It’s rare to see a federal judge slap down two of the nation’s biggest media corporations, accuse them in effect of lying and declare that their intentions are illegal. That’s what Susan Illston did Nov. 28 in a ruling that barred Hearst Corporation and Dean Singleton’s Media News Group from combining sales and business operations in Northern California.
It’s a stunning legal document: The judge exposes in some detail the plans of the two big companies to collaborate with each other on sales and distribution, undermining any pretense that there will be real competition in the Bay Area daily newspaper market.
The ruling came as part of a lawsuit by real-estate investor Clint Reilly, who is doing as a citizen what the state and federal justice departments have refused to do. He’s challenging the right of Singleton and Hearst to create a regional daily paper monopoly.
Reilly sued to block Singleton  from buying the San Jose Mercury News, the Contra Costa Times, the Monterey Herald and some 30 other smaller papers, a move that would give the Denver media magnate a virtual monopoly on daily newspapers in the region. (Singleton already owns the Oakland Tribune and the Marin Independent Journal). Singleton’s lawyers argue that the deal isn’t actually eliminating competition, since the San Francisco Chronicle, owned by the Hearst Corporation, is still a major competitor. And in fact, in part of the basis of that argument, Illston rejected Reilly’s original attempts to put the deal on hold.
But there’s a strange aspect to the sale: Hearst put up $300 million to help finance the buyout, and in exchange was slated to get stock in some of Singleton’s properties outside of California. Reilly found that fishy, but at first, the judge disagreed.
But over the past few months, as Reilly’s lawyer, Joe Alioto, has sifted through a huge pile of discovery material, a key piece of evidence has come to light. It turns out that Hearst and Singleton quietly had a plan going to sell ads together and to combine their Bay Area distribution operations. In other words, the ostensible competitors were really going into business together.
“”The Hearst Corporation and Media News Group Inc. agree that they shall negotiate in good faith agreements to offer national advertising and internet sales for the San Francisco Bay Area newspapers on a joint basis,” an internal letter that Alioto uncovered states. The April 26, 2006 letter, from Hearst Senior Vice President James Asher to Joseph J. Ludovic IV, president of Media News, also states that the companies will work to “consolidate the San Francisco Bay Area distribution networks of such newspapers.”
That sort of arrangement is very similar to the joint operating agreements that were popular in the 1970s and 1980s. Under JOAs, two competing daily papers would combine their business functions while operating separate newsrooms. It was immensely profitable for the JOS publishers - and horrible for readers and advertisers. Without any ecnomic inventive to compete, the papers gave up on their duties as watchdogs of the public trust. The San Francisco Chronicle and Examiner operated under a JOA for many years.
The letter, Illson wrote, “casts doubt on the Court’s earlier finding that the San Francisco Chronicle is a strong source of competition for [Singleton’s] newspapers.” She added that the arrangements “appear inconsistent with the notion [cited by Hearst’s lawyers] that … Hearst ‘is specifically not going to be involved in [Singelton’s] Bay Area newspaper properties.’” That’s legalese for saying that the giant newspaper barons at the very least misled the court.
In fact, Illston states that she “is not wholly convinced that the arrangement now described by defendants would be legal.” The point: advertisers seeking to buy space in a Bay Area daily paper might wind up with having exactly one choice - the combined Singleton-Hearst operation - a situation that would violate antitrust laws.
“Such agreements, the mere existence of the letter, and the cooperation between Hearst and Media News they reflect, increase the likelihood that the transactions at issue here were anti-competitive and illegal,” Illson wrote.
In open court, Alioto argued that the Hearst-Singleton side deal was the lynchpin that made the entire complex purchase deal possible. That would mean that from the start, officials from Hearst and Singleton had agreed to join forced and end daily competition in the Bay Area.
Illston didn’t toss out the entire Singleton deal, ruling that if Reilly succeeds in proving the deal illegal, it can be undone later. But she did issue a restraining order blocking the parties from entering into any of the joint operations that were described in the April 26 letter.
The amazing thing about all of this is that it came to light only because Reilly was willing to put up his own money to take on the case. The U.S. Justice Department was happily allowing it to sail forward. California Attorney General Bill Lockyer had done nothing to toss even a pebble in the path of the merger steamroller. That’s not just terrible public policy - it’s embarrassing. With this new evidence now available, Lockyer and the feds should immediately go into court and join with Reilly to seek a permanent injunction against the entire deal and to force Singleton to divest some of his properties so that some semblance of competition will exist in the local daily newspaper market.
The ruling raises a troubling question: What’s in all of the other secret documents are out there? What other plots and plans were the newspaper owners hatching? We don’t know - because the publishers, who love to describe themselves as staunch supporters of open government, have demanded that every piece of paper in the case be kept under court seal. That’s wrong: The papers certainly can’t claim that competitive trade secrets are at issue, since they clearly had no intention of competing. So why the secrecy? Judge Illston should lift the seal and open all of the records in this case to the public.
PS: The mighty U.S. Justice Department can lock 24-year-old Josh Wolf in prison for standing up to his First Amendment rights, but can’t seem to lift a finger against big newspaper publishers. Lovely.