Fighting a giant in the grocery aisle

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Continued: Fighting a giant in the grocery aisle

Article by: DAN BROWNING , Star Tribune
Last update: December 25, 2010 - 9:41 PM

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During late-night poker games at Harvard in the 1970s, Scott Drill faced down shrewd opponents who included Microsoft founder Bill Gates.

Later, he collected more than $114,000 in tournament winnings, including a $62,740 purse for taking first place in a game of no-limit hold 'em at the 2006 Heartland Poker Tour.

Now he's testing his gambler's instincts over much higher stakes.

Drill's Minneapolis-based company, Insignia Systems Inc., has waged a decade-long legal battle with supermarket advertising rival News America Marketing Inc., part of Rupert Murdoch's global publishing empire.

Insignia alleges that News America has used unfair practices to monopolize the advertising that takes place on the shelves inside supermarkets. News America denies that, and suggests that it's guilty of nothing more than aggressive competition -- the very thing that antitrust laws were meant to protect.

A last-ditch settlement conference is scheduled for Jan. 25, and a trial could start early next year.

The fight has implications for consumers, Drill said, because each company runs exclusive two-week promotions. When Insignia is pushing products for General Mills, for example, it won't promote competing products from Kellogg. But News America can pick up that business.

"So with more than one player in this market, there's better competition among brands, which should result in lower prices to the consumer," Drill said.

Insignia, which had $28.8 million in 2009 revenue, is dwarfed by News America. Its parent company, News Corp., reported $32.8 billion in revenue for its 2010 fiscal year.

An unwelcome offer

Acrimony between the companies dates to 2000, when Insignia alleged in a lawsuit that News America proposed an alliance that would have eliminated competition and reduced the amount of money paid to retailers.

Insignia had begun its in-store advertising program in 1997, and the suit says News America proposed buying up to 40 percent of Insignia's stock and acting as its agent with retailers. Insignia claims that News America also threatened to drive it out of business if it didn't agree to the alliance.

Insignia rejected the deal and claimed that News America retaliated with a "groundless lawsuit" in August 2000, alleging that Insignia was interfering with its retailer contracts. The two companies settled for undisclosed terms in 2002, but the truce failed, leading finally to the pending antitrust case, which Insignia filed in 2004.

In October 2009, U.S. District Judge John Tunheim dismissed allegations that Insignia had interfered with News America's contracts and that Drill had disparaged the firm. But he also dismissed Insignia's allegation that News America had "monopsony" power over retailers, who control their own decisions about which in-store marketing companies to use.

Tunheim allowed Insignia's other allegations to go forward, accusing News America of conspiracy, false advertising and efforts to monopolize in-store advertising on behalf of consumer packaged-goods manufacturers.

The trial, if it goes forward, is expected to last up to six weeks.

News America said in a statement that it "believes that Insignia's allegations are meritless and that the upcoming trial will show that it was Insignia's own faulty business model that caused its business to fail and not the competition posed by our company."

Drill, who is president and CEO of Insignia, said in an interview this month that although he doesn't rule out a settlement, he doesn't expect one, either. "We're excited to go to trial," he said cheerfully.

That could just be his poker face talking.

Drill, 57, of Edina, is an avid player and he's not afraid of stiff competition. At Harvard, he played a couple of times a week against Gates, who was two years behind him. Steve Ballmer, who later succeeded Gates as Microsoft CEO, would mostly watch and shoot the bull, Drill said.

Drill recalled a marathon game against Gates and about seven other players. It started at 6:30 p.m. on a Saturday and ended at 5 p.m. the next day with just Drill, Gates and two others remaining. He couldn't recall the outcome.

Drill attributes his tenaciousness in part to his time at the poker tables, as well as the training he got in high school wrestling.

"It may sound funny, but I think both wrestling and poker prepared me for business and for dealing with adversity," Drill said. "Playing poker, you're not always winning," he noted.

Corporate secrets

Many of the legal filings in the case are under seal because of a protective order that was put into place during discovery. But a flurry of motions seeking to limit what jurors can hear as evidence provides some hints about what might lie ahead.

News America says, for instance, that Insignia may try to use evidence that a News America employee once gave a fishing pole to a Winn-Dixie worker in an effort to influence a contracting decision, a matter that News America says was resolved and supposedly buried by the companies' 2002 settlement.

News America also wants to exclude the testimony of Debra Lucidi, a former employee of Sara Lee who appeared in another, similar lawsuit. She testified that News America had used its market power to strong-arm the global baker and owner of brands such as Ball Park Franks, Hillshire Farm lunch meats and Jimmy Dean sausage.

News America seeks to bar from evidence the notes that Lucidi took when discussing News America's pricing practices with another Sara Lee employee, who reportedly said it "feels like they are raping us and they enjoy it."

News America also wants to keep the jurors from learning about several prior lawsuits against the firm. Such evidence might cause jurors to "improperly infer that because News America allegedly engaged in wrongdoing in the past, it has done so here," the company's lawyers wrote in a recent filing.

News America didn't seek to exclude a related lawsuit filed in 2006 by the state of Minnesota. The state alleged that News America engaged in unfair trade practices that included efforts to damage Insignia's reputation.

That case was settled in January 2008 with News America admitting no wrongdoing but agreeing not to falsely disparage Insignia to its customers or potential customers. News America also agreed to repay the state $20,000 for its costs.

For its part, Insignia wants to bar News America from introducing evidence about a plan Insignia drafted to retain senior management during the litigation. The company never implemented the plan and no Insignia executive benefited from it, the firm's lawyers wrote.

What's at stake?

Drill won't specify the damages that Insignia is seeking in the lawsuit. But he rejects the notion that the firm has bet the farm on the case. "We currently have a good balance sheet and we've made money the last couple of quarters, and most of the [legal] expense is behind us," he said.

"I would say that winning is very important to our future prospects. One of the things that's restricted our ability to grow our business is the exclusive contracts that News [America] has with many of the significant retailers that preclude us from doing business with those retailers. And one of the objectives of the litigation is to knock out those exclusive contracts and create what we characterize as a level playing field."

News Corp. says Insignia's performance augers against its claim of unfair competition. It notes that Insignia's sales in 2009 were significantly higher than in 2005 and 2006.

Insignia is doing even better this year. Its net sales increased 14.2 percent in the first nine months of 2010 compared with the same period in 2009.

News America firmly rejects the idea that it has monopolized in-store marketing. Properly defined, News America says in its court filings, its competition includes all advertisements inside a retail establishment, including those placed directly by consumer goods manufacturers.

In addition, it argues that an alliance between Valassis and Insignia in the in-store advertising space has performed extremely well, which "conclusively rebuts any claim of monopoly power. Since Valassis' entry, Valassis and Insignia have won most of the major retailer contracts up for bid."

Barring a settlement, that's something jurors will decide.

"I think we're going to trial," Drill said. "We're fully prepared. The legal team is geared up."

Dan Browning • 612-673-4493

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