The opinion of the court was delivered by: Walker, District Judge.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
In this private antitrust case, plaintiff challenges two
transactions involving the general circulation daily newspapers
in San Francisco. The publishers of the city's two major dailies
have reached an agreement pursuant to which Hearst Corporation,
publisher of the San Francisco Examiner, will acquire Chronicle
Publishing Corporation's San Francisco Chronicle. The antitrust
ramifications of this transaction and a companion deal involving
the future of the Examiner were the subject of a trial to the
court on May 1-5, 9-12 and 15. The court now makes its findings
of fact and draws conclusions of law.
Plaintiff Clint Reilly is a real estate investor, former
professional political campaign manager/consultant and
unsuccessful candidate for mayor of San Francisco in the 1999
municipal elections. Reilly is a subscriber to the San Francisco
Chronicle newspaper and a purchaser of single copies of the San
Francisco Examiner newspaper.
Defendant The Hearst Corporation (Hearst) is a New York
City-based media company engaged in newspaper, magazine and book
publishing, television broadcasting and ranching, among other
businesses. Hearst was founded in 1887 by William Randolph Hearst
and, through trusts, is owned by his descendants. Hearst is
publisher of the San Francisco Examiner newspaper.
Defendant The Chronicle Publishing Company (CPC) is a Nevada
corporation headquartered in San Francisco. At all relevant
times, CPC was publisher of the San Francisco Chronicle
newspaper, licensee of KRON-TV, a television station in San
Francisco affiliated with the NBC television network, and
operator of Bay TV, a cable television station. CPC also until
recently engaged in book publishing and owned newspapers in
Bloomington, IL, and Worcester, MA. CPC is owned by the
descendants of Michael H de Young who, along with his brother
Charles, founded the San Francisco Chronicle newspaper in 1865.
Plaintiff alleges that an August 6, 1999, contract by which
Hearst agreed to acquire from CPC assets associated with the
Chronicle newspaper constitutes an unreasonable restraint of
trade in violation of section 1 of the Sherman Act, 15 U.S.C. § 1,
an unlawful attempt and conspiracy to monopolize in violation of
section 2 of the Sherman Act, 15 U.S.C. § 2, and calls for an
acquisition of assets that will substantially lessen competition
or tend to create a monopoly in trade and commerce in violation
of section 7 of the Clayton Act, 15 U.S.C. § 18.
In a proposed amended complaint, plaintiff also attacks under
the same provisions of the antitrust laws a March 16, 2000,
contract by which Hearst agreed to transfer certain assets
associated with the Examiner newspaper and make payments to ExIn.
JURISDICTION AND PROCEEDINGS
This court has jurisdiction of an action arising under the
federal antitrust laws pursuant to 28 U.S.C. § 1331 and 1337 and
sections 4 and 16 of the Clayton Act, 15 U.S.C. § 15, 26.
Plaintiff filed this action on January 11, 2000, challenging
the August 6 contract and seeking injunctive relief under section
16 of the Clayton Act, 15 U.S.C. § 26. Because the March 16
transaction post-dated the initial complaint, plaintiff initially
sought to enjoin only CPC's sale of the Chronicle to Hearst. With
the development of the Hearst-ExIn transaction, all parties
consented to ExIn's intervention as a defendant.
On March 30, 2000, the court granted plaintiff's motion for a
temporary restraining order enjoining the transfer of assets
contemplated by the August 6 agreement between Hearst and CPC.
This order effectively enjoined the March 16 transaction,
performance of which is contingent upon completion of the August
6 transaction. In the wake of this ruling, the parties agreed to
extend the temporary restraining order and proceed immediately to
trial without a preliminary injunction hearing.
At the close of evidence, plaintiff moved to amend his
complaint to conform with the evidence presented at trial and the
court by this order grants that motion. Plaintiff's first amended
complaint contains factual allegations regarding Hearst's
transaction with ExIn and seeks to enjoin that transaction.
Plaintiff claims standing as a subscriber to the Chronicle and
single-copy purchaser of the Examiner and as a potential
purchaser of the Examiner assets that Hearst has agreed to
transfer to ExIn. Ordinarily, the issue of plaintiff's standing
to sue would have been litigated and decided in pretrial
proceedings. Because the parties decided to proceed immediately
to trial without the usual pretrial proceedings, this issue was
submitted as an issue for trial.
Standing under Article III of the United States Constitution
demands that the plaintiff have a sufficient interest in the
outcome of the controversy to ensure that the court will be
provided with a fair presentation of the issues. The Supreme
Court has identified three constitutional standing requirements.
A party seeking to invoke federal jurisdiction must demonstrate:
(1) injury to a legally protected interest; (2) a causal
relationship between the injury and the challenged conduct and
(3) a likelihood that the injury will be redressed by a favorable
decision. Northeastern Florida Contractors v. Jacksonville,
508 U.S. 656, 663, 113 S.Ct. 2297, 124 L.Ed.2d 586
In an action seeking relief under the antitrust laws in issue,
plaintiff faces the additional requirement of showing that the
actual or threatened injury to plaintiff also constitutes an
injury to competition. See, for example, Cargill, Inc. v.
Monfort of Colorado, Inc., 479 U.S. 104, 109-113, 107 S.Ct. 484,
93 L.Ed.2d 427 (1986).
Standing analysis in this case is informed, in part, by the
Newspaper Preservation Act (NPA), 15 U.S.C. § 1801-1804. The NPA
provides an antitrust exemption for an otherwise unlawful
combination or merger of two newspapers' business operations if
the market for newspaper circulation and advertising does not
provide sufficient revenue to support independent publication of
the newspapers. In that situation, the NPA permits two newspaper
firms to combine their business operations as long as they
continue to produce separate newspapers.
Although the NPA does not confer affirmative rights on
newspaper readers or advertisers or competing newspaper firms,
the Sherman Act and Clayton Act should be read bearing in mind
the legislative purposes that prompted enactment of the NPA;
namely, encouragement of multiple sources of newspaper news,
features and opinion. The NPA thus imports distinctly
non-economic considerations into the antitrust statutes, which
otherwise exclusively confine their scope to matters of economic
consequence. Under this statutory framework, the elimination of a
newspaper represents a cognizable injury to interests protected
by the antitrust laws, and this injury supplies a ground for
standing under Article III.
Plaintiff claims that the challenged transactions would
eliminate one of only two providers of daily newspaper news,
features and opinion in what plaintiff contends is the relevant
market. This position was more starkly apparent at the time
plaintiff filed his initial complaint, when Hearst's stated
intention was to cease production of the Examiner and no buyer
had come forward with plans to preserve a paper under that name.
The March 16 transaction purports to maintain the Examiner as an
independent source of newspaper news, features and opinion and
thus would appear facially consistent with the goals of the NPA
and, ironically enough, with plaintiff's purported objective in
maintaining this litigation. Plaintiff contends, however, that
the March 16 transaction is a sham, a fig leaf for conduct that
violates sections 1 and 2, and will merely postpone the ultimate
annihilation of an otherwise economically viable Examiner. These
claims, while novel, would appear to state a cognizable injury to
plaintiff as a consumer of newspaper news, features and opinion
and to competition in that market; if proved, such a claim would
entitle plaintiff to injunctive relief under section 16 of the
Clayton Act, 15 U.S.C. § 26.
It follows from the analysis above that plaintiff's standing is
limited; as a consumer of newspaper news, features and opinions,
he is entitled to attempt to prove that the challenged
transactions cause injury to competition for readers among
economically viable newspapers. Based on the markets in which
newspapers compete, there are two other possible bases for
standing to challenge the transactions at bar: alleged injury to
advertisers or to competing publishers. Plaintiff does not claim
standing as a purchaser of advertising in the newspapers
published by Hearst and CPC; the effect of the transactions at
bar on the market for advertising is not, therefore, an issue
that plaintiff has standing to raise. Plaintiff's failed attempt
to acquire the Examiner might afford him standing as a potential
publishing competitor, but, for reasons to be discussed
presently, plaintiff's claim in this regard fails at the outset
because of the anticompetitive nature of his offer to acquire the
Examiner. Because plaintiff's standing as a potential competitor
fails, he cannot challenge, among other things, provisions of the
joint operating agreement restricting the sale of a JOA
publication (such as the right of first refusal and 60-mile
ORIGINS OF HEARST-CPC PARTNERSHIP
In 1959, four general paid circulation newspapers were
published in San Francisco by three competing firms: CPC's
Chronicle was a daily morning and Sunday newspaper; Hearst
published a daily morning and Sunday newspaper, the Examiner, as
well a six-day afternoon newspaper, the Call-Bulletin;
Scripps-Howard published a six-day afternoon newspaper, the News.
In 1959, Hearst bought the News and re-titled its afternoon
offering the News-Call-Bulletin.
Between 1959 and 1964, Hearst and CPC competed vigorously for
circulation and advertising. Both firms suffered losses on their
San Francisco newspapers. Hearst underwrote these losses from its
other operations; CPC survived largely through the profits of
KRON-TV. By 1964, the Chronicle enjoyed an advantage in daily
circulation while the Examiner had a greater Sunday circulation.
On October 23, 1964, Hearst and CPC entered into a joint
operating agreement (JOA) which became effective in 1965. That
agreement formed the San Francisco Newspaper Agency (SFNA), a
corporation owned in equal shares by Hearst and CPC to which the
companies delegated responsibility for printing, distribution and
advertising sales of both papers and transferred assets
associated with those functions. SFNA immediately undertook a
reorganization of the companies' newspaper offerings. First, SFNA
ceased publication of the News-Call-Bulletin and shifted the
morning Examiner to the afternoon. Second, SFNA began producing a
combined Sunday newspaper, with the news portion published under
the Examiner masthead and employing Examiner features, while a
datebook and book review section and an opinion and commentary
section were published under the Chronicle masthead. The
non-Sunday Chronicle and Examiner remained separate editorial
products with all business operations under the direction of
Under the terms of the joint operating agreement, which persist
to the present, SFNA bears all costs of publication other than
those associated with creating editorial content and collects all
revenues generated by advertising sales and circulation. The
excess of revenue over expenses is then distributed equally
between Hearst and CPC, regardless of the costs and revenue
attributable to each newspaper in the joint operation.
The original term of the JOA was thirty years, with each party
entitled to one ten-year renewal for a maximum potential term of
fifty years. In 1995, Hearst exercised its renewal right,
extending the JOA until 2005. In 1997, CPC gave notice that it
would not extend the JOA beyond 2005, thereby ensuring its
termination in that year at the latest.
In entering the JOA, Hearst and CPC followed the lead of other
newspaper publishers in the United States who, beginning in the
years of the Great Depression, negotiated similar agreements
designed to achieve economies in the business operations of
previously competing newspapers while maintaining separate
editorial operations. One of the earliest such agreements was
negotiated in Tucson, AZ, between the publishers of the Tucson
Daily Citizen and the Arizona Daily Star.
In 1969, the United States Supreme Court affirmed a district
court decision holding that: (1) the Tucson joint operating
arrangement constituted a price fixing, profit pooling and market
allocation agreement illegal per se under section 1 of the
Sherman Act; (2) the agreement gave the newspapers monopoly power
and was in furtherance of a conspiracy to monopolize in violation
of section 2 of the Sherman Act; and (3) the acquisition of one
of the parties in 1965 pursuant to the terms of the joint
agreement was in violation of section 7 of the Celler-Kefauver
Act amendments to the Clayton Act. Citizen Publishing Co. v.
United States, 394 U.S. 131, 89 S.Ct. 927, 22 L.Ed.2d 148
(1969). This rendered the Hearst/CPC joint operating
agreement and other similar agreements in probable violation of
the antitrust laws.
The government challenge to the Tucson agreement prompted JOA
publishers — even before the Citizen Publishing decision — to
lobby Congress for protection. Enactment of the NPA in 1970
exempted the Hearst/CPC joint operating agreement from
Lobbying efforts saved existing JOAs from imminent legal
assault, but history suggests that the Hearst/CPC agreement was
not worth saving. The joint venture embodied in the JOA has over
time proved to be a problematic partnership, due to changing
trends in the newspaper business and disincentives to the parties
inherent in the structure of the agreement.
The performance of both papers, as measured by total
circulation figures, has been stagnant or worse. In 1964, the
overall combined daily and Sunday circulations of the Chronicle
and the Examiner were 652,845 daily, 766,580 Sunday; by 1990,
combined daily circulation had risen to 704,493, and Sunday
circulation had dropped to 711,819. But by 1998, the overall
combined daily and Sunday circulations had fallen to 597,042 and
605,354, respectively. Over the decade prior to trial,
circulation has declined dramatically: the daily Chronicle's
circulation has fallen 17.8 percent, the daily Examiner has seen
a 21.3 percent decline and circulation of the Sunday product is
down 17.7 percent.
Although consumer preferences and other market forces have made
daily newspaper growth difficult, the JOA itself bears some of
the blame for the poor performance of the venture. In particular,
its equal profit split diminishes the economic incentives of the
parties to devote the necessary resources to optimize readers'
acceptance of the two newspapers; for each dollar spent on
improving its newspaper, the JOA party reaps only fifty cents of
any resulting profit. The result, in the words of defendants'
expert, is that San Francisco has been "undernewspapered for some
The profit-sharing agreement has also contributed to profound
tension within the JOA. The JOA contemplates partners of
relatively equal strength, as the newspapers of Hearst and CPC
were at the JOA's inception. For a number of reasons, this
equilibrium has disappeared rather dramatically, as reflected by
the steady growth of daily circulation of the Chronicle relative
to the Examiner since inception of the JOA. In 1964, the
Chronicle's daily circulation was 351,489, as opposed to the
Examiner's daily circulation of 301,356. By 1998, daily
circulation of the Chronicle was 482,268, while the Examiner's
daily circulation had diminished to 114,774. Since 1998, the
circulation of the Examiner relative to the Chronicle has fallen
further. At the time of trial, the Chronicle's daily circulation
exceeds that of the Examiner by better than 4:1.
An important factor accounting for the Chronicle's relative
growth is that paper's position in the morning publication cycle.
Due to heavier daytime road traffic, a morning newspaper
distributed at night or in the early morning hours enjoys greater
flexibility and ease in making home deliveries in a large urban
region such as the San Francisco Bay area. Morning newspapers are
also better geared to lifestyle, work and commuting patterns
predominant in urban areas than evening newspapers and are less
affected than evening newspapers by competition from television
news. As a consequence, evening newspapers have largely
disappeared from most of the nation's major urban centers.
In 1993, CPC hired as chief executive officer John B Sias, the
first non-de Young family member to run the company. Sias had
extensive prior experience in the media business.
In the years 1995 to 1999, representatives of Hearst and CPC
had intermittent discussions and exchanges of correspondence
about the impending termination of the JOA. Sias and his
counterpart at Hearst, Frank A Bennack Jr, exchanged much of that
correspondence. Hearst and CPC representatives discussed several
possibilities, including the option of closing the Examiner and
giving Hearst a percentage participation in the Chronicle's
By October 1997, Sias had informed Bennack that CPC would not
exercise its right to extend the JOA and that the JOA would,
therefore, expire in 2005. The JOA provides that at the end of
the term of the agreement, Hearst and CPC will cooperate in
dissolving SFNA to enable both companies to engage in publishing
their respective newspapers separately.
But Sias and Bennack regarded the prospect of separate
publication and head-to-head competition after termination of the
JOA as hopelessly unrealistic. The economics of the newspaper
industry have made it virtually impossible for more than one
general circulation daily newspaper to survive in competition in
the same city. When one newspaper rises to a certain dominance in
a geographic area, advertisers are able to reach their intended
audiences with placements in one newspaper rather than two or
more; to cut advertising costs, advertisers have tended to
eliminate advertising in the smaller general circulation papers.
Since lower circulation rates lead to fewer advertisements, and
fewer advertisements make a newspaper less attractive to readers
who value the information advertisements provide, declines ...