Bid to overturn $107m USPS mail contract approval “likely to succeed”

Regulators were wrong to approve a major new direct mail contract for the US Postal Service, and the ruling is likely to be overturned by the courts, a key advisor said yesterday.
Malin Moench – the Public Representative appointed by the Postal Regulatory Commission to represent the views of the general public in the review of the proposed contract between USPS and direct mail giant Valassis – said the Commission misapplied antitrust principles in approving the $107m deal last week.

The deal offered Michigan-based Valassis discounts of at least 20% on postage for any additional mailing it carries out for major national retailer advertising beyond existing volumes.

The newspaper industry, which fears losing its advertising accounts to Valassis under the terms of the deal, has already filed to appeal last week’s approval.

Yesterday, the Commission’s Public Representative for the case, who recommended against approval during this summer’s review, said the regulators were wrong to rule that the USPS contract was “fair competition” with the newspaper industry’s advertising business solely because it will be above-cost.

He said US antitrust laws do require market-dominant organisations to cover their costs, but also seek to protect the number and diversity of competitors in a marketplace. Going against the protection of market competition, the Valassis deal is in danger of replacing local newspaper advertising businesses with a single direct mail provider, damaging competition “beyond repair, one town at a time”, he claimed.

“The mistaken assumption that pricing above marginal cost functions as a ‘safe harbour’ under antitrust principles is central to the Commission’s Opinion. It badly misrepresents the state of the antitrust laws,” said the Public Representative.

Moench said if allowed to stand, the Valassis ruling will mean all future requests by USPS for a discounted Negotiated Service Agreement with a major customer would also have to be approved if the NSA recoups USPS costs.

This went against the wishes of Congress in its wording of US postal law, he suggested.

“A flaw in legal reasoning of this magnitude means that the Newspaper Association of America’s appeal to the DC Circuit is likely to succeed on the merits,” said the Public Representative.

The Valassis deal with USPS requires the mailer to mail at least a million extra pieces each 12 months of its three-year deal, but the newspaper industry has forecast that it will actually end up mailing more than 400m pieces through the contract.

The Postal Regulatory Commission approved the deal by four votes to one, with Commissioner Tony Hammond voting against approval.

Hammond did not produce an official dissenting opinion to go alongside the approval order, but did authorise Commission staff to issue a statement to the press on his behalf suggesting that there was “too much evidence” presented by opponents of the Valassis deal for him to conclude it would not cause “unreasonable harm” to the market place, a major factor that regulators must consider when reviewing USPS mail contracts.

“Irreparable harm”

Moench was filing his comments yesterday in regard to the request by the Newspaper Association of America that the Commission impose a stay on the Valassis deal until a judicial review can be heard. The NNA, which represents 2,000 newspapers in the US, also requested a stay through the law courts on Friday.

Moench, an attorney in the Commission’s Office of the General Counsel, said in his analysis that with the NSA in hand, Valassis will be able to offer some of the biggest retailers of durable goods in America delivery of advertising materials for $20 per thousand copies, compared to the $45 per thousand it will cost to deliver the items within newspapers.

“Local and regional newspapers, a large percentage of whom are on the brink of (if not in) bankruptcy, will drop like flies,” he warned.

The deal will also limit the profit USPS makes from the additional mailing from Valassis, while losing out on newspaper delivery volumes, said the Public Representative. He said the discounted rates offered to Valassis will mean that for additional saturation mail volumes, profits will be three cents per piece instead of the usual nine cents per piece, a near-70% drop in profit margin for USPS.

Based on previous stays granted by the Commission, the Public Representative concluded that the continuing uncertainty regarding the Valassis agreement with USPS would support the granting of a stay by the regulators in this case.

In its request for a stay submitted to the Commission, the NNA said last week it believed suspending one mailer’s ability to take advantage of the contract would be “greatly outweighed” by the likely injury to newspapers around the US.

Unless stayed, the NNA said the Valassis contract would cause “irreparable harm” on the US newspaper industry within 90 days.

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