Murdoch's setback in the supermarket

NEW YORK (Fortune) -- It's been a rough few weeks for Rupert Murdoch. Start with News Corp (NWS, Fortune 500).'s dismal second-quarter results, announced Feb. 5, and the unexpected announcement that right-hand man Peter Chernin was stepping down. Now comes more potential bad news in the form of a sudden decision by News subsidiary News America Marketing on March 10 to settle, less than a week into trial, with Floorgraphics, Inc., a rival in the in-store marketing business, which had accused News America of trying to drive it out of business.

Though News America has until now aggressively fought the rash of similar lawsuits -- including disputes with Theme Communications, Insignia Systems, which is suing for over $100 million plus treble damages, and Valassis Communications, which wants $1.5 billion -- observers say the sudden change of heart after the testimony of just three witnesses may have implications for the latter two cases, which are scheduled to come to trial in the next few months (News America lost its final appeal on the Theme case last year). "I think News America is looking at a tremendous amount of money to settle," says Anthony Marchese, general partner of the Insiders Trend Fund LP, which owns shares in Insignia. This would also remove a cloud that has hung over both Insignia and Valassis. The latter company is in danger of being delisted, in part because it has spent so much on litigation.

News America, which has some $1 billion in revenues and boasts the second-largest profit margins in all of News Corp., produces in-store and newspaper promotions and coupons. The Floorgraphics case, which FORTUNE wrote about, alleged that News America had tried to force Floorgraphics out of business in the late 1990s, and that it had even hacked into the company's computer system. Floorgraphics alleged that News America CEO Paul Carlucci had vowed to "destroy" the company if it entered a certain part of the in-store business.

According to sources who attended the trial, testimony was heard from Gary Henderson, a former employee of both Floorgraphics and News America; Floorgraphics founder George Rebh, who described his company's travails; and from Robert Emmel, a former News America salesman who was fired from the company. Emmel had acted as whistleblower, bringing his concerns about its business practices to the SEC, senators Paul Sarbanes and Chuck Grassley, the New York State Attorney General and the Senate banking and finance committees. (News America says it was never contacted by any of them). News America has since sued Emmel for misappropriation of trade secrets; his countersuit under the RICO statute was dismissed last year.

While the amount of the settlement has not been disclosed, and neither side will comment on it, News America has not publicly acknowledged that a settlement occurred, instead putting out a news release announcing that it "has entered into an agreement with Floorgraphics, Inc., to purchase the company's network of in-store contracts and other assets." Nowhere in the release was it mentioned that the two companies had been locked in combat for over a decade. "It's a shocking turn of events," says Philip Hilder, an attorney for Robert Emmel. "They dug in their heels and postured as if it was going to be a fight to the death. It's pretty incredible when a defendant caves in after a couple days trial." News America won't comment on the settlement specifically, but says the opportunity to buy Floorgraphics' network was "attractive."

The brief trial also featured an allegation of aggressive behavior on the part of Chris Mixson, News America Marketing's current president. While Emmel was taking a break from testifying, Mixson allegedly followed him into the restroom. Says Hilder: "It's my understanding that Mixson said 'Nice job telling lies on the stand,' in a very menacing way. [Emmel] took how it was done and how it was articulated as a very intimidating act." Mixson wouldn't comment, but Laura Richards, News America's vice president for corporate communications, said: "News America Marketing is involved in a lawsuit against Mr. Emmel for stealing from the company, and he has had $375,000 in legal fees paid for by Floorgraphics. We think those facts should be considered when evaluating the validity of his statements. Mr. Emmel made his specious claim to his attorney, who chose not to bring it to the attention to the court, which speaks volumes in and of itself." Hilder says Emmel did bring the episode to the attention of both sides' lawyers and that it was resolved privately.

Certainly, there is no love lost between News America and Emmel: News America claims that Emmel stole the company's trade secrets when leaving by keeping the contents of a hard drive; Emmel responded in counterclaims -- now dismissed -- that he wasn't taking competitive information but rather evidence of unethical business practices. Yet it is likely that Emmel will be called to testify about his concerns in the Insignia case -- particularly since it also emerged at the trial that Insignia also helped pay his attorney's fees. The suit against Emmel, too, is expected to be resolved later this year. All of which means more headaches for Murdoch at a time when he already has plenty to worry about.