Advo, Inc. v. Philadelphia Newspapers, Inc.

• Decision Date: 10 June 1994
• Docket Number: Civ. A. No. 93-3253.
• Citation: 854 F. Supp. 367
• Parties: ADVO, INC., Plaintiff, v. PHILADELPHIA NEWSPAPERS, INC. d/b/a Philadelphia Inquirer and Philadelphia Daily News, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

854 F. Supp. 367

ADVO, INC., Plaintiff, v. PHILADELPHIA NEWSPAPERS, INC. d/b/a Philadelphia Inquirer and Philadelphia Daily News, Defendant.

Civ. A. No. 93-3253.

United States District Court, E.D. Pennsylvania.

June 10, 1994.

COPYRIGHT MATERIAL OMITTED

John R. Embick, Kittredge, Donley, Elson, Fullem and Embick, Philadelphia, PA, Margaret M. Zwisler, Dimitri J. Nionakis, Edward B. Schwartz, David T. Smutny, Howrey & Simon, Washington, DC, for plaintiff.

Judy L. Leone, Robert C. Heim, Dechert, Price & Rhoads, Philadelphia, PA, Donald T. Petrosa, Petrikin, Wellman, Damico, Carney & Brown, Media, PA, for defendant.

ORDER AND MEMORANDUM

KATZ, District Judge.

AND NOW, this 10th day of June, 1994, upon consideration of the parties' submissions, and after a hearing, it is hereby ORDERED that Defendant Philadelphia Newspapers Inc.'s Motion for Summary Judgment is GRANTED on the federal claims and the state law claims are DISMISSED without prejudice.

I. FACTS

A. Overview

A newspaper chain is competing to distribute advertising circulars in the Philadelphia area with the country's largest full-service direct mail marketing firm. The newspaper chain's Motion for Summary Judgment raises the viability of its competitor's predatory pricing claim in this antitrust case. I find that there is no showing of a dangerous probability of achieving monopoly power in the relevant market.

Plaintiff Advo, Inc. (Advo) brings claims against defendant Philadelphia Newspapers, Inc. (PNI) for allegedly violating Section 2 of the Sherman Act.¹ Advo accuses PNI of monopolizing and attempting to monopolize the market for high density distribution of printed Advertising Materials² and Advertising Circulars.³ Compl. ¶¶ 30-49. Plaintiff also brings a claim against PNI for tortious interference with Advo's contractual relations with its customers in violation of state law. Compl. ¶¶ 50-55.

Advo distributes printed advertising materials to households via mail and hand deliveries. Compl. ¶ 4. Advo is the nation's largest full-service direct mail marketing company. Def.Exh. 12. Advo's revenues in fiscal year 1993 were $911 million. Stipulated Facts, ¶ 3. Advo delivers more than 24 billion pieces of advertising annually, and reaches, on average, more than 53 million households each week. Def.Ex. 12. In October, 1992, Advo acquired CBA Shared Mail Systems, Inc. (CBA). Compl. ¶ 26. Prior to the acquisition, CBA competed against Advo in the Advertising Circulars market. Compl. ¶ 22.

Defendant PNI owns and operates the Philadelphia Inquirer (Inquirer) and the Philadelphia Daily News (Daily News). Stipulated Facts, ¶ 12. The Inquirer and the Daily News are the only two newspapers that cover the entire eight county greater Philadelphia area.⁴ Pl.'s Ex. 31, p. 2. Run-of-Press (ROP) advertisements are the advertisements that are printed on newsprint and appear directly on a newspaper's editorial pages. Compl. ¶ 10. PNI serves many different ROP advertisers. Pl.'s Ex. 31, p. 5. No ROP advertiser accounts for more than five (5) percent of PNI's ROP advertising revenues. Id.

Broadly stated, this action concerns the market for high density advertising in the eight county greater Philadelphia area. Compl. ¶ 31, 44. For purposes of this motion, the court examines three markets: 1) the Advertising Circulars market; 2) the ROP advertising market; and 3) the Advertising Materials market, including both advertising circulars and ROP advertisements. Printed advertising materials are distributed through newspapers, by direct mail and by hand delivery to consumers in the Philadelphia market. Compl. ¶ 6. Participants in these markets seek distribution of their circulars to 95 percent of the households in a targeted area. See Def.Ex. 8; Pl.'s Ex. 8, DiMartino Dep.Ex. 13, p. 6.

Advo delivers circulars in one of two ways: either shared mail or hand delivery. Companies that make deliveries in this manner are known in the trade as alternate delivery companies. Shared mail combines the circulars of multiple advertisers in one mailed package. Compl. ¶ 12. Shared mail and hand delivery packages can be targeted to specific zip codes for delivery. Compl. ¶ 12. The mix of circulars in these packages may vary from week to week and from place to place. Compl. ¶ 14.

Traditionally, newspapers included preprinted advertising circulars as inserts in their papers. These circulars, however, only reached subscribers and other purchasers of the papers. Consequently, traditional newspaper advertising circular distribution could not offer advertisers the desired 95% saturation rates achieved by alternate delivery companies. Pl.'s Ex. 8, DiMartino Dep.Ex. 13, p. 6. In response to the success of alternate delivery companies, newspaper companies like PNI developed programs to provide advertisers with circular distribution to non-newspaper subscribers by mail and/or hand-delivery. Compl. ¶ 18. These programs generally are known as Total Market Coverage (TMC) plans. Id. By 1991, ten of twelve of PNI's newspaper competitors had implemented TMC programs. Pl.'s Ex. 8, DiMartino Dep.Ex. 13, p. 6.

Principal advertisers or "base players" are key to a firm's successful entry into the Advertising Circulars market.⁵ An alternate delivery company will not typically enter a new market without securing a base player. See Pl.'s Ex. 15, Kamerschen Dep., p. at 146.

In the greater Philadelphia area, there are a limited number of base players. Pl.'s Ex. 31 at p. 21. Acme and Super Fresh, two supermarket chains, are the only base players who on their own "could support an alternate delivery program" in the Advertising Circulars market.⁶ Pl.'s Mem. at 11. Acme and Super Fresh are both Advo alternate delivery customers. PNI stated that until it obtains a base player for the Pennsylvania suburbs it will not be able to make a profit on its TMC program. Pl.'s Ex. 26, Rossi Dep. at 355.

Base players typically utilize ROP advertising in addition to preprinted circular distribution in their advertising plans. Base players use ROP advertising to build images, foster comparison shopping and to create multiple weekly presence. Pl.'s Ex. 31 at p. 10. In 1992, Super Fresh and Acme placed, respectively, $1,099,000 and $2,300,000 worth of ROP advertising with PNI. Id. at 34-35. Base players use advertising circulars principally as "impact" advertising to induce customers to purchase in a given week. Id. at 10.

B. Lost Accounts & Revenues

Since 1988, PNI's Inquirer has been Advo's principal competitor for the high density distribution of advertising circulars in the relevant geographic market. Compl. ¶ 21. In the years prior to 1991, the Inquirer lost substantial advertising dollars ($10 million) to alternate delivery competitors Advo and CBA. Pl.'s Ex. 8, DiMartino Dep.Ex. 13, p. 6. Plaintiff alleges that PNI used predatory pricing of PNI's ROP advertising to induce advertisers to use PNI's TMC program.⁷ Compl. ¶ 24.

In 1991, PNI developed a TMC plan to enter the Advertising Circulars market. Pl.'s Ex. 8, DiMartino Dep.Ex. 13. The goal of this plan was to position PNI as the "`one-stop buy' for both newspaper and non-newspaper advertising in the Delaware Valley market." Id. at 5. At that time, PNI's biggest competitors in the Advertising Circulars market were Advo and CBA. Id. at 13.

PNI's TMC program was scheduled to begin in 1992. Id. at 3. The plan had three phases. Id. at 5, 20. The first phase required 18 to 24 months to develop and implement an alternate delivery network. Id. at 5, 10. This phase was categorized by PNI as "primarily defensive." Id. at 20, 22. In 1993, the TMC program was budgeted to lose $1.81 million. Def.Ex. 46, p. 325-26.

Plaintiff claims that the Inquirer sought to contract with CBA's and Advo's "base players" by offering these customers free or deeply discounted ROP advertising in conjunction with extremely discriminatorily low rates for distributing advertising circulars via PNI's TMC program. Through these offers, the Inquirer successfully induced Kmart, a principal CBA customer to cease doing business with CBA.⁸ Compl. ¶ 24.

Advo identified six present or former customers that it asserts PNI solicited in violation of the antitrust laws. Def.Ex. 20, p. 2 (Advo's Supp.Resp. to Def.'s Second Set of Interrogs. to Pl.).

PNI gave advertisers with large ROP contracts credit towards their ROP contract commitments if they participated in the TMC program.⁹ Def.Ex. 42. Special discounts were also targeted at key Advo/CBA customers. See, e.g., Pl.'s Ex. 22, Montgomery Dep. Ex. 6 (PNI proposal to Super Fresh), Ex. 24 (PNI proposal to Acme Markets). For example, the Sunday Inquirer has "Basic Food Special Rates." Under this rate schedule, PNI sells the first full page of advertising to customers at the normal contract rate and sells the second page at a 50% discount. Pl.'s Ex. 22, Montgomery Dep.Ex. 16. PNI proposed that if Super Fresh used PNI's TMC program, it could receive a 50% discount on all Sunday Inquirer Food Section pages. Id. If Super Fresh accepted PNI's proposal, it would have raised its yearly advertising with PNI from $1,193,948.50 a year to $3,017,330.50 a year. Id. While PNI encouraged linking ROP advertising with its TMC program, see Pl.Ex. 22, Montgomery Dep.Ex. 15, there is no evidence in the record that advertisers were denied ROP contracts if they failed to participate in PNI's TMC program. See Def.Ex. 35.

Advo alleges that PNI targeted Super Fresh with predatory pricing. Compl. ¶ 27. PNI offered to distribute preprinted Super Fresh circulars for $29.00 per thousand to nonsubscribers and $32.00 per thousand for distribution by inserted preprinted circulars in the newspapers. Def.Ex. 20, p. 3. In response, Advo was forced to drop its price (from $44.00 per thousand to $36.00 per thousand) in order to maintain the Super Fresh contract. Def.Ex. 20, p. 3. Thus, in order to maintain the Super Fresh account, Advo sustained a loss of revenue. While PNI's solicitation...