THE FUTURE OF SEATTLES two daily newspapers, which have competed to report the news and set the civic agenda for more than a century, could turn on an answer to a question of contract law. King County Superior Court Judge Greg Canova says he will issue a ruling on Thursday, Sept. 25, in the matter of Hearst Communications v. the Seattle Times Co. For the Hearst-owned Seattle Post-Intelligencer, founded in 1863, and The Seattle Times, founded by the local Blethen family in 1896, Canovas decision could mean all the marbles in a battle for control of the citys paid-circulation newspaper market. The Times Co. in April served notice to Hearst that it had taken three consecutive years of losses and would seek either to close the P-I or terminate the two companies 22-year, federally sanctioned joint operating agreement (JOA), the legal monopoly under which both have been able to survive for two decades. Hearst sued to block the move, saying it thinks the arrangement is sustainable, that the losses are anomalous, and that, without its own printing presses, the P-I couldnt otherwise continue to publish.
HOW IT WORKS How the joint operating agreement (JOA) between The Seattle Times and the Seattle Post-Intelligencer splits the profit. MORE
Canova is considering what attorneys on both sides agree could be the biggest question in the lawsuit: whether the Times loss in 2000 should count in the three-year calculation, because it was due to a 49-day strike that drove both newspapers into the red that year. Hearst says the strike was what the JOA terms a force majeurean unexpected, uncontrollable factor that should exclude 2000 if the Times wishes to invoke the three-year loss clause. In a phrase that has practically become a clich頍 in the thousands of pages of documents filed in court, the Times contends that a loss is a loss for the purposes of ending the JOA.
Ordinarily, two private corporations wouldnt expect to have to air their soiled linen in public, but once this dispute landed in court, file drawers full of internal memos, e-mails, and other records became subject to discovery by the opposing parties. Seattle Weekly requested copies of depositions from the parties in the suit and received them after initial resistance from the Times. Those and other documents dont reveal any smoking guns about the conduct of either company in managing the monopoly with which the public has entrusted them, but there is much revealed about the deterioration of relations between Times Publisher Frank Blethen and Hearst executives over the past few years.
The war of attrition between the P-I and the Times has historic roots, with the courtroom only the latest battleground. The companies have fought for control of the Seattle newspaper market ever since Hearst bought the P-I in 1921. Glimpses inside that increasingly bitter struggle shed light on how it came to be that the future of Seattle journalism hinges on the arguments of corporate attorneys.
Changes in Attitude
The papers 1981 JOA was amended in 1999. The Times, then an afternoon paper on weekdays, got the right to switch to morning publication, and it did so in 2000. For Hearst, the new agreement provided long-term protection by guaranteeing a share of Times profits through 2083 should the P-I close. But when the Times Co. said in April that it had lost money in 2000, 2001, and 2002, and that it wanted to negotiate closure of the P-I as set forth in the agreement, Hearst said it wanted to continue to publish the P-I and filed the lawsuit.
Why wouldnt Hearst simply agree to close the P-I and collect checks for the next 80 years? An oft-repeated theme over the past year in Blethens public comments is his belief that Hearsts goal is to hold the Times in a marginally profitable JOA to bleed Blethen family assets until it is forced to sell its controlling interest. (The Knight-Ridder newspaper chain owns the other shares of the Seattle Times Co.) If the Blethens decide to sell, Hearst has the right of first refusalthat was a condition of renegotiating the JOA to allow the Times into the morning marketa right for which Hearst paid $10 million.
That 1999 revision not only changed the media landscapeP-I circulation plummeted when the Times switched to the same morning publication scheduleit changed the tenor of the partnership as well. An internal memo, written last January for the Blethen familys holding company, notes the deteriorating relationship between the Seattle Times Co. and Hearst. Hearst behavior changed almost immediately, the memo says. From a relationship which they touted and which they bragged about us being the countrys best Agency to a contentious, adversarial and accusatory demeanor. Behavior that we believe has been intended to harm the Agency and punish the Blethens in an attempt to force us to sell out to them. (Agency refers to the joint operation as managed by the Times.) At that point, the books were being closed on 2002, and the memo makes it clear that a declaration of three consecutive years of losses would present the Times with an opportunity it couldnt afford to pass up. If we dont use the stop loss language to force Hearst to move to one newspaper and, possibly for us to renegotiate the JOA on much more favorable terms, we will probably never have the chance again until it is too late to save the franchise, the memo says.
Find a Way
Discussions between Hearst and the Times about sharing the morning market actually began in the early 1990s, barely 10 years into the JOA, which was intended to last 30 years. During a deposition this summer, Davis Wright Tremaine attorney Douglas Ross, whose firm represents the Times, asked Bob Danzig, former head of Hearst Newspapers, about the process that led to the 1999 JOA amendments. Originally, the Times proposed that the P-I swap the morning slot for the Times afternoon position, which was flatly rejected by Hearst President Frank Bennack, according to Danzig. In fact, Danzig claimed to be the one who came up with the idea of both newspapers sharing the morning market. He believed that the afternoon market for newspapers was shrinking and, if the Times lost market share, it would hurt the overall profitability of the JOA.
I thought it would go on in perpetuity, properly managed, Danzig said of the JOA.
In the spring of 1993, Danzig got a memo from Hearst executive Lee Guittar, discussing Seattle P-I strategic options. Hearst had just been presented with some Times numbers that were jolting. The Times offered some scenarios for the future that included the need for a South King County printing plant that would cost an estimated $150 million, taking a substantial bite out of JOA profit. The Times said the need for the plant would be unavoidable as long as the Times was forced to deal with the tough logistics of daytime traffic to get newspapers to afternoon readers.
Guittar saw an opportunity to improve the P-I share of the JOA revenue by using the morning market as a bargaining chip. He also mused over the potential impact of taking a more aggressive approach to managing the relationship with the Times. A section of his memo to Danzig was titled: More active (hostile?) role in Agency Management.
Find a way, he wrote, either through legal approach or by enlisting Knight-Ridder participation, to block construction of a second new production facility and demand improved economic performance from Agency operations. If successful, this would help the overall profit picture. If unsuccessful, it could accelerate Times desire to terminate the agreement. In either case, the future relationship with our partner would become increasingly hostile.
That much seems to have come to pass. Relations between the Times and Hearst are definitely hostile.
Another issue raised by Guittar in the 1993 memo, as one of several options for the P-I, was to consider closing the newspaper after negotiating a St. Louis deal, which refers to the Pulitzer-owned St. Louis Post-Dispatch and the Newhouse chains Globe-Democrat. Their JOA was terminated in 1983, with the Globe-Democrat ceasing publication but continuing to draw a share of profit from the Post-Dispatch, now the sole daily newspaper in St. Louis.
Benefits are obvious, wrote Guittar. This strategy would result in best possible stream of profit over the next 40 years. It would be built on the premise that the long-term Seattle market, like most in the U.S., will be able to support only one newspaper.
Questioned about the Guittar memo during his deposition, Danzig characterized it as entirely speculative and his view of some of the things we might consider.
However, thats exactly what the 1999 amended JOA contract provides for sharing the JOA profits after closure of the P-I. The same contract, however, does not specify any restrictions on how the Times can calculate losses for the purpose of invoking the three-year stop-loss clause.
By 2001, Blethen had been telling Hearst executives in so many little ways that the P-I was living on borrowed time, as far as he was concerned. George Irish, president of Hearst Newspapers, when deposed by Times attorneys, recalled a meeting of the papers JOA committee in Toronto in April 2001. The meeting began with Frank Blethen making the statement that, Im paraphrasing, but making the statement that we need to get to one newspaper, Irish said.
Irish said that nobody at the table reacted to Blethens comment. There was a period of silence, and he simply moved into the remaining agenda. He said that Blethen then complained that it was becoming more difficult to sell P-I subscriptions. (For their part, Hearst and P-I executives have complained in recent years that the Times has mismanaged P-I circulation.) My recollection is that he raised his opinion that the P-I was deficient in its news product. Since then, the P-I has beaten the Times two years running for total awards in the regional Society of Professional Journalists competition.
Blethen was deposed by Hearst lawyers last June, and on the topic of the P-Is marketability, some of his responses seemed contradictory. Blethen repeatedly has said that he considers the P-I editorial product to be inferior to that of the Times and that its one of the main reasons the P-I has lost so much circulation since the Times began competing in the morning. (The most recent figures put the Times at 239,468 on weekdays and the P-I at 155,813. Ten years ago, the Times had circulation of 237,665 and the P-I was at 206,936.) But at one point in early 2000, about the time the switch to morning occurred, Blethen told his board of directors that the P-I was devoting substantial new resources to its news product. Dr. Samuel Smith, retired president of Washington State University and an independent member of the Times Co. board, suggested that the P-I had noticeably and substantially improved its product, Blethen noted at the time. Asked during the recent deposition by Hearst attorney Kelly Corr whether he thought the P-I was getting better, Blethen hedged:
I was marketing to my board of directors when I used the word substantial here, because I wanted my board of directors to get focused on the need for us to invest in our own news product and to invest in the fact that the P-I had added some resources. Substantial was a very generous word. I did not know what the numbers were. We know some of the rumors about what hiring they were doing and where they were adding some content.
In a testy exchange with attorney Corr, Blethen bristled when asked if he thought he owed a duty of loyalty to the P-I as a result of being in charge of virtually every aspect of the newspapers business except for news and editorial content.
No, Blethen replied.
No, you think you do not? Corr pressed.
I owe the P-I the right to fulfill the contract, which I do, Blethen said.
In the deposition, Blethen also revealed that Hearst had sought the right to audit the Times books and engage in arbitration of JOA issues before the Times made any move to officially terminate the agreement. It was something in which the Times expressed no interest, Blethen said.
Jerry Pennington, the Times publisher who died in a boating accident in 1985, mentored both Blethen and Mason Sizemore, a nonfamily executive who came up through the newsroom ranks, hoping to solidify the next generation of Blethen-family leadership and the quality of management generally at the Times. It was Pennington who led the negotiations with Hearst for the original JOA contract, signed in 1981. After Justice Department hearings and an unsuccessful federal court challenge by opponents, the arrangement commenced in 1983. With Penningtons death, Blethen became publisher of the Times and chief executive officer of the Seattle Times Co., and Sizemore became president and chief operating officer. The two would work closely together for the next 16 years. Many at the paper saw Sizemores steadying presence in upper management as a prudent counterbalance to Blethens tendency to rule from the heart.
So when Sizemore retired suddenly in October 2001, Seattles media community was stunned. The purported reason, that Sizemore was taking advantage of an early retirement opportunity, seemed incomplete. His retirement was announced as effective immediately. There was no send-off party that is the custom for long-serving Times retirees. He was just gone. And he steadfastly has declined numerous requests from reporters to discuss what was behind his departure from the newspaper where he spent 37 years of his life.
There were rumors of a blowup between Sizemore and Blethen over a number of possible issues, among them the high price the company paid for three Maine daily newspapers that significantly increased its debt load and the handling of the 2000 strike and its aftermath. Sizemores June deposition by Hearst attorneys was the first opportunity that anyone had to quiz him, under oath, about the reason for his startling retirement. But the answer was as bland as boiled mush.
Why did you leave the Times? Corr asked.
Times attorney Ross immediately objected on the grounds that the question was beyond the agreed scope of the deposition, but Sizemore answered anyway.
I took early retirement, he replied.
Reason? Corr persisted.
Same objection, Ross interjected.
I dont know of any [reason], Sizemore said. I spent 37 years working for the same employer, and Im enjoying my retirement.
Ross continued his objections, but Sizemore continued to talk. Sizemore had brought his own attorney to sit in on the deposition, raising the possibility that he might not have seen his own interests in perfect harmony with those of his former employer.
Anything to do with the disagreement with Frank Blethen? Corr asked.
Sizemore: I dont think we had a disagreement. No.
Sizemore went on to discuss how the Times and Hearst came to agree on sharing the morning market. Corr asked him why Hearst President Bennack didnt just say, Lets continue with them in the afternoon, and eventually theyre going to lose money, and theyll go out of business.
In effect, we had that discussion, said Sizemore. And it led to a conversation about where the future of this market is. The future of this market was, in our minds, in areas where the P-I was very weak. The P-I had chosen, because of the natural strength of the morning franchise, had chosen not to become a strong factor in suburban circulation. And the Seattle Times had.
Before the depositions were done, attorney Guy Michelson, for Hearst, took a run at Times President Carolyn Kelly, who succeeded Sizemore, with the question of why Sizemore departed the company so abruptly. What Mason told me is that after 37 years, with the early retirement package that was offered, that his time had come, said Kelly.
Blethen vs. the World
At a June 2002 meeting between Times Co. and Hearst officials, presided over by Blethen, P-I Publisher Roger Oglesby raised questions about a proposed P-I circulation program. He reported on conversations he had had with Times managers on the subject. Oglesbys notes on that meeting included the following observation:
Frank came a little unglued at that point. He said he was on the cusp of deciding that I would be barred from talking with anyone at the Times but Carolyn [Kelly]. He said the Agency once shared more detailed information with the P-I, and there had been a higher level of trust between the two companies. But, he said, that relationship has been damaged over the past three years, with Agency operations constantly being criticized and demands being made for detailed information that later showed up in letters attacking the performance of his company.
The Blethen relationship with Hearst and the P-I is not the only contentious one involving a business partner, nor is it the only one in which Blethen suspects the other company has it in for him and his family. Since the 1930s, the Ridder Co. and its successor, Knight-Ridder, has owned 49.5 percent of the voting stock of the Seattle Times Co. and 65 percent of the nonvoting, preferred stock. The Blethens have struggled to keep Knight-Ridder at arms length ever since, despite having to deal with their minority representation on the Times board. In considering the possible Knight-Ridder reaction to an attempt to close the P-I, last winters Blethen family memo said Knight-Ridder might obstruct the effort.
If they believe the financial conditions and competitive position at the Times is improved and thus helps secure our stability and Blethen commitment, they will most likely oppose, the memo said. Their goal is the same as Hearst in this regardto drive Blethen out and force us to sell to them. However, the Knight-Ridder board members did finally vote to report three years of losses to Hearst and begin an 18-month clock, as specified in the JOA, to negotiate the closure of the P-I.
All Sides of the Story
Last Friday, Sept. 12, at the King County Courthouse, Judge Canova listened to the two companies attorneys and a lawyer representing Citizens for a Two Newspaper Town (CTNT) argue the merits of the Hearst lawsuit that claims the Times cant seek to dissolve the JOA based on its 2000 loss.
Times attorneys point out that had either party intended for force majeure to apply to loss calculations, they would have made sure the contract said so. The purpose of force majeure, said Times lawyer Ross at last weeks hearing, is to protect either party from liability for a failure to perform. He said there was no specific language in the contract that extended the concept to exclude any losses, even in an unusual year.
Seattle attorney Corr, meanwhile, representing Hearst and known as a tough litigator in complex cases, tried to explain why force majeure should be viewed as a principle that pervades the entire agreement. He also urged the judge to consider the intent of the parties in negotiating the JOA contractthat intent being to preserve two competing editorial voices. Corr also raised the issue of good faith performance, noting that the Times had been planning, since 1985, to find a way to close the P-I or get rid of the JOA altogether. He was referring to that Blethen family memo from last January, in which those goals were described as unchanged since 1985. Times spokesperson Kerry Coughlin has since said that no documents have been found in company files that elaborate on the goals cited in the memo.
Dmitri Iglitsin, the attorney for the union-backed CTNT, had already conceded in briefs that Hearst was not likely to prevail on the year 2000 loss issue. Instead, he argued last week that public policy and the intent of Congress in passing the 1970 Newspaper Preservation Act should outweigh the unusual loss of a single strike year. Canova has admitted the committee as an intervener in the case, but last week the judge ruled out of the current proceedings the groups claim that the right of first refusal granted by the Times to Hearst, should the Times be sold, constituted a state antitrust violation.
The prospect of Seattle becoming a one-newspaper town has some citizens concerned, but no group is more aroused than the Pacific Northwest Newspaper Guild, the union that struck in 2000 and which is backing the citizens committee. The Guild stands to lose more than 130 P-I employees, mostly journalists, if the Times effort to close it is successful. Should Hearst agree to close the P-I between now and Oct. 29, 2004, when the 18-month negotiating window runs out, it will continue to receive 32 percent of Times profit through 2083. If that comes to pass, by about this time next year P-I staffers will get their walking papers, some severance, and be dumped into a very sparse newspaper job market. And there will be only one major media force to cover the news and set the civic agenda.
Dick Clever worked for the Seattle Post- Intelligencer from 1970 to 1975 and again from 1988 to 1996. He worked for The Seattle Times from 1980 to 1987 and covered the original joint operating agreement process in the early 1980s. He recently was named city editor of the Skagit Valley Herald in Mount Vernon.