Hearst Communications v. Seattle Times Co.

• Decision Date: 30 June 2005
• Docket Number: No. 75400-4.,75400-4.
• Citation: 154 Wn.2d 493,115 P.3d 262
• Parties: HEARST COMMUNICATIONS, INC., a Delaware corporation, and Texas Newspaper, Inc., a Delaware corporation, as General Partners of the Hearst Newspapers Partnership, L.P., owner of the Seattle Post-Intelligencer, Petitioner, v. SEATTLE TIMES CO., a Delaware corporation, Respondent, and Committee for a Two-Newspaper Town, an unincorporated association, Intervenor.
• Court: Washington Supreme Court

Page 262

115 P.3d 262

154 Wn.2d 493

HEARST COMMUNICATIONS, INC., a Delaware corporation, and Texas Newspaper, Inc., a Delaware corporation, as General Partners of the Hearst Newspapers Partnership, L.P., owner of the Seattle Post-Intelligencer, Petitioner, v. SEATTLE TIMES CO., a Delaware corporation, Respondent, and Committee for a Two-Newspaper Town, an unincorporated association, Intervenor.

No. 75400-4.

Supreme Court of Washington, En Banc.

Argued February 15, 2005.

Decided June 30, 2005.

Dmitri L. Iglitzin, Schwerin Campbell Barnard LLP, Kelly Patrick Corr, Guy Paul Michelson, Kelsey Linn Joyce, Corr Cronin LLP, Seattle, for Petitioner.

Marvin Lee Gray, Stephen Michael Rummage, Douglas C. Ross, Seattle, for Respondent.

CHAMBERS, J.

¶ 1 We are asked to interpret the Joint Operating Agreement between the two daily metropolitan newspapers serving the greater Seattle area. We are told that our decision could lead to the closing of one of these newspapers. The advantages of having two great newspapers in our state's largest city, each with an independent editorial and reportorial voice, are numerous and we do not address our task lightly. Our duty, however, is to interpret and apply the law.

¶ 2 The law of contracts is the same whether the parties are two publishing giants fighting for market control or two individuals disputing the cost of appliance repair work. In the dispute between Hearst Communications, Inc. (Hearst), which owns the Seattle Post-Intelligencer (Seattle P-I), and the Seattle Times Co. (Times), which owns The Seattle Times (Seattle Times), we are asked to interpret two clauses of their Joint Operating Agreement (JOA). We conclude that the written contract between the parties is subject to only one reasonable interpretation. Losses resulting from the 2000-2001 strike by the Newspaper Guild and the Teamsters Union are included in "agency expenses" and may properly be used to calculate "agency revenues" for application of the "loss operations" clause. We therefore agree with and affirm the well-reasoned opinion of the Court of Appeals.

HISTORY OF JOINT OPERATING AGREEMENTS

¶ 3 This is the not uncommon story of the struggle of two newspapers in one town. In many cases, two newspapers have survived in one town by sharing expenses under what is called a JOA. As with any two-newspapers-in-one-town story, the history of JOAs is a good place to start. A JOA is a government-sanctioned contract that allows competing newspaper companies to combine some operations and share profits while distributing separate newspapers.

¶ 4 Beginning during the Great Depression, some newspaper publishers negotiated agreements with local competitors to reduce production costs by combining operating expenses, while maintaining separate and independent reportorial and editorial operations. See Comm. for an Indep. P-I v. Hearst Corp., 704 F.2d 467, 473 (9th Cir.1983). In Citizen Publishing Co., the United States Supreme Court held that such arrangements constituted illegal price-fixing and conspiracy to monopolize in violation of the Sherman Act (15 U.S.C. 1-7) and the Clayton Act (15 U.S.C. 12-27). Citizen Publg Co. v. United States, 394 U.S. 131, 89 S.Ct. 927, 22 L.Ed.2d 148 (1969). In response, Congress enacted the Newspaper Preservation Act, 15 U.S.C. §§ 1801-1804.¹ The Newspaper Preservation Act creates a process by which parties to a JOA can gain limited antitrust immunity. Id. JOAs require the prior written approval of the Attorney General of the United States. 15 U.S.C. 1803(b).

HISTORY OF THE TIMES-HEARST JOINT OPERATING AGREEMENT

¶ 5 Founded in the 1890s, the Seattle Times and the Seattle P-I have been the only metropolitan daily newspapers in Seattle for some time. Comm. for an Indep. P-I, 704 F.2d at 469-70. By the late 1960s, however, the Seattle P-I began losing ground to the Seattle Times in terms of circulation and advertising revenue. Id. In 1981, owners of the two papers entered into a JOA to share certain expenses and revenues. Id. at 469-70.

¶ 6 In 1982, the United States Attorney General approved the JOA pursuant to the Newspaper Protection Act. See Comm. for an Indep. P-I, 704 F.2d at 471.² The attorney general's approval was predicated on a finding that one of the newspapers was a "failing newspaper." 15 U.S.C. § 1803(b). The attorney general found that the Seattle P-I was such a newspaper and approved the JOA, a decision that was upheld in federal court. Comm. for an Indep. P-I, 704 F.2d at 473-74.

¶ 7 Pursuant to the terms of the 1981 JOA, the Times was required to provide the newsprint, presses, and labor and to print, sell, and distribute both newspapers. The two newspapers were to maintain independent news and editorial departments, however, and remain separately owned and managed. The Times and Hearst shared the total operating revenues and expenses, minus news and editorial expenses, of both papers in a ratio of 66 percent to 34 percent respectively.

¶ 8 In 1999, the parties amended the JOA.³ The amendments allowed the Seattle Times to move from an afternoon publication to a morning publication, and compete head to head against the morning Seattle P-I. Compare Clerk's Papers (CP) at 34 (1981 JOA § 4.1) with CP at 88 (1999 JOA § 3.1). In exchange for this concession on the part of Hearst, the Times agreed to change the revenue-sharing formula in Hearst's favor. Compare CP at 38-39 (1981 JOA § 5.1) with CP at 92 (1999 JOA § 4.1). Under the 1999 JOA, the Times and Hearst share the combined revenues and expenses of the two newspapers, except for news and editorial expenses, in a 60-40 ratio respectively. Under this revenue-sharing plan, each newspaper receives its share of the remainder of the combined revenues minus expenses in that same ratio. That remainder is then used by each newspaper to pay its own news and editorial expenses. The fixed ratio applies regardless of whether the newspapers are generating revenue in the same 60-40 ratio. These revenues and expenses are respectively referred to as "agency revenues" and "agency expenses." The excess of agency revenues over agency expenses is referred to as the "agency remainder." This is the amount distributed to each newspaper, in the 60-40 ratio, for the purposes of paying the news and editorial expenses of each newspaper.

¶ 9 The JOA contains a "loss operation" clause.⁴ That clause permits either party to terminate the agreement after three consecutive years of operation losses. The loss operation clause may be invoked when the agency remainder is insufficient to pay a partys own news and editorial expenses. A party invokes the loss operation clause by issuing a "loss notice," stating its intent to establish the "Newspaper Cessation Date ... at the earliest possible opportunity." CP at 102. The parties must then cooperate to bring about the cessation date but, if unable to do so, the agreement automatically terminates 18 months after the loss notice.⁵ The JOA also contains a "force majeure" clause, which provides that neither party shall be liable to the other for any failure of performance resulting from force majeure events, such as acts of war or labor strikes.

¶ 10 Between 1981 and 2000, the story of Seattle as a two-newspaper town was a seemingly happy one. Whether the ending will be as happy is yet to be seen. Beginning in November 2000, the Newspaper Guild and the Teamsters Union went on strike. The strike affected both papers, causing significant increases in expenses and decreases in revenues. As a result, the Times was unable to cover its news and editorial expenses in both 2000 and 2001. The Times was also unable to cover its expenses in 2002, though the loss in that year was not attributable to the strike.

PROCEDURAL HISTORY

¶ 11 Hearst filed a lawsuit in 2003, alleging that the Times had breached its fiduciary duties under the JOA by unnecessarily incurring losses for the purpose of creating a third consecutive year of losses so that it could invoke the loss operations clause.⁶ Additionally, Hearst sought a judgment declaring that the Times could not invoke the loss operations clause because its losses in the three preceding years were the result of force majeure events, including the strike, the September 11, 2001, terrorist attacks, and the ensuing economic recession of 2002. CP at 9-11. The following day, the Times issued the loss notice required under the loss operations clause. Following a discovery period, the parties filed cross motions for partial summary judgment on the question of whether the force majeure clause prevented the Times from issuing a loss notice given the Times' acknowledgement that, but for the strikes, it would not have incurred a loss in 2000. The Committee for a Two-Newspaper Town intervened on the side of Hearst, arguing that public policy supported construing the contract so as to prevent the termination of the JOA.

¶ 12 The Times and Hearst each submitted extrinsic evidence regarding the negotiation of the JOA and the parties' conduct under the agreement. This evidence included the overall purpose of the contract as evidenced by the language in the preamble and in the Newspaper Preservation Act. See CP at 83-84; 15 U.S.C. § 1801. Other evidence was submitted to demonstrate the circumstances surrounding the formation of the contract, including letters from executives at the Times to Hearst indicating the Times' reasons for including the loss operations clause. Hearst submitted evidence of the Times' postformation conduct. Finally, Hearst presented the testimony of a Hearst executive who testified that the reason Hearst did not more vehemently object to the inclusion of the loss operations clause is that Hearst believed it was already protected under that clause for losses caused by force majeure events.

¶ 13 The trial court granted summary judgment in favor of Hearst, ruling that the force majeure clause precluded the Times' issuance of a loss notice based on strike losses. The...