News America Marketing Whistleblower: Clients Were Charged for Ads That Never Appeared

News America Marketing may have charged its clients for ads that never appeared in supermarkets, according to a witness in the recently settled trial in which NAM was sued by rival in-store ad agency Floorgraphics Inc. During the trial, disgruntled former NAM account director Robert Emmel testified that "hundreds" of supermarkets did not receive ads, were closed or went bankrupt even though NAM clients paid for "shelftalkers" and floor ads that were supposedly in those stores.

NAM even maintained a list of stores where revenues had been collected from a client for ads, but ads had not been placed. It was called the "do not pay" list, Emmel testified, a reference to what he described as NAM's policy of not paying retailers if NAM knew no ads had been placed in their stores, even though NAM had collected payment from its packaged goods clients.

In 2003, the Fleming chain of stores went bankrupt, Emmel testified. NAM lost contractual rights to place ads in 50 to 70 of those stores, Emmel said. But NAM had a "freeze-the-list" policy on the list of stores it told clients it had access to. The "freeze" meant that the list of active stores was only updated every 60 to 90 days. As a result, NAM collected money for ads placed in Fleming stores that it no longer had access to, Emmel said.

A similar thing happened through 2006, when about half of Winn-Dixie stores were closed. The contraction of the chain was so fast that NAM ended up charging clients for ads placed in stores that were actually closed, Emmel said.

News America did not immediately respond to a request for comment.

What follows is a digest of Emmel's testimony regarding NAM's practice when it came to receiving revenue from clients for ad placements that it did not, or could not, make. It begins as Emmel is questioned about Fleming, a supermarket chain that went bankrupt in 2003.:

Q: How many stores did News lose as a result of the Fleming bankruptcy? A: Well, the contractual rights they had for the stores that were affected by bankruptcy were 350, 400 stores as I recall. Q: All right. Do you know whether News continued to charge CPGs for making placements in the Fleming stores after they lost those contractual rights? A: Based on the store lists that were published and that any store could be contracted on the News America store list, there was a document primarily intended for the sales organization. The answer is yes.

Emmel testified that News America's Fleming store list was inaccurate as late as 2006, and that the store remained on a "do not pay list," meaning that advertisers payments were not to be passed on to store that no longer existed. Similarly, WInn-Dixie closed half its stores between 2003 and 2006, Emmel said, but News America maintained a "freeze" on its list, which was not updated as far as advertising clients were concerned. News America benefitted by keeping the money for ads that did not have to be run in those stores Emmel said:

Q: And did you have an understanding as to whether this exaggerated store list helped you do your job? A: I did. Q: Okay, what was that understanding? A: Well, there would be a financial benefit to News America for any stores that contracted for business but did not handle the placements into the stores because the revenue sharing would not be paid out to any of these retailer stores that were contracted for. It would be a gain, a financial gain, on the books of News America.

In addition to the frozen lists, NAM maintained lists of stores that they didn't actually manage to visit, the SNCO or "stores not called on" list:

Q: During the time that you had these issues with food line, can you estimate how many stores were part of the SNCO list in you region, stores not called on. A: In my region where I received reports, I know it was in the hundreds of stores ... Q: And now how many regional SNCO reports were there? I know you only saw the one but how many reports were there? A: My recollection, there were 26 field offices ... so I'm going to conclude there were 26 regional reports for each of those field offices. Q: All right, and when News failed to install a floor ad in a store but had that store on its store list, how did that assist you in your work with realtors -- retailers? A: As I testified earlier, any financial gain that would come back to News America that they benefited from contracting with the CPGs, that would be revenue available to them ... I mean it could be any number of reasons but the most important thing is this is money that CPGs paid for that they didn't get the proper performance delivered in the field of the stores on the SNCO report.

On cross-examination, NAM's lawyers tried to point out that while Emmel may have seen some lists, he didn't work in NAM's accounting department and hadn't seen the stores himself, so he had no direct knowledge of whether NAM was reconciling its clients' payments or not:

Q: You were not privy to any of the accounts receivable, were you? A: I know that, counsel, by virtue of a do not pay list. ... there were Fleming stores on what is called a quarterly do not pay list of revenue payments that were not paid to them. So I can state with knowledge of that, that I do know there was contracted business and there were revenues retained by News America that did not go to Fleming.

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