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July 1, 2009 11:21 PM

News America Threatened to "Crush" Agency That Worked for Kroger

By
Jim Edwards
(MoneyWatch)  A Michigan state court heard that News America Marketing, the in-store ad agency that dominates supermarket promotions, threatened to "crush" a rival that developed an innovative milk-jug advertising method.

The testimony came in a trial in which Valassis is hoping to prove that News America used its dominance of supermarket advertising to illegally force competitors out of both supermarkets and the newspaper coupon business.

The case had something of a Matlock Moment when a surprise witness, president of Connect Communications Michael Klabunde, took the stand. Valassis lawyer Michael Palizzi began his interrogation of Klabunde by pointing out that although the trial was more than a week into its testimony -- and litigation with News America has raged for centuries years -- he had never heard from Klabunde until the night before, when Klabunde called him on the phone.

Klabunde invented a coupon delivery system which had been ripped off by News America, he alleged. Klabunde's ingeniously unglamorous device attached promotional coupons to the neck of 1 gallon milk jugs. Milk is a product that about 98 percent of all consumers buy, so advertising on milk jugs potentially reaches a massive audience, Klabunde said. Palizzi asked him:
Q. Has anybody, any individual or company ever tried to knock off your patent? A. Yes. Q. Who is that? A. General Mills. Q. Can you explain what happened there? A. They [Big G] had been using my program for quite a while ... [and then] they hired a company to distribute [a similar] coupon in-store and we discovered it, and did a cease-and-desist where they had to stop, and paid me pittance as a penalty to do that. Basically it was to protect my patent. Q. What company did they use to distribute it? A. News America.
Klabunde said he had signed up Albertson, SuperValue, Publix, FoodLine, Winn Dixie, Out East, Stop and Shop, WakeFern, and ShopRite into his network of milk jug advertising.

But Kroger unit Ralph's suddenly axed Connect's product from its stores. A Kroger client cited an "exclusive" contract with News America as the reason for kicking Connect off its milk jugs. So Klabunde decided to approach News America to see if the agency would be willing to engage in a joint venture that would roll out his milk jug idea nationwide. He reached Chris Curtis, News America's vp/new product development, on the phone, Klabunde testified:
Q. Can you tell the jury about that phone conversation, what was said what transpired? A. She basically said that if I were to try to do anything more in a Kroger store, they would crush me. Q. When you say "crush you," is that her word or is that your word? A. Her word.
Losing the Kroger business cost Connect about $1 million in revenue, Klabunde testified.

On cross-examination, News America lawyer David Ettinger clawed back some ground by establishing that Curtis had no authority over retailers like Kroger, and that he had not used the word "crush" when he was grilled by News America's lawyers the day before.

Further, Klabunde admitted that he talked to another News America exec, Scott Simon, about a joint venture, but that Klabunde somehow dropped the ball:
Q. And Scott told you News America was willing to distribute your product, didn't he? A. Yes. Q. In Kroger, correct? A. He would be interested in doing that. Q. And you thanked him for being understanding and working with you, didn't you? A. Yes. And it never went anywhere. Q. You in the end never gave him a specific proposal did you? A. No, I did not.
Sharp-eyed readers will note that the "they would crush me" threat bears a striking resemblance to this disputed testimony from News America CEO and New York Post publisher Paul Carlucci.

The trial resumes on July 6.

Image by Flickr user Lazurite, CC.

© 2009 CBS Interactive Inc.. All Rights Reserved.
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