Bitter newspaper fight shifts from public view

If The Seattle Times Co. and The Hearst Corp. get their way, you won't be reading much about their bitter, high-stakes legal fight for the next year or so.

It's moved behind closed doors. And the companies have vowed not to talk about it.

Last month, The Times and Hearst, owner of the Seattle Post-Intelligencer, decided to settle their differences through binding arbitration, confirming a tentative agreement first announced in late March.

Their dispute will be decided not in King County Superior Court, where it started three years ago, but by a private arbitrator handpicked by the two companies. If everything is on track, their lawyers already have started filing papers with him.

Arbitrator Larry Jordan's decision, due by next May 31, could affect the futures of both newspapers. If the former judge rules for The Times, the P-I could close. While other parties could weigh in later, Jordan's decision will be final as far as the two companies are concerned — no appeal.

But the agreement between Hearst and The Times states neither can reveal anything about the arbitration proceedings: not the schedule, not the witnesses, not even the details of their claims against each other.

Jordan's decision will be in writing and will be made public, according to the agreement. But because it also calls for all evidence and testimony to stay confidential indefinitely, it's uncertain how illuminating that decision will be.

"I frankly would not expect an exceedingly detailed analysis," says Stew Cogan, a former King County Bar Association president and full-time arbitrator and mediator.

The central question Jordan must answer is the one Hearst posed when it sued The Times in 2003: Has The Times really lost money, as it says, under its joint-operating agreement (JOA) with Hearst? If his answer is yes, the P-I's days could be numbered.

Hearst contends those losses are contrived. Despite the secrecy surrounding the arbitration, court papers filed in 2003 provide some hints of how it might try to prove its case.

Hearst's original lawsuit, and documents and depositions made public in its wake, suggest The Times' accounting could come under intense scrutiny. "If Hearst could show [The Times] didn't really lose money, that changes everything," says a lawyer familiar with the case, who spoke on condition of anonymity.

Longtime partners

While the P-I and Times maintain separate, competing news and editorial operations, they have been business partners since 1983, when the federally sanctioned JOA took effect.

Its aim: Save the smaller P-I, which Hearst formally acknowledged was a "failing newspaper."

Under the JOA, The Times acts as the "agency" for both papers. It handles all the business functions for both and collects all advertising and circulation revenue. In return, it gets 60 percent, Hearst 40 percent of what remains after accounting for expenses the agency incurs in producing both newspapers.

Each paper then pays its own news and editorial expenses from its share of that "agency remainder."

In April 2003, after months of unsuccessful negotiations over the future of their arrangement, The Times triggered an escape clause in the JOA. It notified Hearst that The Times' share of the agency remainder hadn't been enough to cover its news and editorial costs in 2000, 2001 or 2002.

Under the contract, that three-year "loss notice" required Hearst to negotiate a date to close the P-I within 18 months. After that, Hearst would get 32 percent of The Times' profits until 2083, when the JOA expires.

If no deal were struck, the JOA would dissolve. Hearst would get nothing.

Hearst, which maintains the P-I can't survive outside the JOA, challenged the validity of The Times' losses in court. The Times accused much-wealthier Hearst of using the P-I to bleed The Times into insolvency and force its majority owners, the local Blethen family, to sell.

Protracted proceedings

The companies spent more than two years litigating just one of Hearst's claims: that the court should prohibit The Times from counting losses for 2000 and 2001 because they were largely caused by a strike against both papers. Last summer, the state Supreme Court ruled unanimously for The Times.

After that, with other Hearst claims still pending, The Times served Hearst with two more three-year loss notices, for 2002 to 2004 and 2003 to 2005. Hearst also contests those figures.

Altogether, The Times says it lost more than $24 million under the JOA from 2000 to 2005.

When they announced their arbitration agreement March 30, the companies said that path offered a quicker resolution to their dispute. They also said it would allow them to avoid publicly disclosing "confidential and sensitive business and financial information."

The 11-page accord calls for proceedings more formal than most arbitrations, says Cogan. In most such cases, rules are more relaxed than in court, he says. For instance, an arbitrator might allow hearsay evidence.

The Times-Hearst arbitration deal, in contrast, requires Jordan and lawyers to follow all state laws and court rules, with only a couple exceptions.

Attorneys will file motions, seek documents and examine witnesses under the same guidelines that would apply in open court.

"Private trial"

"In a sense it's an arbitration," says Cogan, "but in a sense it's really a private trial."

It almost certainly won't be over quickly. Cogan says arbitrators, mindful of the finality of their rulings, usually are reluctant to decide cases on pre-trial motions.

And the arbitration agreement acknowledges that substantial "discovery" — the process of ferreting out information from the other side — will be required before any trial starts.

The proceedings won't be cheap. Hearst and The Times will split the cost, and Jordan's firm's Web site says he charges $400 an hour to handle two-party disputes. Each company also is paying several lawyers who Cogan says probably command hourly fees in that range.

Just how Hearst will challenge The Times' reported losses isn't entirely clear. The agreement says the claims the companies filed against each other in 2003 are on the table, along with those in a "draft amended complaint" Hearst's lawyers wrote last October.

That complaint was never filed with the court, and Hearst and The Times have refused to make it public.

The agreement also says the companies were to have filed updated claims and counterclaims against each other by mid-May. Again, those documents haven't been made public. Hearst and The Times won't even confirm they exist.

In its original lawsuit, Hearst charged The Times had boosted newsroom expenditures unreasonably in 2002 to intentionally lose money. Times spending on news that year rose by 17 percent, including the hiring of 63 full-time and part-time staffers, at a time when many other newspapers were cutting back.

Rebuilding move

Times Executive Editor Michael Fancher last week repeated the company's long-standing argument that the new hires were needed to help rebuild advertising and circulation after cuts resulting from the 2000-2001 strike.

Even with the new hires, he said, the newsroom staff was 11 employees smaller at the end of 2002 than before the strike.

In a note to the file in March 2003, Times executive Charles Cochrane wrote that Hearst Chief Executive Victor Ganzi had made a "rather astonishing admission" in negotiations preceding the lawsuit that The Times would have lost money in 2002 even without adding staff.

A Hearst spokesman declined comment.

The more-recent loss notices indicate Times newsroom spending continued to grow, by 6 percent in 2003 and 5 percent in 2004, before dipping 1 percent in 2005. Those numbers could provide more ammunition for Hearst's lawyers.

But Fancher and Times spokeswoman Jill Mackie said last week the 2003 and 2004 spending increases were mostly the result of higher pension and employee health-insurance costs, not more hiring.

Newsroom employment — 361 at the end of 2002 — was flat in 2003 and dipped to about 340 or 345 by October 2004, Fancher said. It stands at 306 now after buyouts in 2005 aimed at reducing financial losses, he added.

Rick Edmonds, a researcher at the Poynter Institute for Media Studies in St. Petersburg, Fla., said the drop in The Times' newsroom employment in 2003 and 2004 was fairly typical of large metropolitan papers, perhaps slightly larger.

But while "granted, they had some unusual circumstances, they were kind of plunging to bring that many people on in 2002," said Edmonds, who monitors newsroom employment nationally.

Court records suggest Hearst's lawyers also might challenge the legitimacy of some expenses The Times charged to the agency, or the wisdom of some management decisions that may have driven up agency costs.

"There is no loss if done correctly," Ganzi wrote in notes prepared for a negotiating session with Times executives in December 2002.

In its original lawsuit, for instance, Hearst said a Times-driven decision to increase space allotted to news in both papers in 2002 — a decision Hearst opposed — decreased the agency remainder by $800,000. The Times' response: The larger "newshole" probably generated more circulation and advertising revenue by improving the papers' content.

According to court papers, Hearst and Times executives squabbled even before the lawsuit over the propriety of several expenditures.

Among them: charitable contributions that exceeded the ceiling established by the JOA, and promotion expenses to preserve Times circulation when it switched from afternoon to morning publication in 2000.

In 2003, when Hearst lawyers deposed Times executives whose salaries the agency pays, they asked each how much time they spent on Times business unrelated to the agency.

They asked Times Publisher Frank Blethen about $14,000 in compensation for "spouse travel" in 2000. Blethen said he didn't know if the agency had paid for that.

They asked Times Chief Financial Officer Mae Numata why the agency spent $355,000 in 2000 to groom the generation of Blethens now in their 20s and 30s for company leadership. "To continue the viability of The Seattle Times newspaper, which is the main product — pardon me personally — of the JOA," she replied.

Scrutinizing books

All this suggests that, in arbitration, Hearst will go over the agency's books closely, says the lawyer familiar with the case.

If Hearst can show that, but for dubious charges to the agency, the agency remainder would have been enough to pay The Times' news and editorial expenses, "suddenly it's a completely different story," the lawyer said.

The arbitration agreement calls for Jordan to rule 30 days after the last brief is filed or the last hearing concludes.

If he upholds even one of The Times' three loss notices, the countdown to the P-I's final edition begins. According to the arbitration agreement, the paper must stop publishing within 12 months.

If Jordan rejects all three, the status quo is preserved: Two newspapers, 60-40 profit split.

Those aren't the only possible long-term outcomes, however.

• Even if Hearst wins, Seattle could end up with just one newspaper. Publisher Blethen has said repeatedly that The Times can't be profitable under the current JOA. If the family decides to sell, Hearst has the right of first refusal.

And if Hearst buys The Times, it could shutter the P-I.

There's precedent — in San Antonio and San Francisco, where Hearst owned the smaller of each town's two dailies. In each case, it bought the larger paper from its competitor and closed its own publication or made it a nonfactor competitively.

"P-I is a failing newspaper ... ," Ganzi wrote in his notes in 2002. He called JOAs "an extension of life; a deferral of shutdown; can't change the economics of newspaper business — only delay the inevitable — a one-newspaper town."

• If The Times wins, there's a chance the P-I still might survive. Under federal antitrust law, the paper can't be closed unless Hearst first puts it up for sale and finds no qualified buyers.

Hearst could sell the P-I without selling its interest in the JOA. That happened in St. Louis in the 1980s, and the Times-Hearst arbitration agreement acknowledges it's an option here.

The P-I also could stay alive if the U.S. Justice Department, the state Attorney General's Office or the Committee for a Two-Newspaper Town, an intervenor in the lawsuit, challenges a Times arbitration victory in court.

• Nothing in the arbitration agreement prohibits the two papers from reaching a settlement "out of court," before Jordan rules.

Stephen Barnett, a law professor and JOA expert at the University of California, Berkeley, has said a settlement that keeps the P-I alive — perhaps in reduced form, perhaps with a smaller piece of the profits — could quell possible objections from government antitrust officials and the community.

Such a compromise doesn't seem likely. The two companies tried to negotiate a settlement in 2004 and 2005 without success. Former U.S. Senate Majority Leader George Mitchell, D-Maine, mediated secret talks that ultimately broke down.

Times attorney Marvin "Monty" Gray noted wryly in court in April that Mitchell brought peace to Northern Ireland, yet couldn't do the same for Seattle's two daily newspapers.

As time passes, however, positions can shift. Court records reveal that Hearst and The Times first discussed settling their differences through "alternative dispute resolution," such as binding arbitration, in 2002.

It didn't fly then. Now they're betting everything on it.

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