The Next Newspaper Death

The long war between the San Francisco Bay Guardian and the SF Weekly will likely kill at least one of them.

As the newspaper industry struggles to stay above water, it’s becoming increasingly clear that the Bay Area will lose at least one more publication in the next year or two. The only question is whether it will be that bastion of liberalism, the San Francisco Bay Guardian, or its apolitical rival, the SF Weekly. The two alternative newsweeklies, whose owners despise each other, have been locked in a legal death-struggle for the past several years, and the loser likely will be forced to throw in the towel for good.

Andy Van De Voorde, executive associate editor of the SF Weekly’s parent company, Village Voice Media, said flatly in an interview last week that if his company ultimately loses its long legal battle with the Bay Guardian, it will close the Weekly permanently. “This lawsuit, from the very beginning, was designed to destroy the SF Weekly,” he said. “That was their intent from the get-go.” It’s also a safe bet that the chain of fourteen newspapers, including the flagship Village Voice in New York, likely will have to sell off at least two of its publications if the courts order it to pay the Guardian a jury verdict from 2008 that now stands at more than $20 million and is growing by about $5,000 a day.

For its part, the Guardian has been arguing for years that the SF Weekly‘s parent company had tried to drive it out of business first. And there’s no doubt that Village Voice Media and its predecessor, New Times, have taken funds from their other successful papers for more than a decade to prop up the money-losing Weekly and allow it to sell ads at well below the cost to print them. (The East Bay Express was part of the same chain as the Weekly until we became independent in May 2007.) The steep price-cutting, in turn, has badly wounded the Guardian, and forced it to lower prices just to compete.

Executive Editor Tim Redmond maintained in an interview that his newspaper will struggle on if the appellate courts overturn the jury’s decision. “The future of the Guardian would be threatened,” he said, “but we would fight on as long as we could.”

However, there are reasons to be less sanguine about the Guardian’s chances. After all, the paper has been bleeding advertisers for years, and the publication — once the envy of the alt-weekly world — has shrunk in size from a robust 120 pages a week in the early part of the last decade to an average of about 48 today.

Indeed, the fate of both newspapers may come down to who can hold out the longest. On that score, the Village Voice Media empire and its stable of successful newspapers likely possess the best cards. Nonetheless, the independently owned Guardian has an ace in the hole. Any day now, a San Francisco judge could grant its request to seize half of the SF Weekly‘s revenues as the appellate case runs its course.

The legal battle between the two papers over the past few months has been fought on two fronts — in San Francisco County Superior Court, where the Guardian is trying to begin collecting on the 2008 jury verdict, and in the First District Court of Appeal, where the Weekly is attempting to overturn that verdict. So far, the collection case has garnered more attention, but of the two, the appellate proceedings will ultimately crown the survivor of San Francisco’s fifteen-year-old alt-weekly war.

The appellate case also could have ramifications beyond the fate of the two papers. If the Weekly wins, it could effectively eviscerate a section of California’s Unfair Business Practices law, and thus make it nearly impossible for small, independently owned companies to fight off well-heeled competitors who try to drive them out of business. But if the Guardian wins, it could end up hurting consumers, because corporations may be fearful of offering steep discounts on their products because they will be sued for “unfair business practices.”

In fact, both sides appear to agree in court that the case boils down to a fight over whether a pivotal section of California law should protect businesses or consumers.

For the SF Weekly to win, California’s appellate courts will have to adopt the company’s consumers-first argument. In essence, Village Voice Media contends that state courts should view anti-trust law no differently than the US Supreme Court.

To understand why requires a brief overview of the legal fight to date. In 2008, a San Francisco jury ruled in favor of the Guardian, and found that the Weekly had sold ads for years at less than what it cost to print them. The jury also found that this practice injured the Guardian because it was forced to match the Weekly‘s prices or go out of business. The jury awarded the Guardian $6.4 million in lost profits from October 2001 to the end of 2007. Judge Marla Miller then tripled the award as allowed under California law, and with interest and additional attorneys fees, the judgment now exceeds $20 million.

Although the jury’s award was massive, the verdict was unsurprising to close observers of the case. The reason was that the Weekly effectively admitted at trial that it had sold ads at below cost, and that doing so had hurt the Guardian’s bottom line. The Weekly‘s excuse was that it was engaging in free-market capitalism in an effort to increase its market share, and that competitors are often harmed by competition. Unfortunately for the Weekly, once it acknowledged that it sold ads at below cost and the Guardian was hurt by it, the jury essentially had no choice but to rule against the Weekly under California’s Unfair Business Practices law. (The case might have gone the Weekly‘s way if it could have proved that it lowered prices to match the Guardian. But that would have been impossible, because the Weekly had lowered prices first.)

That’s why the Weekly is arguing on appeal that California law should be more like federal law. In the early 1990s, the US Supreme Court ruled that it wasn’t enough to prove that a business sold its products at below cost and that doing so harmed its competitors. The court said that to win an anti-trust case, a plaintiff like the Guardian must also show that the low prices will ultimately harm consumers.

That is, the Guardian would have to show that the Weekly intended to significantly raise prices once it became a “monopoly” after the Guardian had been severely weakened or forced to shutter. The high court called this concept “recoupment.” “There must be a real danger to the customer,” explained Ray Cardozo, one of the Weekly‘s appellate attorneys. “And there must be some assessment of that — more than just a speculative possibility.”

The Weekly‘s attorneys also note that courts in other states have interpreted their anti-trust laws in the same way. The courts have recognized that price wars can benefit consumers. And they only turn harmful when one of the companies becomes a monopoly and significantly raises prices, and thus forces its customers to pay more so that it can “recoup” its earlier losses.

Although the Guardian has maintained for years that the SF Weekly intended to drive it out of business and monopolize the San Francisco alt-weekly market, it didn’t have to prove that argument at trial. And so the Guardian‘s lawyers have asked the appellate court judges that if they ultimately side with the Weekly, they should be allowed a retrial so they can prove that the Weekly would be a monopoly and could recoup its losses if the Guardian were to fold. “There was, in fact, ample evidence that defendants could rationally believe that their price war on the Guardian would eventually pay off,” the Guardian‘s attorneys wrote in their appellate brief.

By contrast, the Weekly, whose experience with a jury didn’t go so well the last time, is asking for a directed verdict in its favor. Cardozo said the Guardian already had a chance to prove its case and shouldn’t get “a second bite of the apple.”

But even if the Guardian gets another opportunity, it could be a tough argument to make. That’s because the Bay Area media market is extremely diverse, and so if the Weekly were to greatly raise ad prices beyond the cost to print them, its customers might just switch to other publications. “Look at the San Francisco Chronicle,” said Van De Voorde. “It has a monopoly in the daily newspaper business in San Francisco, and it was losing $50 million a year” at one point. It should be noted that the Chronicle doesn’t quite have a monopoly. The Examiner still exists, although it is a shell of its former self.

Finally, the Weekly‘s attorneys contend that the jury’s verdict will set a dangerous precedent if allowed to stand. They argue that it will stifle competition and will be bad for consumers because businesses will be too afraid to sell their goods at below-cost. They also argue that there’s nothing in the law preventing larger companies from using the Unfair Business Practices law against smaller, new competitors who offer cheap prices in order to get a toehold in the marketplace.

At the heart of the Guardian’s case is an argument that the state’s Unfair Business Practices law was enacted more than sixty years ago and it hasn’t curtailed competition or spurred more lawsuits in California. “The statute has been around since the Thirties,” explained Joseph Hearst, one of the Guardian‘s appellate lawyers, “and the floodgates aren’t open.”

The Guardian‘s attorneys also contend that the state Legislature intended California law to be different from the already established federal Sherman Anti-Trust Act, whose primary purpose was to protect consumers. By the 1930s, the state Legislature realized that small businesses needed to be protected from predatory corporations as well.

The Guardian‘s attorneys also note that ever since the US Supreme Court added the so-called “recoupment” requirement that the Weekly wants incorporated in this case, federal anti-trust law has become toothless when it comes to predatory pricing. No business since has successfully brought an anti-trust suit against a larger competitor who engaged in below-cost pricing, Hearst noted.

The Guardian also has reason to hope that its argument will ultimately win the day. In a 1999 state Supreme Court case involving the Unfair Business Practices law, Justice Marvin Baxter, a Republican appointee, said in a concurring and dissenting opinion that the law requires no proof of “recoupment.” Although Baxter’s statement was not binding, it’s a clear indication that the Guardian may have at least one justice in its favor.

For their part, the Weekly‘s attorneys have noted that Justice Joyce Kennard, another Republican appointee, said in the same 1999 case that federal law requires some proof of recoupment. It’s unclear, however, whether Kennard will rule that California law should as well.

But even if the appellate court adopts the Weekly‘s recoupment argument, the Guardian believes it will win a retrial. Executive Editor Redmond explained that alternative newsweeklies have a near monopoly on certain types of ads, including ones for nightclubs and other local entertainment. And he argued that the SF Weekly would be able to substantially boost prices on those customers if the Guardian were out of the way.

Nonetheless, the different interpretations of federal and state law provide some evidence that the appellate case will be a closer call than what happened at trial. Oral arguments are expected to take place in about four months. The Weekly intends to appeal to the state Supreme Court if it loses, while the Guardian has not yet made up its mind.

To a certain extent, the long fight between the two papers also represents a reflection of the deep animosity between their owners. The dislike that Village Voice Media co-owner and Executive Editor Mike Lacey harbors for Guardian co-owner and publisher Bruce Brugmann and his brand of liberal-advocacy journalism is legendary in the alt-weekly world. And there’s no doubt that Brugmann has gone to great pains over the years to highlight the predatory practices of Lacey and his partners and portray them as corporate raiders.

The two weeklies will also continue to battle it out in superior court. A judge has already allowed the Guardian to seize two of the Weekly‘s delivery trucks and to confiscate rent payments from the Weekly‘s subtenants at its South of Market offices. As of last week, the Guardian had collected more than $17,000, and it’s awaiting a judge’s decision on whether it’s entitled to 50 percent of the Weekly‘s ad revenues going forward.

The Guardian‘s collection efforts are highly unusual. Typically, plaintiffs must wait until the appeals process is over. But the Weekly and its parent company opened the door when they failed to post an appeal bond of about $25 million.

Van De Voorde told the Express that his company simply couldn’t afford it. The newspaper chain, which is heavily leveraged, also can’t get a loan to post the bond because it doesn’t have enough cash as collateral. In fact, Village Voice Media would probably have to sell some of its newspapers just to post the appeals bond.

Village Voice Media also has argued in superior court that the Guardian isn’t entitled to the Weekly‘s revenues because its main creditor, the Bank of Montreal, has legal priority over any jury verdict. Village Voice Media owes the bank more than $80 million in outstanding loans. However, the Bank of Montreal has yet to show up in a San Francisco courtroom to try to stop the Guardian’s collection effort.

Jay Adkisson, the Guardian‘s collections attorney, said the Bank of Montreal has no legal authority to intercede unless it declares that Village Voice Media has defaulted on its loans. As of late last week, there was no evidence that the newspaper chain had done so.

If the judge rules in favor of the Guardian, the Weekly likely will appeal. And Adkisson said that if the Guardian ultimately wins both cases, Village Voice Media likely will not only close the Weekly, but it will also have to sell at least two of its papers, and possibly more, to pay the judgment. 

The question is: Can the Guardian stay in business long enough to see that happen?

Correction: An earlier version of this story misspelled the last name of San Francisco Bay Guardian co-owner and publisher Bruce Brugmann.


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