Strike costs fuel JOA battle

The 49-day strike against The Seattle Times cost the paper more than $14 million in direct losses in 2000 and 2001, providing the critical difference between profit and loss for those years, lawyers for The Hearst Corp. said yesterday.

Now those losses — and whether they should be counted — are at the heart of legal briefs filed yesterday by Hearst and The Seattle Times Co. in the first critical legal standoff between the publishers of Seattle's two newspapers over their joint-operating agreement (JOA).

In a 19-page motion filed in King County Superior Court, Hearst is asking Judge Greg Canova to rule that those losses should be covered by the "force majeure" clause of the JOA contract, which would create a major hurdle for The Times Co.'s effort to force a shutdown of Hearst's Seattle Post-Intelligencer or end the JOA. Hearst contends that the strike was a force majeure, or "greater force" event, and losses stemming from it should not be counted in overall loss calculations under the JOA.

Using that argument, the New York-based media conglomerate is seeking to invalidate The Times' use of a JOA provision under which three consecutive years of losses could trigger the shutdown of one paper.

But in their own filing, Times lawyers argued that Hearst paid more than $7 million as its share of losses related to the JOA from the strike, without ever citing the agreement's force majeure provision. Workers from both papers had been on strike.

"Hearst thus acknowledged, in the most tangible possible way, that strike-related losses were properly considered in calculating" The Times' overall loss during those three years, The Times lawyers said.

"A loss is a loss," they contended, quoting a statement made by former Times President Mason Sizemore in a recent deposition.

The company argues that the force majeure clause applies more narrowly to such things as production and distribution issues.

The legal wrangling over force majeure and the contention that a "greater force" caused events beyond either paper's control is but Round 1 in what could be a protracted fight over which JOA partner survives. Judge Canova has set July 18 as the date to hear Hearst's motion.

The briefs are part of a suit Hearst filed in late April. A day later, The Times officially invoked the loss clause, saying it had recorded losses in 2000, 2001 and 2002.

Times Publisher Frank Blethen, whose family controls The Seattle Times Co., has charged that Hearst is seeking to "bleed" his company through continuing JOA losses.

Blethen, whose company owns The Times and seven other papers in Washington and Maine, calls the P-I a "failing newspaper" and says The Times and Seattle readers would benefit from its closing.

Hearst has said it intends to continue to publish the 140-year-old P-I.

Under terms of the JOA, both papers run their own news operations, while The Times handles production, distribution, advertising and other non-news operations for both papers. The two papers pool their revenue and, after accounting for non-news expenses incurred by The Times, split the remainder, with 60 percent going to The Times and 40 percent to the P-I.

In the current fight between the two companies, a 1999 revision to the JOA gives Hearst 18 months after receiving The Times' loss notification to negotiate a shutdown of the P-I. If that happens, Hearst would receive 32 percent of The Times' profit — after news and non-news expenses — until 2083.

If 18 months pass without an agreement, the JOA dissolves and both papers are on their own. Hearst has said that without presses and other support services the P-I cannot operate.

In its filing yesterday, Hearst contended that Times officials had acknowledged on several occasions that the paper's 2000 and 2001 losses were covered by the JOA's force majeure clause.

While much of yesterday's filings repeated claims by Hearst and denials by The Times that the 2000 loss fell within the force majeure provision, the Hearst documents — trying to bolster its "greater force" argument — did disclose some new information: that Times officials called the strike losses a "one-time" event during discussions last year to renegotiate $233 million in loans used to purchase The Times Co.'s Maine papers.

Blethen has acknowledged The Times fell out of compliance last year with its lending group, headed by Citicorp, and faced possible pressure to sell its flagship Seattle paper, either to Hearst or to Knight Ridder, which owns 49.5 percent of Times Co.'s voting stock. The Times eventually was able to refinance its loans and regain compliance.

In yesterday's filing by Hearst, Sizemore, who retired in 2001, said in his deposition that the 2002 period was one of two times The Times has been out of compliance with its lenders in recent years.

The other time occurred during the strike and immediately afterward, he said. The company asked for, and received, a special exception from its bankers from the loan requirements.

Sizemore said the exception was granted because both The Times and the lenders believed the paper would return to profitability once the effects of the strike receded.

"Were you, in essence, telling the banks that you thought this was just a one-time event?" Hearst's lawyer asked Sizemore.

"The strike?" he replied. "Absolutely."

Hearst's filing also included a copy of a presentation by Times officials to their lenders during the second round of noncompliance negotiations in April of last year. In that presentation, The Times projected the Seattle paper's revenue would climb by nearly 30 percent from 2001 to $472.7 million in 2006, while the paper's operating income would rise from $5.8 million to $41.7 million in that period.

The projections have so far been optimistic. In an internal memo last March, Blethen said the paper's ad revenues were sagging and he instructed the paper's managers to prepare for staff layoffs and other cutbacks.

Times spokeswoman Kerry Coughlin declined to say if the company is still in compliance with its loan covenants, but she said there have been no staff cuts since the March memo.

The Times' tight financial situation could increase pressure on the company to settle its fight with Hearst.

Coughlin called The Times' legal arguments "clear and strong" and said the company had no additional comment.

"Hearst is trying to achieve through litigation what it couldn't get through negotiation," Coughlin said.

Coughlin said The Times' basic argument is that the 2000 loss, as well as losses in the two following years, were part of a continuing series of events, including the strike, Seattle's economic slump, and the Sept. 11, 2001, terrorist attacks. The JOA contains nothing, including the force majeure clause, to discount the economic impact of those events, she said.

A spokesman for Hearst could not be reached for comment.

Bill Richards is a free-lance writer hired on a special contract by The Seattle Times to cover events involving the joint operating agreement with the Seattle Post-Intelligencer. He can be reached at brichards@seattletimes.com.