Seattle newspapers' fight to enter critical stage

P-I's future is at stake in four-week legal hearing

A new round of fighting is set to begin today in the four-year-old contract dispute between Seattle's two daily newspapers. In the balance, as it has been from the outset, is the future of the Seattle P-I.

But events that could follow a crucial arbitrator's ruling, due by June 7, make it hard to predict the fate of either the P-I or The Seattle Times, two of the state's oldest businesses.

Over the next four weeks, attorneys for the papers' owners will examine dozens of witnesses during a trial-like proceeding before arbitrator Larry Jordan, 62, a former King County Superior Court judge.

Jordan's ruling is expected to determine whether The Seattle Times Co. may exit a business agreement binding it to the P-I since 1983.

The Times Co. says that the joint operating agreement, or JOA, is ruining it financially. Hearst Corp., which owns the P-I, says the JOA is necessary to keep its paper alive.

Under the JOA, The Times Co. performs key business tasks for the P-I in exchange for a larger share of the joint profits.

After three years of litigation, Hearst and The Times Co. agreed in March 2006 to move their fight into binding, confidential arbitration.

After opening statements, each side will call witnesses. To judge by the number of current and former newspaper employees who were preliminarily interviewed under oath between July and February, each side could call 50 or more witnesses.

In a case of this magnitude, it's reasonable to expect the witnesses will include top executives from both companies. Among them could be Hearst Chief Executive Victor Ganzi, Hearst Newspapers President George Irish and Seattle Times Co. Chief Executive Frank Blethen.

The proceedings, which will take place at the offices of Judicial Dispute Resolution in Seattle, are confidential and closed to the public. Some participants are subject to fines if they disclose what goes on there.

The claimant in an arbitration always goes first, so the P-I will open the proceedings. Each side will get two weeks to present its case. That time must be used wisely, because it's a fraction of the period they would have to present the same case in court.

Hearst is represented by Seattle's Corr Cronin Michelson Baumgardner & Preece LLP. The Times Co.'s law firm is Davis Wright Tremaine LLP of Seattle.

About 3.5 million pages of documents have been analyzed by lawyers on both sides, according to court filings. Typically, such documents are used to guide the questioning of witnesses, and to corroborate or impeach their statements.

After closing arguments, which may extend a day or two into the proceeding's fifth week, Jordan will have until June 7 to issue a ruling.

The ruling, which will be released to the public, must explain why and how the result was reached. It cannot be appealed.

The focus will be on the three times since April 2003 that The Times Co. has officially declared it experienced three consecutive years of financial losses under the JOA.

The agreement says any one such three-year period permits an owner to quit the agreement. But Hearst maintains the Times Co.'s losses weren't the type contemplated by the JOA.

Based on their earlier court filings, Hearst's lawyers are expected to focus on The Times Co.'s losses in the years that have the biggest JOA impact: 2000, 2002 and 2005.

Hearst will likely address:

· Whether The Times Co. has improperly spent money so as to manufacture the losses it invokes as a basis for exiting the JOA.

· Whether it has improperly allocated revenue and incurred expenses so as to create those losses.

· Whether it has promoted and circulated the two newspapers unequally, in violation of the JOA, so that its attempts to exit the JOA should be denied.

Hearst has agreed that if Jordan upholds even one of The Times Co.'s loss notices, it will shut down the P-I within six to 12 months after the ruling, unless for some reason Jordan halts the closure.

Earlier this year, the papers' owners offered to extend the earlier of those two deadlines by four months, so that the paper would instead have to close within 10 to 12 months. But the status of that offer, made to the citizens group The Committee for a Two-Newspaper Town, remains uncertain.

Before Hearst could shut down the P-I, it would first be required by antitrust law to put the paper up for sale. The intention of putting it on the market is to demonstrate that no one wants to buy it, so that its closure won't unnecessarily diminish competition.

Regardless of the outcome, Hearst has intimated in public filings that it may seek damages before the arbitrator for some of The Times Co.'s alleged improprieties. That would probably be done in separate proceedings.

If Jordan rules in favor of Hearst, The Times Co. would need losses in 2006, 2007 and 2008 to again try exiting the JOA. It wouldn't be able to issue another loss notice until the spring of 2009, under the JOA's terms.

Any subsequent loss notice would be reviewable by Jordan, as the arbitration agreement requires him to preside over any dispute between the owners through 2010.

On another front, The Committee for a Two-Newspaper Town has sued the papers' owners in an attempt to keep them both publishing. In a motion for summary judgment pending before King County Superior Court Judge Greg Canova, the committee is attacking a provision in the JOA giving Hearst the right to collect 32 percent of The Times newspaper's profits through 2083 even after closing the P-I.

In a hearing set to begin July 20, the committee will describe that provision as an economic incentive for Hearst to quit doing business, which reduces competition in violation of the Washington Constitution.

The committee could seek to invalidate the 1999 revision to the JOA, which let the Times move to morning publication. Faced with the possibility of having to move back to afternoon publication, "we think they'd (the Times) go back to the bargaining table pretty quickly," said CTNT attorney Kathy George.

George worked as a P-I reporter and editor before becoming an attorney.

If the Times Co.'s JOA losses continue beyond six consecutive years, it may be motivated to sell. If it does, Hearst has the legal right to buy the Times for whatever amount anyone offers. It bought the so-called right of first refusal through a side agreement to the JOA.

P-I reporter Dan Richman can be reached at 206-448-8032 or danrichman@seattlepi.com.