Extended silence in Times, P-I JOA fight stirs talk

Here's one sign of how long the high-stakes legal dispute between Seattle's two daily newspapers has been on hold: For a couple of days last month, the King County Superior Court clerk's office had the case marked closed.

It popped up as an inactive case during an internal audit, and court officials erroneously concluded everything had been resolved.

That mistake was fixed. The Seattle Times Co. and The Hearst Corp., owner of the Post-Intelligencer, remain officially at war. Still, nothing has happened — in public, at least — since the state Supreme Court awarded The Times Round 1 in the conflict eight months ago.

The justices then sent the case back to King County Superior Court for "further proceedings" on the host of issues that remain — proceedings that still haven't resumed. Neither side has made a move. Legal experts say that's highly unusual.

What's going on? Hearst and The Times have been deflecting inquiries for months. But when students of the newspaper industry and followers of the dispute speculate about what the inactivity may signify, they reach the same conclusion:

The two sides probably are talking settlement.

"Any time there's silence like this in a case, the parties have got to be talking," said Seattle attorney Anne Bremner, co-chair of the Committee for a Two-Newspaper Town, a citizens group that has intervened in the case. "Cases don't just languish unless there's something else going on," Bremner said.

A settlement, if it happens, could reshape the Seattle newspaper scene. It could determine whether the smaller P-I survives and who controls The Times. Millions of dollars are at stake.

The Times and P-I have been linked since 1983 by a joint-operating agreement (JOA). They maintain separate news and editorial operations, but The Times handles circulation, advertising, production and other business functions for both.

Under current terms, The Times gets 60 percent, Hearst 40 percent of any revenue that remains after accounting for non-news expenses of publishing both papers.

The Times has said the arrangement no longer works, that producing the P-I has become a big expense that threatens both The Times' profitability and its continued control by the Seattle-based Blethen family. In April 2003, it served notice to Hearst that, under terms of the JOA, it intended to terminate the agreement, move to shut down the P-I, or both.

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

The notice and the lawsuit were filed only after top executives from the two companies spent months negotiating in late 2002 and early 2003. Notes that Times Publisher Frank Blethen and Hearst Chief Executive Victor Ganzi kept during the talks — made public during court proceedings — indicate they discussed all sorts of ways to avoid the courtroom:

• Keeping the P-I alive in reduced form, perhaps killing its Saturday and holiday editions.

• Giving The Times a bigger cut of the papers' joint revenue.

• Deferring a showdown for several years in return for a lump-sum payment from Hearst to The Times.

Ultimately, they reached an impasse. But observers who suspect settlement talks are under way say the landscape has changed since 2003. Here's what they say is different:

The legal situation

More than two years of litigation may have altered the position or resolve of one or both companies.

This fight started when The Times notified Hearst it had lost money under the formula prescribed by the JOA three years in a row — 2000, 2001 and 2002. Under the contract, 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 was no agreement within 18 months, the JOA would dissolve.

Hearst's lawsuit challenged whether The Times' losses — calculated under the contract's formula — were valid. The newspapers later agreed to stop the 18-month "clock" until the lawsuit is resolved.

So far, only one aspect of the case has been decided: The state Supreme Court ruled last June that The Times could claim losses for 2000 and 2001 that resulted from a strike and other unexpected factors, such as the 9/11 attacks and the recession. Hearst had claimed those were "force majeure" events, extraordinary occurrences that should have been excluded from the calculations.

Still pending: Hearst's claims that The Times boosted spending unreasonably to deliberately lose money in 2002, and that The Times violated its legal obligations to treat the P-I fairly and try to make the JOA successful.

But force majeure may have been Hearst's best shot at winning, several lawyers say. "It was a pretty good case compared to what they have left," said Dmitri Iglitzin, who represents the Committee for a Two-Newspaper Town.

There's a hint in the court record that Hearst may have felt the same way. In notes he prepared for a meeting with Blethen on Dec. 30, 2002, Hearst CEO Ganzi wrote that, if The Times filed a loss notice, "Hearst challenges notice in court over def. of force majeure clause; Hearst audits and challenges numbers — best chance to win is 2000 and 2001."

A Hearst spokesman would not discuss Ganzi's notes.

The legal situation also could work to Hearst's advantage. Even though Hearst lost the first round in court, the proceedings consumed more than two years. Resolving the remaining claims could take as long or longer.

Hearst, which owns 12 daily newspapers, 19 U.S. magazines, 28 TV stations and numerous other media properties, has much deeper pockets than The Times. Blethen has said the New York-based media giant is using the lawsuit and JOA to push The Times toward insolvency and force him to sell to Hearst.

"If Hearst's strategy is to bleed The Times, they've certainly shown they could," said Doug Underwood, a University of Washington journalism professor.

The newspaper

industry's condition

In notes he prepared for the December 2002 negotiating session with Blethen, Ganzi indicated that The Times' JOA losses during the preceding three years were aberrations. "The events of 2000, 2001 and 2002 are not a fair test — one-time and extraordinary in nature," he wrote.

Since then, the newspaper industry's condition, in Seattle and nationally, has only grown worse.

Circulation is down at papers nationwide. Competition from the Internet is taking a toll. Unhappy shareholders have forced Knight Ridder, the nation's second-largest newspaper company, to put itself up for sale.

"The industry isn't dying. The industry is adjusting," said Michigan State University professor Stephen Lacy, who studies media economics. "What that means is, there's not a need for as many daily newspapers as there was."

The marketplace already has killed second daily newspapers in most cities, Lacy said, and now it's undercutting the economics that kept two papers alive in JOAs.

In Seattle, The Times probably can make a stronger case now that the current JOA has failed as a business model, Iglitzin said.

The P-I's daily circulation has dropped 15 percent, The Times' 10 percent since early 2003. The Times has said it lost money in 2003 and 2004 — not only under the JOA formula, but companywide. (The Times has other holdings, including daily newspapers in Eastern Washington and Maine.)

The Times hasn't said whether it lost money under the JOA formula in 2005, but when the newspaper cut staff and other expenses a year ago, a spokeswoman said the goal was to return to profitability by 2007.

With documented losses in 2005, The Times could file another three-year loss notice and kick off a second, parallel bid to end the JOA or close the P-I. Hearst could have more trouble contesting that one, Underwood said: "The general trend in the market has to weaken Hearst's hand."

Liz Brown, who heads the union that represents the largest number of Times and P-I workers, hopes both newspapers survive. But "if they keep squabbling over the spoils and keep spending their money on litigation," she said, "there may not be any spoils."

Knight Ridder's potential sale could come into play in Seattle: It owns 49.5 percent of The Times Co.'s voting shares but has had a rocky relationship with the family-controlled Blethen Corp., which owns the remainder.

Ganzi's notes from late 2002 indicate Blethen wanted Hearst to buy out Knight Ridder's interest in The Times. Representatives of the two newspapers would not discuss the matter earlier this month.

But Peter Horvitz, publisher of the suburban King County Journal, said Hearst would make more money in Seattle if it agreed to close the P-I for a piece of The Times' profits and also owned part of The Times.

The political environment

Ganzi's and Blethen's notes, and a Blethen Corp. "strategic discussion outline" from January 2003, indicate concern three years ago that the U.S. Justice Department could object to changes in the Seattle newspaper situation on antitrust grounds.

There's probably less reason for such concern today, said Stephen Barnett, a University of California law professor and JOA expert.

Ganzi's and Blethen's notes refer to Honolulu and San Francisco. In 1999 and 2000, the Justice Department stepped in when publishers moved to terminate JOAs and close the smaller paper in each of those cities.

Those papers eventually were sold and continue to publish outside any JOA.

"The aggressiveness that was reflected in the Honolulu and San Francisco cases might not be continued today," Barnett said. The antitrust division has a new chief, he said, and it was reprimanded by a federal judge for its role in the San Francisco case. What's more, five of the country's 11 other JOAs have been changed over the past two years, and the department hasn't objected.

In one city, Birmingham, Ala., the afternoon paper, whose daily circulation had dwindled to just 7,500, shut down last fall in return for $41 million from the owner of the larger, morning paper.

In the four other cities — Detroit, Las Vegas, Charleston, W.Va., and York, Pa. — both papers continue to publish, but the JOAs were amended to become more one-sided.

In Detroit, Charleston and York, one company sold all or most of its economic interest in the JOA to the other. In Las Vegas, the smaller, afternoon Sun became an insert in the morning Review-Journal.

A Justice Department spokeswoman said the antitrust unit still is investigating the four amended JOAs. Barnett said action is unlikely.

The department would be more likely to get involved in Seattle if Hearst and The Times agreed to close the P-I, he said. That makes some settlement keeping the P-I alive for now more likely, he added.

But the Justice Department could only require Hearst to put the P-I up for sale, said Lacy, who doubts the paper would find a buyer. "It's tough to find any newspaper company willing to invest in a second [smaller] paper these days, unless you want to subsidize it or run it as a nonprofit," he said.

Or, with the industry's changing economics and environment, alternative resolutions could pop up, including migrating the P-I entirely to the Internet. When asked if Seattle would still be a two-newspaper town then, Pacific Northwest Newspaper Guild leader Brown said "it could be" — at least there would be two news operations.

The Committee for a Two-Newspaper Town, whose name reflects its goal, would fight any deal that closed the P-I, even if the Justice Department didn't, Iglitzin said.

But for now, he added, the committee is happy. Seattle still has two newspapers. The two publishers seem to have arrived at a truce of sorts.

No one expects it will last.

"There's something to be said for limbo... ," said Brown. "I just wish the other shoe would drop."

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