Litigation over joint operation of Seattle's newspapers is over – until further notice

The fight over the future of Seattle's two daily newspapers effectively ended Wednesday, June 20, with an announcement by the Committee for a Two-Newspaper Town that the citizens group was dropping a legal challenge to a settlement between the Seattle Times Co., which owns the dominant Seattle Times, and Hearst Corp., owner of the Seattle Post-Intelligencer. The two companies had agreed on April 15 to end a legal fight that began more than four years ago over the Times' desire to terminate a joint operating agreement (JOA) and shut down the smaller P-I. The committee had been seeking details of a $49 million payment by the Times Co. to Hearst under that settlement, raising a question: Was the payment a back-door effort by the Times to ensure eventual closure of the P-I ? Both Hearst and the Times Co. denied the committee's suggestion of a possible quid pro quo, but they also refused to disclose how the $49 million that the Times Co. owes Hearst breaks down – which portion is for terminating part of the agreement and which is for damages for alleged mismanagement of the JOA. A judge was to hear the committee's motion to have that information disclosed next month. With no further challenge by the committee, which was an intervenor in the lawsuit in King County Superior Court in Seattle, the settlement will stand and the city will have two daily newspapers until at least 2016 – unless Hearst wants to voluntarily withdraw from the JOA. Under the agreement, the Times Co. cannot seek to terminate the joint operation or shut down the P-I until that year. In a brief statement, a Hearst spokesman said the New York-based media company intends to continue publishing the P-I. Times spokesperson Jill Mackie called the committee's decision a relief. "We certainly believe their stated purpose was accomplished when the Times and Hearst settled," she said of the Committee for a Two-Newspaper Town. Anne Bremner, a Seattle attorney who co-chairs the committee, said the group was voluntarily withdrawing its complaint, but she declined to say if the group is satisfied that the agreement ensures the P-I's continued existence. "I don't think we can be convinced one way or the other," Bremner said. "We're done for now. We can refile at any time if something comes to pass that indicates there is a problem." Committee attorney Kathy George noted that this Friday would have been the last day for the group to decide whether to proceed with its legal challenge. Judge Greg Canova already had rejected an effort by the group to gain immediate access to documents gathered by Hearst and the Times Co. In opposing the committee's efforts, both Hearst and the Times Co. denied they had cut any secret deal to shut the P-I. George said the documents were necessary to analyze the breakdown of the $49 million payment. Without them, she said, the committee's five-member board decided unanimously to wait. "If there is an effort or a new plan emerges to shut down either paper," George said, "the committee would be looking at that very closely." The committee's decision not to pursue the details of the $49 million Times Co. payment to Hearst leaves a number of unanswered questions about the long-running newspaper dispute. One of the most puzzling is why Times Publisher Frank Blethen, whose family owns a controlling stake in the Times Co., picked the fight with Hearst in the first place. Under the JOA, the Times and P-I share the Seattle newspaper market, dividing circulation and ad revenue with 60 percent going to the Times and 40 percent to the P-I. The Times handles ad sales and distribution for both papers and owns the presses. The arrangement, which began in 1983 and was re-negotiated in 1999, amounts to a federally sanctioned monopoly, and it produced huge profits for both papers during the 1990s. But in 2003, Blethen, whose family owns 50.5 percent of Times Co. voting stock, notified Hearst that the JOA was dragging down Times profits. During the three years from 2000 to 2002, he said, the Times lost money under a JOA formula that bases profit or loss on newsroom expenses. Blethen's formal notification of three years of losses triggered a JOA clause that allowed the Times to end the agreement and shut down the P-I. Hearst sued, challenging the loss claim and saying it wanted to continue publishing the P-I. Throughout the subsequent dispute, Blethen and other senior Times Co. officials insisted the Times Co. and its flagship, The Seattle Times, were in such serious financial straits between 2001 and 2006 that the Times might have to be sold. However, documents from Hearst's lawsuit and internal Times Co. memos raise questions about whether Times finances were the cause or an excuse for the company's attack on its rival. They show that while Seattle Times ad revenue did drop sharply in 2000 and 2001 – after the dot-com bust, during and after a strike, and after terrorist attacks – revenue stabilized and even improved in the following years. Federal securities filings by the Times Co.'s former and current minority owners, which give an oblique snapshot of the privately held Times, also indicate the Times Co. was profitable after 2000. Today, publicly traded McClatchy Co. owns the other 49.5 percent share of voting stock. More revealing, perhaps, is a key memo produced during the papers' legal fight. The document, a "Strategic Discussion Outline" prepared by Blethen for a talk to his family's holding company, Blethen Corp., in January of 2003, indicated the Blethens had made elimination of the P-I a priority goal since 1985. The renegotiation of the JOA in 1999, when the three-year-loss clause was added, provided a unique opportunity to realize that goal, the memo said. "If we pull this off," said Blethen's memo, "we will take a major step in ensuring the survival of The Seattle Times as a private, locally-owned, fiercely independent voice." When the memo was publicized, Times officials said they could find no other evidence supporting amy claim that eliminating the P-I was a longtime family goal. Mackie, the Times Co. spokeswoman, said the settlement in April had resolved the JOA dispute. She declined to elaborate on the company's strategy going forward. Another unexplained element of the newspaper dispute is Hearst's insistence on paying the Blethens millions of dollars for a chance to make the first bid on the family's Times Co. stake, should it be for sale. Times Co. officials said Hearst first insisted on the arrangement during the 1999 JOA re-negotiation, agreeing to pay the Blethens $10 million over 10 years for that right. Under the April agreement, the first-refusal rights were extended to 2083, when the JOA expires. But Blethen has insisted his family has no intention of selling its Times Co. stake to anyone. The family's deal with Hearst, he jokes, is like "selling the sleeves off a vest." When the new agreement was disclosed in April, a Hearst spokesman confirmed the basic elements of the company's deal with the Blethens. "We are very excited about our continuing relationship with the Blethens," he said. But the spokesman declined to elaborate on details of that relationship or why Hearst is willing to spend so heavily to maintain it. Nor would he say whether the relationship requires Hearst to make additional payments to the family in the future. It is also unclear why Hearst, a much bigger company than the Times and with far deeper pockets, elected to change strategy at last year when it agreed to submit the dispute to binding arbitration. That process enabled this year's settlement. Prior to that, Hearst's attorneys privately boasted they could keep the legal fight going for years, draining the cash-strapped Times of millions of dollars in legal fees alone. Taking the fight to arbitration locked Hearst into a chronological box, guaranteeing a far-quicker resolution to the legal fight. One final question: Who won this fight? Both sides claimed they came out ahead after the settlement. But the Times Co. will have to borrow $24 million to pay off Hearst, and Hearst must still deal with owning a fading, money-losing newspaper in a two-paper town. (Hearst is paying the Times Co. $25 million to keep the JOA going, so while the Times Co. owes Hearst $49 million, in the end it pays Hearst $24 million.) Phil Talmadge, co-chair of the Committee for a Two-Newspaper Town with Bremner, says Hearst may have been the winner. "I get the impression they want to keep a foot in this marketplace," says Talmadge, a former state Supreme Court justice. But he hesitates when asked how Hearst will convert that foothold into a profitable newspaper. As for the Times, Talmadge is less uncertain. "I just don't know what Frank [Blethen] got out of this," he says. "He didn't really achieve any of the goals he set out to get at the start of the litigation." The only clear winner, says Talmadge, is the public. "They get the win in this," he says. "We get to have two news operations stay in business in a community of this size. We're pretty pleased with that."