Court setback for Times, P-I

A King County Superior Court judge Thursday threw a monkey wrench into a plan by Seattle's two daily newspapers to resolve their long-running legal dispute through binding arbitration.

Judge Greg Canova rejected a bid by The Seattle Times Co. and The Hearst Corp., owner of the Seattle Post-Intelligencer, to put all court proceedings on hold until arbitration concludes.

The Committee for a Two-Newspaper Town, an intervenor in the case that has filed claims against both newspapers but would not be part of the arbitration proceedings, had argued such a freeze could damage it irreparably.

Canova agreed. Postponing any court action on the citizens committee's claims until after the newspapers resolve their differences in closed-door arbitration would effectively "deprive the intervenor of its right to litigate," he said.

Canova's ruling, delivered after 55 minutes of oral argument, leaves the next move up to New York-based Hearst and the locally owned Times Co. Their representatives said they didn't yet know what they would do.

Their options include:

• Scrapping the arbitration agreement entirely and resuming their long court battle. The agreement, announced last month, gave either company 30 days to pull out if Canova didn't rule in their favor Thursday.

• Pursuing a two-track strategy: Arbitrating their claims against each other — which still would be allowed under Canova's ruling — while at the same time contesting the committee's claims in court.

• Negotiating a deal with the committee to let it participate in the arbitration in some way. Committee leaders say that has been their goal all along, something both papers have opposed.

Appealing Canova's ruling probably isn't feasible, lawyers for both papers said, because it is "interlocutory," a legal term for temporary or provisional, and there is no automatic right to appeal it.

The committee, too, now must decide whether to actively pursue its antitrust and breach-of-contract claims. Its lawyer, Dmitri Iglitzin, said the group, a coalition of labor, civic and political organizations, would meet soon.

The group is "overjoyed" with the ruling, he said.

Canova's decision was the latest development in a complex case that could determine the futures of both newspapers. Its focus: a joint-operating agreement (JOA) between them that has been in place since 1983.

Under the JOA, the two newspapers maintain separate news and editorial operations, but The Times handles the business and production side for both. In return, it gets 60 percent, Hearst 40 percent of what remains after the non-news expenses of producing both newspapers are paid.

The Times contends producing the smaller P-I has become an economic burden that threatens The Times' future. In April 2003, it triggered an escape clause in the JOA, notifying Hearst it had lost money in 2000, 2001 and 2002 under a formula prescribed by the agreement.

That meant Hearst and The Times had 18 months to negotiate a date to close the P-I, after which Hearst would get 32 percent of The Times' profit for the contract's remaining years, until 2083. If there were no agreement within 18 months, the JOA would end, and Hearst would get nothing.

Hearst, which has said the smaller P-I can't survive outside the JOA, went to court to block The Times the day before the notice was delivered.

Its lawsuit — which is back in Canova's court after The Times successfully appealed a ruling on some issues in it — challenged whether The Times' losses were valid. The newspapers later agreed to stop the 18-month "clock" until the lawsuit was resolved.

In recent months, The Times has served Hearst with two more "loss notices" covering 2003, 2004 and 2005.

The papers' agreement to submit their dispute to binding arbitration, announced March 30 after months of courtroom inactivity, came as a surprise. Under its terms, retired King County Superior Court Judge Larry Jordan would conduct a private trial and issue a final decision by May 31, 2007, that could not be appealed.

Both companies hailed the agreement as a path to a quicker, less expensive resolution that eliminated the risk of revealing sensitive company information. Both also said they did not want the Committee for a Two-Newspaper Town involved.

The committee, whose goal is the same as its name, has been funded primarily by the Pacific Northwest Newspaper Guild, the largest union at both papers. Canova allowed it to intervene in the Times-Hearst lawsuit in July 2003, writing then that the group appeared to represent the public interest.

Among its claims, the committee contends the JOA provision that would allow Hearst to voluntarily close the P-I and collect 32 percent of The Times' profits was a disincentive to continue publishing and an unconstitutional restraint of trade.

In Canova's courtroom Thursday, Hearst attorney Guy Michelson argued the committee still could pursue that claim after the arbitration concluded. Iglitzin disagreed, calling that "a classic example of 'Justice delayed is justice denied.' "

Moves the papers make during and as a result of arbitration could make the committee's claims moot, he added.

Without a stay in the legal proceedings, Michelson said, either newspaper could pull out of the arbitration deal to avoid the expense and effort of litigating on two fronts. If that were to happen, he said, Hearst would be forced to put the P-I up for sale because the 18-month "clocks" on The Times' new loss notices would be ticking.

"That could create incredible damage," to the P-I, he said.

But Iglitzin suggested the papers were bluffing, that they still would arbitrate their claims against each other even if Canova ruled against them. They may not want the committee to participate in arbitration or pursue its claims in court, he speculated, because they fear the group will uncover evidence of collusion through the discovery process.

But Times attorney Marvin Gray, noting the links between the committee and the Newspaper Guild, said information the committee obtains through discovery could end up hurting The Times in upcoming contract negotiations.

He also said the U.S. Justice Department already has investigated and dismissed restraint-of-trade allegations similar to the committee's. But if the committee's claim prevails, Gray added, it would "very likely destroy The Seattle Times."

The contract provision providing Hearst with 32 percent of The Times' profits if the P-I closes was part of a 1999 amendment to the JOA that also allowed The Times to switch from afternoon to morning publication. If that amendment were struck down, Gray said, The Times would be forced to return to the afternoon, and few p.m. publications survive today.

In ruling from the bench, Canova acknowledged there's a risk either or both newspapers could back out of the arbitration agreement now. The potential harm to the committee's interests outweighs that, he said.

Denying the committee the right to litigate until arbitration concludes would counteract the findings he made when he allowed it to intervene in the first place, the judge added.

Times spokeswoman Jill Mackie said the company was disappointed with the ruling, and that pursuing the conflict on two fronts would be complex and expensive. When asked what's next, Mackie said Publisher Frank Blethen and President Carolyn Kelly "will consider all avenues that may be productive for The Seattle Times."

Michelson sounded a similar note. "We'll have to review the situation with our client," he said.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com