With The Hearst Corp.'s lawsuit against The Seattle Times Co. back in King County Superior Court, the long-running dispute enters the next...

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With The Hearst Corp.’s lawsuit against The Seattle Times Co. back in King County Superior Court, the long-running dispute enters the next phase, one that could be even more contentious and drawn out than the opening round.

Hearst, owner of the Seattle Post-Intelligencer, says it has no intention of backing down from the lawsuit it filed in April 2003, despite losing a key decision in the state Supreme Court in June.

The Times has declined comment on its plans, and it has not shown any signs of dropping its end of the battle, either. But company officials have acknowledged the dispute has been costly.

The Times says its joint-operating agreement (JOA) with Hearst is a financial drain, and it is seeking to end the agreement, shut the P-I or both. Under the joint agreement, it can do that after three years of JOA-related losses, which it says it had from 2000 through 2002.

Hearst disputes the loss claims and is seeking to block The Times. The Supreme Court ruled for The Times on the 2000 and 2001 loss claims. The lawsuit now moves back to the lower court to take up the 2002 claim.

Attorneys familiar with the case said Hearst is expected to amend its lawsuit, providing hints at the New York-based media company’s strategy.

As the case reaches this latest crossroad, The Times has a couple of options, neither of which holds much appeal: It can wade into another protracted and expensive round in court, or it can drop, for now, its campaign to end or modify the 22-year-old joint-operating agreement.

The choices come at a time Seattle’s larger daily, like many big-city papers, is struggling financially, despite a solid rebound in the local economy. Advertising revenue grew less than 1 percent during the first six months of this year over the same period last year. Classified ads, the paper’s financial bulwark, shrank 5.3 percent during the same period.

“While there are certainly signs of recovery in the Seattle market,” Carolyn Kelly, Times Co. president and chief operating officer, wrote in a staff memo last month, “it is not translating into the significant return of traditional ad dollars.”

Meanwhile, said Kelly, the court fight with Hearst has been “incredibly draining.”

While The Times hasn’t formally backed off its initial stance that it cannot continue to live with the JOA, company officials have shifted their emphasis.

Before the legal battle launched, Times Publisher Frank Blethen said Seattle could no longer support two papers. And if the city was to have one paper, Blethen said he was determined to make it The Times.

Position softens

Times officials have since softened that position. Blethen and others have called on Hearst to give The Times a bigger share of the agreement’s revenue split to make the JOA work better financially for the company.

Under the JOA, The Times and P-I pool ad and circulation revenue and split them 60-40, respectively, after The Times is paid for printing, distributing and marketing both papers. Each paper operates its own news and editorial staffs.

Hearst has not shown any interest lately in changing the P-I’s share of the JOA pot.

So far, Times and Hearst attorneys have talked only about administrative details since the state Supreme Court ruled 9-0 for The Times on June 30.

Times officials cheered the decision, which ended more than two years of legal wrangling and centered mainly on interpreting the JOA’s contract language covering the 2000 and 2001 losses.

But the fight over the $2.7 million The Times said it lost in 2002 under the JOA could take even longer, industry experts say.

To make its case, Hearst will have to convince the court The Times spent itself into a loss by running up newsroom expenses, and that those costs were out of line with the rest of the newspaper industry.

What’s “unreasonable”?

Hearst’s original complaint challenged what it called “unreasonable and unnecessary” expense claims by The Times for 2002. But the complaint does not define an “unreasonable” news expense. Some industry experts say Hearst will have a tough time doing that.

“It’s hard to say there was excessive coverage of the news” by a newspaper, says former Detroit News editor Bob Giles, who now heads the Nieman Foundation for Journalism at Harvard.

Hearst, for example, cites The Times’ decision to hire at least 63 full-time and part-time staffers in 2002, a year when many papers were freezing or cutting their news staffs. Those new hires cost the paper millions in unneeded expenses, it says.

But Times officials say the hiring made up for staff lost after a bitter 49-day strike that straddled the previous two years. The new hires did not bring The Times back up to its pre-strike staff level, they say.

Hearst also complains that in 2002 The Times increased its “news hole” — the space papers devote to news as opposed to advertising. That move cost The Times an extra $480,000 at a time other papers were cutting their news hole, Hearst says.

The Times says the extra news coverage was needed to regain readers lost to the strike.

Without such expenses, Hearst says, 2002 would have been a profitable year for The Times.

Comparison possible

Comparing one paper’s spending against the industry norm can be done, says University of North Carolina journalism professor Philip Meyer.

But Meyer, who has written several books on newsroom economics, says he can’t recall a case in which a court was asked to decide whether a newspaper’s spending was reasonable.

In “The Vanishing Newspaper: Saving Journalism in the Information Age,” published last year, Meyer cited industry sources saying that a typical paper with a circulation of 100,000 spends 11.4 percent of its revenue on news and editorial functions.

The Times’ daily circulation in the latest reporting period was 233,268. The Sunday paper, which is produced principally by The Times, is 457,010.

Neither The Times nor the P-I, whose daily circulation for the reporting period was 144,836, will comment on their newsroom spending.

Meyer said newspapers can improve their quality, and gain readers and income, by spending more on news than the industry norm. “But beyond a certain point,” he adds, “hiring more reporters to cover city hall isn’t going to help.”

Reasonable spending, said Meyer, depends on the publisher’s view of the business.

“Either a publisher should spend more than others to try to hold on to readers,” he says. “Or they should spend less because they believe this is a dying industry and they should milk it.”

Impact on loss claims

If Hearst challenges The Times’ 2002 spending and wins, The Times’ claims to three consecutive money-losing years would no longer be valid. The JOA would remain in effect.

If The Times wins, Hearst would have 12 months to negotiate a shutdown of the P-I or decide to publish the paper on its own, outside the JOA, which Hearst says it can’t do. (Six of the 18 months that the JOA contract stipulates for the shutdown negotiations have already been used up.)

Under the agreement, if a shutdown occurs, Hearst would get 32 percent of The Times’ profit until 2083.

Whatever happens, dragging out the legal fight will cost The Times money it says it can’t afford.

And under an agreement by the newspapers’ attorneys last year, the clock governing the showdown cannot restart until all the court proceedings are finished.

One key element in the struggle, say attorneys involved in the case, is who will seize the legal initiative.

Fiduciary duty

In its lawsuit, Hearst contends The Times breached its fiduciary duty under the JOA and damaged the P-I by allegedly overspending on news.

For example, by boosting the size of both papers’ news hole in 2002 and charging the $800,000 cost to the JOA, Hearst says Times officials not only helped create a loss in their own newsroom, but cost the P-I some $320,000 in lost revenue.

The decision to increase the news hole for both papers was made “over the express objections of the P-I,” Hearst’s complaint says.

In addition, the complaint says that in mid-2002 The Times increased marketing, promotional and other expenses for the entire JOA. The move “significantly increased JOA operating expenses for the year,” it says.

During the first round of litigation, that specific complaint was set aside by Superior Court Judge Greg Canova for future consideration.

A lawyer involved in the case said Hearst’s pursuit of this damage claim, if allowed by Canova, would open a separate fight in the lawsuit — one that doesn’t directly involve the loss claims.

Instead, it would center on whether The Times was fulfilling its obligations under the contract.

Taking this path would allow Hearst to keep pressing its lawsuit, even if The Times elects not to pursue its loss claims for now, the lawyer said.

New fight

Meanwhile, The Times could initiate its own new fight if it is unsuccessful in claiming its 2002 loss. Under this scenario, it could file a new three-year-loss claim for 2003 through 2005 — if, under the JOA formula, 2005 is a money-losing year.

Another unknown starting to loom over the JOA fight is its impact on labor talks when the contract between The Times, the P-I and the Pacific Northwest Newspaper Guild expires next July 21.

Traditionally, the papers and the union begin informal talks several months before the contract expires.

“With all the bad blood in the JOA, we were curious whether this time they would be joined at the hip as they have in the past,” said Liz Brown, the union’s administrative officer.

Brown said she recently asked both papers if they would negotiate jointly this time.

“They said they had no plans to do anything different,” she said, “but they’d let us know if they change their minds.”

P-I Publisher Roger Oglesby said his paper hadn’t decided how the labor negotiations would be conducted if the two papers were still fighting.

“Based on what we know now, I don’t see that we would approach negotiations any differently than in the past,” he said.

A Times spokeswoman said the paper would not comment.

Bill Richards is a freelance writer hired on a special contract by The Seattle Times to cover events involving the joint-operating agreement with the Seattle Post-Intelligencer. He can be reached at brichards@seattletimes.com.