Hearst may attempt to prove Times used JOA to hurt P-I

As Seattle's long-running newspaper war heads toward a climactic private trial, The Hearst Corp. is trying to build a case that The Seattle Times Co. has violated its contractual obligations and worked to undermine Hearst's Seattle Post-Intelligencer since the 1980s, sources involved in the secret proceedings say.

The Times handles all business functions for the P-I under a 24-year-old joint-operating agreement (JOA). It is required by that contract to use its "best efforts" to make both newspapers successful.

Hearst's attorneys are probing for evidence that The Times instead has sabotaged the smaller P-I for many years in a bid to become Seattle's only daily newspaper, the sources said.

"It's clear that's where they're going," one source said of Hearst. "I think that's where they've been going for a long time."

Hearst did not attack The Times' long-term management of the JOA in the original lawsuit it filed in 2003, although it had said it might later. The attention the matter is getting now, in private binding arbitration proceedings, suggests it may have become central to Hearst's strategy.

Hearst's original case — based largely on financial rather than operational issues — probably is weaker now than when the dispute began, according to outside observers who have followed the fight closely.

Both companies declined to comment on the closed-door arbitration. But Times Co. Vice President Jill Mackie said The Times "has always used our best efforts to market and circulate the P-I, and will continue to do so as long as we're in the JOA."

The two newspaper companies have been battling for nearly four years over a Times move to trigger an escape clause in the JOA that could lead to closure of the P-I. The Times says the Seattle market can no longer support two dailies.

Last spring, the companies agreed to let arbitrator Larry Jordan, a former judge, settle the dispute for good. He will preside over a hearing, which amounts to a private trial, that is scheduled to start April 9.

Both sides have agreed not to appeal his decision, which is expected by May 31.

People who have been questioned by lawyers for both companies in advance of the hearing say they have been interrogated extensively about The Times' intentions toward the P-I, and about the intensity of its efforts to market, promote and distribute the Hearst paper.

Some say they have been questioned about internal Times documents dating back to the JOA's first years, in the 1980s.

All the sources spoke only on the condition that their identities not be revealed.

Shroud of secrecy

Exactly what Hearst is after is shrouded in secrecy. The companies were allowed to update their claims against each other after the arbitration began last spring, but those documents haven't been made public.

The arbitration agreement the companies signed last March says the proceedings are to remain "strictly private and confidential."

The U.S. Justice Department's antitrust division looked into Times management of the JOA several years ago. It closed its investigation in 2005, issuing a statement that it hadn't found sufficient evidence The Times had engaged in improper conduct toward the P-I that was likely to lead to a monopoly.

But the agency said it had reached no conclusion about whether The Times had breached its contract with Hearst.

Joint arrangement

The Times and P-I maintain separate news operations under the JOA, but The Times handles almost everything else for both papers. Such arrangements are allowed under a federal law designed to keep "failing newspapers" — in Seattle's case, the P-I — alive longer.

Under the JOA, The Times gets 60 percent, Hearst 40 percent, of what remains after The Times is compensated for the non-news expenses of producing both newspapers.

While both sides agree the JOA was profitable for years, The Times now maintains it is losing money under the arrangement. In 2003, it notified Hearst that its 60 percent hadn't been enough to cover its news expenses in 2000, 2001 or 2002.

That three-year "loss notice" triggered an escape clause in the contract that required Hearst to being negotiations to either close the P-I within 18 months or terminate the JOA — which Hearst has said would also be a death sentence for its paper.

Hearst sued, challenging the validity of The Times' losses. While the dispute dragged on in court, The Times issued two more "loss notices" — one for 2002, 2003 and 2004, another for 2003, 2004 and 2005.

The companies agreed to binding arbitration in part to resolve the dispute more quickly, in part to keep it private.

So far lawyers for both sides have been engaging in "discovery" — demanding documents and deposing potential witnesses — to gather information to present to Jordan at the April hearing.

Compiling that information has been a mammoth undertaking. In court papers filed Monday objecting to a citizens committee's bid for all discovery materials, The Times and Hearst revealed they have exchanged more than 3.5 million pages of documents.

Third parties have produced 55,000 more pages, the companies said.

One source who was deposed said lawyers presented documents with exhibit numbers in the six digits.

The companies' lawyers are delving deeply into the past. Chris Urban of Urban & Associates, a Massachusetts newspaper market-research firm, said Hearst subpoenaed records last August of her company's work for The Times.

She said she had to go to the archives to find them. Urban last worked for The Times in the early 1990s.

Sources said Hearst has continued to attack the validity of The Times' loss notices. But the arbitration agreement also allows Hearst to present Jordan with "other reasons" why The Times should not be permitted to invoke the escape clause.

Hearst clearly considers The Times' treatment of the P-I in the JOA one of those "other reasons," sources involved in the proceedings said.

One source who was deposed said a Hearst attorney asked about internal Times documents in which Publisher Frank Blethen wrote of his desire to maintain The Times' dominance over the P-I.

"It seemed like they were mostly hanging their hat on things that Frank had said, rather than things The Seattle Times had done," the source said. "There's a significant difference."

Fair treatment

Another source associated with The Times said many questions from a Hearst lawyer focused on whether The Times had treated the P-I fairly in selling advertising for both papers.

"Everything was always equal," the source said.

Another source who was deposed said a Hearst lawyer questioned some expenses charged partly to Hearst, and asked about whether The Times treated both papers equally in soliciting new subscriptions.

Other topics that came up in the deposition included trucks that are used to distribute both papers but carry only The Times' name, and the size and placement of Times and P-I logos on the "masthead" of the joint Sunday newspaper, the source said.

Hearst's top executives raised some of those same issues in a letter to Blethen in January 2002, more than a year before the lawsuit was filed.

Victor Ganzi, now Hearst's chief executive, and Frank Bennack, his predecessor, wrote that, since both papers had begun publishing in the morning two years earlier, it was "even more important that the two newspapers be marketed and promoted equally. ...

"Regrettably, equality of treatment has not been accorded the P-I in some aspects of the operation of the JOA," they wrote.

Blethen responded three months later. "Accusations that The Seattle Times has not complied with both the legal requirements and the spirit of our Joint Operating Agreement at any time during the past 20 years are completely incorrect and offensive," he wrote.

He blamed the P-I's declining circulation and other problems on media giant Hearst's failure to invest in the paper's newsroom.

The P-I's average weekday circulation remained fairly constant, at about 46 or 47 percent of the two papers' combined circulation, from 1983 through 1999. Since The Times switched from afternoon to morning publication in 2000, however, the P-I's share has dropped to 37 percent.

From March 2000 to September 2006, according to the Audit Bureau of Circulations, the P-I's circulation has dropped from 185,888 to 126,225, while The Times' circulation has slid from 218,032 to 212,691.

After the lawsuit started, Hearst accused The Times more directly of working to undermine the P-I. Through the discovery process, it obtained a January 2003 "strategic discussion outline" from the Blethen Corp., the family-controlled holding company that owns a majority interest in The Times.

That document indicated that eliminating the P-I had been a Blethen goal since 1985.

Hearst entered the outline in the court record, even though it wasn't directly related to the lawsuit. It charged The Times had pursued that goal despite its legal obligations to Hearst under the JOA.

A Times spokeswoman said at the time that the company hadn't located any documents from 1985 that showed killing the P-I had indeed been a priority.

"Unclean hands"

If Hearst can show in the arbitration that The Times has "unclean hands" in managing the JOA, it could prevail even if The Times' losses are valid, a contract-law expert said.

But that wouldn't be easy, said Kathleen O'Neill, who teaches contracts at the University of Washington's law school.

"Acting in bad faith generally doesn't preclude someone from getting the remedy to which they're otherwise entitled," she said, referring to The Times' bid to trigger the escape clause.

Meanwhile, there is mounting sentiment among outsiders who follow the dispute that, if Hearst still hopes to win by challenging The Times' losses since 2000, its prospects are dim.

One example: In a posting on its Web site this month, the Pacific Northwest Newspaper Guild, which represents workers at both papers, said the arbitration's outcome would result in "most probably a shutdown of the P-I."

Hearst argued in its original lawsuit that the losses The Times claimed for 2000, 2001 and 2002 were aberrations or contrivances, and that the local market still could support two newspapers.

Since then, however, The Times has claimed losses for three additional years. Both papers have lost circulation.

Blethen told a University of Washington crowd this month that print-advertising revenue is down 25 percent from 2000.

Industry hurting

The newspaper industry nationally is experiencing similar troubles. Knight Ridder, once the country's second-largest newspaper company, dissolved last year after selling its holdings to McClatchy. McClatchy itself sold The (Minneapolis) Star-Tribune in December for less than half what it paid for the paper in 1998.

All those developments suggest Hearst will have trouble showing The Times didn't lose money under the JOA formula in 2003, 2004 and 2005, said an attorney who has followed the dispute.

Unless Hearst finds another argument, "I think it's a foregone conclusion The Times is going to win," the attorney said.

Jack Kirkwood, an antitrust expert at Seattle University's law school, also has watched the dispute closely. He advises the citizens group that is working to keep both papers alive.

"My sense is it's going to be difficult — more difficult than it was four or five years ago — to make the case that Seattle can support two viable newspapers, even within the JOA," he said.

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