(Super. Ct. for the City & County of San Francisco No. CGC-04-435584) Trial Judge Honorable Marla Miller
The opinion of the court was delivered by: Dondero, J.
CERTIFIED FOR PARTIAL PUBLICATION*fn1
The Bay Guardian and the San Francisco Weekly are competing alternative newspapers in the San Francisco Bay Area. Each paper relies on advertising revenue in large part to sustain the publication of the news weekly. San Francisco Weekly offered advertising to business entities at a rate lower than was provided by the Bay Guardian. Consequently, the Bay Guardian sued San Francisco Weekly for unfair competition under California law. It was successful and won a jury verdict of approximately $16 million.
This appeal has been taken by defendants New Times Media (the New Times), San Francisco Weekly (the SF Weekly), and East Bay Express (the Express), from a judgment that awarded plaintiff Bay Area Guardian (the Guardian) damages in an action for violations of Business and Professions Code section 17043 based on sales of advertising at rates below cost for the purpose of harming a competitor.*fn2 Defendants claim that the trial court erred by failing to admit defense evidence and properly instruct the jury on the essential element in a section 17043 action of proof of the defendant's ability to recoup losses. Defendants also argue that the court gave defective instructions on the intent or "purpose" to harm a competitor and the statutory presumption of improper purpose stated in section 17071. They further assert that the evidence presented by plaintiff failed to adequately prove the element of damages caused by the below-cost sales, or that the New Times and the Express were agents of the SF Weekly so as to incur liability to plaintiff pursuant to section 17095.
We conclude that recoupment of losses by the defendant is not a requirement to prove a violation of section 17043. Therefore, the trial court did not err by failing to instruct the jury on recoupment of losses as an element of the action, by limiting the presentation of defense evidence on recoupment, or by denying defendants' motions for judgment based on lack of evidence of recoupment. We also conclude that the court's instructions on the purpose to harm a competitor and the statutory presumption of improper purpose were not erroneous. Substantial evidence supports the finding of damages suffered by plaintiff, and the agency relationship between the SF Weekly and the New Times. The judgment against the Express must be reversed for lack of evidence that it acted as an agent of the SF Weekly to sell advertising at rates below cost in violation of section 17043. Otherwise, we affirm the judgment.*fn3
The Guardian was first published in October of 1966 in San Francisco as an "alternative" newspaper of "tabloid size," published weekly and distributed free of charge. The Guardian targeted a young, educated, affluent audience, more focused on alternative views and life styles than daily newspapers such as the San Francisco Chronicle or San Francisco Examiner. Without any revenue from circulation, the Guardian relied almost exclusively on sale of advertising space in the paper to produce income. The Guardian sold two forms of advertising: classified advertising, which was primarily personal in nature and was placed in the back of the paper; and display advertising, which was purchased by local retail businesses and sold "modularly" as a larger portion of a page of the newspaper. During the first six years of existence the Guardian struggled, and was published only irregularly. By 1995, however, the Guardian became the dominant weekly newspaper in the San Francisco Bay Area. Between 1985 to 1995, revenues grew from $2 million to $8 million, and then to over $11 million by 2000, of which $7.6 million was attributable to display advertising.
Over the years the Guardian did not compete with the radio or "even the daily" newspapers, but rather with other "non-daily papers" which also had "alternative" editorial content. One of the Guardian's competitors was defendant SF Weekly, which in 1995 principally focused "on the music scene in San Francisco," and had a target demographic of 18 to 40 years of age.
Defendant the New Times decided to acquire the SF Weekly in 1995 to enter the vibrant San Francisco journalism market. At the time the SF Weekly was a marginally profitable newspaper of under 70 pages per edition which had a circulation of about 90,000 - about half that of the Guardian. The objective of the acquisition of SF Weekly was to increase circulation and improve content by bringing more "magazine-length journalism into the paper." Thus, from 1995 to 2000 the journalism staff of the SF Weekly was increased significantly, as was the editorial size of the paper, its circulation, number of advertisers, and total revenue.
The Guardian adduced evidence at trial that soon after the acquisition the executive editor of the New Times, Mike Lacey, disparaged the content of both the SF Weekly and the Guardian at a staff meeting, and announced that he wanted "the SF Weekly to be the only game in town." The Guardian was considered the primary competitor of the SF Weekly. Lacey stressed that the New Times had "deep pockets," with the financial resources to "compete very aggressively" with the Guardian and use "guerilla tactics" in rate battles. Lacey also emphasized that he was interested in improving the editorial quality of the SF Weekly. To increase circulation, additional salaried journalists were hired to bring higher quality "long form journalism" to the paper. The essence of Lacey's message was that he wanted "to put the Bay Guardian out of business."
One of the "new policies" implemented at the SF Weekly was to specifically target businesses which advertised in the Guardian. The previous advertising policy of the SF Weekly, like that of the Guardian, was to set the advertising "rate card" based on the "overhead costs" of publishing the newspaper, plus a variable percentage, depending on the frequency of the customer's advertising. Rates were structured on a "graduated frequency discount" scale, with customers who advertised "52 weeks throughout the year" offered a lower rate than a "one time customer." Ads were sold according to "the frequency earned."
Following the acquisition of the SF Weekly by the New Times, sales representatives were authorized to directly contact advertisers in the Guardian and offer "to sell advertising at a lower frequency" than was earned to transfer their business to the SF Weekly. 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 the New Times would cover the losses, even over a term of many years. For example, the SF Weekly began to offer Bay Guardian advertisers the rate for "52 times, even if the advertiser only agreed to run for one week."
Furthermore the SF Weekly identified "key categories" of advertising emphasis in the newspaper, such as restaurants, fitness clubs, health and beauty, music and film, and furniture. To increase volume in those categories, the strategy of SF Weekly was to "initially lower the [introductory] rate" to advertisers to "build up a certain amount of critical mass," then once volume was established "slowly increase the rates" over time of both the "re-signs" and "new advertisers."
The Guardian recognized that SF Weekly had become a threatening competitor, along with internet publishing. Both newspapers appealed to essentially the same demographic and attracted many of the same advertisers. Competition between the two newspapers for advertisers was "pretty intense." The fundamental objective of the Guardian was essentially the same as the SF Weekly: to become dominant in the San Francisco marketplace.
In March of 2001, the New Times acquired another alternative weekly newspaper, the Express, which then had a circulation of about 60,000 to 65,000. The Express, which was based in Oakland, offered advertising customers a slightly different geographical region of exposure than the Guardian or the SF Weekly, and in conjunction with the SF Weekly provided a greater coverage area and circulation than the Guardian alone. As with the SF Weekly, the "approach" of the New Times was to improve the editorial quality of the Express and increase circulation. The Express provided reduced rates to advertising customers, which it intended to "slowly raise" over time. Despite its lower circulation the Express charged higher advertising rates than the SF Weekly, although lower rates than the Guardian. Once the Express was acquired by the New Times, to entice prospective advertisers "away from the Guardian" the SF Weekly also offered free advertisements in the Express. The New Times anticipated losses at the Express while the paper was developed and expanded.
Thereafter, through 2007, the SF Weekly and the Express continued to offer advertising, particularly to advertisers in key categories, at rates at least 20 percent below those charged by the Guardian, below the "rate card" prices, and well below its own costs per inch of display advertising space. According to the calculations of plaintiff's expert, the SF Weekly's average advertising space costs ranged from $21 per inch in 2001 to $29 per inch in 2007, whereas the average sale price of advertising space varied from $17 per inch in 2002 to $20 per inch in 2007. For the same time period, the Guardian's advertising costs per inch of paper ranged from nearly $23 in 2001, to $18 in 2004, and $20 in 2007; its display revenue per inch was nearly $23 in 2001, $18 in 2004, and nearly $22 in 2007.
As a result of reduced-price advertising offered by the SF Weekly, the Guardian consistently lost other advertising customers and revenue to the SF Weekly after 1995, even though the Guardian had 20 percent greater distribution in San Francisco - and therefore theoretically should have received a 20 percent greater price for advertising. An examination of customer account ledgers for 128 customers and over 20,000 advertising transactions with the Guardian and the two "New Times papers" between 1999 and the first quarter of 2007 revealed that 91 percent of the transactions of the SF Weekly and Express were sold below cost. For approximately 66.5 percent of those transactions the Guardian either lost customers to defendants' papers or was compelled to discount advertising rates to remain competitive.
As an illustration, by offering reduced rates to advertisers the SF Weekly managed to obtain the critical print advertising account of Bill Graham Presents (BGP), a major concert producer which historically advertised heavily in the Guardian.*fn4 After the acquisition by the New Times, BGP consolidated more of its advertising budget with the SF Weekly, 75 to 80 percent, at favorable, below-cost rates, while at the same time reducing its overall print promotion in favor of "radio and online advertising." Then in 2005, BGP entered into a "sponsorship agreement" to direct to the SF Weekly a minimum annual display advertising purchase of $350,000 or 90 percent of its advertising budget in alternative newspaper publications in the Bay Area market, whichever was greater.*fn5 In exchange, the SF Weekly paid an annual "sponsorship" fee to BGP for "naming rights" to the Warfield Theatre owned by BGP, and was given exclusive advertising rights associated with that venue. The advertising prices charged to BGP by the SF Weekly under the sponsorship agreement were above previous rates, but still below cost. Before the sponsorship agreement, BGP spent approximately $160,000 per year in advertising with the Guardian. As a result of the agreement between BGP and the SF Weekly, the Guardian subsequently received only a fraction of its previous advertising revenue from BGP, and lost "hundreds of thousands" of advertising dollars.
In 2004, the Guardian began a program to match the SF Weekly's lower advertising prices to some customers on a "case by case basis" by giving discounts, "free ads" and "upsizes" in the paper. The program lasted two or three years, but did not appreciably abate the Guardian's revenue losses. Between 2000 and 2007 the Guardian suffered a loss of display advertising revenue of about 50 percent, and earned a total profit of $1.2 million.
The Guardian and the SF Weekly also lost advertising revenue, particularly "classified business," to internet providers such as Craigslist, which attracted the youthful demographic targeted by both papers. The "dot com" bust in the San Francisco Bay Area in 2001 further caused appreciable loss of display advertising revenues for both papers, as did the ensuing more general recession. The Guardian increased advertising revenues between 1996 and 2000, but suffered substantial loss of income between 2000 and 2007.*fn6
Despite increases in circulation and advertising revenue, between 1995 and 2007 the editorial expenses for the SF Weekly and the Express increased dramatically, and with the exception of 2000 and 2001 the papers lost money every year that the New Times parent company was forced to "cover." The New Times sold the Express in 2007, due to lack of "progress financially," for much less than the acquisition price six years earlier.
Plaintiff offered expert opinion testimony from CPA Clifford Kupperberg, presenting an analysis of damages suffered by the Guardian as a result of defendant's advertising price structure. Kupperberg suggested several models for calculation of plaintiff's damages, which he characterized as the revenue or profits the Guardian would have earned during the "damage period" established by the court - the fiscal years 2001 through 2007 - "but for" defendants' below-cost advertising. Kupperberg acknowledged that a damage analysis of "something that didn't happen" can "never be perfect," but through his methodology of examining "comparable" situations he attempted to discern the "most reasonable measure of damages."
In one model Kupperberg assumed that between 2001 and 2007 the Guardian would have continued to charge the same rate for advertising space - that is, $2,270 per page - as it had for the five years (1996 to 2001) before the below-cost pricing "damage event." The total amount of damages according to this model, without any increase in advertising volume, was $4,856,000.
A different "comparable model" approach took into account an increase in the Guardian's "display revenue achievement" in the damages period at a rate or percentage equivalent to the two other "most comparable" Bay Area weekly newspapers (the Bay weeklies) - those being the Palo Alto Weekly and the Pacific Sun - or alternative newspapers operated elsewhere by the New Times (the New Times weeklies), that were not impacted by the SF Weekly's pricing structure. Those projected profits were then compared to the actual expenditures, profits and losses of the Guardian during the same damages period. As so calculated the total projected damages ranged from a low of $7.3 million as measured by the Bay Weeklies to a high of $10.2 million as measured by the New Times weeklies.
Kupperberg also calculated damages according to a "minimum change" model, based on a projection that the Guardian would not have lost any net market share to the SF Weekly during the damages period in the absence of below-cost pricing. Assuming the Guardian maintained its revenues for the damages period, the total calculated damages were between $4 and $5.2 million. Kupperberg felt that the minimum change model did not give "a complete picture of the loss" because it was not adjusted for the higher prices the Guardian could have charged for the lost sales without the unfair practices.
The calculation of damages under Kupperberg's models ranged from a low of $4,083,748 to a high of $11,834,570.*fn7 Kupperberg asserted that all of the models he mentioned, although imperfect, "could be representative of what happened," but the most "appropriate" method of calculation depended on the jury's "view of the facts." He also testified that a calculation of damages based on an examination of individual transactions was both impractical - due to the hundreds of thousands of transactions at issue - and inaccurate given the impossibility of knowing which "transactions would have gone to [the] Bay Guardian absent the [be]low-cost pricing."
Defendants countered with expert opinion testimony by accountant Everett Harry that Kupperberg's models were based on faulty assumptions as to potential earnings during the damages period, and failed to follow established accounting guidelines for certainty. Harry formed the opinion that Kupperberg's models and ultimate analysis of damages were "unreasonable, unsupported based upon speculation" and "completely exaggerated." The range of Kupperberg's damage estimates, asserted Harry, "is far too wide to pass a reasonableness test." Harry testified that the evidence of damages presented by plaintiff failed to consider competition for advertising from the internet, direct mail advertising, other free newspapers such as the San Francisco Examiner, and entertainment inserts in the San Francisco Chronicle. He also considered the cost plus six percent revenue ...