P-I owner sues Times, calls losses avoidable
In documents filed in King County Superior Court, The Hearst Corp., which publishes the P-I, said the shortfalls came either from "force majeure" events beyond either paper's control or from excessive spending by The Times.
"The Times could have taken several reasonable steps to avoid three years of losses as calculated under the JOA but failed to do so," Hearst said in a complaint filed with the court.
What had been an intense but collegial 83-year publishing rivalry between The Times and the P-I has suddenly accelerated in recent days into a life-or-death struggle.
Times Publisher Frank Blethen, whose family controls the newspaper, charged Saturday that Hearst is using the JOA to "bleed" The Times and force it out of business, or to be sold to Hearst.
Hearst says it is fighting to preserve the P-I, which has been publishing in Seattle for 140 years.
Last week, Blethen said he was prepared to invoke a section of the JOA that allows The Times to pressure Hearst to shut the P-I after three consecutive years of Times losses.
In yesterday's lawsuit, which also seeks unspecified damages, Hearst said the bulk of The Times' losses over the past three years came from a strike against the papers in late 2000 and early 2001 and from the terrorist attacks in September 2001. Both events, the New York-based media conglomerate said, fell under the JOA's "force majeure" — or "greater force" — clause.
The clause, which appears in a section dealing with "nonliability provisions," says neither paper is liable to the other "for any failure or delay in performance occasioned by war, ... public enemy, ... strike, labor dispute ... or any other cause substantially beyond the control of the party required to perform."
Hearst's suit said Blethen himself had invoked the clause in a letter to Hearst executives last year, arguing The Times wasn't obligated to print and circulate the P-I during the strike because it was a force majeure event.
Stacie Smith, a senior Times corporate accountant, also invoked the clause in a memo last year on JOA charitable donations, Hearst said.
Blethen declined to comment. But Times spokeswoman Kerry Coughlin said the agreement is structured in a way that the force majeure clause applies specifically to production issues and not to the losses.
"There is nothing in the (JOA's) three-year loss clause that excludes any particular circumstances leading to those losses," Coughlin said.
Unreasonable decisions cited
In addition to those arguments, Hearst contended certain spending and other decisions by The Times were unreasonable and unnecessary. In 2002, The Times spent "millions of dollars" hiring at least 63 full- and part-time news and editorial employees, Hearst said, and it increased the space devoted to news and editorials over the objections of the P-I's management, costing $800,000 in potential JOA profit.
Hearst also said The Times "greatly increased marketing, promotional and other expenses" in 2002, which "significantly increased JOA operating expenses for the year." The filing gave no specific amounts.
Coughlin called the spending in 2002 "strategically essential to preserving The Seattle Times reader base."
"You have to keep the lights on in a business," she said.
Blethen, in an interview in January, defended The Times' 2002 spending, which the company said included 71 new full- and part-time hires, added coverage of prep sports and a new wine page, as well as some remodeling of the paper's newsroom. The hiring returned the staff's size nearly to the level it was immediately after the strike.
"The quickest way for the demise of this business would be to lose our customer base," he said. "And the quickest way to do that would be not to make the investments we did in our readers and content."
The alternative, he said, would be to see circulation drop and not be regained. While many large urban papers have lost readers recently, The Times circulation grew about 2 percent, to 224,140 in the year ended Sept. 30. The P-I's circulation, according to industry figures, fell during the same period by about 7 percent, to 157,558.
Disenchantment with JOA
The dispute between the two companies stems in part from growing disenchantment among Times management with the JOA. In the agreement, The Times performs nearly all non-news functions for both papers.
The papers maintain separate news and editorial operations and publish separately, but they pool revenues. After The Times is paid for its production, circulation and advertising duties, the remainder is split, with 60 percent going to The Times and the rest to the P-I.
In January, The Times said the Seattle paper had lost money for three straight years. Under the JOA, after notification of three years of losses, The Times can demand Hearst begin negotiations to set a date to shut down the P-I.
If the two companies can't reach an agreement within 18 months, the JOA would be terminated. Industry experts say either option would end publication of the P-I.
If Hearst agrees to voluntarily shut the P-I within 18 months of a loss notification, it will get 32 percent of The Times profit, minus both news and non-news expenses, for 80 years.
Last Thursday, according to an affidavit in the filing, Blethen told Hearst President and Chief Executive Victor Ganzi that The Seattle Times Co. board had unanimously approved issuing a loss notice to the P-I. Ganzi's affidavit said The Times intended to issue the loss notice yesterday. Ganzi said he called Blethen back the next day and said Hearst would go to court to challenge the loss notice.
Coughlin, The Times spokeswoman, said last night the company had not yet issued the loss notice. "We're still deciding what to do next," she said.
On the argument about the force majeure clause, one antitrust specialist said the contract appears to support the position taken by The Times.
"It isn't written in a way that would limit the kinds of financial losses The Times could claim to trigger a shutdown of the P-I," said John Kirkwood, an assistant professor at Seattle University Law School.
"If the parties in the JOA had wanted that," he said, "they would have addressed the issue directly."
Second claim may be stronger
But Kirkwood said Hearst's second claim — that The Times spent heavily last year to show a loss — might carry more weight in court.
"In Washington, every contract carries an obligation of good faith and fair dealing," Kirkwood said. "That does seem litigable in this case."
Hearst's lawsuit provides an unusual peek into the finances of the Seattle JOA, set up in 1983 after Hearst and The Times said the P-I was failing and would shut down without an exemption from most federal antitrust laws. The U.S. Department of Justice approved the JOA, but since Hearst and The Seattle Times Co. are privately held, they have not been required to publicly disclose their finances.
According to an affidavit by P-I Editor and Publisher Roger Oglesby, during the first 16 years of the Seattle JOA, The Times pocketed an estimated profit of more than $200 million and generated about $500 million in pre-tax cash flow, a common accounting measurement of a company's financial health. The P-I's profit during that period, he said, was more than $50 million.
Hearst called the JOA "a resounding success."
In 2000, after the revenue-sharing formula was amended to a 60-40 split for The Times and P-I respectively, The Times was ahead of its JOA profit projection after 10 months by $6 million and the P-I was up by $3 million.
Strike was costly
The strike, which began Nov. 21, 2000, sharply cut both papers' advertising revenue during the busiest ad months of the year. Both papers lost money.
"But for the strike," Hearst said, "the Seattle Times and the P-I would have made a profit in 2000."
In January this year, Blethen said in a memo to Times staffers that the strike and terrorist attacks, along with the dot-com bust and Boeing layoffs, had caused The Times' revenues to drop so severely that The Times Co. had fallen out of compliance with its loan covenants. The paper managed to meet the requirements by slashing $40 million from its operating budget; it also refinanced its debt.
Hearst's filing doesn't specify The Times' revenues and losses by year but says that between 2000 and 2002 The Times generated more than an estimated $50 million in pre-tax cash flow from the JOA.
"The alleged losses incurred by the Seattle Times from 2000-2002," the court filing says, "are small in relation to the JOA's revenues and expenses during this period."
In addition, the filing says, during the three years before 2000, The Times piled up total profits after paying its news expenses that were estimated to be more than twice as large as its total losses between 2000 and last year.
Hearst did not disclose whether the P-I had losses in any of the past three years.
|
|