1 92BUSOUC 1 UNITED STATES DISTRICT COURT 1 SOUTHERN DISTRICT OF NEW YORK 2 ---------------------------------------x 2 SOURCE INTERLINK DISTRIBUTION, 3 L.L.C. and SOURCE INTERLINK 3 COMPANIES, INC., 4 4 Plaintiffs, 5 5 v. 09 CV 1152(PAC)(MHD) 6 6 AMERICAN MEDIA, INC., BAUER 7 PUBLISHING CO., L.P., CURTIS 7 CIRCULATION COMPANY, DISTRIBUTION 8 SERVICES, INC., HACHETTE FILIPACCHI 8 MEDIA, U.S., HUDSON NEWS DISTRIBUTORS 9 LLC, KABLE DISTRIBUTION SERVICES, INC., 9 THE NEWS GROUP, LP, TIME INC. and 10 TIME/WARNER RETAIL SALES & MARKETING, 10 INC., 11 Defendants. 11 ---------------------------------------x 12 12 New York, N.Y. 13 February 11, 2009 13 3:15 p.m. 14 Before: 14 15 HON. PAUL A. CROTTY 15 16 District Judge 16 17 APPEARANCES 17 18 KASOWITZ, BENSON, TORRES & FRIEDMAN, LLP 18 Attorneys for Plaintiffs 19 BY: MARC E. KASOWITZ 19 DANIEL R. BENSON 20 HECTOR TORRES 20 21 PILLSBURY WINTHROP SHAW PITTMAN LLP 21 Attorneys for Defendant American Media 22 BY: DAVID G. KEYKO 22 23 TROUTMAN SANDERS LLP 23 Attorneys for Defendant Bauer Publishing 24 BY: STEPHEN G. RINEHART 24 DANIEL N. ANZISKA 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 2 92BUSOUC 1 Appearances (Continued) 1 2 DECHERT LLP 2 Attorneys for Defendant Curtis Circulation 3 BY: JOSEPH F. DONLEY 3 4 JONES DAY 4 Attorneys for Defendant Hachette Filipacchi Media 5 BY: MEIR FEDER 5 6 GIBSON, DUNN & CRUTCHER LLP 6 Attorneys for Defendant Hudson News Company 7 BY: D. JARRETT ARP 7 ADAM H. OFFENHARTZ 8 8 McELROY, DEUTSCH, MULVANEY & CARPENTER, LLP 9 Attorneys for Defendant Kable Distribution Services 9 BY: I. MICHAEL BAYDA 10 10 CRAVATH SWAINE & MOORE LLP 11 Attorneys for Defendant Time 11 BY: ROWAN D. WILSON 12 12 K&L GATES LLP 13 Attorneys for Defendant The News Group, LP 13 BY: DOUGLAS BRODER 14 JOHN H. CULVER III 15 15 ALSO PRESENT 16 DOUGLAS J. BATES, General Counsel 16 Source Interlink Companies 17 18 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 3 92BUSOUC 1 (Case called) 2 MR. KASOWITZ: Your Honor, our client, Source 3 Interlink is going under, and it is going under as we speak. 4 And the reason it is going under is that it is a magazine 5 wholesaler and the defendants who have been supplying it with 6 magazines -- People magazine, Time magazine, Sports Illustrated 7 and the like -- for seven uninterrupted years have now abruptly 8 cut it off from 80 percent of the supply of magazines that is 9 the lifeblood of its business. 10 As a result, Source's business is being destroyed. 11 Its customers are leaving. Its employees are being raided by 12 competitor wholesalers. Its bank credit is evaporating. Its 13 vendors are threatening to demand cash in advance or cash on 14 delivery. And if things continue the way they are going, 15 Source will not be able to make its payroll this Friday. The 16 result of that, your Honor, will be that the company will have 17 no choice but to lay off thousands of employees. 18 The only thing that can prevent this is a temporary 19 restraining order. And what we are asking for and all we are 20 asking for is an order preserving the supply of magazines from 21 defendants to our clients, a supply that has been uninterrupted 22 for the past seven years. And we are requesting that that be 23 continued for a short time on a schedule to be set by the Court 24 until a preliminary injunction hearing can be held. 25 Just for a little background, our client, Source SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 4 92BUSOUC 1 Interlink, the operating company, buys magazines from the 2 publishers and those publishers are Time Inc., Bauer, American 3 Media and Hachette. The publishers have agents who manage 4 their relationships with the wholesalers. And those agents are 5 called national distributors and they are defendants 6 Time/Warner, Kable, Curtis Circulation and Distribution 7 Services. 8 Source and the other wholesalers buy the magazines and 9 resell them to the retailers. In addition to Source, the other 10 retailers are Hudson and the News Group, and until last week 11 there was a fourth wholesaler called Anderson which was cut off 12 from its supply of magazines and went out of business last 13 Saturday. 14 The retailers who buy magazines from the wholesalers 15 run the gamut, your Honor, from newsstands, airport newsstands 16 large drugstore chains like CVS and Rite Aid to mass 17 merchandisers like Wal-Mart. The sum and substance of it is 18 that the retailers depend upon the wholesalers such as Source 19 for their supply of magazines which they then sell to the 20 ultimate consumers. And the wholesalers depend for their 21 source of magazines on the publishers and the national 22 distributors. The wholesalers have another responsibility, and 23 that was to pick up from the retailers and destroy all copies 24 of the magazines that the retailers didn't sell. 25 We believe that the evidence is clear, your Honor, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 5 92BUSOUC 1 that the defendants here acted in a concerted and a coordinated 2 effort to monopolize the wholesale magazine market on a 3 national scale. The evidence shows that the defendant 4 publishers and their agents, the national distributors, acted 5 simultaneously to cut Source off from its supply of magazines, 6 from 80 percent of its supply of magazines. 7 The evidence also shows that the publishers and their 8 national distributors were acting in concert with the defendant 9 wholesalers who were raiding Source's retail customers, 10 poaching Source's employees and spreading disparaging rumors 11 about Source's financial condition at virtually the same time. 12 All of this was done, your Honor, we submit, in an effort to 13 destroy Source as a competitor in the wholesale magazine 14 market. 15 Let me just run through, if I could, your Honor, a 16 very quick chronology which we believe makes this conclusion 17 crystal clear. 18 On January 19, Source informed the publishers that it 19 was imposing, effective February 1, a 7 cent per copy surcharge 20 on the publishers to help it defray expenses which had been 21 rising. 22 THE COURT: In fact, Mr. Kasowitz, they were joining 23 Anderson which had already made that same suggestion? 24 MR. KASOWITZ: Anderson had made an announcement five 25 days earlier on January 14. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 6 92BUSOUC 1 THE COURT: It was five days. I was going to say a 2 week. 3 So your client then joined in with Anderson in saying 4 there was going to be a 7 cent increase in prices? 5 MR. KASOWITZ: That's correct, your Honor. 6 That was January 19. 7 And the surcharge gave the defendants the pretext that 8 we now know they were looking for because, in mid to late 9 January, the defendant publishers and the national distributors 10 objected to the surcharge. And in response, Source informed 11 the publishers and national distributors that it was retracting 12 that surcharge before it took effect. Anderson did not retract 13 the surcharge and now it is out of business. 14 Between January 26 and January 30, all of the 15 publishers except Time and all of the national distributors 16 except Time/Warner gave Source explicit assurances that they 17 would continue to supply Source and that they would try to find 18 a way to work out the issues that had given rise to the 19 surcharge in the first place. 20 And over the weekend, on January 31, Source's CEO Greg 21 Mays had what he considered a positive meeting with the CEO of 22 Time/Warner, Rich Jacobsen. Mr. Jacobsen assured Mays at that 23 meeting that Time/Warner had not yet engaged any other 24 wholesalers or entered into contracts with them for 25 distribution purposes and that the door was still open to SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 7 92BUSOUC 1 making a deal with Source. 2 So that on that Monday, February 2, Source, in a 3 gesture of goodwill, made tens of millions of dollars in 4 advance payments -- payments that were not even due yet -- to 5 all of the national distributors for the benefit of all of the 6 publishers, and those payments were made to Time/Warner as 7 well. I think that the total of the payments, your Honor, was 8 $85 million. 9 Your Honor, literally within minutes of the payments 10 that Source made, these good faith advance payments, the 11 publishers and the national distributors sent letters to Source 12 reneging on the assurances that they had given to Source during 13 the previous two to three days and informing Source that they 14 would no longer supply Source with magazines. 15 THE COURT: Was there any suggestion in the meeting 16 between the president of your client and Mr. Jacobsen of 17 Time/Warner that it would be a good idea for Source to make 18 these advance payments to the national distributors? Why did 19 you make the payments? 20 MR. KASOWITZ: In fact, Mr. Mays suggested to 21 Mr. Jacobsen that Source would make the payments as a gesture 22 of goodwill. There had been discussions and negotiations 23 between the companies for some time over different credit 24 adjustments and the like, and this was the sign of goodwill on 25 Source's part. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 8 92BUSOUC 1 On the same day that all of these publishers and all 2 of these national distributors, literally, minutes after they 3 received the payments and minutes within each other notified 4 Source that they were cutting Source off from their entire 5 supply of magazines, Time/Warner, on that day was sending 6 letters to Source's customers, to the retailers. 7 And the letters that they were sending were both, on 8 the one hand, we submit, defamatory and disparaging because 9 they had the message that Source was not financially able or 10 financially able to continue in business and, on the other 11 hand, those letters said that Source was going to be replaced 12 with the two other wholesalers with whom Time/Warner said it 13 had already entered into agreements. This was on the exact 14 same day that Source was cut off by all of the suppliers. 15 There is no question, your Honor, that this is 16 evidence, in our view, of a concerted boycott and refusal to 17 deal under Section 1 of the Sherman Act. 18 THE COURT: I understand your argument, but what do 19 you say about the defendant's response that you had a ticking 20 time bomb on your hand -- not you, Mr. Kasowitz, but your 21 client -- 22 MR. KASOWITZ: Thank you. 23 THE COURT: -- putting a gun to the head of the 24 publishers, and we are going to impose a 7 cent increase 25 effective February 1, unilaterally? SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 9 92BUSOUC 1 And then the publishers acting as publishers 2 separately, each one separately said, we don't trust Source 3 anymore. They are not a reliable supplier. Anybody who would 4 try to put a gun to our head that way, we are not going to deal 5 with them. 6 So I think you would agree with me that if each one of 7 these publishers acted unilaterally, there wouldn't be the 8 antitrust violation that you claim? 9 MR. KASOWITZ: I certainly agree, your Honor, that any 10 of these publishers unilaterally would have the right to stop 11 dealing with a particular customer. 12 THE COURT: And your evidence of concert is the 13 simultaneous action by all of them? 14 MR. KASOWITZ: It is not just that. It is virtually 15 simultaneous action. It is virtual simultaneous action in the 16 face of the fact that the supposed gun or time bomb that Source 17 had, had been retracted. 18 THE COURT: Right. But you will agree with me, while 19 they retracted it, a publisher could say to himself, anybody 20 who could do something like this to me, I am just not going to 21 trust in the future? 22 MR. KASOWITZ: I don't think that is quite the reality 23 and that wouldn't be what the evidence would show here. The 24 evidence here would show that Source had a longstanding 25 relationship with these national distributors and with these SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 10 92BUSOUC 1 publishers or had over the period of the prior seven years 2 acquired companies that had longstanding relationships. 3 It would also show, your Honor, that there are 4 discussions all the time about price and dealings and the like. 5 And it would also show that after the announcement on January 6 19 was made of this surcharge, the reaction was not, we don't 7 trust you, we are leaving you, there's no further matter for 8 discussion, there were ongoing -- we have submitted some of 9 this in our affidavits and would demonstrate at a hearing the 10 rest of it, your Honor -- discussions between Source on the one 11 hand and the publishers and national distributors on the other 12 hand in which they were discussing what the reasons for the 13 surcharge were, what the publishers' issues were about it. 14 And in fact as set forth in our papers pretty clearly 15 and pretty consistently in the affidavits of several of our 16 executives including Mr. Mays and including various senior 17 officials of Source, including Mr. Tuchman and the like and 18 Mr. Argentieri, they had discussions with the defendants and 19 they came to an agreement that in return for working these 20 things out, supply would be -- 21 THE COURT: -- continued. 22 MR. KASOWITZ: -- forthcoming and the surcharge would 23 be withdrawn. 24 THE COURT: Mr. Kasowitz, the key to your argument 25 here is that Source is suffering an irreparable injury. The SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 11 92BUSOUC 1 papers are coming in. I am referring to Mr. Donley's letter 2 from the Dechert firm on behalf of Curtis. Have you seen that? 3 MR. KASOWITZ: I have not yet, your Honor. 4 THE COURT: At any rate, there are a couple of 5 attachments that I am happy to share with you, that deal with 6 representations from correspondents. If you look toward the 7 end of it, it suggests that Source has not been irreparably 8 injured because you are still in business. It is the last two 9 exhibits. 10 I got this at 2 o'clock this afternoon myself. 11 MR. KASOWITZ: Right. I am familiar with this 12 document and, of course, this was a letter that was sent out 13 the prior week, not this week but last week. And what the 14 letter -- 15 THE COURT: The week of the 2nd of February? Today is 16 the 11th. 17 MR. KASOWITZ: Yes. If today is the 11th, I think it 18 was on the 6th or the 7th. I have to check. 19 THE COURT: The 6th is a Friday. The 7th is a 20 Saturday. 21 MR. KASOWITZ: A couple of days after that, mid week 22 last week. 23 What this says is that, this is an attempt by -- faced 24 with a cutoff of 80 percent of their business, 80 percent of 25 the magazines -- this is a letter from Mr. Mays talking about SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 12 92BUSOUC 1 the fact that the business had been in good shape. It had 2 lines of credit. It had support from a significant private 3 equity sponsor and equity holder and the like. 4 And it is certainly an effort to try to, to the extent 5 possible, assure the markets that they are fighting hard to try 6 to maintain themselves. However, the letter makes clear that 7 they have been confronted by an unprecedented and unprovoked 8 assault on this channel and that they are substantially at 9 risk. 10 What was happening at that time and what has happened 11 since then, your Honor, is that their business is literally 12 going down the tubes. And with respect to virtually every 13 metric of the business that you could measure, source of 14 supply, 80 percent is gone. Customers, they are walking out 15 the door. Yesterday, your Honor, they lost CVS, the enormous 16 drugstore chain. We have a list of other large customers like 17 CVS, huge Rite Aid drugstores and Super Value which is an 18 enormous grocery retail outlets and the like, who have all 19 gone. What has happened is that it has gotten worse and 20 worse -- 21 THE COURT: I understand your point. Your point is, 22 as a wholesaler, you need a source of supply in order to take 23 care of your retail customers. 24 MR. KASOWITZ: Correct, your Honor. 25 THE COURT: Without a source of supply, you are SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 13 92BUSOUC 1 literally, respectfully, out of business and that's the 2 irreparable harm. 3 MR. KASOWITZ: That's correct. 4 And now they are at serious risk of losing all of 5 their bank facilities. Within their financial documents, they 6 have clauses that say, if there is a material adverse change in 7 their business, then the banks -- these are typical clauses -- 8 are no longer obligated to maintain their facilities. That 9 looks like it is going down the tubes. 10 When I represent to the Court that if a TRO is not 11 entered and supply is not restored, then the other customers 12 and employees are going to leave and the bank facilities are 13 going to be lost and that they won't have enough funds or 14 confidence to be able to make payroll on Friday and that then 15 thousands of employees are going to be out of work. The 16 estimate is about 4500 employees. 17 I can support all of that, your Honor. We have 18 brought here today the general counsel and senior vice 19 president, Mr. Bates, who could give testimony on it if that 20 were required. 21 THE COURT: There is another question that I can ask. 22 I want to hear from the defendants. 23 Do you have anything you want to add? 24 MR. KASOWITZ: I will respond to any questions that 25 you would like. The only last point that I would make is that SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 14 92BUSOUC 1 the Second Circuit law on this is pretty clear in circumstances 2 that are not even as compelling for the entry of temporary 3 relief. 4 THE COURT: What is your best case there? Is it 5 Reuters or the case that I was reading, Jacobson v. Armstrong 6 Cork? 7 MR. KASOWITZ: Reuters, Jacobson are two compelling 8 points. I think that we are stronger than both of them and I 9 think that, frankly, your rulings in Helios mandate the entry 10 of a TRO because the circumstances that your Honor held were 11 not present in Helios, the destruction of an entire business 12 and gross disparagement of the distributors' products and 13 business and the like are exactly present here. 14 THE COURT: In this letter that is attached to Mr. 15 Donley's -- I guess it is Mr. Castardi's affidavit which is Mr. 16 Mays' letter that I showed you -- 17 MR. KASOWITZ: Yes. 18 THE COURT: -- it talks about unprecedented and 19 unprovoked assault on this channel by certain publishers and a 20 national distributor. You, of course, have named a number of 21 national distributors? 22 MR. KASOWITZ: Yes, your Honor. 23 THE COURT: What accounts for the difference? 24 MR. KASOWITZ: I think that the difference is that 25 after -- we were retained very late last week, as you can SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 15 92BUSOUC 1 imagine, and after we were retained we were able to do a very 2 fast investigation. And based on our interviews, our review of 3 documents and the like, it resulted in a broader complaint. 4 THE COURT: Anything you want to add now? 5 MR. KASOWITZ: No, your Honor. 6 THE COURT: You will have a chance to respond later 7 on. 8 MR. KASOWITZ: Thank you, your Honor. 9 THE COURT: I saw some lawyers come in late. 10 Is there anybody here representing American Media? 11 MR. KEYKO: David Keyko, from Pillsbury, trying to 12 finalize our papers. We sent an e-mail with our papers and an 13 affidavit. 14 THE COURT: I do have papers from Mr. Donley of the 15 Dechert firm and Mr. Broder at KL Gates. 16 Anybody else have papers that they want to submit, 17 bring them up. 18 MR. BAYDA: I will pass up copies. 19 THE COURT: Did you serve your adversary? 20 MR. BAYDA: No. It was filed electronically today. 21 MR. WILSON: Your Honor, we have papers we have not 22 served. We were unclear about the portion of the Court's order 23 saying papers would be due 9:30 Friday. 24 THE COURT: Just so that the record is clear, the 25 order to show cause was presented to me on Monday. I refused SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 16 92BUSOUC 1 to grant a TRO. The reason for that was, I don't think that 2 there was compliance with Rule 65(b)(1)(B). 3 At any rate, when I noted compliance on Tuesday, I 4 advanced the hearing from Friday to Wednesday. I should have 5 been more complete and advanced the submission of papers, but I 6 will take any that you have. 7 MR. WILSON: I would only say that we have not served 8 them and electronically filed them. We will do that promptly. 9 THE COURT: I am sure that Mr. Kasowitz will take 10 them. 11 MR. ARP: Jarrett Arp, for Hudson News. 12 We have not filed papers so far. We were provided 13 with a copy of the complaint naming our client yesterday, and 14 we have members of our management all over the country right 15 now traveling in connection with expanded sales duties. If the 16 Court were inclined to entertain any other papers, we could 17 submit a declaration and I am also prepared to make statements. 18 THE COURT: Who wants to go first? 19 And I would appreciate argument from anybody who wants 20 to speak if you give me an order of battle here, but the first 21 question that I want to hear, in light of Source's position 22 that they are a wholesaler that has been cut off from the 23 supply, what I would like to hear first is why this isn't 24 irreparable injury on the facts of this case. Then we will 25 take up such questions as whether there is a likelihood of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 17 92BUSOUC 1 success or there's fair grounds for litigation and balance of 2 hardships. 3 The first thing I want to hear is why, on the facts of 4 this case as they are alleged in the complaint, is there not 5 irreparable injury. 6 Who wants to go first? 7 Mr. Wilson. 8 MR. WILSON: Your Honor, I did not arrange this, but 9 let me start. 10 All that I would say, I think, about irreparable 11 injury is the following. This is a court of equity. You are 12 being asked for an equitable remedy, and this is a problem of 13 Source's own making. 14 Going back to the question about the gun being pointed 15 at the head and withdrawn, it wasn't withdrawn. It was shot. 16 And it didn't kill Time yet, anyway, and didn't kill 17 Time/Warner Retail. 18 What we had to do -- the papers, I think are quite 19 clear about this, that consistently Time/Warner Retail on 20 behalf of Time Inc. said, we are not providing you product. We 21 are not doing it. Are you going to withdraw your demand? 22 Mr. Jacobsen's affidavit just handed up goes through a 23 long chronology of events. This is a problem that started in 24 early 2008 and got progressively worse and worse and worse. 25 What happened after Source and Anderson also refused SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 18 92BUSOUC 1 to withdraw the ultimatum was that we had to take steps to try 2 to find other ways to get the product out. Those steps 3 included finding other distributors, finding other ways to get 4 the product out and arranging for trucks and warehouses and 5 things like that to be sent different places. 6 How does that relate to irreparable injury? 7 The problem here is, the relief that is being sought 8 is relief that can't be granted if what Mr. Kasowitz told you 9 is true -- and I am speaking only for Time Inc. product. The 10 issues that bear a March date of the monthly magazines are 11 essentially all gone. They were already shipped to somebody 12 else. The weekly magazines shipped on Monday are already gone. 13 The weekly magazines bearing a cover date of February 23 are 14 gone. 15 So there is a period, if Mr. Kasowitz is asking for a 16 one- or two-day order, at least as to Time Inc. -- 17 THE COURT: What is the harm here then? What is the 18 harm to you by the issuing of a short TRO to bring this on for 19 a hearing if I issue an order and you say as to your client, 20 because of the way that the magazines are dated, it is 21 impossible for you to comply because the magazines are already 22 gone? 23 MR. WILSON: It depends on what the TRO says. There 24 are still a few different titles of magazines, for example, 25 there is a title called All You that is sold only in Wal-Mart SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 19 92BUSOUC 1 and that is being held up while we are trying to figure out how 2 to get the product to Wal-Mart. So there are bit and pieces. 3 The harm to us is, in reliance on the clear statement 4 from Source and from Anderson, and we went back to them over 5 and over, will you retract this, will you give us some time to 6 negotiate it and they said no, we won't. We took steps. We 7 made other arrangements to distribute this product. If your 8 Honor enters a TRO, it is going to disrupt that. The product 9 is not going to get anywhere. We can't get it to them. 10 THE COURT: So the answer to my question, what I 11 really wanted to know, why there is no irreparable injury. And 12 you are telling me that any relief that I would order by way of 13 a TRO would not be effective in remediating -- 14 MR. WILSON: I am telling you that, and I am telling 15 you that the situation that the Court and the parties find 16 themselves in is one caused by the plaintiff. At least as far 17 as I've been taught, injury that you cause yourself is not 18 injury you can then rush into court and ask for extraordinary 19 relief. 20 What is being asked here is to force us to deliver 21 magazines to people who have not paid us for them. 22 THE COURT: Now, you were delivering magazines to 23 Source in January, weren't you? 24 MR. WILSON: That is correct. 25 THE COURT: You cut them off effective the first of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 20 92BUSOUC 1 February? 2 MR. WILSON: They cut us off. 3 THE COURT: Delivery stopped on the first of February? 4 MR. WILSON: I cannot tell you for sure what the last 5 delivery was, but I believe it was somewhere in very late 6 January, yes. 7 THE COURT: Anything else that you want to add, Mr. 8 Wilson, on irreparable injury? 9 MR. WILSON: Irreparable injury, no. 10 THE COURT: Anybody else want to be heard? 11 MR. DONLEY: Yes, your Honor. 12 THE COURT: You are Mr. Donley? 13 MR. DONLEY: Yes, from Dechert, for defendant Curtis 14 Circulation. 15 First of all, I don't think there has been a showing 16 that they can't get any product, that they can't get any 17 supply. 18 One of the major publishers here is a company called 19 Comag. And you will notice that they are not named as a 20 defendant. Comag is a large publisher, and we believe they are 21 getting product and can continue to get product from Comag, and 22 they have worked out pricing issues with Comag. They made a 23 different decision. 24 Secondly, as I think is buried in a footnote in their 25 memo, they indicate that they publish their own material. If I SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 21 92BUSOUC 1 am recalling it correctly, they say that they may have as many 2 as 65 or 70 titles that Source, at least partially, as an 3 integrated company, publishes. 4 Now, it is certainly true that to continue in business 5 they are going to have to revamp, and they are going to have to 6 operate on a somewhat smaller scale, but there has been no 7 showing that they are unable to do that. 8 As we pointed out in Mr. Castardi's affidavit, 9 although in this atmosphere, as Mr. Wilson said, putting a gun 10 to our head, we are not prepared to go forward with them now. 11 That is not to say that down the road if they demonstrate their 12 ability -- 13 THE COURT: Mr. Donley, what if the roles were 14 reversed and you on behalf of Curtis were denied access to 15 magazines from Bauer, Hachette and Time and American Media 16 because they all got together and decided that Curtis was not a 17 reliable distributor, wouldn't you be arguing that that would 18 cause you irreparable injury, that you have been denied this 19 source? 20 MR. DONLEY: First of all, as I say, they have some 21 other supply. 22 THE COURT: Well, they have some other source of 23 supply. I thought Comag was a distributor. But assuming that 24 they are publisher, they are not publishing Time magazine and 25 they are not publishing any of the Time titles. They are not SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 22 92BUSOUC 1 publishing any of the American Media titles. 2 MR. DONLEY: That is true. There are certain titles 3 that they can't get from Comag. But it is not apparent to me 4 that in that situation there wouldn't be a dollar remedy for 5 the harm alleged. It is certainly not the case that anytime a 6 failing company can say, I can't get supply, I am entitled to 7 an injunction. There is no reason in the world why a dollar 8 remedy won't work for them that I have heard. 9 THE COURT: I will come back to the substance. I just 10 want to hear on irreparable injury. 11 MR. DONLEY: A further point on irreparable injury, I 12 believe the case law in this area that they have cited really 13 tends to focus on small businesses. In fact, some of the cases 14 actually talk about mom-and-pop cases, typically a franchisor 15 that is cutting off a much smaller franchisee, and that is not 16 the model here. 17 THE COURT: Reuters Limited and United Press 18 International are pretty sizable companies. 19 MR. DONLEY: I am talking about the broad doctrine and 20 the cases they cited. 21 THE COURT: The broad doctrine was applied in Reuters 22 against UPI. They are both sizable companies. I think that 23 the doctrine is applicable, regardless of the size. 24 MR. DONLEY: Your Honor, I also think that they have 25 not taken into account in any way the situation of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 23 92BUSOUC 1 distributors, the harm that distributors are facing. The 2 reality here is, we had a business decision to make. It is not 3 surprising that the decision was made on the same day after 4 checks went out. It was the day after they said they were 5 going to impose the surcharge and we then had to scramble. We 6 had to develop alternative supply lines. 7 THE COURT: Did anybody from Source meet with a 8 representative of Curtis? 9 MR. DONLEY: Yes, your Honor. That was on January 27. 10 And we have described that meeting, and it is a very different 11 account than the one presented in the papers by Source. And 12 there was a discussion about the 7 cent increase. Source made 13 it very plain that they were going forward and even went to the 14 point of saying, if Curtis's publishers will not pay it, then 15 we are going to take it out of Curtis' -- 16 THE COURT: As far as Curtis is concerned, what 17 Mr. Kasowitz says, that Source did not retract the demand for 18 the 7 cent increase so far as Curtis was concerned. 19 MR. DONLEY: By January 30, they did send out a letter 20 that said we are now retracting it, the day before it was 21 supposed to go into effect. That is true. That went out. At 22 that point we had a business decision to make. And it was 23 clear to us that this was not a company that it made sense to 24 do business with. 25 And another point on our harm, if this is a company SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 24 92BUSOUC 1 that has a nine-day cash supply and they are going out of 2 business on Friday, how can you ask someone to assume that 3 credit risk? One of the real factors in Curtis' decision was 4 the credit assessment. We are at risk when we deliver product 5 to them if they don't pay. We are holding the bag. So that 6 has to be taken into the calculus, your Honor. 7 THE COURT: Thank you, Mr. Donley. 8 is there anyone else who wants to speak on the issue 9 of irreparable injury so far as their client is concerned? 10 MR. BAYDA: Michael Bayda, on behalf of Kable 11 Distribution Services. 12 THE COURT: Mr. Bayda. 13 MR. BAYDA: On the issue of irreparable harm, first, I 14 would agree with the issue on balance of hardships. Kable did 15 attempt to dissuade Source from this surcharge, but Source had 16 written directly to Kable's clients. 17 Kable has approximately 200 publisher clients and 18 they, on their own, decided that they would not go along with 19 this surcharge. When Kable wrote back declining to continue 20 service, it was only on behalf of one publisher client. 21 When Source would not retract the surcharge, Kable had 22 to make alternate arrangements, and it has made these 23 arrangements and it has shipped to the facilities of other 24 wholesalers. 25 I would also point out that, if you take a look at SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 25 92BUSOUC 1 Exhibit 2, to the declaration of Michael Duloc which I just 2 handed up, this is an e-mail dated February 3, 2009 from 3 Source's chief financial officer. And, basically, this relates 4 to the line of business that Source will continue in which is 5 the bookstore business. And as I read this, he looks pretty 6 optimistic about Source's future in this business. Yes, they 7 will have to revamp their business and they will be smaller, 8 but he said, we would be bigger than when we bought IPD in 9 2001. And his guess is that the other distributors would 10 continue to support Source in the bookstore business. 11 THE COURT: I know who Mr. Michael Duloc is. He is 12 the principal of Kable. Who is the from? 13 MR. BAYDA: From John Bode who is the chief financial 14 officer of Source Interlink. 15 THE COURT: He is the CFO at Source? 16 MR. BAYDA: Yes, your Honor. 17 That's really all that I have on that issue. 18 MR. KEYKO: Your Honor, if I may, on behalf of 19 American Media? 20 THE COURT: What firm are you with? 21 MR. KEYKO: David Keyko, from Pillsbury. 22 THE COURT: Yes. 23 MR. KEYKO: The reason that at least with respect to 24 American Media that Source will not suffer irreparable harm is 25 American Media was actually terminated. As of December 31, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 26 92BUSOUC 1 2008, the contract ended between Source and American Media. 2 In June of 2008, a new contract was negotiated between 3 American Media and Source. It was a year-and-a-half contract, 4 however, what it provided was that every six months in advance 5 of the six-month period, three months ahead of that, notice was 6 sent by either party, the contract would not continue. 7 On August 5 of 2008, such a notice was sent to 8 American Media by Source terminating the contract. So as of 9 January 1, there was no contract between American Media and 10 Source. 11 THE COURT: Give me the facts again. What is the 12 timeline there, Mr. Keyko? June 30 -- 13 MR. KEYKO: It was in June. 14 THE COURT: In June of 2008, your client, American 15 Media, and Source entered into an agreement which provided 16 for -- 17 MR. KEYKO: It was a contract which covered a year and 18 a half. It was in six-month increments. 19 THE COURT: Three six-month increments? 20 MR. KEYKO: Exactly. 21 THE COURT: It provided for -- 22 MR. KEYKO: Notice was provided in advance of the 23 ending of the six-month period, three months ahead of that, 24 then the contract would terminate at the end of the six-month 25 period. If no notice was sent or received by either party, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 27 92BUSOUC 1 then the contract would continue for the next six months. 2 THE COURT: So six weeks after they entered the 3 contract, they decided that they would cancel it effective the 4 end of -- 5 MR. KEYKO: -- the end of 2008, and they did so cancel 6 the contract. So we were operating without any contract as of 7 January, so our circumstances were a little different than 8 anyone else. 9 THE COURT: Did your client provide magazines to 10 Source in the month of January? 11 MR. KEYKO: They did, without a contract. 12 THE COURT: Why did they do that? 13 MR. KEYKO: Because they didn't have any alternative 14 at that point in time as to how they would distribute their 15 magazines. 16 What happened then was that we received the notice, 17 like I guess everyone else did, of the 7 cent increase saying 18 that this is going into place and, furthermore, if you don't 19 agree to this increase, you will be terminated as of February 20 1. 21 We sent a letter back saying, we can't accept that, 22 and the cost to American Media was some $6.9 million, assuming 23 that it had given the 7 cent increase to all of the 24 distributors because we could hardly give it to one, it would 25 have amounted to, I believe, some 23 million, 26 million SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 28 92BUSOUC 1 dollars which was a huge portion of the actual profits that the 2 company made. It was impossible. 3 So on Monday we received the notice saying, you are 4 cut off if you don't accept it. 5 On Friday a letter was sent back saying, sorry, we 6 cannot accept that. 7 On the following Monday a letter was received by us 8 saying, the contract is over as of February 1. So they had 9 terminated our contract. 10 We did receive a letter like the Curtis letter on the 11 30th saying the increases were rescinded, but we still had no 12 contract and there was no written receipt. No new contract was 13 ever executed, so we didn't have a contract at all. 14 They therefore can have no expectation that they would 15 continue to receive publications from American Media and, 16 indeed, in the letter that they had sent us on the 26th saying 17 that it was over, they said that we had acknowledged that this 18 was a contract at-will terminable by either party by simply 19 saying so, and they were terminated. 20 We didn't have a contract, therefore, they can't be 21 irreparably harmed by not getting ours. 22 Furthermore, if you go back to the contract that 23 existed on January 15, we still don't have a contract because 24 we had no contract as of that date. So in fact, go to merits, 25 the entire premise of their complaint that somehow we SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 29 92BUSOUC 1 terminated them is flawed because we didn't terminate them. 2 They terminated us, putting us in a horrible mess. 3 THE COURT: You are speaking on behalf of American 4 Media and Distributor Services? 5 MR. KEYKO: I am, your Honor. American Media is a 6 publisher. Distribution Services is a merchandising company 7 that helps merchandise publications on behalf of American Media 8 and various other publishers. 9 THE COURT: Thank you, Mr. Keyko. 10 Anybody want to speak for Hachette, Jones Day or 11 Troutman on behalf of Bauer? 12 MR. RINEHART: Stephen Rinehart, if I may, very 13 briefly, your Honor. 14 I would like to refer to the letter which I believe 15 was attached to a submission by one of the other defendants in 16 the case, and I think that your Honor referred to as the letter 17 which suggested the financial condition of Source was pretty 18 healthy, and that was a letter dated February 4. I don't have 19 the specific submission made by co-defendant, but I do have an 20 article from the media in which that letter is quoted, and I 21 wanted to point something out which may have escaped our 22 attention earlier. 23 First of all, the letter begins by saying Source, as 24 of February 4, after it claims to have been unlawfully cut off, 25 as of February 4 had $200 million in cash, is backed by a large SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 30 92BUSOUC 1 investor, it has DVD and CD distributions, 75 magazine 2 publications and 90 related web sites. 3 We haven't heard a thing this morning about what 4 happened with those assets and those businesses. 5 But rather strikingly, your Honor, as of February 4, 6 this same letter states, from Mr. Mays: "We will shortly be 7 filing a major antitrust lawsuit and seeking a restraining 8 order so that we can continue to properly service your stores." 9 So on the very day that this plaintiff is claiming to 10 be fully liquid and robust and continuing in business, it is 11 already drafting and planning this lawsuit in which they claim 12 they are circling the drain and they are going out of business. 13 So I think it is fair, your Honor, in the context of 14 assessing the credibility of claims of irreparable harm that 15 the statements of the plaintiffs themselves be taken into 16 consideration. 17 In addition, a point with respect to Bauer, the 18 assertion was made by Mr. Kasowitz that on February 2, within 19 minutes or seconds of each other, each of the defendants 20 terminated his client. That is not a true statement, your 21 Honor. In fact, my client, Bauer, through its distributor 22 Kable, sent the letter to the plaintiff on January 29, a couple 23 of days before, unilaterally and independently made that 24 decision. The complaint itself concedes, although 25 inaccurately, that the letter was sent on January 30. But SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 31 92BUSOUC 1 there is certainly no simultaneity of response here as might 2 have been suggested by Mr. Kasowitz. 3 THE COURT: Mr. Rinehart, let me ask you a question. 4 There are a lot of facts here, and I am sure that the 5 parties are not going to agree on the facts and there will have 6 to be a hearing. The real question that I have to address is 7 whether there will be a corporate plaintiff when we have the 8 hearing. 9 What is the harm to your client if I give them the 10 TRO, provided it is very short? 11 MR. RINEHART: It is a couple of things, your Honor. 12 One is that, as of the end of January, once faced with 13 the ultimatum, we had to make other arrangements to get our 14 publications shipped, and those will be disrupted. And in fact 15 as we speak, we are having difficulty finalizing such 16 arrangements because this lawsuit is hanging over our head, as 17 it is the other defendants. 18 The other issue is, frankly, your Honor, to do 19 business with somebody who is suing us and who has a track 20 record of attempting to extort surcharges and giving ultimatums 21 makes doing business for our client almost impossible. It 22 would be hard to do business with somebody in those 23 circumstances who clearly does not do business on terms that we 24 can accept and who, frankly, plays hardball, and it is very 25 disconcerting and disruptive to our business. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 32 92BUSOUC 1 THE COURT: But this is a business that you did 2 business with? You did business with Source for a number of 3 years? 4 MR. RINEHART: That's right. 5 THE COURT: Right up to right now? 6 MR. RINEHART: Right up until the middle of January 7 when they decided to impose this surcharge, and they followed 8 the lead of their competitor Anderson in doing so. We said no, 9 we can't do this. It was followed with an absolute drop-dead 10 ultimatum. They said, if you continue to ship to us February 11 1, we will consider you to have agreed to this price increase, 12 and we couldn't do it. 13 Now for our pains for making that decision not to pay 14 the surcharge, we are in litigation with this party and to be 15 forced to do business with them and to disrupt the arrangements 16 we are trying to make with others to get our magazines out the 17 door, we think, is irreparable to us and, frankly, the balance 18 of the equities does not favor the plaintiffs. 19 THE COURT: I think that I have heard from everybody 20 except Jones Day. 21 MR. FEDER: Your Honor, we don't have anything 22 additional to add on this issue. 23 MR. BRODER: Your Honor, Douglas Broder, K&L Gates, 24 for the News Group. 25 With your permission, my partner John Culver from SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 33 92BUSOUC 1 Charlotte would like to speak on behalf of the News Group. 2 THE COURT: Thank you. 3 Mr. Culver. 4 MR. CULVER: I will be quite brief. I really have 5 just two points to make. 6 The arguments so far have focused on the acquisition 7 of the product by the plaintiff. My client does not sell 8 product to the plaintiff. We actually compete with the 9 plaintiff. So to the extent that that is what the Court is 10 focused on, the TRO should not be applicable to us. The 11 allegations concerning the News Group are that somehow we have 12 "stolen," is the word that is used in the complaint, their 13 employees. We respond to that with our affidavits. 14 THE COURT: These are the affidavits of Mr. Mixon and 15 Mr. Perry? 16 MR. CULVER: Yes, sir. They were submitted this 17 afternoon. 18 THE COURT: Mr. Broder submitted those. 19 MR. CULVER: Yes. 20 To respond to your Honor's specific question, how 21 would the News Group be injured here if your Honor were to 22 grant the relief, I think that you have to understand what my 23 client does. We compete with the Source daily for customers. 24 That is the nature of the American economic system. 25 THE COURT: I read Mr. Broder's letter saying, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 34 92BUSOUC 1 whatever you do by way of injunctive relief, it should not be 2 applicable to us because we are competitors and you shouldn't 3 hamstring the competitive process. 4 MR. CULVER: That is exactly right. If you enter an 5 order, our client is then shut down because how do we operate? 6 Our business is to compete. 7 THE COURT: I have your point. 8 Mr. Arp? 9 MR. ARP: Also from Hudson News. 10 THE COURT: You have the same point? 11 MR. ARP: Very same point as well with respect to the 12 notion of selling product to them and not thinking the product 13 is being denied them by us. 14 And I may not have read the papers carefully, but my 15 reading of the papers suggests that plaintiff is seeking to 16 restrict either the News Group or Hudson from competing in the 17 manner it has been, at least for these weeks. 18 THE COURT: I think it does. The TRO or the 19 preliminary injunction says that it bars all of the defendants 20 from boycotting, disparaging Source to its retail customers and 21 interfering with Source's business relationship and stealing 22 Source's employees, trade secrets or intellectual property. 23 So I read Mr. Broder's submission and I have 24 considered Mr. Culver's argument. I have read the affidavits 25 of Mr. Perry and Mr. Mixon and they are saying that they read SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 35 92BUSOUC 1 the TRO and the preliminary injunction as applicable to them, 2 but they don't like the application. 3 MR. ARP: In that event, we obviously join in the 4 comments of the News Group, and will speak when the Court asks 5 for comments with respect to probabilty of success on the 6 merits. 7 THE COURT: I have heard from these defendants on 8 irreparable injury. 9 The Second Circuit has another phase to this test and 10 that is likelihood of success or substantial question or the 11 balance of the equities tipping in favor of one party. 12 Does anyone want to be heard on the other part of the 13 test, likelihood of success or substantial question and balance 14 of hardship tipping decidedly in favor of one party? 15 We will go in the same order. 16 Mr. Wilson, do you want to start? 17 MR. WILSON: Yes, your Honor. 18 Your Honor, there are, I think, a few very important 19 things that are contained in the submissions that I want to 20 point out to you and also I want to address some of the things 21 Mr. Kasowitz said. 22 First of all, I do think that it is clear to the Court 23 that we were continuing in business and attempting to continue 24 in business with Source although we were very, very worried 25 about their financial condition. They were falling further and SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 36 92BUSOUC 1 further behind in paying us. They were extracting all sorts 2 of -- deducting amounts that were owed to us off of statements 3 that were invoiced to them. 4 One thing that is not mentioned in the papers and 5 really is inconsistent, I think, with the affidavits that have 6 been submitted by the Source employees is that there is a 7 lawsuit pending in this court that raises some of these issues. 8 It was filed originally in California. It was removed here. 9 It is in front of Judge Pauley. It has several claims, and it 10 was filed by the Source against Time/Warner Retail. 11 One of the claims in it is that the parties cannot 12 unilaterally change the terms of trade between them, which is 13 exactly what the Source's own letter attempts to do. 14 Another claim is for tortious interference with their 15 retail customers saying that we were talking to them and 16 shouldn't have been talking to them. 17 And there is a counterclaim in it for more than $5 18 million of fraudulently taken returns claims which are exactly 19 the sort of thing that the affidavit said we don't know 20 anything about any sort of improperly taken claims when in fact 21 there is a lawsuit pending here about that now. 22 THE COURT: What is the status of that lawsuit? 23 MR. WILSON: It is just transferred. Nothing in this 24 court has yet happened. At this point I think it is fair to 25 say Judge Pauley knows less about this general industry than -- SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 37 92BUSOUC 1 THE COURT: That is not saying much. 2 MR. WILSON: If I can direct you to -- 3 THE COURT: That is not on Judge Pauley, but on 4 myself. 5 MR. WILSON: I wasn't entirely sure how to take it but 6 I figured I would move on. 7 Mr. Kasowitz, I am sure, was not attempting to mislead 8 the Court, but the $25 million that was paid in February was 9 not an advance of any moneys. 10 Source, I don't know how they pay other people, but 11 they have a monthly statement that is due at the very end, last 12 business day of every calendar amount. In December that amount 13 was supposed to be $29 million and they paid 5. That was at 14 the very end of December. In January the amount was supposed 15 to be $39 million and they paid zero for January. The $25 16 million represented a $14 million shortfall against what they 17 actually owed. There is no question about it. There is no 18 advance there. 19 If I can ask you to turn to the thicker document I 20 gave you -- 21 THE COURT: It is the affidavit prepared by 22 Ms. Papish? 23 MR. WILSON: Yes. She works with me, my colleague. 24 It is attaching a bunch of documents. 25 If you turn to tab 9, you will see an e-mail from Jim SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 38 92BUSOUC 1 Gillis who is the COO of Source Interlink to Ann Moore who is 2 the president of the Time Inc. essentially saying he is not 3 going to retreat from the 7 cent fee and that they don't 4 have -- you can see there is a reference down in the next to 5 last paragraph about the DSO until the goal of 53 days is met. 6 DSO is days sales outstanding. It is essentially how old the 7 receivable is. What he is saying, we don't have the money to 8 reduce this right now even when you give us an increased 9 discount on product. 10 The most interesting thing is on the next page which 11 is a spreadsheet that Mr. Gillis attached which at point 3 said 12 SID currently owes TWR approximately $120 million. 13 We had a very, very real concern that we were never 14 going to collect any meaningful portion of that amount of 15 money. 16 THE COURT: How do you calculate the 120? Do you have 17 to total up all of the 90 million, the 1 million, the 20 and 18 the 5? 19 MR. WILSON: This is Mr. Gillis' document, not ours. 20 THE COURT: You said $120 million, Mr. Wilson. 21 MR. WILSON: I did. 22 THE COURT: I wondered how you did the calculation. 23 MR. WILSON: It said that right in the text. It was 24 point 3, SID currently owes TWR approximately $120 million. 25 THE COURT: Thank you very much. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 39 92BUSOUC 1 MR. WILSON: It doesn't look like it is quite the 2 total. And in fact I don't think it relates to the numbers on 3 top at all. That is just the amount of the outstanding 4 receivables. 5 After the $25 million payment and taking into account 6 other shipments that were made after year end, that number is 7 somewhere around $105 million that is presently owed, due, 8 outstanding. 9 What Mr. Jacobsen's affidavit chronicles is that we 10 met on the 14th. Coincidentally, it was the same day that 11 Anderson decided to send out their 7 cent notice and had a 12 meeting to discuss with Source their financial condition and 13 whether we would be doing business with them on the future and 14 what terms and whether they could pay down any of this 15 receivable. The answer to that was not very fruitful. 16 We went back. We saw the 7 cent note from Anderson 17 and were very surprised when five days later, completely 18 inconsistently with what the Source personnel at that meeting 19 told us, we got an ultimatum because they expressly said, we 20 are not giving you any ultimatum. They did that. 21 Mr. Jacobsen's affidavit then chronicles the rest of 22 the history of us trying to get them to back off of that 7 cent 23 fee so we could negotiate something going forward and they are 24 saying no. 25 Time Inc., on its own, made a decision that it was not SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 40 92BUSOUC 1 going to do business with Source, and at the same time made a 2 decision that it was going to make one last attempt with 3 Anderson to see if it could have a negotiating period. 4 And if you want to look for the evidence of that which 5 is entirely inconsistent with this conspiracy theory, you can 6 find it at tab 10 which is a letter on the 27th to the 7 president of Anderson saying, we will pay you for a 30-day 8 standstill to try to negotiate. This is not any sort of 9 evidence of somebody trying to drive wholesalers out of 10 business. 11 On the merits, likelihood of success, let me say two 12 things. 13 One, the standard here has to be likelihood of 14 success. The alternate standard is not available here. What 15 is sought here is a mandatory injunction, not prohibitory. It 16 is not, don't sell your product to someone else. It is, you 17 must sell the product to me. That is a mandatory injunction. 18 THE COURT: Why isn't it prohibitory? 19 MR. WILSON: Why isn't it? 20 THE COURT: Yes. You can't cut them off. You can't 21 pursue your cut-off. What I am asking you to do is do what 22 Time/Warner has done in good faith for -- good faith has 23 nothing to do with it -- they had a business relationship that 24 has gone on for several years. I am just asking to, say, for a 25 period of time, continue that relationship until on this matter SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 41 92BUSOUC 1 you can have a hearing and resolve it on a full record. 2 MR. WILSON: The fundamental difference here is that 3 the Source terminated us. They said, if you send us product, 4 we are not going to ship it out. 5 THE COURT: They rescinded that. 6 MR. WILSON: They did not rescind that to us. They 7 did not. And by the time on the 31st, which is the day before 8 the deadline was supposed to have occurred, when Mr. Mays 9 slightly backed off that position and the conversation is 10 recounted in Mr. Jacobsen's affidavit, it was far too late to 11 do anything. Product had been shipped other places. 12 Agreements had been signed. That was the end of it. 13 THE COURT: Where is this in Mr. Jacobsen's affidavit, 14 Mr. Wilson? 15 MR. WILSON: Sure. His affidavit is roughly 16 chronological, so this is paragraph 37 on page 15. 17 THE COURT: Mr. Mays, according to Mr. Jacobsen, said 18 the 7 cent demand was inappropriate. He goes on to say that 19 they want some other specified price reductions. 20 MR. WILSON: That's correct, your Honor. 21 THE COURT: Jacobsen says it is too late. 22 MR. WILSON: In fact, your Honor, it was too late 23 because product had been shipped elsewhere. Arrangements have 24 been made. Contracts had been signed. We took them at their 25 word when they said over and over, if you send us the product, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 42 92BUSOUC 1 it is not going anywhere. It is going to sit here and rot. 2 Your Honor, we had problems with them in the summer 3 before this, where that is exactly what happened. Thousands 4 and thousands of copies of magazines -- that's also in 5 Mr. Jacobsen's affidavit -- they sat in the Source's warehouse 6 and went nowhere. 7 You cannot claim return credit. Our policy is very 8 clear on that. If you don't distribute the magazines so that 9 the consumers have a chance to buy them, you can't then send 10 them back for full credit. That's what Source did and deducted 11 that off the statement. We had that problem in the summer and 12 that's in Mr. Jacobsen's affidavit. 13 The next thing that I wanted to say, your Honor, is 14 that to succeed on likelihood of success on the merits here, 15 the plaintiff has to do a lot more than what would be required 16 on a motion to dismiss. They have to convince your Honor that 17 the relevant markets here, there is a per se violation, all 18 these sorts of thing, or it is a rule of reason violation and 19 there is antitrust injury and standing and so on and, most 20 importantly, that there is actually a conspiracy. 21 THE COURT: Actually, in the Second Circuit they put 22 the emphasis on the irreparable injury which is why I started 23 with that one separately. 24 If you are balancing things, Mr. Wilson, as I am sure 25 you know, if there is irreparable injury, then the emphasis on SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 43 92BUSOUC 1 the other questions becomes not of secondary importance but of 2 less controlling importance. Do you agree with that? 3 MR. WILSON: I don't disagree with that, your Honor, 4 but here this complaint would not survive a motion to dismiss 5 under Twombly. The alleged concerted action here, the facts 6 that are pleaded that relate to that simply do not support any 7 inference that these parties did anything other than act 8 independently in their own self-interest. As to my clients, 9 the complaint almost says that -- doesn't quite come out and 10 say that but does consistently say but, yes, there was one 11 publisher and national distributor that said from the beginning 12 that they were not going along with this. 13 The whole claim against my client turns on, 14 essentially, the phrase "the door was left open." This was 15 after letters, after communications, after letters to the 16 president of Time Inc., after all sorts of other very tangible 17 things and turns on the words "the door was left open." I 18 think even under the most charitable reading of "the door was 19 left open" -- which, by the way, Mr. Jacobsen said he did not 20 say -- put that aside, suppose he did. Where does that get 21 you? That doesn't get you conspiracy. Doesn't get you 22 anything like it. 23 One more thing I would like to point out, your Honor, 24 and I will sit down and leave time for other people to say 25 something. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 44 92BUSOUC 1 Further inconsistent with the idea that there was a 2 conspiracy here are some very interesting communications from 3 the company that have been referred to a few times as Source 4 Media. It is the subsidiary of Source Interlink Company that 5 publishes magazines, 75 or so, according to footnote 1 of the 6 memorandum of law. Well, that company, Source Media, which 7 publishes Automobile, Road and Track and some other titles like 8 that is actually an outside client of Time/Warner Retail 9 because Time/Warner Retail does just not serve Time Inc. 10 Publications. About half of its business on a revenue business 11 basis is with people unaffiliated with Time Inc. And one of 12 those happens to be a subsidiary of plaintiff. 13 THE COURT: And you are still doing business with 14 them? 15 MR. WILSON: We have a contract with them. 16 Here's what happened. 17 We, on the 27th, sent to all of our clients -- we, 18 Time/Warner Retail -- letters saying, we don't want to bear the 19 credit risk anymore going forward with either Anderson or 20 Source. So you, because we don't control your decision, have 21 to make a decision about what you want to do individually. Do 22 you want us to continue shipping to Source and Anderson, in 23 which case we will, and we will continue -- we don't actually 24 do the shipping. The print plants that are not owned by us but 25 are owned by a third party print it and the publishers actually SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 45 92BUSOUC 1 put the order into print plant about where it is supposed to 2 ship. If you want to continue shipping to Source that's fine, 3 but then you are going to have a credit risk. If you don't, 4 then we will try to find you other places we can get your 5 product out to distributors. 6 We sent letters to almost all of our almost 40 or 7 so -- slightly more than 40 clients. One of those included 8 Source Media. That was sent on the 27th. 9 No response from Source Media on September 28th, 29th, 10 30th, October 1st, 2nd. On the 3rd you will see the response 11 from Source Media at tab 15 which says, "We are in receipt of 12 your letters dated January 27, 2009. This e-mail serves to 13 notify Source that Source Interlink Media, per your guidance, 14 will be ceasing those shipments to Anderson and SID -- its own 15 sister company. 16 The next day somebody thinks the better of this, and 17 you will see at tab 16 there is now an e-mail that says, Source 18 Media will hold the risk on all product that is shipped to 19 Source Interlink Distribution. They changed their minds. 20 The day after that, February 5th, somebody realized 21 that not only would it be inconsistent with this lawsuit if 22 Source Interlink didn't want to bear the credit risk for 23 shipping to its own sister company, the plaintiff here, but 24 they realized it wouldn't look very good if they didn't bear 25 the credit risk as to Anderson either. So they said, disregard SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 46 92BUSOUC 1 everything. We are actually going to bear the credit risk for 2 Source Interlink Distribution and for Anderson. 3 If the sister company of the plaintiff, if the sub of 4 the other plaintiff made the same decision that everybody else 5 here made at the same time, actually while the plaintiffs here 6 were contemplating a suit, how can there possibly be any 7 inference of a conspiracy rather than self-interested 8 independent action? 9 THE COURT: Thank you, Mr. Wilson. 10 Mr. Donley. 11 MR. DONLEY: Your Honor, the first point I would make 12 is that it is indisputable that the conduct of the defendants 13 here was completely reactive. No one suggests that we got in a 14 room and cooked up a scheme where we would entice Source to 15 impose a 7 cent surcharge so that we would have an excuse to 16 stop doing business with them. Rather, it is obvious that it 17 was all in reaction to their own bad business judgment, and 18 that is inconsistent with the normal fact pattern in which 19 collusion is found. 20 Second, there is a complete vacuum of evidence here. 21 THE COURT: Mr. Donley, I understand your point. You 22 are really saying that Source started the fight, but if the 23 response was an orchestrated response that wouldn't make any 24 difference, would it? 25 MR. DONLEY: Your Honor, it certainly suggests that SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 47 92BUSOUC 1 there was no preexisting plan. I think it does increase the 2 burden on them to show why a company -- 3 THE COURT: Maybe so, but if you are acting in 4 concert, which is what the allegation is -- 5 MR. DONLEY: If we colluded, then it would be 6 improper, your Honor. 7 THE COURT: That's all I am suggesting. And you are 8 suggesting it is difficult to find collusion when you didn't 9 start it; they started it? 10 MR. DONLEY: That's a fact that weighs against it, 11 your Honor. 12 Secondly, there is just a complete vacuum of evidence. 13 They have not supplied you with a single document or a single 14 witness who says, here is a communication from one defendant to 15 another defendant that we say amounts to collusion. Rather, it 16 is all inference. It is all inference about when announcements 17 are made. 18 THE COURT: Lots of people are convicted on 19 circumstantial evidence from which jurors draw inferences. 20 Mr. Kasowitz is saying to me, look what happened here. 21 Everybody did the same thing at the same time. How could it be 22 anything other than -- 23 MR. DONLEY: Your Honor, we already heard that 24 everyone didn't do everything at the same time, and it is 25 hardly surprising that two of the defendants here would wait SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 48 92BUSOUC 1 until they got paid before they told Source of their decision, 2 and that happened to be the first business day after they were 3 threatening to impose these price increases. 4 Your Honor, it is also, I would submit, completely 5 implausible to suggest that this was all done for the purpose 6 of eliminating two wholesalers. My client, as a distributor, 7 would love to have as many wholesalers as possible. It 8 diminishes the risk of a bad credit from a wholesaler. It 9 increases your options. So the theory here is that the 10 defendants conspired to take 60 percent of the wholesale 11 delivery capacity -- 12 THE COURT: Mr. Donley, you told me that Curtis 13 made -- if you really want more wholesalers, but you tell me 14 that you made an independent determination to get rid of a 15 wholesaler? 16 MR. DONLEY: Yes, because it had reached the point 17 where we couldn't do business with them. It had reached the 18 point where they were laying down the gauntlet, and if they 19 were not going to get their 7 cents now, they were going to get 20 it some other time. And we had a very tough business decision 21 to make, and it cost us some pain and some money to re-channel 22 our product, but we had to make that business decision. 23 As I said earlier, we see no reason down the road 24 where with the revamped Source we may not decide to resume 25 business. But the fact of the matter is that there is not a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 49 92BUSOUC 1 single piece of evidence showing any communication between the 2 defendants. And I submit it is implausible that all of this 3 was done so that Hudson and the News Group would suddenly be 4 the favored wholesalers of the clients. They were the small 5 fry in the pan, your Honor. 6 Thank you, your Honor. 7 THE COURT: Thank you, Mr. Donley. 8 Mr. Bayda, do you want to add -- 9 MR. BAYDA: I have nothing, your Honor. 10 THE COURT: Mr. Keyko, I think that I have your point. 11 MR. KEYKO: I think I have a few things -- 12 THE COURT: -- that you want to add? OK. 13 MR. KEYKO: Yes. I have some case law on the issue of 14 the appropriate standard, whether it is just simply a 15 substantial issue or whether you actually have to show 16 substantial likelihood of success. 17 The case law, we believe, clearly shows that you have 18 to show substantial likelihood of success. There are two 19 reasons. First here, this is a mandatory injunction and it is 20 actually seeking relief, at least vis-a-vis American Media to 21 not just put something back the way it was but to create 22 something that didn't even exist. 23 What they have asked for, at least as I read their 24 request for an injunction, is that they want to go back to the 25 15th of January -- I think it says 2008, but it must be a typo SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 50 92BUSOUC 1 and it must mean 2009 -- to January of 2009. As of that date, 2 we had no contract. 3 But the request doesn't stop there. What it said, 4 they want an arrangement that is no worse than the publishers 5 have with other distributors. So they want to have the Court 6 create something wholly new. From American Media's standpoint, 7 the contracts have been different. When we had contracts, it 8 was different than the contracts we had with the other parties. 9 So they are trying to have us enter into a contract 10 that didn't exist and to have it on terms that in fact it was 11 never in. So it is clear that we think, under that prong they 12 are required to make a higher showing. 13 In addition to that, there is a second problem. They 14 note both of these issues in a footnote and dismiss them. The 15 second issue they note is that they are actually asking for the 16 preliminary relief which is the same relief that they are 17 asking for ultimately, which is to force us to do business with 18 them and to stop disparaging them. 19 I might mention that there is no mention that American 20 Media disparaged them but that we continued to do business. So 21 it is exactly the same relief. 22 For those two reasons under the case law, the Second 23 Circuit decision cited in our brief, but I would like to point 24 out -- 25 THE COURT: Why don't you tell me what they are. I SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 51 92BUSOUC 1 will be honest with you, I haven't read your brief. 2 MR. KEYKO: Sure. It is on page 3 of our brief. It 3 is the Doninger case, which is the 2008 Second Circuit case 4 that sets forth the two standards and then talks about it has 5 to be clear or substantial likelihood when it is a mandatory 6 injunction. 7 And then for the issue of where you are seeking the 8 same or ultimate relief you are ultimately seeking. That is 9 the Philip case which is 1997 Second Circuit decision. 10 But I would like to mention to your Honor a decision 11 by Judge Glasser in 2006, the union cosmetics case. There, 12 very similar to this case, there were distributors or, I guess, 13 retailers that were cut off by distributors. They were sellers 14 of cosmetics and they were cut off by the manufacturer in 15 Korea. They sought an injunction, just like here, forcing the 16 seller of the cosmetics to do business with them, to re-instate 17 the contract. 18 Judge, they made the same argument as here, that this 19 is really prohibitory; it really wasn't mandatory. Judge 20 Glasser wrote, "Plaintiff's apparent interpretation of the term 21 'status quo' lacks a basis in law or in common sense." He 22 found that that clearly was not prohibitory. It was really 23 forcing them to do something. The contract had already been 24 terminated. 25 Here, at least with respect to American Media, we have SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 52 92BUSOUC 1 even better facts because we were actually terminated and our 2 contract didn't even exist as of that date as a result of the 3 doing of the plaintiffs here. 4 So it clearly cannot be prohibitory insofar as we are 5 concerned and I don't think insofar as anyone else is concerned 6 either, but certainly insofar as we are concerned. 7 Now, going to the merits of the case -- 8 THE COURT: Mr. Keyko, let me just interrupt you for a 9 second. 10 MR. KEYKO: Of course. 11 THE COURT: Company A is doing business with Company B 12 and then Company A stops doing business because, for the 13 purposes of this hypothetical, clearly, as a result of a group 14 boycott, it cuts B off. B then immediately goes to court, or 15 as immediately as it can because it has to have careful counsel 16 draw up papers, so it is a gap of 10 days before they get to 17 court. Is the injunction that B is seeking to restore the 18 business relationship prohibitory or mandatory in that 19 circumstance? 20 MR. KEYKO: According to Judge Glasser's reading, it 21 still would be a mandatory injunction. You would have to go in 22 while the threat was occurring as opposed to after the fact 23 because you are still looking to reinstate something that no 24 longer exists. 25 THE COURT: So whether it is prohibitory or mandatory SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 53 92BUSOUC 1 depends on how soon you get to the courthouse? 2 MR. KEYKO: It does indeed, your Honor, because you 3 are no longer seeking to preserve the status quo. The status 4 quo as of the lawsuit is that there is no contract. By 5 definition, a prohibitory injunction, you are seeking to 6 preserve the status quo. 7 THE COURT: Pretty hard case. I didn't mean to cut 8 you off. 9 MR. KEYKO: Going to the merits of the matter, we have 10 all been talking a little bit about Twombly to withstand a 11 motion to dismiss, that is, even to show you are probably going 12 to succeed on the merits, but to withstand a motion to dismiss, 13 you have to show that the facts are inconsistent with normal 14 business judgment that would be made outside of any 15 anticompetitive intent. 16 THE COURT: What is not plausible about the complaint? 17 MR. KEYKO: What is not plausible here? 18 Insofar as American Media is concerned, again, we were 19 the ones terminated. I don't know what we could have done, 20 conspiring with the others, to convince them to terminate us 21 back in August. 22 THE COURT: I have your point. Your point is, I'm 23 out. So as a matter of contract, as a matter of law I am out. 24 I couldn't have co-conspired. I made my own separate 25 arrangements long before this 7 cent threat. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 54 92BUSOUC 1 MR. KEYKO: Exactly. Which was unfortunate. We were 2 very unhappy the way it worked out, but it turned out it was 3 fortunate insofar as this lawsuit is concerned. 4 The only thing that I would add insofar as the 5 rationale for doing this, why would someone who is a publisher 6 want to conspire to eliminate people that you are buying 7 product from? All economists would say that you are better off 8 if you are trying to buy a product, you want to have as many 9 people to buy that product from because you want to have 10 competition so that you can get the best price. What they are 11 arguing is the exact opposite, that the publishers conspired to 12 eliminate competitors and that would somehow enable them to get 13 a better price. That is completely contrary to any economic 14 doctrine. It just simply doesn't make sense. 15 THE COURT: OK. 16 MR. KEYKO: I guess I have overstayed my welcome. 17 THE COURT: No, you haven't. Go ahead. 18 MR. KEYKO: The other point I was going to raise, it 19 was mentioned that Curtis, which is a national distributor, was 20 at risk here, the financial condition placed all kinds of 21 problems on them. In fact, they are at risk, but the risk is 22 split between the publisher and the national distributor 23 because the publishers were also at risk as a result of these 24 credit problems. 25 The credit problems here, insofar as American Media SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 55 92BUSOUC 1 was concerned were particularly exacerbated by the fact that 2 the stated reasons for this 7 cent increase was that they were 3 losing money on all of their business. So given the fact that 4 we and, from the press reports, all of the other people had 5 refused to go along with this 7 cent increase and in fact they 6 rescinded it, we were then doing business with someone, 7 self-stated, was losing money on their business. 8 Furthermore, it had already been reported by them that 9 they were losing retailers. So their business was shrinking at 10 the same time, so their business was even worse than it was at 11 the time that they told us that they needed the increase. So 12 we were then facing doing business with someone where we had 13 the prospect of the never getting paid, certainly not a very 14 attractive candidate to go back and say, yes, we want to talk 15 with you to reinstate the contract that you cancelled. 16 Thank you, your Honor. 17 THE COURT: Thank you very much. 18 MR. RINEHART: Your Honor, just briefly on behalf of 19 Bauer, a couple of points. 20 One is that, in assessing likelihood of success, we 21 parse the complaint for allegations with respect to my client 22 Bauer. We find a total absence of allegations of fact, of any 23 agreement, much less communication with any other defendant in 24 the case regarding Source. And the absence of any such 25 allegation or any fact or any assertion, indeed, in the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 56 92BUSOUC 1 affidavits for that matter, we find that there is no merit. 2 And given the absence of merit that would certainly outweigh 3 considerations with respect to harm. 4 Also, your Honor, I think, at least my understanding 5 of the Twombly burden is that the burden is on the plaintiff to 6 make allegations of fact that suggest or support concerted 7 conduct. Twombly held that the complaint must have enough 8 factual matter -- factual matter -- to suggest an agreement was 9 made. And, therefore, an allegation of parallel conduct and a 10 bare assertion of conspiracy will not suffice. Indeed, the 11 allegations must be placed in a context that raises a 12 suggestion of a preceding agreement, not merely parallel 13 conduct that could just as well be independent action. 14 So I believe that Twombly really places the burden on 15 the plaintiff to come forward with such facts as opposed to, is 16 it plausible or not plausible. The plaintiff really has that 17 burden in pleading. 18 And with respect to my client and I focus on my client 19 alone, there are no such allegations either in the pleading or 20 in the affidavits. 21 Thank you, your Honor. 22 MR. FEDER: Briefly on behalf of Hachette, we have a 23 fairly simple point to make. 24 I agree with that statement of what Twombly requires 25 and, again, as to Hachette there is absolutely nothing in the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 57 92BUSOUC 1 complaint or the affidavits to suggest any participation in any 2 agreement. I would say that the allegations are bare enough 3 here to give guilt by association a bad name because it doesn't 4 really rise to that level. It is just a lot of group 5 allegations saying defendants did this, defendants did that -- 6 nothing suggesting any actual participation by Hachette or any 7 division by Hachette. 8 And in fact the way the business works, Hachette is 9 not the one that makes the decisions as to who the product is 10 getting shipped to. The decision is made by the distributors 11 as to which wholesalers they are going to use. So that not 12 only are there no allegations about Hachette acting or 13 conspiring to cut off the Source, there really couldn't be any 14 allegations like that just based on the nature of the business. 15 And so whatever the standard is that you would be looking at 16 for likelihood of success, at a minimum, it would have to be at 17 least enough to survive a motion to dismiss. And in this case, 18 obviously, if it gets that far, we will be moving but, clearly, 19 having no allegations about Hachette individually would not be 20 enough to survive a motion like that and, so no basis -- 21 THE COURT: Does Hachette have any contractual 22 relationship with the plaintiff at all? 23 MR. FEDER: I don't believe so. Not to my knowledge. 24 Our contract relationship would be with the distributor. 25 THE COURT: Any one in particular of the distributors SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 58 92BUSOUC 1 or just named as defendants or all of them? 2 MR. FEDER: Curtis is the particular distributor. 3 THE COURT: Anybody else want to be heard? 4 MR. CULVER: Very briefly again, because my client the 5 News Group is in a much different situation, I won't review the 6 allegations in the complaint but simply point out the 7 weaknesses with respect to my client. 8 There is no allegation in the complaint that the 9 employees that were hired were under any sort of contractual 10 commitment to the Source. There is absolutely no allegation 11 about that. And as far as I understand, employees at-will are 12 free to leave and in fact the affidavit that we submitted 13 demonstrates that those employees checked with the HR 14 department at the Source to determine whether they were free to 15 leave and then represented to my client that they were. So 16 there can be no basis for any sort of tortious claim. 17 THE COURT: It is just an accident that they are 18 expert at merchandising. 19 MR. CULVER: No, sir. It is because they are expert 20 at merchandising that we wanted to hire them. That is what 21 competition is about. We are entitled to hire people that come 22 to us and say, we would like to be hired by you. They were not 23 under no competition agreement. One did not exist. Just as I 24 would be free to go to work for some other law firm. 25 THE COURT: Broadly read, as I understand the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 59 92BUSOUC 1 allegations of the complaint, there is a conspiracy between the 2 publishers, the national distributors and the wholesalers to 3 drive Source out of business. And part of that effort and your 4 role in this conspiracy, this group boycott or restraint of 5 trade is to steal the employees of Source, and so deprive them 6 of their ability to do business which other people have done 7 because they cut them off from their Source of supply. 8 MR. CULVER: If only the complaint alleged that. If 9 you look at paragraph 53 of the complaint in fact what it says 10 is that the News Group which evidently acting in concert with 11 TWR began raiding the key employees. They don't even allege 12 that we did it in concert. They said evidently acting in 13 concert. 14 The allegations in the complaint are bare of any sort 15 of agreement other than these broad generalizations about how 16 the defendants did this or the defendants did that. When it 17 comes time to make this specific allegation it is made using 18 this qualification of evidently. 19 THE COURT: It says evidently but it also says that it 20 is part of an orchestrated campaign to destroy Source. 21 MR. CULVER: We put in what we did and, respectfully, 22 I don't think that that is prohibited by law, and we have not 23 done. It is not alleged to be tortious and therefore shouldn't 24 be enjoined for us to hire other employees if we were 25 interfering with contractual relationships it would be an SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 60 92BUSOUC 1 entirely different matter, and I would be making perhaps a 2 different argument, if any argument whatsoever. 3 THE COURT: Thank you, Mr. Culver. 4 Mr. Arp. 5 MR. ARP: Thank you, your Honor. 6 Just a couple of quick points that will focus, if 7 useful to the Court, on the antitrust claims that are presented 8 here. 9 I certainly concur with everything that has been said 10 with respect to the Twombly issues. I do believe that the 11 complaint on its face should fail under Twombly, and I think 12 your Honor asked the right question of Mr. Kasowitz earlier in 13 terms of what the basis was for concerted action. The answer 14 was simultaneous action. That does not suffice under Twombly 15 for reasons others have set forth, but I think the Court has 16 the answer there, and I would submit that respectfully. 17 If parallel conduct were enough, then we might also 18 wish to be inquiring into the parallel pricing behavior and 19 demands made by Anderson and the Source in a roughly 20 contemporaneous manner, similar to the allegations made with 21 respect to the defendants. 22 In this case, I would also note, your Honor, that 23 observing just that this is a conspiracy that alleges 24 involvement in multiple layers or levels of this industry. And 25 as the plaintiffs say in their papers they allege both SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 61 92BUSOUC 1 horizontal and vertical concerted action. And the vertical 2 context that would potentially implicate a client like mine, 3 Hudson News, which provides distribution services to the 4 publishers, in that context, there are a couple of important 5 points to be made I think that may bear on your deliberations 6 at this point. 7 One is that the applicable standard in assessing 8 whether a vertical restraint violated Section 1 of the Sherman 9 Act is per se rule that is now -- I know your Honor knows quite 10 clear in light of GTE, Sylvania and the Legion case that the 11 Supreme Court handed down quite recently as well as the 12 Business Electronics case. 13 In addition, the clearly articulated concerns of the 14 Supreme Court in decisions like GTE Sylvania and Legion address 15 the rights and freedoms that manufacturers or publishers enjoy 16 in determining how their products are going to be distributed 17 into the market in competition with the products of other 18 parties. 19 THE COURT: But that is not Hudson's argument, is it? 20 Why are you telling me about manufacturers when you are a 21 wholesaler? 22 MR. ARP: All I am saying, to the extent that we are 23 alleged to have violated Section 1 pursuant to a vertical 24 agreement with a publisher that the rule of reason applies and 25 there are strong policy considerations well articulated by the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 62 92BUSOUC 1 courts that offer caution, especially at a stage like this. 2 THE COURT: Thank you. 3 MR. ARP: I am not aware of any specific allegation 4 that would suffice, clearly, that would even begin to suffice 5 under Twombly. Collusion between Hudson and the News Group, 6 for example, wholesalers at the same level, that has not been 7 demonstrated in any way in the complaint. 8 The allegation appears to be that there is a 9 conspiracy to create a monopoly. And the complaint and 10 plaintiffs' papers note several times that the idea is to 11 create monopoly power, monopolization in the wholesale 12 distribution market nationwide and that -- 13 THE COURT: The wholesale distribution of single issue 14 magazines. 15 MR. ARP: I'm sorry, your Honor. That is correct. 16 Which is the business that my client is involved in, the News 17 Group is involved in, the idea being that you are going to go 18 from four suppliers or four service providers to two is just 19 going to create a problem. 20 This is a curious claim, and I would like to pause 21 just to note that. First, of course, there is no allegation of 22 monopolization under Section 2 of the Sherman Act which is the 23 typical setting for such a claim. And under antitrust law, 24 clear precedent established by the Supreme Court, if you are 25 going to assert and attempt to monopolize a market, one must SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 63 92BUSOUC 1 show that there is a dangerous probability of actually 2 achieving and maintaining that monopoly after the conduct 3 challenged is undertaken. 4 In short, it must ultimately harm competition because, 5 as your Honor knows, the antitrust laws are not concerned about 6 the experience of a given competitor. Competitors will succeed 7 and fail based on the merit, based on luck, sometimes based on 8 bad judgment, but they come and go. But the antitrust laws are 9 not concerned with competitors, rather they are concerned with 10 competition. So one has to ask, what is the theory of the harm 11 to competition in this case. And it appears to be that 12 monopoly power is going to be exercised and that this will 13 damage or effect the retailers. 14 But the evidence even in the complaint itself and in 15 the record before your Honor already shows that the probability 16 of achieving a monopoly is remote, at best -- and I will not go 17 through all the things the Court would normally consider, but 18 let me just consider a few. 19 One, it is clear that barriers to entry are low. You 20 see that in the fact that my client was able on very short 21 notice, although with great investment and intensive effort, to 22 come in and replace Source in some parts of the country. You 23 see it in the Source's own claim that if they could just get 24 magazines they would be right back in. You also see a market 25 in which there are powerful buyers. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 64 92BUSOUC 1 You know from the discussion today that some of the 2 retailers have elected to switch to other distributors. Some 3 have stayed with the Source. In other words, they are able to 4 make their own decisions. They are not compelled automatically 5 by what is alleged to be a conspiracy to switch. 6 And you have to also remember that it is undisputed 7 that there are any number of other wholesalers out there. 8 There are two that are defendants in this case, but there are 9 other wholesalers out there that have the capacity to expand. 10 And I think their those facts could certainly be developed more 11 fully for the Court if you desired. 12 THE COURT: That is really the point. If I want the 13 facts more fully developed, I would like to do that with a 14 plaintiff in front of me. 15 MR. ARP: Then I will represent to the Court -- 16 THE COURT: You may still be around, but Mr. Kasowitz 17 says he won't be around. 18 MR. ARP: I think that the question is whether 19 Mr. Kasowitz disputes that there are other wholesalers that 20 exist out there. That is the only assertion that they are 21 making. There are other wholesalers that exist. 22 THE COURT: I think Mr. Kasowitz' complaint is not 23 that there are other wholesalers but that he won't be there and 24 he wants to be there. 25 MR. ARP: That's right. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 65 92BUSOUC 1 THE COURT: I think that I have your point. 2 Anybody else want to be heard? 3 MR. ARP: Your Honor, with your indulgence, if I could 4 make one more point and I will conclude -- 5 THE COURT: One more point. 6 MR. ARP: -- that is that obviously granting a TRO in 7 this situation would force competitors of the plaintiff to pull 8 their competitive punches as I read your comments earlier. And 9 it also presents, I think, what would be huge market 10 disruption. 11 The conspiracy here, does not make sense. It doesn't 12 hold together. And one of the reasons is that if the objective 13 here was to create some kind of monopoly at the wholesale level 14 that would be equally punitive for publishers as it would be 15 for retailers. 16 THE COURT: Thank you, Mr. Arp. 17 I am going to take a two-minute break and then I will 18 hear from you, Mr. Kasowitz. Maybe everyone ought to take a 19 break. 20 (Recess) 21 THE COURT: All right. If you want to resume. 22 Mr. Kasowitz. 23 MR. KASOWITZ: Thank you. I will be brief. 24 THE COURT: Don't be brief. There are a number of 25 very, very cogent arguments that were made here, in particular, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 66 92BUSOUC 1 by Mr. Keyko and American Media and the Hudson and the News 2 Group defendants. But go ahead, do whatever you want and then 3 I have some questions for you. 4 MR. KASOWITZ: I am delighted, your Honor, to take the 5 questions in whatever order you would like. The few things 6 that I would just like to address, at least first, would be 7 that the comment was made repeatedly that the only evidence of 8 a conspiracy or the only evidence of monopoly that has been 9 alleged in the complaint and set forth in the affidavits was 10 that there was action taking place at or about the same time. 11 And, certainly, we have alleged that, your Honor, and 12 that action and the conduct that did take place virtually at an 13 identical time after seven years of supplying product is 14 striking in these circumstances. 15 But in addition to the fact that there is evidence of 16 identical action taking place at the same time, there is 17 specific and direct evidence in this case of anticompetitive 18 illegal conduct under the Sherman Act. For that, your Honor, I 19 would point you to a couple of places by way of example. And 20 this is without the benefit of any discovery at all, of course. 21 In paragraph 26 of the affidavit of our CEO Gregory 22 Mays, he talked about the dinner meeting that he had with 23 Mr. Jacobsen of Time/Warner on February 2 in which Mr. Jacobsen 24 said that he was finally cutting Source off from any product. 25 And I would like to read that. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 67 92BUSOUC 1 "During that dinner I asserted to Jacobsen that with 2 the distribution system being created by him and others, there 3 would be no standing base trading, the wholesalers would force 4 reduced margins down to the retailers rather than to the 5 publishers and there would be absolutely control over the 6 market. Jacobsen's response was: 'Exactly -- we now control 7 this space.'" 8 Let me explain for the Court why that is significant. 9 It is significant as we allege in the complaint and as 10 set forth in detail in the affidavits, the struggle here in 11 this distribution system, your Honor, is between the publishers 12 and their national distributors on the one hand and the 13 retailers on the other hand as to who is going to bear the 14 increasing expenses of this distribution system. 15 Let me give you an example. 16 The way the system works is that the publishers ship 17 too many magazines through the wholesalers to the retailers. 18 Then the wholesaler goes to the retailer, takes the amount of 19 magazines -- we have all seen these in kiosks and the like -- 20 20 of 100 magazines are sold, 80 are waste and need to be 21 returned. 22 And the way that the system has worked historically is 23 that it is then the burden of the wholesaler to go back to the 24 retailer, pick up all of these magazines and then count them, 25 tabulate for the amount of sales that are made and then to SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 68 92BUSOUC 1 destroy the ones that are left over. 2 Source's position has been that that is an inefficient 3 and wasteful system and it has huge costs for Source itself and 4 other wholesalers, in addition to the fact that the mere fact 5 that too many magazines are being shipped imposes a large 6 burden. 7 So what Source has been promoting has been a system 8 called scan-based trading. Have the computers right at the 9 retailers. When a sale is made, then it is scanned right into 10 the computer there. The publisher knows how many that they 11 have sold and you don't have to then ship back all of these 12 excess magazines. The magazines can be destroyed right at the 13 point of sale. 14 The publishers and the national distributors have been 15 resisting that system for some time because they are concerned 16 that there is something called shrinkage. Shrinkage is that a 17 number of the magazines are not going to be reported through 18 the scan-based trading system through error or the like and 19 that they then don't get the benefit of those sales. So they 20 have resisted that. They have resisted this new efficiency. 21 What is their answer to it? 22 Their answer to is exactly what has happened here, 23 your Honor. Their answer is to get rid of a wholesaler like 24 Source who has been supporting and promoting this type of 25 increased efficiency so that they can dominate the market and SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 69 92BUSOUC 1 then prevent scan-based trading, just the way that Mr. Mays has 2 talked about it here. And that is exactly what has happened. 3 THE COURT: You are skipping over the fact that in 4 between this time while all of this is going on, your client 5 tried to raise prices by 7 cents. 6 MR. KASOWITZ: Sure, your Honor. And part of the 7 reason why he tried to raise prices by 7 cents was because of 8 these efficiences and because of the burden that was imposed on 9 it, and yet it did rescind and I didn't hear from any of the 10 counsel a denial of the fact that that was rescinded. 11 THE COURT: You are painting a picture now that says 12 the national distributors and the publishers didn't like this 13 proposal and therefore decided to get rid of your client. 14 MR. KASOWITZ: That's correct. 15 THE COURT: But Mr. Donley suggests that puts the cart 16 before the horse, because we were not doing anything 17 together -- which seems almost as plausible as your argument -- 18 we were reacting. Of course because we are reacting, we 19 reacted at the same time because the threat was made to us at 20 the same time. So over a two-week period all of us took the 21 same position, but we took it independently. 22 MR. KASOWITZ: They didn't take it independently. The 23 evidence shows that all of their conduct was so orchestrated -- 24 and I am going to point you to two pieces of evidence that 25 points to the fact that they didn't take it independently. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 70 92BUSOUC 1 One is the fact that there was testimony in an 2 affidavit, and that is the Argentieri affidavit that on 3 February 2 that one of the national distributors, Curtis, had 4 told Mr. Argentieri of Source that he had already known, Curtis 5 had already known "with 100 percent certainty on January 31 6 that Time/Warner, Bauer and AMI would announce on February 2 7 that they would refuse to supply Source." 8 And that is in paragraph 2 of the Argentieri 9 affidavit. 10 In addition to that, I would like to turn your Honor's 11 attention to Exhibit J to the Mays affidavit. Exhibit J to the 12 Mays affidavit is an e-mail, and it is an e-mail dated on 13 February 4, '09. It is a very, very enlightening e-mail. This 14 is an e-mail from someone who was speaking with Curtis and who 15 had gotten a pretty complete picture of where we stand. But 16 what is interesting about this e-mail, your Honor, is that it 17 is completely consistent with the discussion that Mr. Mays had 18 with Mr. Jacobsen when Mr. Jacobsen said that we now control 19 the space. There will be no point-based scanning and the like. 20 If you look down to the fifth paragraph: "Another 21 aspect of the concern about working with a" -- this is key -- 22 "large and monopolistic wholesale group might be alleviated, at 23 least in part, by the fact that, as TNG" -- the News Group -- 24 "re-signs the business, they are re-signing at a more favorable 25 rate," meaning that they are pushing the price up. This is key SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 71 92BUSOUC 1 to the publishers. 2 "Another example" -- if you go down to the next 3 paragraph -- "Paradies," who is a retailer, "had recently begun 4 moving all its business to ANCO with the promise of scan based 5 trading; in the newly-signed business with the News Group, 6 Paradies is no longer looking for scan based trading, SBT." 7 THE COURT: ANCO is Anderson? 8 MR. KASOWITZ: Yes. 9 The point here really is this. As alleged in the 10 complaint and as set forth in the affidavits, this was a scheme 11 to get rid of Source in order that the two remaining 12 wholesalers -- not Source and not Anderson -- but Hudson and 13 the News Group would then have the entire market to themselves, 14 90 to 100 percent of the market to themselves and then they 15 could do as they please, but they would not promote scan based 16 trading. They would not promote the kinds of efficiencies that 17 Source was looking at. 18 Now I will get to maybe the most important or pieces 19 of evidence that demonstrate that there was an antimonopolistic 20 conspiracy here -- anticompetitive conspiracy here. 21 Price charged by these wholesalers immediately began 22 to raise to the retailers. And we have set forth facts with 23 respect to that in the complaint and in the affidavits, and we 24 also have here things that we have come up with, documents that 25 we have come up with in the past couple of days which show that SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 72 92BUSOUC 1 with Source out of the picture and with business being taken 2 over by the News Group and by others, retailers who formerly 3 were being serviced by Source now are being serviced by the 4 News Group and the amount of the deductions that they are 5 getting are being reduced and the amount of price that the 6 retailers are paying for product is going up. 7 There is evidence that the amount of product, that the 8 price increases after Source has been eliminated has been going 9 up from the News Group and from Hudson by 1.5 percent in one 10 instance, 10 percent in another instance and 14 percent in 11 another instance, and we have e-mails to prove it. 12 That in and of itself, your Honor, is extraordinarily 13 compelling evidence that there has been an anticompetitive 14 monopoly in place here with the elimination of Source as a 15 competitor, the elimination of Anderson as a competitor and 16 just these two other wholesalers who are playing ball with the 17 national distributors and the publishers who put them in place, 18 and all to the detriment of the retailers who now have no 19 choice but to pay higher prices and, of course, it is all very 20 bad for the consumers and the like. 21 So all of those indicia, all of those aspects of 22 evidence confirm the allegations in the complaint that this has 23 been an anti-competitive venture between and amongst the 24 publishers and national distributors on the one hand and the 25 wholesalers on the other hand for the benefit of both levels of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 73 92BUSOUC 1 distribution, your Honor. 2 I was struck by the fact that AMI says that it didn't 3 have a contract so it didn't do anything wrong. 4 THE COURT: I read Mr. Keyko as saying that the 5 contract was over as of December 30. And your TRO seeks to 6 restore the status quo ante as of sometime in mid January. And 7 as of mid January, insofar as American Media is concerned, 8 there is no status quo ante to restore because you didn't have 9 a contract. 10 MR. KASOWITZ: We didn't have a contract, but as your 11 Honor elicited from a question that you asked, they were 12 continuing to deal with Source after the contract expired, and 13 it was only at the end of January, the beginning of February, 14 as we allege in the complaint, in collusion with everybody else 15 that they stopped. So whether or not there was a contract does 16 not vitiate their participation in an illegal boycott of 17 Source. 18 THE COURT: But they were, according to Mr. Keyko, 19 at-will, no longer had a contract obligation as between you. 20 MR. KASOWITZ: Your Honor, they are all at-will and 21 were they acting -- as your first question to me this afternoon 22 was, were any national distributor or publisher acting in a 23 unilateral way, would they be within their rights not to make a 24 decision not to supply goods and in the absence of a contract 25 or if there was an arrangement at-will they would be. But if SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 74 92BUSOUC 1 they are doing it in cahoots with one another as part of a 2 conspiracy to take Source out of business, that is illegal. 3 What we have heard this afternoon have has been a 4 drumbeat of argument to the effect that Source is the bad guy 5 here. 6 THE COURT: You are not surprised about that, are you? 7 MR. KASOWITZ: I am not surprised, your Honor. I've 8 been around long enough not be to be surprised by that, and 9 I've been around long enough to know that if you sue a roomful 10 of people, you are going to have to sit and listen to a lot of 11 argument for awhile. 12 But the fact of the matter is, in these types of 13 situations, as the Second Circuit has recognized and 14 acknowledged, there is an enormous amount of power that a 15 supplier has. And when a supplier abruptly stops the supply, 16 especially in a situation where there is a lengthy history and 17 custom of that supply, and certainly if it does it in an 18 illegal way as we have alleged, then the law says that if the 19 wholesaler or the party in the position of the wholesaler is 20 going to suffer irreparable harm, as Source clearly is here, 80 21 percent of its supply is absolutely gone -- all of the 22 statements that I have made this afternoon about it being on 23 the brink of having its business go away are true. 24 We have a witness here and we have sworn affidavits to 25 that effect, then it is appropriate, in fact, necessary in SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 75 92BUSOUC 1 order to sort out all of the disputes in the factual 2 representations that have been made to the Court. 3 Just as I am not surprised to hear accusations from my 4 colleagues about what Source's role is here, the Court can't 5 credit what any particular individual is saying. This needs to 6 be sorted out. 7 And in these kinds of circumstances where the survival 8 of the company and the survival of its employees financially is 9 at stake and the survival of retailers who depend upon it and 10 the like, especially given the disruptions that have occurred 11 in the retail markets as has been acknowledged here today, it's 12 got to be sorted out. 13 It can't be sorted out if Source disappears because 80 14 percent of its business is gone. So that's all that we are 15 asking for, your Honor. We are asking for a very, very 16 appropriate temporary restraining order that will maintain the 17 appropriate status quo of supply, a status quo that has existed 18 for seven years while the court gets to sort out these claims. 19 THE COURT: When you strip it down to the bare bones, 20 what do you want? 21 MR. KASOWITZ: We would like a TRO that requires the 22 publishers -- 23 THE COURT: -- and national distributors. 24 MR. KASOWITZ: -- and the national distributors to 25 continue to supply product to Source on terms that are no less SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 76 92BUSOUC 1 than the terms that product is being supplied to the remaining 2 wholesalers now. 3 THE COURT: How about terms that they were supplied to 4 you before you were terminated? 5 MR. KASOWITZ: Well, we think that the appropriate, in 6 order to maintain fair competition, they ought to be the 7 terms -- 8 THE COURT: Why should you be in a better position or 9 different position? Why shouldn't you be in the same position? 10 MR. KASOWITZ: That's fine, your Honor. 11 THE COURT: What about Hudson and the News Groups 12 position? They want to continue to compete. Read broadly, 13 your injunction would have some inhibitory effect on the News 14 Group and Hudson. 15 MR. KASOWITZ: We don't want to inhibit their ability 16 to compete, but we do believe that they should be prohibited 17 from using some of the tactics that he have seen to try to 18 intimidate and take our employees. 19 THE COURT: If they are at-will employees, why can't 20 they leave any time? The procedure that Mr. Broder sets forth 21 for Mr. Mixon and Mr. Perry said that they checked to make sure 22 that they are not bound by terms of employment or an employment 23 agreement and after that they say, well, you are an employee 24 at-will, if you want to quit, we will hire you. 25 MR. KASOWITZ: That's fine, your Honor. In the normal SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 77 92BUSOUC 1 course in a unilateral way that is fine, but we have evidence 2 of situations in which representatives of those wholesalers 3 have gone to Source employees and have said, your company is 4 going out of business. It is virtually bankrupt. If you want 5 to have a job, you need to sign up by tonight, and if you don't 6 sign up by tonight we are not going to sign you up and then you 7 and your families are going to be on the street because your 8 company is no longer getting 80 percent of the supply of 9 magazines that it has enjoyed for the last seven years. 10 That is not appropriate, your Honor, in the context of 11 the allegations of conspiracy that we have made, I don't think. 12 THE COURT: Anything else that you want to say? 13 MR. KASOWITZ: No, your Honor. 14 THE COURT: You have a witness to testify on 15 irreparable harm? 16 MR. KASOWITZ: We do, your Honor. 17 THE COURT: Who is that, general counsel? 18 MR. KASOWITZ: Yes. It is Mr. Bates. 19 THE COURT: Anybody want to hear from Mr. Bates, the 20 defendant? 21 Let's take a 15-minute recess. 22 MR. KASOWITZ: Thank you, your Honor. 23 (Recess) 24 THE COURT: Granting a TRO is a discretionary act 25 under Rule 65. The merits of this case are going to turn SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 78 92BUSOUC 1 exclusively on the facts. The law is very clear. 2 The plaintiff has acknowledged that if defendants' 3 actions are unilateral, it will lose the case, but it maintains 4 that the defendants' actions were the polar opposite of 5 unilateral. They were acts taken in concert to accomplish an 6 anticompetitive purpose, in clear violation of the antitrust 7 laws. 8 The well pleaded allegations of the complaint and the 9 affidavits in support show the magazine publishers and the 10 distributors who had previously made magazines available to 11 plaintiff have terminated the supply of the magazines. As a 12 result of the termination, Source plaintiffs face a loss of its 13 retail customers. They are certainly at a competitive 14 disadvantage because they are unable to supply their retail 15 customers with the products that have been denied to them. 16 This constitutes irreparable harm under the teachings of 17 Reuters v. UPI, decided by the Second Circuit. It is reported 18 at 903 F.2d 904. 19 Under the Jacobson case against Armstrong, which is 20 548 F.2d 438, the right to a final decision on the merits does 21 not have to be certain or free from doubt, and certainly that 22 is true here. But the balance of hardships tips very much in 23 favor of the plaintiff, at least at this particular stage, and 24 there are fair grounds for litigation. 25 Accordingly, I am going to grant a TRO, pending the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 79 92BUSOUC 1 determination of a preliminary injunction hearing. The 2 temporary restraining order directs that the publisher 3 defendants -- AMI, Bauer, Hachette and Time and defendant 4 national distributors DSI, Curtis, Kable and TWR -- supply 5 magazines to Source that were being supplied by these 6 defendants in the month of January 2009 and under the terms and 7 conditions that were made available to Source in January of 8 2009. 9 There is no TRO issued against the News Group or 10 Hudson. 11 I will conduct a further preliminary hearing on this 12 matter. We will have an evidentiary hearing on this matter on 13 Monday, February 23. I would do it next week except it is the 14 week of the Federal Bar Council meeting, and I am going to be 15 in attendance at that. So we will do it on Monday, February 16 23. 17 Prior to the 23rd, please submit any papers you wish, 18 affidavits and so forth, memorandum of law to chambers. We 19 will package up the material and get it to me. I will be 20 prepared on Monday to hear whatever witnesses you want. 21 I will do it for one day, and then I have a previously 22 scheduled trial which was supposed to start on the 23rd. It 23 will start on the 24th. If there are further hearings that are 24 necessary, we will do those at the end of the day to 25 conclusion. I will issue my ruling promptly. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 80 92BUSOUC 1 You have to post a bond to secure the issuance of TRO. 2 Anybody on the defendants's side want to suggest an 3 amount? 4 MR. WILSON: Your Honor, I have a slightly different 5 suggestion which is that the plaintiffs be required to pay cash 6 for the product. 7 THE COURT: No. You can be on the same terms and 8 conditions that the product was made available. That's my 9 order. 10 Thank you for the suggestion, Mr. Wilson. 11 Do you want to respond to my suggestion now? How much 12 of a bond do you want? 13 MR. WILSON: I can answer for Time Inc. roughly based 14 on volume, but I can't answer for anyone else. 15 THE COURT: OK. 16 MR. WILSON: For Time Inc. the daily value of the 17 product, I believe, is in the range of $750,000. That is for 18 Time Inc. That is not for other clients who, as I understand 19 it, are not the subject of this injunction. So if we are 20 expecting the TRO to last ten days, that is 7 and 1/2 million 21 for Time Inc. 22 MR. CULVER: We are American Media, and we are out 23 between a half and a third of the volume of Time Inc., so the 24 that would be the portion that relates to American Media. 25 Bauer, I think, has the same amount that we do. So if you set SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 81 92BUSOUC 1 it at twice what would be sufficient for Time Inc. it would 2 cover -- I don't know about Hachette -- but it would be enough 3 to cover at least Bauer and American Media. 4 THE COURT: Do we hear from Bauer? 5 MR. RINEHART: I concur with the comments just made. 6 It would be about roughly half of the Time Inc. number. 7 THE COURT: So you two together are about the same as 8 Time? 9 MR. DONLEY: I believe Curtis is in the neighborhood 10 of the size of Time, but I don't have exact numbers. 11 THE COURT: Mr. Kasowitz. 12 MR. KASOWITZ: I think that those amounts are 13 punitive, your Honor, in the sense that this is a short window. 14 I don't know how much product is going to be shipped in fact 15 during that period of time. And, in a way, a bond for that 16 high an amount would, it seems to me, emasculate the effect of 17 the TRO which is that terms are supposed to be the same as in 18 January. 19 We would propose a total bond in the amount of half a 20 million dollars, and we think that that ought to be more than 21 sufficient under these circumstances. I haven't done any 22 calculations, your Honor. It is just that in listening to what 23 the defendants have said, saying that product for this week has 24 already been shipped and the like, we don't even know how much 25 is going to go. So it wouldn't seem to be fair to the company SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 82 92BUSOUC 1 to require a bond in the amount that they are discussing. 2 MR. KEYKO: I understand the schedule for American 3 Media, I believe all of the publications have similar shipping 4 schedules. They are weekly magazines. Normally, the shipping 5 is arranged -- by Friday evening all of the shipping schedules, 6 the papers or magazines are then all shipped so that they 7 arrive on Monday or Tuesday at the latest in the warehouse. 8 We have obviously missed this last week, but we will 9 pick up, in light of your Honor's ruling, there are two weeks 10 worth of sales. So the sales will go out this weekend for next 11 weekend, and the week after will go over for the week after 12 that. 13 Obviously, the concern that we all have from the 14 defendants' side is that we have heard about Mr. Kasowitz's 15 statement about his client being on the verge of going out of 16 business and so forth. Part of the problem is that while we 17 would supply under the same terms and conditions, they are 18 already talking about losing a substantial number of their 19 retail customers. If that has already occurred, there is 20 nothing the Court can do about it, so the magazines that will 21 be supplied will have to be enough for the remaining customers 22 that they have. That is a small portion of what they had 23 before, therefore, their business is going to be continuing to 24 lose a substantial amount of business. 25 And, obviously, we all feel that we need to protect SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 83 92BUSOUC 1 ourselves in light of your Honor's order. Half a million 2 wouldn't even come close to covering anything. 3 MR. KASOWITZ: Your Honor, if I may, we will agree, if 4 I heard the numbers correctly, that is a $25 million bond or 5 something like that. That would be a burden. 6 We appreciate the point that the counsel makes that 7 the company is in difficulty. Counsel understands the reason 8 we believe that the company is in such dire difficulty is 9 because of their conduct. 10 We would be prepared to post a $5 million bond and we 11 think that that ought to be more than fair and sufficient under 12 the circumstances. 13 THE COURT: Make it $7.5 million, Mr. Kasowitz. That 14 is the bond that I will order. 15 MR. KASOWITZ: OK, your Honor. 16 Thank you. 17 THE COURT: The court is closed tomorrow. I will be 18 in. So if you want to put this in the form of an order, 19 Mr. Kasowitz and notice to your adversaries, I will sign it 20 tomorrow and enter it on the ECF system. But I consider this 21 TRO issued this afternoon in the lines that I have dictated to 22 in the record. And the formal order that will be entered 23 tomorrow if we get it entered tomorrow because the clerk's 24 office is closed will be consistent with what I have read into 25 the record now. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 84 92BUSOUC 1 In terms of the hearing that will take place on the 2 23rd, you get whatever briefs you are going to submit in by the 3 19th, I would appreciate that. And I will get a package sent 4 to me and I will be prepared on the 23rd to conduct a hearing. 5 Any witnesses that you want to put on the stand, 6 Mr. Kasowitz, and any defendants who want to put on witnesses 7 will work hard on Monday, the 23rd. 8 I know that this is an important matter and it ought 9 to be decided promptly, and I intend to do that. So with your 10 cooperation, we will have a hearing on the 23rd and if it has 11 to go over, it will be have to be on the afternoons of the 24th 12 and 25th, and I will give you a decision just as quickly as I 13 possibly can, but it won't be long. 14 MR. KASOWITZ: Just one last thing, if we could have 15 witness lists exchanged on the 19th along with the briefs, that 16 would be fine with us. 17 THE COURT: You have to do your best you can to comply 18 with my pretrial order. 19 We are exchanging exhibits. 20 If there has to be discovery and depositions, the 21 parties should work and confer with one another on that. 22 I would like to have a witness list by the 19th. 23 MR. DONLEY: Could we have a day to respond to their 24 witness list since we are the plaintiffs and we are not sure 25 what we are responding to? SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 85 92BUSOUC 1 THE COURT: Mr. Kasowitz -- that is probably a good 2 suggestion -- if you get your witness list in by the 18th, they 3 will do theirs by the 19th. 4 MR. KASOWITZ: That's fair, your Honor. 5 Thank you. 6 THE COURT: Anything else? 7 Thank you very much. 8 9 o 0 o 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300