Editors note: To celebrate Crosscut's 10th anniversary as a local news organization, so we are featuring the stories from April 1, 2007 on our homepage.
A potential bombshell is buried in 3.5 million pages of documents and testimony collected for a winner-take-all arbitration between Seattle's two daily newspapers. In a deposition, a former Seattle Times Co. executive claims that Times officials in the mid-1990s secretly violated their joint operating agreement (JOA) with Hearst Corp., owner of the Seattle Post-Intelligencer, using unfairly lopsided circulation spending to keep the Seattle Times' circulation lead over the P-I. Times executives then tricked Hearst into giving up their paper's exclusivity in the morning, the former executive claims.
Since the joint operation began 1983, the P-I had been the morning paper and the bigger Times had the less-desirable afternoon publishing cycle. Today, of course, both are morning papers and the P-I is in a circulation death spiral. The 122-page deposition by former Seattle Times Co. Vice President Stephen Sparks was given under oath to federal and state antitrust investigators in 2004.
Sparks headed circulation for both the Times and the P-I under the JOA from 1993 to 1997. Speaking with Hearst attorneys under oath last November, he repeated the allegations. A copy of Sparks's earlier federal deposition was obtained by Crosscut. Sparks' depositions are likely to be among the key documents under consideration when arbitrator Larry Jordan begins hearing the case behind closed doors on April 9. (Update 4/6/2007: The proceeding has been postponed until April 16.) The retired Superior Court judge is expected to issue a non-appealable ruling on the Times-P-I dispute by the end of May.
People familiar with the proceedings say both sides have mobilized double-digit teams of attorneys and investigators and are preparing to present Jordan with a massive case. Without elaboration, the Times Co. categorically denies Sparks' allegations, pointing out that the U.S. Justice Department took no action after it learned of his claims. The Justice Department ended an investigation of the Seattle JOA in May 2005, saying no antitrust laws were broken. But it did not comment on the JOA contract between the Times Co. and Hearst that is now the subject of the arbitration. Both the Times Co. and Hearst have agreed not to disclose any details at issue in the proceedings.
The JOA, which was signed in 1981 and implemented in 1983, is essentially a legal monopoly allowed by the Newspaper Preservation Act of 1970 and was approved by the U.S. Justice Department. The privately held and locally controlled Times and Hearst's P-I maintain separate newsrooms and compete for readers. But the Times gets a greater share of profit and handles the business side — selling advertising and printing, circulating, and marketing both papers. The agreement says the Times Co. "will use its best efforts, using the same degree of diligence" to promote and circulate both papers.
The Times Co. has been trying since 2003 to shut down the P-I, claiming that the fading circulation of its smaller partner and editorial rival is a financial burden on The Seattle Times. In 2003, it invoked a JOA provision requiring Hearst to negotiate an end to the agreement and close the P-I if the Times Co. could prove three consecutive years of losses under the JOA. Hearst disputed the Times' loss claims and sued in King County Superior Court to block the P-I's closure. Pretrial disputes dragged on until last year, when both parties agreed to a confidential, secret, binding arbitration. In addition to asking arbitrator Jordan to reject the Times loss claims, Hearst is expected to ask Jordan to rule separately on a claim that the Times favored itself under the JOA, costing the P-I millions of dollars in unrealized revenue.
In his deposition, Sparks told the antitrust investigators that under his circulation management during the 1990s, the Times spent as much as 70 percent of JOA money, which was allocated for both papers' new-subscription efforts, on maintaining the flagging circulation of the Times. He said the Times was struggling to maintain its circulation lead over the P-I. While P-I executives voiced concerns about circulation problems in monthly meetings with Sparks and other Times Co. officials, Sparks said, Times officials were under orders not to provide budget specifics that would have disclosed skewed circulation spending.
"The mandate" from Times Publisher Frank Blethen "was that the Times would maintain its dominant position," Sparks told the investigators.
Although the original JOA gave the Times Co. responsibility for the business operations of both papers and the Times was granted a dominant presence in a joint Sunday edition, the P-I got the more desirable morning publication slot on weekdays. The Times was forever stuck in the afternoon, and by 1996 it was clear the afternoon newspaper market was dying. Times internal projections showed it would eventually fall behind the P-I.
So, Sparks said, senior Times Co. officials concocted an elaborate plan to pressure Hearst to amend the JOA and let the Times switch to mornings alongside the P-I — the arrangement today. The plan, which Sparks' deposition calls "a ruse," involved convincing Hearst that unless it let the Times publish in the morning, the Times Co. would build a second, $150 million printing plant on land it owned in the suburb of Renton. Such a plant would make it easier to distribute the afternoon paper during daytime traffic congestion.
Under JOA rules, Hearst would then be assessed millions of dollars annually for a facility it didn't want or need. But, Sparks said, Mason Sizemore, then president of the Times Co., told him, "We really weren't going to build that plant." Sparks' deposition quotes Sizemore as saying further: "We are going to go through the process of making sure the public knows, making sure that Hearst knows, making sure the world knows basically that we are going to build a plant in the southern end of this market."
Sparks told the antitrust investigators that the story made little practical sense to him. Traffic on Interstate 405, which passes the Renton property, was a certainly a nuisance, he said, but the Times' circulation problems in the south suburbs were mainly due to an antiquated subscription system and entrenched competition from the Tacoma News Tribune. Spending $150 million or more on a new plant in Renton, Sparks said, would not have produced significant circulation gains in the area.
According to Sparks, a handful of top Times Co. officials, including Blethen, Sizemore, current Times President Carolyn Kelly, and the paper's then-executive editor, Michael Fancher, who is now editor-at-large, discussed plans to spread the bogus story, both in the Times and elsewhere. Times archives show that stories appeared in the paper in March and May of 1996 mentioning plans by the Times Co. to possibly build a printing plant at the Renton site. Court documents in Hearst's JOA lawsuit contain a copy of an internal Hearst memo titled "Seattle Strategic Alternatives," outlining the Times plan for the plant and the offer to drop it if the Times was allowed into the morning publication cycle.
In 1999, Hearst did agree to amend the JOA and allow the Times to go head-to-head against the P-I in the morning, among other changes. Almost immediately, the P-I's circulation began to plummet. Since 2000, the P-I's daily circulation has dropped 32 percent to 126,225. Times circulation, meanwhile, fell 2 percent to 212,691. A Times story the following month said the Times was dropping plans for the Renton plant. The story quotes Sizemore as saying: "There seems to be no need to build another printing plant, but we will retain the property for investment." The Times Co. sold the Renton property to a California investment group in 2003 for $9.5 million.
While the 1999 JOA amendments gave Hearst a slightly larger share of JOA profit (though still less than the Times Co.), the gain was offset by administrative changes. The full explanation for Hearst's decision to give up the P-I's sole possession of the morning newspaper market — a move that saved the Times and likely doomed the P-I — has remained a mystery.
Today, the Times Co. denies Sparks' claims. Wrote spokesperson Jill Mackie, in an e-mail to Crosscut: "The Seattle Times Company has consistently conducted all operations in accordance with the Joint Operating agreement and has met all of its contractual responsibilities under it. We take issue with any assertions to the contrary, including the circulation and other issues you have raised. These allegations were old and were known and examined by the Department of Justice, which saw no reason to act on them.
"The confidentiality provision of the arbitration agreement prohibits us from commenting on specifics related to the arbitration."
Sizemore, who was questioned under oath by both Justice Department investigators and Hearst's lawyers, declined to comment on the Sparks allegations. "I'm sure Sparks gave his version of what happened," Sizemore said in a brief telephone conversation about the deposition. "I'm not going to talk about it. It's ancient history." Sparks now works for billionaire Philip Anschutz's Denver-based Clarity Media Group, which publishes free papers in Baltimore, Washington, D.C., and San Francisco. He declined to comment for this article. Attorneys for the Times Co., the P-I, and the Justice Department also refused to comment.
Sparks' deposition says it was widely understood among Times Co. executives that while both JOA papers' circulation efforts were supposed to be treated evenhandedly under the agreement, Blethen expected the Times to remain the larger paper. Sparks told investigators that he understood that falling behind the P-I "would create potential problems for Frank Blethen to deal with his family and ... problems with our employees who would think the ship was sinking."
The Blethens, who have owned the Times since 1896, control 50.5 percent of Times Co. voting stock through Blethen Corp., a tightly controlled family holding company. McClatchy Co. of Sacramento holds the other 49.5 percent of voting stock – a stake it acquired when it bought most of the Knight Ridder newspaper chain. The Times Co. also publishes the Yakima Herald-Republic and the Walla Walla Union-Bulletin in Washington and three daily papers in Maine. Within days after Sparks was hired, his deposition says, a senior Times executive told him, "when I got my payroll check it would say Seattle Times on it and it wouldn't say Post-Intelligencer, and that I should always remember that." At least one other former Times Co. official has also told Hearst attorneys under oath that the Times favored itself in the JOA's marketing efforts during the 1990s. Among the examples cited by the former executive were Times Co. decisions to remove the P-I's identification from the trucks that delivered the papers, favoritism toward the Times at event promotions, and the diversion of revenue to the Times from Times Co. subsidiaries such as Rotary Offset Press and outside magazine deliveries.
"They were not treated evenly," the former executive said in a recent interview with Crosscut. The former executive requested anonymity because a relative still works for the Times Co.
If accurate, Sparks' allegations could prove troublesome for the Times, said Kathy George, an attorney for the Committee for a Two-Newspaper Town. The Committee has challenged the validity of the JOA and is an intervener in the Hearst Superior Court lawsuit but was barred from taking part in the arbitration proceedings. George, who is a former P-I reporter, said the allegations by Sparks and the other former Times Co. executive raise questions about whether the JOA is still a valid contract.
"I would think Hearst could argue that sort of behavior supports a bad-faith claim," said George. "When one party breaches a contract duty that can relieve the other contract party of performing its obligations." While both the Times Co. and Hearst have agreed not to contest Jordan's ruling, the long-running dispute between the two may not end with Jordan's May 31 decision. Under the arbitration rules, Jordan will have to make a second binding decision regarding Hearst's claim that Times Co. management of the joint operation cost the P-I millions of dollars. This damage ruling will likely be made after the May 31 deadline.
The Committee for a Two-Newspaper Town also has a pending claim questioning the validity of the 1999 amendments to the JOA. The committee argues the JOA amendments are anti-competitive under Washington law and should be invalidated. King County Superior Court Judge Greg Canova is scheduled to take up the committee's challenge on June 29. If he upholds the challenge, the 1999 amendments could be rolled back, leaving Jordan's arbitration results moot because they will have been based on the amended JOA, according to legal experts. Under that scenario, the Times Co. and Hearst would have to renegotiate the original 1981 JOA, which limited the Times to afternoon publication and gave the P-I the sole morning publishing slot.
Copyright © 2007 by Crosscut