Lawsuit claims News Corp. tried to destroy rival

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Posted: Jul 20, 2011 6:44 PM
Lawsuit claims News Corp. tried to destroy rival

Paul Carlucci was interested in buying the small ad firm Floorgraphics and he said so over hors d'oeuvres. But its executives weren't interested in selling, and they said so, according to a lawsuit filed by Floorgraphics.

So, the CEO of News America Marketing In-Store Services Inc., a unit of News Corp., warned brothers George Rebh and Richard Rebh that if they ever moved into his business, he would destroy them.

"Let me see if I have this right ... It's OK for you to come into our business, but if we ever go into your business, you're going to destroy us?" George Rebh asked.

"Yeah, that's right," Carlucci replied, according to the suit.

Following that conversation in the summer of 1999, News Corp. opened a "multi-million (dollar) war chest" to try to take customers from Floorgraphics, according to the New Jersey lawsuit filed in 2004. In the suit, Floorgraphics also accuses Connecticut-based News America of hacking into computers and using that confidential information to lure away its clients. The case went to trial but abruptly ended seven days later when News Corp. bought Floorgraphics' assets and clients for $29.5 million.

The lawsuit, which portrays News Corp. as more interested in making a deal than sticking to ethics, raised questions about the media empire's corporate culture and conduct. Those same things are being intensely scrutinized now: The media company, which owns Fox TV network and the Wall Street Journal, has come under fire since allegations surfaced this month that one of its tabloid newspapers in the United Kingdom hacked into the voicemail of a murdered schoolgirl. In the U.S., the FBI now is investigating whether News Corp. sought to hack the phone records of victims of the Sept. 11, 2001, terrorist attacks.

News Corp. earlier this month closed the U.K. tabloid, News of the World. Chairman Rupert Murdoch, the media mogul who built News Corp. into what it is today, on Tuesday told U.K. lawmakers that he had known nothing of allegations that tabloid staff hacked into cellphones. He apologized for the "horrible invasions" of privacy. Murdoch also told lawmakers he had "seen no evidence" of the Sept. 11 related allegations.

News America denied all the allegations in the New Jersey lawsuit __ except one. News America said in court documents that someone using its computers accessed a password-protected Floorgraphics site. The company said it condemned the conduct, but it believed that an old password __ not traditional hacking methods __ were used.

"This site was available to hundreds, if not thousands, of Floorgraphics retailers, representatives of consumer packaged goods companies and Floorgraphics employees," Suzanne Halpin, a spokeswoman for News America, said Wednesday. "There is considerable employee movement within this industry, and we believe it was someone with an authorized password."

But the company also says Floorgraphics wanted to be acquired by News America. "Over the years, Floorgraphics approached News America Marketing about buying the company, including prior to the lawsuit," Halpin said.

Meanwhile, Sen. Frank Lautenberg, D-NJ, sent a letter Wednesday to Attorney General Eric Holder and the FBI, reminding federal authorities that he urged them six years ago to look into allegations that News Corp. had hacked Floorgraphics.

Founded in 1996 in Cherry Hill, N.J., Floorgraphics sold advertising decals to put on supermarket floors. It grew as big as 85 employees, and the Rebh brothers were named N.J. "Entrepreneurs of the Year" for their industry by Ernst & Young.

In 1999, at the suggestion of a Floorgraphics sales employee named Gary Henderson, the Rebhs met for lunch in New York with Carlucci, the News America CEO, and another executive, according to court documents.

The Rebhs said they did not know News America was interested in buying the firm, according to court documents. They said they thought it was a get-acquainted meeting with a contemporary. After all, News America markets SmartSource coupons and sold other types of supermarket advertising, like placards for shopping carts. But during that meeting over hors d'oeuvres, Carlucci gave them a warning, according to the lawsuit.

In a 2006 deposition, Carlucci said he never had any discussions about destroying Floorgraphics, according to court transcripts referencing the deposition. "They made up this story," a News America lawyer said in court testimony in 2009.

Today, Carlucci has another title in addition to News America CEO: He's the publisher of the New York Post, a tabloid newspaper known for the same sensationalist headlines as its former corporate sibling, News of the World.

A voicemail to Carlucci wasn't immediately returned. A person who answered the phone in his office transferred the call to corporate communications.

The Rebh brothers declined to comment for this story. Conditions associated with the settlement agreement preclude them from disparaging News Corp.

Following that alleged meeting, Floorgraphics accused News America of upping the ante significantly, according to court documents. About a year after the alleged meeting, Henderson left Floorgraphics to work for News America and its new floor ad project, Floortalks.

In the New Jersey lawsuit, though, Floorgraphics alleged that News Corp. offered to pay companies to not do business with Floorgraphics, sent news releases about its new contracts to the homes of Floorgraphics employees, and told employees to scuff up Floorgraphics decals.

The company also accused News America of breaking into Floorgraphics' computers to look at contracts and other proprietary information. Then, the lawsuit claims, News America used that information to lure away Floorgraphics' customers.

Floorgraphics said it believed that News America hacked its computers in New Jersey at least 11 times between October 2003 and January 2004, from a remote connection in Connecticut. Floorgraphics lost contracts with Safeway, Winn-Dixie, Piggly Wiggly and other supermarkets as a result, it said. It sued News America six months later.

The case went to trial in 2009 in district court in New Jersey. During jury selection, lawyers said they wanted to ask potential jurors whether they had strong feelings about Murdoch. The trial ended a week after it started when News America bought Floorgraphics' assets and clients.

In 2010, Floorgraphics asked a judge to reopen its case, saying that News America had withheld evidence. The judge denied the request.

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Josh Lederman reported this story from Trenton, N.J.

AP Business Writer Chip Cutter in New York contributed.