Guardian."

Judge Marla J. Miller had instructed the jury, based on Business and Professions Code section 17071, that state law includes a presumption of intent when the plaintiff proves that below-cost pricing damaged a competitor, but she added that the defendants could introduce evidence to rebut the presumption. Maio contends that Miller's instruction improperly shifted the burden of proof to the defendants, and that the correct instruction would shift only the burden of producing evidence.

Not surprisingly, the Bay Guardian's's defense is that Miller's jury instruction in fact went only to the burden of production.

But if the burden-of-proof issue seems technical, it may also be unimportant. The main thrust of New Times's appeal is that California's UPA - and in particular section 17043 - should parallel antitrust case law in federal and in other state courts, where a recoupment requirement was grafted onto predatory pricing cases in the 1980s (see Matsushita Elec. Indus. Co., v. Zenith Radio Corp., 475 U.S. 574, 592594 & n. 16 (1986)).

Maio argues that predatory pricing statutes modeled on the Sherman Antitrust Act imply a recoupment requirement, based on reasoning that the low prices that result from selling below cost harm neither consumers nor competition.

Joseph A. Hearst, the Berkeley appellate lawyer who represents the Bay Guardian, responds in court papers that New Times's arguments "have no connection with the language of the UPA and cannot be reconciled with that language. That same problem has led California appellate courts to reject all previous attempts to import federal below-cost pricing standards into the UPA." He cites language from section 17043, which requires a showing that the defendant acted "for the purpose of injuring competitors or destroying competition."

"Note the disjunctive 'or' there," Hearst says. "It is enough to have the purpose of injuring one competitor." Nor is that disjunctive an accident of drafting, he contends, since other sections of the UPA use the conjunctive "and" to require both injury to competitors and injury to competition.

Hearst also points to what he calls a key distinction between a UPA claim and one asserted under federal antitrust law. As pointed out by former California Supreme Court Justice Marvin Baxter, "a UPA plaintiff need not demonstrate that the below-cost seller anticipates recoupment of losses in the monopolistic market." (Cell-Tech Comm., Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 219 (1999) (Baxter, J. concurring & dissenting); see also Fisherman's Wharf Bay Cruise Corp. v. Superior Court, 114 Cal. App. 4th 309 (2003).)

Maio argues that it's crazy to think a consumer protection statute would punish a vendor just for having low prices. But Hearst notes that the rates charged for an ad in SF Weekly were being supplemented by revenues from the parent com-pany. That's the anticompetitive part, he contends.

Hearst adds that he's not losing sleep over the outcome of the appeal - but he isn't sure where even a favorable ruling will leave his client. "I am worried that we won't be able to collect," he says.

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