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Theme Promotions, Inc. v. News America Marketing FSI
Citations: 546 F.3d 991; 2008 WL 4531453Docket: 06-16230, 06-16341
Court: Court of Appeals for the Ninth Circuit; August 19, 2008; Federal Appellate Court
Original Court Document: View Document
The case involves Theme Promotions, Inc., a California corporation, in a legal dispute against News America Marketing FSI, a Delaware corporation, concerning the legality of right of first refusal agreements under California antitrust and tort law. The Ninth Circuit Court of Appeals affirmed the jury's verdict favoring Theme, indicating that substantial evidence supported this decision. News America Marketing FSI is one of the two main publishers of free-standing inserts (FSIs), multi-colored advertising booklets used for distributing coupons in newspapers. Packaged goods companies commonly enter into right of first refusal agreements with either News or its competitor, Valassis Communications, to secure their insert needs. These agreements allow companies to commit a percentage of their insert business to News, which must accept the business unless it cannot meet the requested schedule, offering discounted prices in return for this commitment. Theme Promotions specializes in promotional programs, particularly related-item merchandising, which involves joint promotions of complementary products. Although Theme executes these promotions, it often purchases inserts directly from News or Valassis under its own right of first refusal agreements to secure lower prices. This arrangement allows Theme to effectively manage its promotional activities while benefiting from cost savings on inserts. In June 1995, Theme entered a right of first refusal agreement with News for its insert business, which was later voided due to a dispute, leading Theme to establish a similar agreement with Valassis. News then sued both Theme and Valassis for intentional interference with contractual relations, resulting in a settlement in 1997. Since 1996, Valassis has been Theme's preferred supplier, offering benefits like improved coupon positioning and rebates. During litigation, News claimed its right of first refusal agreements extended to inserts purchased indirectly by third-party suppliers like Theme, warning packaged goods companies that orders through Valassis would breach these agreements. In response, News amended its contracts to clarify that packaged goods companies must comply with the terms regardless of whether orders were placed directly or through agents. Between 1997 and 1999, conflicts arose as Theme attempted to leverage Valassis for multiple insert programs, including one with Benevia, which led to News enforcing their right of first refusal and resulting in the inserts being placed with News. Following similar disputes with other companies, Theme initiated legal action against News in December 1997 for violations of federal antitrust laws, the Cartwright Act, and the Unfair Competition Act, among other claims. The district court dismissed these claims with prejudice and granted summary judgment to News. Theme appealed, leading to a reversal of the dismissal and remand for further proceedings. Theme then sought to amend its claims to include a declaratory judgment but was denied, ultimately withdrawing all federal antitrust claims with prejudice. In August 2005, a trial was held regarding allegations against News for restraint of trade and monopolization under the Cartwright Act, unfair business practices under the Unfair Competition Act, and various forms of interference with Theme’s prospective economic advantage. The district court granted News’ motion for judgment as a matter of law (JMOL) on Theme's boycott claim. The jury found in favor of Theme, determining that: 1) two provisions of News' right of first refusal agreements restrained trade, awarding Theme $1,000,000 in damages; 2) News violated the Unfair Competition Act; 3) News negligently interfered with Theme’s economic advantages, awarding $154,111 and $496,023; and 4) News intentionally interfered with Theme’s relationships, awarding $132,992 and $800,353. The jury also imposed $2,500,000 in punitive damages due to News' threats of litigation. However, the jury ruled against Theme on its monopolization claim and certain interference claims. Post-trial, News renewed its JMOL motion, while Theme sought a permanent injunction against News' enforcement of its agreements and restitution. The district court set aside the jury's verdict on intentional interference claims and related punitive damages, citing privileged litigation threats, and also set aside one negligent interference claim. It upheld the jury's verdict on the Cartwright Act claim and denied Theme's post-trial motions. A joint proposed judgment was submitted, but a disagreement arose over whether damages for negligent interference were duplicative of the Cartwright Act award. The court ruled they were not duplicative, leading to a final judgment of $3,496,024 for Theme on June 1, 2006. News appealed the court’s decisions regarding JMOL and duplicative recovery, while Theme cross-appealed the court's partial grant of News' JMOL, the dismissal of the boycott claim, denial of leave to amend its complaint, and denial of injunctive relief and restitution. The appellate review of the JMOL decision will be conducted de novo, focusing on whether the evidence allows only one reasonable conclusion contrary to the jury's verdict. Antitrust standing will also be reviewed de novo. The district court's decisions regarding the denial of a motion to amend the complaint, evidentiary rulings, award of damages, and the ruling on a motion for a new trial are reviewed for abuse of discretion. The court's choice of remedies, denial of equitable relief, and refusal of permanent injunctive relief are also reviewed under the same standard. The court upheld its decision not to grant judgment as a matter of law (JMOL) in favor of News concerning Theme’s claims under the Cartwright Act and for negligent interference with prospective economic advantage, as well as rejecting News’ alternative motion for a new trial. The jury's awards for antitrust and tort damages were deemed not duplicative. In evaluating the Cartwright Act claim, the court determined that the evidence, viewed favorably for Theme, did not solely support News' non-violation of the Act. The Cartwright Act prohibits combinations that restrict trade, with the California Supreme Court emphasizing its purpose is to prevent unreasonable restraints of trade. Courts apply a "rule of reason" analysis to vertical restraints, weighing anticompetitive effects against procompetitive benefits. Exclusive dealing contracts are subject to this analysis, being unlawful if they substantially foreclose competition. Establishing market power involves demonstrating either direct evidence of restricted output and supracompetitive pricing or circumstantial evidence through defining the relevant market and showing the defendant’s significant role in it. The jury was instructed that Theme needed to prove several specific elements to succeed on its Cartwright Act claim, including that News' actions constituted an unreasonable restraint of trade and that the anticompetitive effects outweighed any benefits. The court provided the jury with guidelines to identify the relevant market and assess whether News' right of first refusal agreements substantially foreclosed competition within that market. News contends that Theme did not present adequate evidence to support the jury's market definition or its conclusion regarding News' foreclosure of competition. Additionally, News claims a lack of evidence for antitrust injury, a requirement for standing, and causation. The court found sufficient evidence indicating that News did indeed foreclose competition and that Theme suffered an antitrust injury due to News' actions. For Theme's Cartwright Act claim, the jury was instructed to establish that the relevant market involved the sale of inserts to packaged goods companies. Determining the relevant market is a factual question for the jury, defined by considering commodities that are reasonably interchangeable. This determination can be complex, involving economic analyses such as cross-elasticity of demand and SSNIP analysis, which examines whether a monopolist could profitably implement a slight price increase. Evidence supporting the jury's conclusion includes testimony that inserts are crucial for distributing coupons and that a price increase in inserts correlated with their increased market share. Ultimately, the court concluded that a reasonable jury could infer that the relevant market was indeed the sale of inserts to packaged goods companies, and that Theme had sufficiently demonstrated that News' agreements foreclosed competition in a significant portion of that market. California courts require a market share of at least 45-70% to establish substantial market power, particularly when combined with factors like market fragmentation and high entry barriers. In assessing exclusive dealing arrangements, courts emphasize a comprehensive analysis beyond mere mathematical calculations. Evidence presented indicated that News held a 40-60% share of the national insert publishing market from the late 1990s to 2004, supported by testimonies from expert witnesses, executives, and Theme’s president, highlighting significant entry barriers such as high capital costs and existing contracts that restricted new market entrants. Theme's evidence included the experience of a third insert supplier that was marginalized by News and Valassis, reinforcing the claim of competitive foreclosure. News did not effectively counter this evidence, allowing for a reasonable jury to conclude that News' actions impacted a substantial market share. To establish antitrust standing, Theme needed to demonstrate an antitrust injury, defined as injury of a type the antitrust laws aim to prevent, directly linked to unlawful acts by the defendant. Theme argued that News' right of first refusal agreements forced them to purchase inserts from News at higher prices, limiting their market alternatives and causing financial harm. They also claimed that News' conduct led to increased insert prices and reduced competitive presence. In contrast, News contended that Theme’s decline was due to its own poor business practices and that its actions were procompetitive. Evidence indicates that Theme's injury, characterized by a reduced choice of market alternatives leading to fewer insert orders and higher prices, aligns with the antitrust laws' objectives. This injury was directly caused by News' violation of antitrust laws due to its right of first refusal agreements with packaged goods companies, justifying the district court's denial of News' motion for Judgment as a Matter of Law (JMOL) on Theme’s Cartwright Act claim. In addressing the negligent interference with prospective economic advantage claim, the jury was instructed on specific elements Theme needed to prove, including the existence of an economic relationship, News’ knowledge of it, and whether News acted with reasonable care. The jury found sufficient evidence to support Theme's claims, including that News engaged in wrongful conduct beyond mere interference. News contended that a new trial was warranted due to alleged evidentiary errors, specifically concerning the testimony of Theme’s president about the internal decisions of packaged goods companies, which News argued was speculative and lacked foundation. However, the court found that the president's testimony did not lack foundation and was not speculative, as he did not comment on internal decisions. Furthermore, even if the testimony were considered erroneous, it did not likely affect the jury's verdict, especially given additional corroborative evidence. Thus, the district court's denial of the motion for a new trial was affirmed. News contends that the district court incorrectly determined that the jury's awards for antitrust and tort damages were not duplicative. The jury awarded $1,000,000 under the Cartwright Act and $496,023 for negligent interference with a business relationship concerning Campbells. News argues these awards are duplicative since both stem from the loss of future profits related to Campbells. The principle against double recovery prohibits a plaintiff from obtaining more than one recovery for each distinct item of damage. The California Supreme Court affirms that a single recovery is warranted for each distinct compensable damage, but different legal harms arising from one act can be compensated if they are based on separate statutes serving different purposes. The district court found that the damages resulted from different legal harms: one from antitrust violations and the other from intentional misrepresentations. News argues both awards compensate for the same economic harm, but the record does not support this, as it would require speculation about the jury's intent. The damages expert indicated that the jury's verdicts reflected distinct harms, with the $496,023 specifically tied to interference with Campbells and the $1,000,000 related to anticompetitive behavior. Therefore, the district court did not err in denying News' motion. In the cross-appeal, Theme asserts that the district court wrongly vacated the jury's verdict on intentional interference claims regarding Benevia and Van de Kamp, which had awarded $700,353 and $132,992 respectively, along with punitive damages of $1,250,000 for each claim. The court dismissed these claims based on the Noerr-Pennington doctrine, which protects conduct related to petitioning the government from statutory liability. Theme argues the district court misapplied this doctrine, asserting that News’ conduct was not privileged under either Noerr-Pennington or California privilege law. However, the Noerr-Pennington doctrine, grounded in First Amendment protections, provides immunity for those petitioning the government, and has been extended beyond its original antitrust context. The court affirmed the district court's decisions on all counts. The Noerr-Pennington doctrine, which protects the right to petition the government, has not been definitively applied to state law tort claims within this circuit, although other circuits have extended it to such claims. Notably, the Fifth Circuit has reasoned that there is no justification for distinguishing between common-law torts and statutory claims like antitrust regarding the potential to infringe on the right to petition. This court agrees that the Noerr-Pennington doctrine applies to Theme Promotions’ state law claims of tortious interference with prospective economic advantage. Theme argues against this application by referencing Federal Rule of Evidence 501, which dictates that state privilege law governs in diversity actions. However, the court clarifies that Noerr-Pennington is a principle of statutory construction rather than a privilege and protects federal constitutional rights, thus applicable in all contexts, including those involving state law doctrines. Additionally, actions related to a lawsuit, such as pre-suit demand letters, are protected under the Noerr-Pennington doctrine, although they may be restricted if they constitute "sham litigation." The Supreme Court's test for sham litigation requires that the lawsuit be objectively baseless, after which the litigant's subjective motives can be examined. In this case, the jury found in favor of Theme based solely on evidence that News threatened litigation against certain companies, which included letters implying potential legal consequences if those companies did not comply with News's demands. The pre-suit letters from News to packaged goods companies are analyzed to determine if they threatened "sham litigation." The letters suggest two potential threats: inclusion in ongoing litigation between News and Theme, which settled, indicating the original suit was not objectively baseless, and threats of future lawsuits for breach of contract. The district court found that News had a potentially meritorious claim to enforce its right of first refusal agreements, leading to the conclusion that the threatened litigation was not objectively baseless. Consequently, the Noerr-Pennington doctrine bars Theme’s intentional interference claims. The jury also found News engaged in unfair competitive practices under California’s Unfair Competition Law (UCL), and Theme sought restitution under section 17203 of the UCL. However, the district court denied this motion, ruling that the profits from News’ insert transactions were not “restitutionary in nature.” The UCL targets unlawful and unfair business practices, allowing violations of other laws to be actionable. While broad in scope, UCL remedies are limited to restitution, which requires returning money obtained through unfair practices, as clarified by the California Supreme Court. Disgorgement, on the other hand, is not permissible if it demands all profits from unfair practices without direct connection to victims. The California Supreme Court has determined that nonrestorative disgorgement is similar to a damages remedy, which is not permissible under the Unfair Competition Law (UCL). In the case of Theme Promotions v. News America, Theme sought $929,187 in restitution, claiming this amount represented profits News earned from insert orders placed by Theme, stemming from News’ right of first refusal agreements with packaged goods companies. The district court ruled that this amount was not restitutionary because, had Theme not purchased from News, it would have bought from Valassis, which would have also profited. Consequently, Theme could not assert an ownership interest in News' profits. While the appellate court partially agreed with the district court, it emphasized that evidence did not establish Theme's property interest in all of News' profits from the insert orders, supporting the district court’s denial of Theme's restitution motion. After trial, Theme sought a permanent injunction against News to prevent enforcement of its right of first refusal agreements, which was denied by the district court. Theme's subsequent motion for an injunction pending appeal was also denied. California law allows for injunctive relief under the Cartwright Act and UCL, with precedent indicating that courts must act to restore competition in cases of antitrust violations. However, the district court found the record ambiguous regarding market definition and antitrust injury, concluding that an injunction might hinder rather than promote competition. Evidence presented indicated that the right of first refusal agreements stemmed from competition between News and Valassis, and enforcing the injunction would disadvantage News competitively. The district court's denial of the motions for permanent injunction was thus deemed appropriate and within its discretion. After the initial dismissal of Theme's claims was reversed and remanded, Theme sought to amend its complaint for a second time, aiming to replace antitrust claims with a request for declaratory relief regarding the right of first refusal agreements with packaged goods companies. Concurrently, Theme filed a motion for summary judgment, asserting the matter was a straightforward contract law issue. The district court denied the motion to amend, ruling the proposed amendment would be futile, and deemed the motion for summary judgment moot. Under Federal Rule of Civil Procedure 15, a party may amend its complaint with the court's permission, which is typically granted liberally unless the amendment would be futile. A declaratory judgment requires an actual controversy within the court's jurisdiction. The Supreme Court has indicated that such a judgment is only suitable if it resolves the concrete controversy completely. The district court noted that Theme acknowledged the absence of a controversy regarding its contractual obligations, as it was not a party to the agreements in question. Furthermore, a declaration that Theme was not bound by News' agreements would not resolve the ongoing controversy between the parties. Consequently, the court found no basis for granting declaratory relief, leading to its determination that the amendment would be futile. The district court's decisions, including the rejection of News' motions for judgment as a matter of law, new trial, and damage reduction, as well as its ruling on Theme's claim of intentional interference with prospective economic advantage being barred by the Noerr-Pennington doctrine, were upheld. The court also rightly denied Theme's requests for restitution and injunctive relief, affirming the denial of the amendment for declaratory relief. The judgment of the district court was affirmed in its entirety.