Gloves Off in Seattle JOA Fight

By: Mark Fitzgerald The lawsuit Hearst Communications Inc. filed in Seattle last week gets to the point in its very first sentence: "This case is about an attempt by the Seattle Times Company ("Times" or "Defendant"), owner of The Seattle Times newspaper ("Seattle Times"), to eliminate one of the two daily newspapers in Seattle."

That's pretty much how The Seattle Times sees things -- only in reverse. "I've got a $5-billion-a-year conglomerate trying to put us out of business," Times Publisher Frank A. Blethen said about his family's paper when reporters cornered him for a comment during the Newspaper Association of America (NAA) convention here last week.

It had been obvious for a while that the unhappy parties to the joint operating agreement (JOA) between Hearst's Seattle Post-Intelligencer and The Seattle Times -- owned 50.5% by Blethen family members and 49.5% by Knight Ridder -- were headed for a collision. Last week, the smash-up took place.

This is a high-stakes fight for both sides: The Times owns all the printing presses, production equipment, and circulation trucks, and its circulation has been pulling ahead of the P-I since it went to the morning cycle in 2000. But Hearst has the far deeper pockets -- and experience emerging from JOA wrecks unscathed. In San Francisco, it ended up taking over the bigger paper, and in San Antonio, it bested Rupert Murdoch and wound up with his paper, too.

The events of the week were swift and dramatic: Blethen told Hearst the Times board had decided to trigger a clause that would kill the JOA, and perhaps the P-I as well, in 18 months; Hearst quickly responded with a pre-emptive lawsuit; and Blethen issued the formal "loss notice" the following day.

Yet, the litigation, which promises only to become more bitter if it continues, also offered a rarely opened window into the operations of the two privately held newspaper companies. Here are some of the claims from Hearst Communications v. Seattle Times Company, Case No. 03-2-23950 (obtained by E&P), in King County Superior Court in Seattle:

* The Seattle JOA was a gold mine for its first 16 years. Hearst says it estimates the JOA generated more than $500 million in pretax cash flow between 1983, its first year, and 1999. The Times' share of the so-called "agency remainder" -- the money left over after news and editorial expenses are paid -- was more than $200 million during that period, the suit claims. Hearst, owner of the smaller paper, said its share of the take in those years was just $50 million.

* Just before the November 2000 strike against both papers by The Newspaper Guild, the Times was forecasting an operating profit for the year of $73 million -- $6 million more than it figured in January. With the strike ruining its holiday-advertising season, the agency's actual operating profit turned out to be $44.4 million, Hearst claims. "But for the strike, The Seattle Times and the P-I would have made a [agency-remainder] profit in 2000," the suit says.

* A 1999 amendment to the JOA loss notice "requires" both sides to do whatever is necessary to kill one paper if either paper sustains three consecutive years of losses. If a paper is not folded, the JOA automatically terminates. By issuing the loss notice on April 29, the Times has set the stage for the JOA to dissolve in 18 months, on Oct. 29 of next year -- unless, of course, court action leads to a delay or series of delays.

* Blethen "increased The Seattle Times' news and editorial expenses by millions of dollars" by hiring "at least 63 additional full-time and part-time" journalists, the suit says. While Blethen is not commenting on the lawsuit, he previously has maintained that those hires only brought the paper back to staffing levels before the strike, when dozens of employees were laid off. The suit claims Blethen also depressed the agency remainder by $800,000 when, "over the express objections of the P-I," he increased the minimum news hole for both papers that is paid for out of JOA revenue rather than by each paper.

There were revelations outside the courthouse last week, too: Bill Richards, the freelance journalist who is covering JOA issues for the Times, revealed that Blethen and Hearst executives were in talks throughout the winter. At one point, Blethen proposed to roll back the P-I's share of the JOA proceeds to 32% in exchange for allowing the JOA to continue. The P-I share increased to 40% from 32% in 2000 as part of the deal that allowed the Times to switch to morning publication.