Times, P-I bet their futures on key arbitration ruling

The warring owners of Seattle's two daily newspapers have been preparing for Monday for nearly four years.

Unless there is a last-minute settlement, lawyers for The Seattle Times and Seattle Post-Intelligencer will face off in a closed-door binding-arbitration hearing whose outcome could transform the city's newspaper landscape.

Speculation that a settlement was brewing surged after the companies announced April 6 that the hearing, which had been scheduled to convene April 9, would start a week later. But as of Friday no deal had been announced.

For now, at least, the owners have placed their papers' fates in the hands of one man: arbitrator Larry Jordan, a former King County Superior Court judge. His decision is expected by June 7.

The story behind the hearing is a long and complicated one. Here are some questions and answers that address what the dispute is all about.

Q: First, tell me who the players are.

A: In one corner, from Seattle: The Seattle Times Co., owner of The Times and five smaller dailies in Eastern Washington and Maine. The Blethen family, which has owned the paper since 1896, controls 50.5 percent of the company's voting shares. Sacramento, Calif.-based newspaper chain McClatchy owns the other 49.5 percent.

In the other corner, from New York: The Hearst Corp., owner of the Seattle Post-Intelligencer since 1921. The P-I is part of Hearst's empire of 12 dailies, eight weeklies, 30 TV and radio stations, more than three dozen U.S. and British magazines, and a wide-ranging collection of cable and Internet investments.

Q: What are these two companies fighting over?

A: In the narrowest sense, it's a contract dispute over the joint-operating agreement (JOA) linking the two newspapers since 1983. But each owner maintains it's really fighting for its newspaper's future.

Q: What is a JOA?

A: A partial exemption from federal antitrust laws, authorized by the Newspaper Preservation Act of 1970. That law allows competing newspapers — with Justice Department approval — to merge business operations if one newspaper is failing. News operations remain separate.

In Seattle, the smaller P-I is designated the "failing newspaper." The Times markets, prints and distributes both papers. In return, it gets 60 percent and Hearst 40 percent of what's left after The Times is compensated for the non-news costs of producing both newspapers.

Q: Have the papers made money under this arrangement?

A: For years, yes. But The Times now says the JOA has become a money loser.

In 2003, after months of fruitless talks with Hearst, it moved to trigger an escape clause in the contract by notifying Hearst it had lost money in 2000, 2001 and 2002 under a formula spelled out in the JOA.

Under the contract, that three-year "loss notice" required the owners to negotiate a date to close the P-I within the next 18 months. Hearst, in return, would get 32 percent of the surviving Times' profits until 2083, when the JOA is scheduled to expire.

If the owners couldn't reach agreement on a P-I shutdown date, the contract says, the JOA would terminate and Hearst would get nothing from The Times.

Hearst said either option amounted to a P-I death sentence. In April 2003, it filed a lawsuit challenging the validity of The Times' loss notice.

Q: So is the P-I the victim and The Times the aggressor here?

A: That's how Hearst paints it. But Times Publisher Frank Blethen has said his newspaper is the real victim and that his family's control of it is at risk.

He has accused much-wealthier Hearst of intentionally keeping the P-I weak to undercut the JOA's profitability and force the Blethens to sell their majority stake in The Times. The expensive legal fight is part of that strategy, he has said.

Should the Blethens sell, Hearst would be the most likely buyer. When The Times and Hearst amended the JOA in 1999 to allow The Times to switch from afternoon to morning publication, Hearst insisted on a side deal that gives it a right of first refusal if the Blethens ever put their shares on the market.

Hearst doesn't really care about the P-I, Times officials have said: It wants The Times. Hearst's "goal is making Seattle a one-newspaper town ... in which the one newspaper is owned by Hearst," Times lawyer Douglas Ross wrote last month.

Q: What has happened since the lawsuit was filed?

A: The companies spent more than two years litigating just one of Hearst's claims — that the losses The Times claimed for 2000 and 2001 were invalid because they resulted from an extraordinary event — a strike.

Ultimately, the state Supreme Court ruled unanimously for The Times. But Hearst's other claims remained to be decided.

U.S. Sen. Patty Murray brought in former Sen. George Mitchell to mediate the dispute in private. Those talks failed. Meanwhile, The Times says, it continued to lose money under the JOA. It filed two more three-year loss notices, for 2002-2004 and 2003-2005.

The big breakthrough came March 30, 2006, when the companies said they would resolve their differences through binding arbitration.

Q: What is binding arbitration?

A: Jordan will hear both sides' arguments in a proceeding similar to a court trial. His decision is final. Both sides have agreed not to appeal.

Q: Will this hearing be open to the public?

A: No. The agreement between The Times and Hearst says everything about the arbitration is "strictly private and confidential." The two have updated their claims against each other, but that's private, too. Only Jordan's decision will be public.

Q: It's been more than a year since the arbitration agreement was announced. What's been going on since then?

A: The two sides have been preparing their cases. They spent months in what's called "discovery" — demanding documents from each other and deposing potential witnesses. None of that has been made public.

The two say they have exchanged more than 3.5 million pages of documents. They have spent millions in legal fees.

Q: What arguments will Hearst make?

A: At least two.

First, Hearst is likely to focus on challenging The Times' reported losses from two years: 2002 and 2005. If Jordan rules the losses in both those years were contrived, all three loss notices would be undermined because there would be no uninterrupted three-year stretch.

In 2002, The Times hired 63 full- and part-time newsroom employees while much of the newspaper industry was cutting workers. It said it was replacing some staff let go after the 2000-2001 strike to help boost circulation and advertising.

Hearst claims the hiring was a thinly veiled Times bid to intentionally lose money so that it could file the first loss notice.

The Times' 2005 losses are another likely Hearst target, if only because The Times came closer to breaking even in that year than in any of the other five. It reported it lost just $1.9 million under the JOA formula that year.

In court papers, Hearst also has noted if Jordan rules there was no loss in 2005, The Times couldn't file another three-year loss notice until 2009.

Q: What's the other argument?

A: That The Times, which is obligated under the JOA to use its "best efforts" to make the P-I successful, has been violating that requirement for many years so it could eventually put the P-I out of business and become Seattle's only newspaper.

People deposed by both sides said they were questioned extensively by attorneys about how The Times promoted, marketed and distributed the P-I.

They said it was clear Hearst was trying to build a case that The Times has systematically favored its own paper.

It's a charge The Times vigorously disputes. Times President Carolyn Kelly may have been referring to it in a March 21 memo to employees.

"All the preparation and work we've done [for the arbitration hearing] has only reaffirmed our faith in how well all of us have exercised our responsibilities under the JOA contract for so many years," she wrote.

Q: Give an example of what Hearst might argue The Times has done to sabotage the P-I.

A: The Times' handling of the two papers' Newspapers in Education (NIE) program has been raised in pretrial proceedings.

The program brings both newspapers to classrooms. The Times provides free copies to teachers along with related curriculum materials. Costs are paid by corporate sponsors and by subscribers who donate papers while they are on vacation.

Over the past decade, average weekday NIE circulation for both papers has grown dramatically, from about 4,300 to more than 20,000. But The Times has been responsible for most of that growth. A year ago, its average weekday NIE circulation was nearly 15,000, the P-I's just 5,476.

Sources associated with both papers say the P-I has complained over the years about the disparity, questioning whether The Times promoted both papers equally.

Internal Hearst audits of the JOA from 2000, 2001 and 2002 also indicate the company had concerns about the program's management.

Teachers choose which paper they get through NIE. Times spokeswoman Jill Mackie said The Times' much larger school circulation probably results in large part from The Times' newsroom's extra support for the program.

Q: Who will testify at this hearing?

A: The witness lists, like everything else, are secret, but here are four names:

• Mark Henschen, circulation director of the North County Times in Escondido, Calif. A frequent speaker on circulation strategies at industry workshops and seminars, he will appear as an expert witness for Hearst, according to a source involved in the proceedings.

Calls and an e-mail to Henschen were not returned.

• Chuck Taylor, former editor of the Seattle Weekly, now editor-in-chief of the new regional news Web site Crosscut.com. He has written that Hearst has subpoenaed him to testify at the hearing "regarding a trivial matter."

Hearst wants to question Taylor about a photo he took in 2003 to accompany a JOA story in the Weekly. It showed side-by-side Times and P-I street boxes, with both displaying The Times.

• Art Thiel, P-I sports columnist who was courted heavily by The Times in the late 1990s. He, too, has been called by Hearst, according to a blog posting by newspaper union leader Liz Brown. Thiel declined to comment.

• Joel Connelly, P-I metro columnist and 30-year employee, also identified as a Hearst witness in Brown's blog posting. Connelly, too, declined to comment.

Q: How long is the arbitration hearing supposed to last?

A: Four weeks.

Q: Why was it postponed a week?

A: Times President Kelly attributed the delay to "scheduling issues and complexity" but declined to provide details. Hearst offered no explanation.

The timing of the postponement struck many as suspicious. Lawsuits often are settled right before trial.

"I'd be willing to bet you anything they're talking right now," David Lord, president of a Seattle-based chain of smaller Northwest newspapers and a former King County deputy prosecuting attorney, said early last week.

Neither company would say whether a settlement was under discussion. They have tried to resolve their differences out of court before, without success.

But they weren't facing anything then that's as final as Jordan's looming decision, said Stew Cogan, a former King County Bar Association president and full-time arbitrator and mediator.

"The parties are going to have to accept the [arbitrator's] award, good, bad or indifferent," he said.

Q: What happens if Jordan rules for Hearst?

A: Nothing changes — at least for now. Both papers continue to publish, with the same 60-40 split. But Blethen has said his family can't keep operating The Times under that arrangement.

Q: And what happens if Jordan rules for The Times?

A: The ball is in Hearst's court.

It could choose to let the JOA expire and keep the P-I alive, perhaps as an online-only publication. But experts agree such a venture probably would lose money for at least the first few years.

If Hearst decides instead it wants 32 percent of The Times' profits, it would have six to 12 months to close the P-I. But at least two hurdles would need to be cleared first.

Q: What two?

A: First, the deal would need to be approved by state and federal antitrust regulators. Hearst almost certainly would be required to put the P-I up for sale, to show there's no market for it.

If there is a buyer, Hearst could sell to someone who would run the P-I outside the JOA while Hearst still collects its 32 percent of The Times' profits. The arbitration agreement the companies signed last year acknowledges that.

Hearst could even retain a 10 percent interest in the P-I, perhaps more.

Second, a group called the Committee for a Two-Newspaper Town, which says it wants to keep both papers alive, has filed claims in court against both companies.

Among other things, it claims the JOA provision that allows Hearst to close the P-I and collect 32 percent of The Times' profits is an unconstitutional restraint of trade.

King County Superior Court Judge Greg Canova is scheduled to hear the committee's claims July 20.

Q: So Jordan's decision won't really end this newspaper war?

A: No. But it will shape all that follows.

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