Trial: Did News America Marketing Group Break Into Floorgraphics' Computers?

Last Updated Mar 2, 2009 11:09 AM EST

The eyes of the direct mail, in-store and coupon marketing world will be focused today on a trial which pits Floorgraphics Inc. (a maker of those ads that appear on the floor of supermarkets) against Rupert Murdoch's News America Marketing Group. The jury case opens at 10 a.m. in a Trenton, N.J., court before Judge Anne E. Thompson.

The case is unlikely to be covered by the major media even though it could be potentially explosive and will be of keen interest to employees of News America's main competitor, Valassis Communications. Between them, News America and Valassis control most of America's direct mail, coupons and in-store promotions.

At issue is whether News America has lied, cheated and stolen to maintain its market share. FGI claims News America "engaged in illegal computer espionage by breaking into FGI's password-protected computer system and obtaining proprietary FGI information." News America denies the allegations.

The saga began when, according to FGI's complaint, News America made FGI an offer it couldn't refuse:
At a meeting in July 1999, News' Chief Executive Officer told FGI that News was interested in buying FGI, but if FGI refused to sell and chose instead to compete with News for in-store programs other than floor advertising -- such as instant coupon machines, shelf ads, take ones or shopping cart placards -- News would destroy FGI.
FGI chose to compete -- and News America allegedly made good on its promise to kill FGI. The complaint:
"...on at least eleven separate occasions between October 2003 and January 2004, News intentionally, knowingly and without authorization breached FGI's secure computer system and repeatedly accessed, viewed, took and obtained FGI's most sensitive and private information concerning its past and upcoming advertising and marketing programs."
FGI discovered this when one of its clients asked FGI how News America knew about a program that the client was only running with FGI. News America had blown its cover by asking the client why the program wasn't also running with News America.

A breach of FGI's computer system was later traced to "an IP address registered at the time to News," the complaint states.

Following the computer break-in, FGI lost contracts from Safeway, Winn-Dixie, Piggly Wiggly and Basha's. Is there any evidence for the computer break-in? Valassis has so far kept its court files sealed. But another case, Insignia v. News America, shows that the Department of Justice has reviewed FGI's claims that News America was tapping FGI's machines. In this download of exhibits, you can see letters from former Sen. Jon Corzine and Sen. Frank Lautenberg to the U.S. Attorney's Office:
We have been informed by FGI that the US Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, and the US Secret Service initiated an investigation into allegations that News America illegally gained access to FGI's password-protected computer system and obtained FGI's confidential data over a period of many months ... If it is possible to update FGI on the status of this investigation, we ask that you do so at your earliest convenience.
A reply from Deborah Goldklang, commercial crimes chief of that office, says that the allegations were reviewed by the FBI and the U.S. Attorney's office.

News America's campaign against FGI was so vicious the company allegedly "orchestrated a mass resignation of FGI's advertising sales staff" who then went to News America, and "harassed FGI employees by mailing a series of News press releases to employees' homes in an effort to break their spirit."

According to its trial brief, News America will argue that:
Floorgraphics will not call any witnesses from retailers or consumer packaged goods companies to support its claims about why those retailers and consumer packaged goods companies did less business with Floorgraphics.
The rest of the case is hearsay, the company claims.

One interesting aspect of FGI's case is whether former News America employee Robert Emmel will appear at the FGI trial. Fortune magazine wrote in 2007:
...after Floorgraphics subpoenaed him as part of its lawsuit, Emmel revealed he had kept a copy of his computer hard drive because, he said in a deposition, he "had some concerns about some of the business practices that News America had engaged in."
Just what is on those disks is still unknown, but News America isn't taking any chances: In April the company sued Emmel personally, alleging, among other things, breach of contract and misappropriation of trade secrets. Emmel countersued under Georgia's RICO statute.
The trial is set to be a curtain-raiser for another, even larger case, that of Valassis v. News America. Valassis is currently spending 10 percent of its profits on legal bills in its fight with News America. Valassis's allegations are similar to FGI's: that the company used predatory pricing and contracts to unfairly force competition out of the marketplace.

Hat tip to BNET reader murdochnewswatch500, who pointed us to this story.

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