State high court sides with Times

The Seattle Times Co. won a decisive legal victory in the city's newspaper dispute yesterday, taking a key step toward ending a strained business relationship that the Seattle Post-Intelligencer's owner calls essential to the P-I's survival.

IN GREATER DETAIL

- Read the court's opinion
- Hearst Corp. statement
- Seattle Times statement (Word)

But The Hearst Corp. said it will forge ahead with its broader suit, raising the possibility that the conflict could continue for years.

In its unanimous opinion yesterday, the nine-judge panel of the state Supreme Court rejected arguments by Hearst and ruled that The Seattle Times Co. can count financial losses incurred during a strike toward those required to end the joint operating agreement between the papers. The Times Co. says the 22-year-old JOA has become financially untenable and threatens its paper's future.

Writing for the court, Justice Tom Chambers acknowledged that the fate of the city's two major daily papers could hinge on the outcome of the dispute.


		Karen Ducey / P-I
	Seattle Post-Intelligencer Publisher Roger Oglesby tells employees about yesterday's state Supreme Court ruling in favor of The Seattle Times.

"We recognize this day is not a happy day in the ongoing story of Seattle as a two-newspaper town," Chambers wrote. "While a happy ending to the story ... is very desirable, our duty is clear. That duty is to uphold the law and to enforce lawful agreements parties bring before us. We conclude that the Joint Operating Agreement between Hearst and the Times is subject to only one reasonable interpretation."

The decision upheld a state appeals court's earlier reversal of a King County Superior Court judge's original decision in favor of Hearst.

"If I were scripting this, that's not the way I would have written it. That's not the decision we wanted," P-I editor and publisher Roger Oglesby told the paper's newsroom yesterday. "We're still in the very early stages of a lawsuit that should go on for a long time, and nobody's throwing in the towel. Hearst will continue this fight."

In a statement after the ruling was issued, Seattle Times Publisher Frank Blethen said the Times was "gratified" by the Supreme Court's decision. Blethen renewed his earlier calls for Hearst to renegotiate the JOA's terms.

"It is our hope that the Hearst Corp. will join The Times in modifying the JOA contract to reflect today's difficult newspaper economics so that The Times has a fair chance to become profitable again," Blethen said in the statement.

A lawyer for Hearst said past efforts to negotiate haven't worked.

"We're always willing to negotiate, and indeed we have, on multiple occasions in the past," said Kelly Corr, who argued the case for Hearst before the Supreme Court. He noted that Hearst has offered The Times Co. $50 million in cash and offered to take a lower percentage of the papers' joint revenue. Corr said, "each and every offer we have ever made has been rejected by the Times."

The Times Co. has said in the past that none of Hearst's offers were adequate to return The Times newspaper to sustained profitability.

Reaction to the decision was subdued in both papers' newsrooms.

"I think everyone was interested to hear about it, but there hasn't been any real reaction one way or the other," said Yoko Kuramoto-Eidsmoe, a Seattle Times features copy editor. "It's an ending, but it's not the ending, so it was just a big collective, 'oh.' "

P-I reporter Lisa Stiffler said people at the paper seem "in a state of resignation to ride this out." At the same time, she said, "people are talking casually about what their options are if this ends sooner rather than later."

Under the JOA, which began in 1983, The Times Co. handles advertising, circulation and other business functions for both papers, but the newsrooms compete. As originally negotiated in the early 1980s, the JOA gave The Times Co. 68 percent of the newspapers' combined profits before news and editorial expenses, with the remainder going to Hearst. A 1999 renegotiation that let The Times move to morning publication changed the split to 60 percent for The Times Co. and 40 percent for Hearst.

The best hope of preserving both newspapers would be through further negotiations between the two companies, said Phil Talmadge, a former state Supreme Court justice and co-chairman of the Committee for a Two-Newspaper Town.

But he said: "You really can't bring two parties to the table who don't want to be there."

Barring a deal, the dispute now moves back to King County Superior Court, where the major issue remaining is Hearst's challenge to the annual loss claimed by The Times Co. in 2002 -- the last of the three annual losses that the Times is citing in its bid to end the pact.

Hearst alleges that the 2002 loss was caused by excessive spending, including dozens of new hires, which amounted to a breach of the Times' fiduciary duties under the contract. The Times says its spending increase that year was a necessary investment to rebuild operations depleted by the Pacific Northwest Newspaper Guild strike and the economic downturn.

Blethen declined to be interviewed yesterday. A lawyer for the Times in the case declined to comment.

One wild card in the next phase of the case is a decision by the Justice Department in May to end an antitrust investigation into The Seattle Times Co.'s handling of business functions for both papers. The department concluded that The Times Co. did not handle those functions in a manner solely meant to reduce competition, in a way that would give it a monopoly over the Seattle newspaper market.

The decision to close the investigation without taking action may help The Times counter allegations of a bias against the P-I, "but it probably won't be decisive," because the exact circumstances behind the decision weren't disclosed, said Seattle University law professor John Kirkwood, an antitrust specialist.

But Hearst attorney Corr said he thinks the Justice Department's investigation will have no effect on the upcoming litigation. "I don't know whether they got all the same documents, took all the same depositions. Ultimately, the outcome will be determined by a what a jury says," Corr said.

Under Washington law, Superior Court Judge Greg Canova should regain jurisdiction over the case within one month, said Guy Michelson, another lawyer for Hearst. Once he does, the two newspapers will set a schedule for discovery -- the process of interviewing witnesses and obtaining key documents.

Michelson said that discovery will require weeks or months, and that the trial "would be highly unlikely to begin this year, given the number and complexity of issues and the amount of discovery to be done."

Seattle University's Kirkwood said the next stage of the suit could take as long as the first, and perhaps longer. That's because key questions, such as whether The Times' spending was justified, are in dispute. In contrast, in the phase just concluded, the companies did not dispute the underlying fact that the strike caused The Times' losses in 2000 and 2001. The court was faced with the less-time-consuming matter of interpreting the contract language.

The dispute began in April 2003, when The Seattle Times Co. gave notice that it had suffered the three consecutive years of losses required to end the JOA, from 2000 to 2002.

Hearst filed suit to block the move, claiming in part that one passage in the agreement, known as the force majeure clause, prevented The Times Co. from moving to end the pact. That clause says that "neither party shall be liable to the other for any failure or delay in performance" caused by any one of a series of events -- including a strike.

The force majeure at issue was the Guild's strike, which began in late 2000 and lasted into early 2001. The Times Co. later acknowledged that, if not for the strike, it wouldn't have posted the necessary losses in 2000 and 2001, the first two of the required three years. But it said the force majeure clause didn't preclude it from moving to end the agreement.

The court resoundingly agreed with The Times in yesterday's ruling.

The court also rejected Hearst's contention that the JOA's loss-operations clause was mutually understood to be usable only if changes in the Seattle marketplace made it unable to support two newspapers. That clause lets either paper end the JOA when its share of JOA proceeds aren't enough to cover its news and editorial expenses.

In rejecting those assertions, the court upheld the appeals court's reversal of a September 2003 decision in Hearst's favor by Judge Canova. Canova, the court said, had looked beyond the terms of the JOA to reach a decision, relying on statements from officials of both papers as the JOA was negotiated.

That approach was incorrect, the court said. The decision puts the issue of force majeure to rest in the case.

But Hearst's lawyers said they may also ask the King County Superior Court to consider different bases, aside from force majeure, for disallowing the losses claimed by the Times in 2000 and 2001. For all three years in question, Hearst will try to show that the Times' spending was excessive, and that the Times improperly allocated some of its institutional expenses to the JOA, Michelson said.

WHAT THEY'RE SAYING

State Supreme Court

"We recognize this day is not a happy day in the ongoing story of Seattle as a two-newspaper town. ... While a happy ending to the story ... is very desirable, our duty is clear. That duty is to uphold the law and to enforce lawful agreements parties bring before us. We conclude that the Joint Operating Agreement between Hearst and the Times is subject to only one reasonable interpretation."

"Hearst essentially asks us to rewrite the JOA by revising the loss operations clause, something we are not at liberty to do."

"We do not interpret what was intended to be written but what was written."

"The Committee for a Two-Newspaper Town argues that the JOA should be construed so as (to favor) the public interest ... to preserve two independent reportorial and editorial voices. ... The Committee does not suggest, however, that such a policy requires the court to ignore, modify, or contradict the express terms of the agreement."

Seattle Times Publisher Frank Blethen

"The Times entered the JOA more than 20 years ago with the Post-Intelligencer, which was failing financially. For most of that time the JOA served our community well, but it doesn't any more."

"The Times has lost money every year since 2000. It is our hope that the Hearst Corporation will join The Times in modifying the JOA contract to reflect today's difficult newspaper economics."

The Hearst Corp.

"Hearst will continue to press its efforts to preserve two separate and distinct editorial voices in Seattle. If we succeed, as we believe we will, Seattle will not lose the benefits of two daily newspapers under a JOA."

"We're always willing to negotiate, and indeed we have, on multiple occasions in the past. In fact, we made an offer of over $50 million in cash and taking a lower percentage of the JOA revenue. ... Every offer we have ever made has been rejected by the Times." -- Attorney Kelly Corr

The Committee for a Two-Newspaper Town

"We could come up with a number of experts to mediate between the papers. The question is really whether the parties want that scenario to proceed." -- Co-chairman Phil Talmadge

JOA TIMELINE

1983: Times and P-I combine business operations under a joint operating agreement, or JOA.

1999: JOA is amended to let Times publish in the morning.

2000-01: For 49 days, editorial workers at both papers strike.

April 28, 2003: P-I owner, the Hearst Corp., sues The Seattle Times Co. to prevent it from ending JOA.

April 29, 2003: The Times gives official notice of its intention to do so.

Sept. 25, 2003: King County Superior Court Judge Greg Canova rules JOA's force majeure clause prevents Times from counting 2000 and 2001 toward three consecutive years of losses needed to end JOA.

March 22, 2004: A three-judge panel of state appeals court reverses Canova's decision.

Nov. 30, 2004: Washington Supreme Court agrees to review appellate court's ruling.

Yesterday: In a unanimous opinion, Washington Supreme Court affirms appellate court's ruling, holding JOA's force majeure clause doesn't prevent Times' strike-related losses in 2000 and 2001 from being used to end JOA.

By Aug. 30, 2005: Judge Canova is expected to take jurisdiction again. Hearst will likely request a 12-person jury to determine whether Times overspent to deliberately incur losses, or wrongly attributed its own expenses to JOA, in 2000, 2001 and 2002. Papers will negotiate a calendar for discovery and a trial date.

P-I reporter Todd Bishop can be reached at 206-448-8221 or toddbishop@seattlepi.com

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