Papers Agree to Pact on Collusion Allegations- New Times papers in antitrust settlement

New York Times ^ | 1-27-2003 | By DAVID CARR

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In a quiet end to a highly contested investigation, the Justice Department signed a consent decree on Saturday with New Times Media and Village Voice Media, two newsweekly chains that it had accused of dividing markets when they closed competing papers in Cleveland and Los Angeles last October, according to representatives of both companies.

The Justice Department is expected to file a complaint and a competitive impact statement today, along with the consent decree, they said.

There is no admission of guilt in the consent decree, but each company is required to aid the opening of new weekly papers in Los Angeles and Cleveland by selling assets, including the rights to the names of the closed newspapers — The Cleveland Free Times and The New Times Los Angeles — as well as lists of advertisers, office equipment and newspaper racks. Each company will pay a fine of $375,000 to the State of California and a much smaller amount to the State of Ohio.

The federal government, which has generally stood by as media companies of all types have consolidated, apparently decided that the swap of assets and the closing of so-called alternative newspapers was anticompetitive on its face and required an immediate remedy.

That has left alternative newsweeklies, which have generally chided government for its role in media consolidation, on the wrong end of an antitrust settlement. And an administration that has taken a very dim view of judicial activism is now in a position of having its Justice Department decide which parties are given assets from a settlement to open new newspapers.

Maurice E. Stucke, the lead federal prosecutor in the case, did not return calls for comment.

The consent decree states that the two newspaper companies "entered into agreements in violation of Section One of the Sherman Act."

The deal that led to the investigation — which also included lawyers from the attorney general offices of Ohio and California and the Los Angeles County district attorney — took place on Oct. 2. That is when New Times Media agreed to close The New Times Los Angeles, a six-year-old weekly that competed with Village Voice Media's L.A. Weekly. And at the same time, Village Voice Media agreed to shut down The Cleveland Free Times, which shared a market with New Times Media's Cleveland Scene.

New Times Media received $11 million from Village Voice Media for its Los Angeles newspaper, while Village Voice Media was paid $2 million for its Cleveland newspaper.

James Larkin, the chief executive of New Times Media, maintained that the companies had each paid fair market value for the assets they acquired. The Justice Department took a different view, one that eventually prevailed in the settlement, saying the transaction represented an allocation of markets.

Robert Pitofsky, former head of the trade commission, said before the settlement that the exchange of significant payments was an indication that each saw value in the other's being out of a geographic market.

"When two firms, regardless of what they sell, say, `You stay West and I'll stay East,' that is a cartel behavior and illegal," said Mr. Pitofsky, now a professor of law at Georgetown.

New Times officials said they were outraged at what they viewed as an unprecedented governmental intrusion into free speech. Mr. Larkin said he believed that the company should not have been punished for taking a risk in 1996 by opening up a paper to compete with The L.A. Weekly. Mr. Larkin said they had settled the case because it had brought business to a halt at the company, which operates 11 weekly papers in Southern and Western cities like Denver, Dallas and Phoenix.

"After 32 years in this business, we may have made a bad business decision by competing with such an established weekly in Los Angeles," Mr. Larkin said in a phone interview from Phoenix. "We have taken our lumps for that, but now Justice believes that after $20 million in losses in Los Angeles and Cleveland, that they should decide who gets our assets."

As part of the agreement, the two companies must divest those assets within 30 days to "an acquirer or acquirers acceptable to the United States in its sole discretion." If a sale is not made in 30 days, a trustee will be appointed to oversee a purchase.

In one of the many oddities in the case, each company will be allowed to keep the proceeds of the sale, effectively selling the assets twice. Because Justice Department officials believe that the closings created temporary monopolies, advertisers who signed contracts with the remaining paper in Cleveland or Los Angeles are no longer bound by them and must be mailed notices of the settlement.

Former employees of The Cleveland Free Times have expressed interest in restarting the paper, and in Los Angeles, the former mayor, Richard Riordan, has formed a group that expects to begin a weekly in June.

The agreement concludes a fast-paced investigation in which federal prosecutors questioned advertisers and employees of the newspapers in both cities in an effort to establish that the alternative weeklies constitute a discreet market. Mr. Larkin said that the two companies had executed the swap in the belief that many forms of media competed for the same dollar. He added that other newsweeklies had already announced that they would begin publishing to fill the void.

Village Voice Media declined to comment, beyond confirming that its lawyer had signed the consent decree on Saturday.

The case is a validation of the growing role of the alternative press in an era when many dailies now own monopolies in their respective markets. The Association of Alternative Newsweeklies has 116 member papers, which generate a half-billion dollars in sales. Through much of the 90's, both New Times Media and Village Voice Media acquired or started new properties in the belief that advertisers would be attracted to a unified media approach that would allow them to reach young people in markets all over the country. But a widespread retreat in tobacco advertising, combined with a more general pullback in advertising after the attacks of Sept. 11, made consolidation a less lucrative prospect.

Village Voice Media, which underwent a management-led buyout three years ago and is backed by Goldman, Sachs and Weiss, Peck & Greer, owns six newsweeklies, including its flagship in Manhattan. The company has experienced significant financial difficulties, especially with its Seattle Weekly newspaper, according to a former publishing executive there.

New Times Media, founded by Mr. Larkin and Michael Lacey, executive editor of the company, used bank debt and the cash flow of growing alternative weeklies to create a 13-paper chain with a combined circulation of 1.3 million, $100 million in revenues and over $15 million in earnings by 2001.

Losses in Los Angeles, and to a lesser degree in Cleveland, put the company in technical default with its lending agreements, the owners said, and they personally paid out over $3 million to maintain compliance. Bank lending for media properties was squeezed by the telecommunications fiasco in 2000, and the owners said that they were able to get new financing only on the condition that they close their Los Angeles paper, which had lost $17 million.

"These were failing businesses," Mr. Larkin said. "The way that it has been told, this was two fat cats getting together so they could get even fatter, but the fact of the matter is, we would not be here if we had not done this deal."

Richard Karpel, executive director of the association of newsweeklies, said the association had no position on the propriety of the deal but found it "odd that the government decided it must prevent two small newspapers from closing after it stood on the sidelines for years as the AOL Time Warners of the world swallowed entire industries."