Federal judge bars MediaNews and Chronicle distribution pact

By Julia Cheever, Bay City News Service

November 29, 2006

SAN FRANCISCO (BCN) - A federal judge Tuesday temporarily barred the owner of 10 Bay Area newspapers and the proprietor of the San Francisco Chronicle from going ahead with plans to combine local distribution operations and national advertising sales.

U.S. District Judge Susan Illston said new evidence of agreements between MediaNews Group Inc. and Chronicle owner Hearst Corp. increases "the likelihood that the transactions at issue here were anticompetitive and illegal."

The judge wrote, "The court is not convinced that an agreement between the only two competitors in a market to share distribution networks does not raise serious competitive questions."

Illston issued the temporary restraining order in an antitrust lawsuit filed in July by San Francisco businessman Clint Reilly. A full trial on the case is slated to begin before Illston in San Francisco on April 30.

The temporary order will remain in effect until Illston decides at a Dec. 6 hearing whether to extend it into a preliminary injunction that would last until the trial.

But Illston turned down Reilly's bid for an additional temporary order blocking Denver based MediaNews from any further consolidation of operations of its Bay Area newspapers, including the San Jose Mercury News, Contra Costa Times and Oakland Tribune.

The judge wrote that the Mercury News and Contra Costa Times "continue to exist despite recent events" and that if Reilly wins the antitrust lawsuit, the two publications can be divested by MediaNews at a later date.

MediaNews acquired the Mercury News, Contra Costa Times and two other newspapers from Sacramento-based McClatchy Co. last summer in a complex $1 billion deal in which Hearst provided $263 million in financing. MediaNews already owned the Tribune and seven other Bay Area papers.

Reilly's lawsuit contends the deal will reduce competition in violation of federal antitrust laws and thereby decrease newspaper quality and choice for Bay Area residents.

The new evidence provided by Reilly's lawyers and cited by Illston includes an April 26, 2006, letter signed by Hearst Corp. Senior Vice President James Asher and MediaNews President Joseph Lodovic.

The two companies agree in the letter to negotiate pacts to offer national and Internet advertising sales for their Bay Area newspapers on a joint basis and to consolidate the papers' distribution networks.

Illston wrote, "The April 26 letter suggests, at the very least, that Hearst's investment was specifically tied to an agreement by MediaNews to limit its competition with Hearst in certain ways."

Reilly's attorney, Joseph M. Alioto, said the agreement "is the knot tying the whole transaction together" and explains why Hearst was willing to help a competitor with financing.

Alioto contended, "This was not simply a smoking gun. This was a picture of the bullet coming out of the nozzle."

Hearst Corp. spokesman Paul Luthringer said the New York-based company "declines comment."

A spokesman for MediaNews could not be reached for comment. MediaNews and Hearst attorneys argued before Illston that the agreements discussed in the letter had not yet been carried out, would not reduce competition and were not illegal.

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