ALIOTO LAW FIRM
Joseph M. Alioto
Angelina Alioto-Grace, Pro Hac Vice
One Embarcadero Center, Suite 4000
San Francisco, CA  94111-3607
Telephone:  415-434-8900
Facsimile:  415-434-9200

SHULMAN, WALCOTT & SHULMAN, P.A.
Daniel R. Shulman, Pro Hac Vice
James Hilbert, Pro Hac Vice
121 West Franklin Avenue
Minneapolis, MN  55404
Telephone:  612-871-2909
Facsimile:  612-871-2939

Attorneys for Plaintiff Clinton Reilly

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA

CLINTON REILLY,
                                                 Plaintiff,
v.
THE HEARST CORPORATION and THE CHRONICLE PUBLISHING COMPANY,
                                                 Defendants.	COURT FILE NO. C 00 0119 VRW

PLAINTIFF’S TRIAL BRIEF	

TABLE OF CONTENTS
Page

Table of Authorities	iii

I.    INTRODUCTION	1

II.   PLAINTIFF’S TRIAL EVIDENCE	1

A.  THE PARTIES	1

B.  THE RELEVANT MARKET.	2

C.  THE JOINT OPERATING AGREEMENT	2

D.  COMPETITION UNDER THE JOA	4

E.  CPC’S DECISION TO SELL	5

F.  HEARST’S MONOPOLY PROBLEM	6

G.  THE SALE TO THE FANGS	8

H.  THE FANG/HEARST SHAM	9

I.  WORSE THAN A SHAM	11

III.  CONTROLLING ISSUES OF LAW	14

A.  PLAINTIFF HAS STANDING TO BRING THIS ACTION	14

B.  HEARST’S ACQUISITION OF THE CHRONICLE VIOLATES
      SECTION 7 OF THE CLAYTON ACT AND SECTIONS 1
      AND 2 OF THE SHERMAN ACT.	15

      1.  Daily Newspapers in San Francisco Are a Relevant Market	16

      2.  The “Sale” to the Fangs is a Sham	16

      3.  The Examiner is Not a Failing Enterprise that Hearst
           Should be Allowed to Close	17

      4.  Public Policy is Served, Not Offended, by an Injunction
           in This Case	18

C.  PLAINTIFF’S ANSWERS TO THE COURT’S SIX QUESTIONS	20

IV.   CONCLUSION	21

TABLE OF AUTHORITIES

Page

CASES

American Tobacco Co. v. United States, 
328 U.S. 781 (1946)……………………………………………………………………..…...19

Associated Radio Service Company v. Page Airways, Inc., 
624 F.2d 1342 (5th Cir. 1980)…………………………………………………………….…..16

Blue Shield of Virginia v. McCready,
457 U.S. 465 (1982)	14

Brown Shoe Co. v. United States,
370 U.S. 294 (1962)	14, 18

California v. American Stores Co.,
495 U.S. 271 (1990)	14

Citizen Publishing Co. v. United States,
394 U.S. 131 (1969)	20

Committee for an Independent P-I v. Hearst Corp.,
704 F.2d 467 (9th Cir.), cert. denied,
464 U.S. 892 (1983)	17

Community Publishers, Inc. v. Donrey Corp.,
892 F. Supp. 1146 (W.D. Ark. 1995), aff’d,
139 F.3d 1180 (8th Cir. 1998)	15

Key Enterprises of Delaware, Inc. v. Venice Hosp.,
919 F.2d 1550 (11th Cir. 1990)	14

Nelson v. Monroe Regional Medical Ctr.,
925 F.2d 1555 (7th Cir. 1991)	14

Reiter v. Sonotone Corp.,
442 U.S. 330 (1979)	14

State of Hawaii v. Gannett Pacific Corp.,
Civil No. 99-687 ACK-BMK, 1999 US Dist.
LEXIS 19069 (D. Haw., Oct. 15, 1999),
aff’d, Nov. 15, 1999 (9th Cir., unreported)	15

United States v. Aluminum Company of America,
148 F.2d 416 (2d Cir. 1945, L. Hand, J.) …………………………………………………....19

United States v. Griffith,
 334 U.S. 100 (1948)…………………………………………………………………………19

United States v. Socony-Vacuum Oil Co.,
310 U.S. 150 (1940)	21

United States v. Times Mirror Co.,
274 F. Supp. 606 (C.D. Cal. 1967), aff’d,
390 U.S. 712 (1968)	14, 15, 16

Zenith Radio Corp. v. Hazeltine Research, Inc.,
395 U.S. 100 (1969)	15

RULES AND STATUTES

Clayton Antitrust Act, § 7
38 Stat. 731, as amended, 15 U.S.C. § 18 (1996)	Passim

Newspaper Preservation Act,
15 U.S.C. § 1801, et seq. (1970)	Passim

Sherman Antitrust Act, §§ 1, 2
36 Stat. 209, as amended, 15 U.S.C. § 1, 2 (1990)	Passim

I.  INTRODUCTION
	Clinton Reilly, plaintiff above named, submits this trial brief in connection with the trial of this case, scheduled to commence May 1, 2000.  Hereafter, plaintiff will preview the evidence plaintiff intends to present at trial and will discuss what plaintiff believes to be the salient legal issues and controlling law.  As the Court is aware, this is an action brought under United States antitrust laws to obtain a permanent injunction prohibiting defendant The Hearst Corporation (“Hearst”) from purchasing The San Francisco Chronicle newspaper from defendant The Chronicle Publishing Company (“CPC”).  On March 30, 2000, this Court entered a temporary restraining order against this acquisition, which has remained in place pending trial on the merits.  As plaintiff will hereafter show, this injunction should become permanent in order to prevent Hearst from obtaining an unlawful monopoly in the daily newspaper market in San Francisco, and to preserve competition in this market until at least 2005, if not beyond.
II. PLAINTIFF’S TRIAL EVIDENCE
	A.	THE PARTIES
	Plaintiff is an individual residing in the city and county of San Francisco.  Plaintiff is a purchaser of both the San Francisco Chronicle and San Francisco Examiner newspapers.  He is also a potential advertiser in both newspapers, as well as, indirectly, an actual advertiser through a real estate business he owns.
	Hearst, the owner and publisher of The Examiner, is one of the nation’s largest diversified communications companies.  Its major interests include, inter alia, magazine, newspaper, and business publishing, cable networks, and television and radio broadcasting.  The Hearst newspaper business began with The Examiner in 1887.  (Plaintiff Exhibit (“PX”) 18.)
	CPC, the owner and publisher of The Chronicle, is a privately held, diversified media company, which has owned newspapers and television stations.  The deYoung family, which began CPC, first published The Chronicle in 1865.  (PX 73.)
	Defendant-intervenor ExIn, LLC (“the Fangs”) is an affiliate of a company owned by the Fang family, which publishes a thrice-weekly, throw-away newspaper called The Independent in San Francisco and surrounding communities.  (PX 49.)  The Fangs have entered into an agreement with Hearst to acquire The Examiner, contingent on Hearst’s acquiring The Chronicle.
	B.	THE RELEVANT MARKET
	The relevant market for purposes of this action is the publication and sale of daily newspapers in the city and county of San Francisco.  Daily newspapers constitute a relevant product market because they perform functions for which there are no adequate substitutes.  For example, there are distinct classes of advertisers that cannot reach their target audiences except through daily newspapers.  Readers interested in timely and in-depth news coverage must rely on daily newspapers.  Timely and in-depth coverage of cultural events, sports, and the arts is likewise available primarily through daily newspapers.  Daily newspapers also provide features and commentary in an immediate and in-depth manner not readily available in other media. Finally, no other medium provides the combination of all of the foregoing attributes of a daily newspaper.  (Deposition of Ted Fang (“T. Fang Depo.”), taken April 19, 2000, pp. 144-45; trial testimony of Dr. William S. Comanor, professor of economics.)
	The city and county of San Francisco constitutes the relevant geographic market because residents of San Francisco turn to the daily newspapers published in San Francisco, i.e., The Chronicle and The Examiner, when they purchase daily newspapers.  Although numerous newspapers are published throughout the Bay Area, within the city and county of San Francisco The Chronicle and The Examiner account for over 97 percent of paid daily newspaper circulation.  The predominance of The Chronicle and The Examiner within San Francisco is reflective of the industry-wide phenomenon that locally-published newspapers establish a committed core of readers within their communities.  (PX 3, PX 52; Comanor trial testimony.)
	C.	THE JOINT OPERATING AGREEMENT
	On October 23, 1964, Hearst and CPC entered into a joint operating agreement (“JOA”), pursuant to which they merged all of the business, i.e., non-editorial, non-news, functions of their newspaper operations into a jointly-owned company known as the San Francisco Newspaper Agency (“the Agency”).  At the time, CPC was publishing The Chronicle as a morning paper.  Hearst was publishing The Examiner as a competing morning newspaper, and Hearst was also publishing an afternoon newspaper, The News Call Bulletin.  Under the JOA, Hearst agreed to move The Examiner to the afternoon and combine it with The News Call Bulletin.  The Agency undertook to perform “the mechanical, circulation, advertising, accounting, and credits and collections functions” for the newspapers, who divided equally the excess of Agency revenues over expenses.  With their shares of the Agency profits, Hearst and CPC funded their news and editorial departments, which remained separate and independent, thus preserving two daily newspaper voices in San Francisco.  (PX 1.)
	The agreement provided that Hearst and CPC would separately set prices and advertising rates for their own newspapers, a practice they have in fact followed, thus maintaining price competition between The Chronicle and The Examiner.  (Id.; Deposition of John Sias (“Sias Depo.”), pp. 11-12.)  In 1970, Congress passed The Newspaper Preservation Act, 15 U.S.C. § 1801, et seq., which accorded antitrust immunity to the JOA and comparable arrangements throughout the country.
	The term of the JOA was 30 years, with each party having a single option to extend the JOA for ten more years.  In the early 1990s, Hearst exercised its option to extend the JOA from 1995 to 2005, at which time it will expire, CPC having stated that it will not extend the JOA.
	The JOA as structured contains a number of terms that have the effect of impeding Hearst or CPC from leaving the JOA or selling its newspaper, and deterring potential buyers of either newspaper.  First, Hearst and CPC each have a right of first refusal to match any offer from a prospective buyer.  Second, Hearst and CPC each have an undivided one-half interest in all assets of the Agency, which requires an equal division on termination of the JOA or sale of one of the newspapers.  Third, any buyer of one of the newspapers must assume that newspaper’s obligations under the JOA, which include paying half of Agency profits to the other partner.  Finally, neither Hearst nor CPC can sell its interest to any buyer operating a competing newspaper within 60 miles.  These features have combined to prevent CPC from selling The Chronicle to anyone but Hearst, and have also depressed the value of The Chronicle.  (PX 1; Comanor trial testimony; Sias Depo., pp. 71-76.)
	D.	COMPETITION UNDER THE JOA
	Because of independent price-setting, there has in fact been economic competition between Hearst and CPC.  As the eventual termination of the JOA has come closer, this competition has intensified in other ways.  Seeing the end of the JOA as inevitable and imminent, Hearst determined in the late 1990s that it would move The Examiner to the morning to compete against The Chronicle at the end of the JOA, if not before.  Realizing that they would be locked in a newspaper “war” after the JOA expired, both Hearst and CPC sought to position themselves so that they would have a competitive advantage in their head-to-head competition.  They also maneuvered to try to avoid this eventual competition, with various proposals for closing The Examiner and sharing profits from The Chronicle.  Hearst intended in any event to stay and compete in San Francisco after the JOA, at one point even accusing CPC of violating the antitrust laws by hamstringing The Examiner so that it would not be able to compete in the future.  (PX 124 (“MISSION STATEMENT: The San Francisco JOA terminates in 2005.  It is the intention of the Hearst Corporation to maintain a newspaper presence, and compete for the marketplace following the demise of the JOA.”); PX 86 (Hearst CEO Frank Bennack: “...Hearst’s desire and, indeed, intention is to remain in the San Francisco newspaper market going forward...”); PX 70 (CPC CEO John Sias writing to Bennack, August 11, 1998: “Thank you for your July 9th letter replying to the Chronicle’s request for your terms under which Hearst would consider closing the Examiner.  * * *  It is the unanimous opinion of the Chronicle Board that we are too far apart on our JOA positions to warrant any further discussion.  We will commence the advance planning necessary for the ultimate dissolution of the San Francisco Newspaper Agency in 2005.”); PX 71 (Bennack reporting on a discussion with Sias, September 8, 1998: “I told him, however, that we were certainly going to take the steps necessary to prepare ourselves for the resumption of a fully competitive situation in the post-2005 period.”).)
	On April 15, 1999, chagrined that CPC had directed the Agency to halt a joint subscription program, Timothy White, publisher of The Examiner, wrote to Sias:

The over-arching intent and purpose of the Joint Operating Agreement is to “enable both Chronicle and Hearst to survive as publishers of independent newspapers,” and upon termination of the Agreement, in the absence of its renewal or extension, to “...enable each of said parties to engage independently of Printing Company in the newspaper publishing business.”

*	*	*

As indicated in prior letters, we believe this [CPC’s efforts to terminate the joint program] to be in violation of the anti-trust laws and the Agreement. . .

*	*	*
The stated intent and purpose of the Agreement is now clearly frustrated by requiring the Examiner to remain in the afternoon field.  Accordingly, we hereby formally request your concurrence in our moving the Examiner expeditiously to the A.M. cycle, alongside the Chronicle. [PX 72.]
	Hearst obviously did not think The Examiner to be enough of a failing company to warrant abandoning the field to The Chronicle.  Indeed, under the JOA, The Examiner was not a failing company, and was flush with profits, accumulating at the rate of $25 million per year, enough to provide a war chest to fund direct competition against The Chronicle after the JOA.  (PX 91, PX 93; Comanor trial testimony.)
	E.	CPC’S DECISION TO SELL
	The Chronicle’s owners blinked first.  Faced with the prospect of a “war” with Hearst, increased competition in the San Francisco newspaper market after the JOA, CPC hired an investment banker to advise on how best to liquidate its holdings, including The Chronicle.  The investment banker, Donaldson, Lufkin & Jenrette (“DLJ”), advised CPC that the terms of the JOA, and Hearst’s enforcement of those terms, placed CPC in the difficult position where its choices were (1) go to “war” with Hearst in the marketplace; (2) accept a depressed offer from a third party unwilling to pay full value for The Chronicle because of the JOA; or (3) sell The Chronicle to Hearst.  (PX 4, PX 5, PX 9.)  The “war” scenario envisioned by DLJ included “substantial price cuts at Examiner with modest price cuts at Chronicle” and “significant ad price competition with 15% and 10% rate declines at Examiner and Chronicle, respectively.”  (PX4.)  In the absence of “war,” DLJ saw increasing prices and profits for The Chronicle.  (Id.)  
Simply by enforcing the JOA, Hearst drove CPC to Hearst as the only buyer for The Chronicle.  In a declaration filed in this case, CPC CEO Sias concluded, “Only Hearst has the ability to buy The Chronicle without assuming The Chronicle’s obligations under the JOA to subsidize The Examiner.  As a result, Hearst is the only purchaser from which CPC can obtain the fair market value for The Chronicle.”  (PX 50.)
	Consequently, on August 6, 1999, CPC entered into an agreement to sell The Chronicle to Hearst for $660 million, $150-250 million more than CPC could have obtained from any other buyer. (PX 10, PX 11; PX 50.)
	F.	HEARST’S MONOPOLY PROBLEM
	Hearst then faced the problem that it would own the only two daily newspapers in San Francisco and that it intended to close The Examiner, thereby achieving a monopoly in the relevant market.  Accordingly, Hearst decided to offer The Examiner for sale, in order to secure Justice Department approval for its purchase of The Chronicle.
	Initially, The Examiner assets offered by Hearst included nothing from the Agency, but only news and editorial assets.  Any buyer of The Examiner would therefore have had to arrange separately for printing and distribution of the paper, and all other business functions.  Hearst received no offer for this package.  Instead, Hearst received widespread criticism for offering a mere shell.  (PX 13, PX 15, PX 19.)
	Hearst therefore changed the package of Examiner assets it was offering.  On January 25, 2000, Hearst announced that it was offering The Examiner as a “turnkey” package, with production and distribution assets and a period of transitional assistance for any new owner.  Hearst did not offer its interest in the JOA, however, including the right to receive half the Agency’s profits.  This deterred most eligible buyers, such as Knight Ridder, which was interested in The Examiner only if the JOA interest were available. (PX 19, PX 53, PX 92, PX 21, PX 24.)
	Hearst received only three offers for The Examiner: from a New York concern not in the newspaper business; from the Fangs; and from plaintiff.  Each proposal required Hearst to pay a multimillion dollar, multiyear subsidy to the acquirer, in effect a negative purchase price.  Hearst did not pursue negotiations with the New York concern, but focused instead on plaintiff and the Fangs.
	Plaintiff’s discussions with Hearst occurred after plaintiff brought this lawsuit and were solicited by Hearst, not by plaintiff.  When Hearst inquired if plaintiff would be interested in buying The Examiner, plaintiff retained a number of prominent experts to evaluate the opportunity.  These experts included persons with extensive and varied experience in all aspects of the newspaper business, including hands-on experience working for the Agency.  Plaintiff’s experts provided in-depth analysis of what would be required to make The Examiner a viable competitor in the hands of a new owner.  On March 7, 2000, plaintiff made the following proposal to Hearst, based on the advice of his experts:
	1.  3 years joint advertising, circulation, production and distribution services [to be provided by Hearst through the Agency]
	2.  For 3 years Hearst absorbs all JOA costs for a 65,000-70,000 circulation PM newspaper [this is inaccurate; plaintiff was proposing an AM newspaper], one print run, home delivery in SF city area--estimated incremental cost $17 million/year [this is Hearst’s estimate]
	3.  Hearst retains all Examiner revenue during 3 year period--estimated incremental revenue $3.5 million/year [Hearst’s estimate]
	4.  Hearst to pay actual Examiner editorial and G&A expense up to $20 million (perhaps $15 million) per year for first 3 years. Hearst to pay an additional $17 million/year for years 4, 5, and 6
	5.  Reilly wants to purchase Examiner Office Building, adjacent parking lot and Brannon St. property at price to be negotiated--offered $5 million, $1 million, and $2.5 million respectively
	6.  Will sign firm contract within 2 weeks and close promptly thereafter. [PX 32.]
	The offer made by plaintiff approached a total subsidy of $200 million over six years, including the income to be generated from the real estate.  Plaintiff also estimated the need for significant capital expenditures to build a printing plant, create a Sunday edition, and move The Examiner to the morning.  Plaintiff estimated annual operating costs for the paper to be a minimum of $45 million.  (Reilly trial testimony.)
	Hearst, however, had another agenda.  On March 16, 2000, less than 10 days after plaintiff’s proposal, Hearst sold The Examiner to the Fangs, on far different terms, not only ensuring that The Examiner would fail, but providing incentives to the Fangs to fail.  (PX 35.)
	G.	THE SALE TO THE FANGS
	The first concrete proposal from the Fangs, to be discussed in more detail hereafter, was made on December 2, 1999, and called for a subsidy of $210 million payable over six years.  (PX 100.)  This occurred before the filing of this lawsuit and any negotiations between Hearst and plaintiff.  Once plaintiff began discussions with Hearst, the Fangs reduced their demands.  (PX 29.)  On March 10, 2000, three days after plaintiff’s March 7 proposal, knowing from press reports that plaintiff was in discussions with Hearst, the Fangs secured an agreement from Hearst to negotiate exclusively with them for a 15-day period.  (PX 34; T. Fang Depo., pp. 157-58.)  Plaintiff had no notice of this agreement to negotiate exclusively with the Fangs.  (Reilly trial testimony.)
	On March 16, Hearst and the Fangs executed an agreement to transfer certain Examiner assets to the Fangs, including The Examiner name, computer hardware and software, various news service and features contracts, newsracks, and subscription lists.  For these assets, the Fangs paid $100.  In addition, Hearst agreed to provide to the Fangs (1) printing, distribution, advertising, and business services from the Agency for a four-month transition period; (2) for the next eight months reimbursement of actual expenses up to $16 and 2/3 million; and (3) for each of the next two years reimbursement of actual expenses up to $25 million.  (PX 35.)  The total subsidy agreed to by Hearst was $67 million over three years.
	The agreement also included disincentives for the Fangs to make the expenditures necessary to operate the paper.  For example, during years two and three, if the expenses for which the Fangs seek reimbursement from Hearst are less than $25 million, Hearst will pay the Fangs one-half the difference up to a total of $5 million.  A similar prorated provision applies to the first year.  This provision is intended as an incentive for the Fangs to spend only $15 million on The Examiner and then pocket the extra $5 million from Hearst.  (T. Fang Depo., pp. 162-65.)  Similarly, the agreement purports to limit the salary Ted Fang may take as publisher of The Examiner to $500,000 per year, which is four times his combined current compensation as publisher of The Independent and CEO of Grant Printing  (T. Fang Depo., pp. 168-70) and almost double the salary of The Examiner’s current publisher.  Finally, the Fangs have agreed to limit reimbursable capital expenditures to $3.3 million annually (PX 35; T. Fang Depo., pp. 165-66), not nearly enough to create the infrastructure for a viable daily newspaper.  The agreement with the Fangs amounts to a subsidy not to publish a competing newspaper, instead of a subsidy meant to ensure competition.
	H.	THE FANG/HEARST SHAM
	After entering into its agreement with the Fangs, Hearst claimed that it had preserved competition in the daily newspaper market in San Francisco.  Nothing could be further from the truth, as Hearst well knows.  The transaction is a sham that will have the effect of destroying competition, not preserving it, and creating a newspaper monopoly controlled by Hearst.
	The agreement, as shown, not only limits the amount of Hearst’s support to $25 million per year, but also provides incentives for the Fangs to try to operate the paper on an annual budget of $15 million, so that they can pocket the extra $5 million “no-strings” payment from Hearst.  Indeed, the Fangs themselves have testified that their budget for The Examiner, if they ever get it, will be between $15 and $25 million per year; their internal planning documents place the number much closer to $15 million than $25 million, although they include a $500,000 salary for Ted Fang, with a $500,000 bonus.  (PX 101, PX 104; T. Fang Depo., pp. 75-76.)  Nor do the Fangs intend to put one penny of their own money into The Examiner.  (T. Fang Depo., pp. 7-9.)  It is not likely they could, given their statements in other litigation attesting to their straitened financial circumstances.  (PX 107, PX 108, PX 109.)  Their own documents also portray the amount of the Hearst subsidy as so low as to “squeeze” the Fangs so that neither The Examiner nor The Independent will be successful.  (PX 104; T. Fang Depo., pp. 105-06.)
	Whether or not the Fangs are right about The Independent, they are right about The Examiner.  It is simply impossible to operate a daily newspaper in San Francisco in competition with The Chronicle for $25 million a year, let alone the $15 million the Fangs and Hearst envision.  The Examiner going against The Chronicle on a $25 million dollar budget will fail.  Apart from the Fangs, every witness who will testify in this case knows this, from Hearst and CPC executives to defendants’ experts to plaintiff’s experts.  There will not be a scintilla of credible evidence in this record to support a finding otherwise.
	The very experts plaintiff assembled to advise about The Examiner acquisition will all testify that the idea of publishing a daily newspaper in competition with The Chronicle for $25 million a year is absurd.  The proposed subsidy of $67 million for the Fangs is roughly 25 percent of what is actually needed, a total of $250 million.  If the Fangs spend only the $15 million Hearst is paying them to spend, the subsidy falls to under 20 percent of what is needed.  Plaintiff’s experts, seven of whom will testify at trial, have impeccable credentials and varied and extensive experience, including direct management of key Agency newspaper functions.  They have also done detailed analysis of the investment and resources required for The Examiner to be viable.  (See previously filed declarations of Messrs. Clancy, Flood, Ingram, Osborn, Page, Weaver; PX 55-60, 62.)
	Nor are plaintiff’s experts alone.  Defendants’ experts also agree that The Examiner cannot survive against The Chronicle on $25 million a year.  They go even further, opining that The Examiner cannot survive regardless of the amount spent to keep it afloat.  Dr. Joseph W. McAnneny, an economist making a report on behalf of Hearst to the Justice Department, concluded that “there are no commercially viable options available to maintain The Examiner as a second competitive daily newspaper in San Francisco.”  (PX 94.)  Hearst’s other experts, John Morton and Dr. James Rosse, both of whom advised Dr. McAnneny, concur.  (Deposition of John Morton (“Morton Depo.”), pp. 92-93, 97-98.)  Morton has commented on national television that Hearst’s acquisition of The Chronicle will lead to Hearst’s’ “owning the only paid circulation metropolitan daily newspaper in San Francisco.”  (PX 43; Morton Depo., pp. 47-48.)  Hearst’s lawyers in this very case have told the Court that The Examiner is an irretrievably failing enterprise.  (April 13 Transcript of Proceedings, p. 6.)
	This is also what Hearst told the Justice Department in interrogatory responses last November.
Hearst does not believe that entry into the metropolitan daily newspaper business in the relevant area [San Francisco] in direct competition with the combined San Francisco Chronicle and Examiner newspapers (or the Chronicle alone) is either economically feasible or rational business behavior.”  [PX 16.]

	Hearst estimates the cost of a new printing plant at $210 million of which $139 million is unrecoverable sunk costs, and annual operating costs at $172 million for a newspaper of 300,000 daily circulation.  (Id.)  Hearst also estimates the annual production and distribution costs for The Examiner itself to be $48 million.  This does not include news or editorial costs, which have totaled an additional $25 to $30 million per year.  (PX 81; Deposition of James Asher (“Asher Depo.”), pp. 191-195.)  The total cost of producing The Examiner is thus three to five times what the Fangs plan to spend.
	Indeed, Ted Fang himself testified in a Justice Department deposition last November 9 that Hearst’s attempts to sell The Examiner were “phoney” (Justice Department Fang Depo., p.126); and that, to be viable, a buyer would need an interest in the Sunday paper, a share of agency ad revenues, at least a six month transition period, and additional printing facilities (id., pp. 134-37, 171) – none of which the Fangs are acquiring.
	Hence, the evidence that the sale to the Fangs is a sham is overwhelming.
	I.	WORSE THAN A SHAM
	Plaintiff will present at trial the following evidence, which has surfaced only recently in discovery and was previously unknown to plaintiff:
	On July 28, 1999, its purchase of The Chronicle imminent, Hearst met with San Francisco Mayor Willie Brown to seek his support for the acquisition.  Mayor Brown advised Hearst that if it wished to avoid problems with the City over The Chronicle acquisition, Hearst ought to settle litigation then pending with the Fang family.

Willie then reflected that it was really not smart for us to have something like this predatory pricing case “hanging around” when we’re trying to get something big done like an acquisition or merger.  He observed that funny undesired consequences often ripple from something like this, even if one thing has nothing directly to do with the other.

*	*	*

Willie seems like a friend in all this, but I am forewarned and often reminded that he’s a lot closer to the Fangs than he is to us.  [PX 99.]

	The following day, July 29, 1999, Hearst advised Mayor Brown that it would “be pleased to meet with Florence Fang any time and any place.”  (PX 76.)
	On August 6, Hearst announced its agreement to buy The Chronicle.  Almost immediately the Fangs attacked the acquisition in The Independent, with the headline “Hearst Plots One-Paper Town” and an editorial entitled “Stop the Hearst Monopoly.”  (PX 97; PX 96.)  At the same time, Ted Fang began a sub rosa campaign to obtain The Examiner, telling the Mayor and members of the Board of Supervisors that the Fangs very much wanted to acquire the paper from Hearst.  Fang made such statements continuously and repeatedly to the Mayor and Supervisors.  (T. Fang Depo., pp. 58-64.)
	On August 30, the Mayor assured Hearst that he would not be voicing opposition to the purchase of The Chronicle unless pressured to do so by the Board of Supervisors or City Attorney.  He said that the lawyer to whom the City Attorney had assigned the matter was a “lightweight” (PX 141), “who was not someone likely to lead a charge on a major issue.”  (PX 78.)  In this time frame, the Fangs opened negotiations with Hearst about acquiring The Examiner.
	These negotiations, however, were highly unsatisfactory and unproductive for the Fangs, who felt that Hearst’s efforts to sell The Examiner were “phony,” and so told the Justice Department on November 9, in an effort to ratchet up pressure on Hearst.  The Fangs then directly played their political cards.  
	On December 2, 1999, the Fangs’ attorney, David Balabanian, counsel of record in this case, called Hearst vice president James Asher “to explore a ‘package’ resolution of a variety of matters including the pending litigation, the sale of The Examiner and future relationship.”  As reported by Asher, the “package” offered by the Fangs had four parts: (1) settlement of preexisting litigation; (2) “The Fangs would ‘take The Examiner off our hands’“ by taking assets and an annual payment of $35 million for six years, until the JOA expired, a total of $210 million; (3) Hearst would agree not to compete with the Fangs in the throw-away newspaper field; and
4.  Assuming we reached agreement on all matters, the Fangs would use their extensive political connections to assist us in completing our purchase of The Chronicle.  [PX 100.]

Hearst responded that it “would give it some consideration.”  (Id.)  Hearst did in fact take into account the Fangs’ political connections, which were “a consideration” in Hearst’s decision to sell The Examiner to the Fangs.  (Asher Depo., p. 98.) 
	On January 21, 2000, Examiner publisher Timothy White had lunch with Florence Fang and Senator Diane Feinstein.  At that meeting, Senator Feinstein assured Mrs. Fang that Hearst’s purchase of The Chronicle could be good for the Fangs, and White urged Mrs. Fang to acquire The Examiner.  (PX 128.)
	On March 16, 2000, after plaintiff had entered the picture, Hearst and the Fangs signed their agreement.  Immediately, Ted Fang telephoned Mayor Brown in Paris, and Mayor Brown publicly blessed the agreement.  (T. Fang Depo., pp. 122-23; PX 39.)
	Only this lawsuit and this Court’s injunction have prevented these events from reaching their intended conclusion: a Hearst newspaper monopoly in San Francisco.
III.  CONTROLLING ISSUES OF LAW
	A.	PLAINTIFF HAS STANDING TO BRING THIS ACTION
	As a consumer and purchaser of both newspapers, plaintiff has standing under the antitrust laws to challenge a merger that will result in a reduction of output (only one daily newspaper); a lessening of consumer choice (only one news and editorial voice in San Francisco); the elimination of price and rate competition between The Chronicle and The Examiner; the likely enhancement of subscription and newstand prices and advertising rates; and the elimination of competition that would have occurred on the expiration of the JOA.  Key Enterprises of Delaware, Inc. v. Venice Hosp., 919 F.2d 1550, 1559 (11th Cir. 1990) (narrowing of consumer “choice is sufficient to show injury to consumers” under the antitrust laws); Nelson v. Monroe Regional Medical Ctr., 925 F.2d 1555, 1562-65, 1568 (7th Cir. 1991) (consumers denied medical treatment as the result of a hospital merger have standing to challenge the merger under section 7 of the Clayton Act); see Reiter v. Sonotone Corp., 442 U.S. 330 (1979) (consumers have standing to enforce the antitrust laws when violations cause them monetary injury); California v. American Stores Co., 495 U.S. 271 (1990) (action by state as parens patriae to redress harm to its citizens as consumers resulting from a merger); see also Blue Shield of Virginia v. McCready, 457 U.S. 465, 473-74 (1982) (injury to the “general economy” of a state “is no more than a reflection of injuries to the ‘business or property’ of consumers, for which they may recover themselves . . . .”)
	In addition, section 7 of the Clayton Act permits an injunction against a merger “the effect of which may be substantially to lessen competition, or to tend to create a monopoly.”  15 U.S.C. § 18, emphasis added.  “Congress used the words ‘may be substantially to lessen competition’ (emphasis supplied) to indicate that its concern was with probabilities, not certainties.”  United States v. Times Mirror Co., 274 F. Supp. 606, 613 (C.D. Cal. 1967), aff’d, 390 U.S. 712 (1968), quoting Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962).
	Finally, under section 16 of the Clayton Act, 15 U.S.C. § 26, injunctive relief is available “upon the demonstration of ‘threatened’ injury.  That remedy is characteristically available even though the plaintiff has not yet suffered actual injury . . . [citation omitted]; he need only demonstrate a significant threat of injury from an impending violation of the antitrust laws or from a contemporary violation likely to continue or recur.”  Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 130 (1969).  Equally applicable is the Supreme Court’s admonition that “the purpose of giving private parties treble-damage and injunctive remedies was not merely to provide private relief, but was to serve as well the high purpose of enforcing the antitrust laws.”  Id.  The availability of injunctive relief “should be ‘conditioned by the necessities’ of the public interest which Congress has sought to protect.”  395 U.S. at 131.  The Court’s words could not apply with more force than to this case, where plaintiff is acting as a private attorney general by default, in place of federal, state, and local authorities conspicuous by their absence.
	As a consumer, plaintiff clearly satisfies all antitrust standing requirements.

B.	HEARST’S ACQUISITION OF THE CHRONICLE VIOLATES SECTION 7 OF THE CLAYTON ACT AND SECTIONS 1 AND 2 OF THE SHERMAN ACT
	Plaintiff has already shown in the briefing on his motion for a preliminary injunction that Hearst’s acquisition of The Chronicle will violate section 7 of the Clayton Act and sections 1 and 2 of the Sherman Act.  It goes without saying that if daily newspapers in San Francisco are a relevant market, and if Hearst’s acquisition of The Chronicle will result in a Hearst’s obtaining a monopoly in that market, then Hearst will have violated these three sections of the antitrust laws, while CPC will have violated at least section 1 of the Sherman Act.  State of Hawaii v. Gannett Pacific Corp., 1999 U.S. Dist. Lexis 19069 (D. Haw., October 15, 1999), aff’d, Nov. 15, 1999 (9th Cir., unreported); Community Publishers, Inc. v. Donrey Corp., 139 F.3d 1180 (8th Cir. 1998); United States v. Times Mirror Co., supra.  The more relevant inquiry is what are the possible defenses to plaintiff’s claims.
	Defendants have four defenses in this lawsuit: (1) that daily newspapers in San Francisco are not a relevant market; (2) that competition will not be foreclosed because The Examiner will continue under the Fangs; (3) that, notwithstanding their second defense, The Examiner is a failing company, which Hearst is not required to continue; and (4) that Hearst and CPC cannot be required to perpetuate the JOA, fixing prices and dividing markets, under either the antitrust laws or the Newspaper Preservation Act.  None of these defenses has merit.  Plaintiff will address each in turn.
1.	Daily Newspapers in San Francisco Are a Relevant Market
	Although relevant market is a question of fact, Associated Radio Service Company v. Page Airways, Inc., 624 F.2d 1342, 1348-49 (5th Cir. 1980), the issue has been litigated to conclusion sufficiently often in the newspaper field to settle the question that local daily newspapers are indeed a relevant market for antitrust purposes.  Times Mirror, 274 F. Supp. at 606; Community Publishers v. Donrey Corp., 892 F. Supp. 1146, 1155-57 (W.D. Ark. 1995).  The evidence here, set forth in Section IIB supra, will lead inexorably to the same conclusion (e.g., The Chronicle and The Examiner account for 97 percent of daily newspaper circulation in San Francisco).  Defendants lose on the relevant market.
		2.	The “Sale” to the Fangs is a Sham
	Defendants contend that they have preserved competition in the relevant market by Hearst’s transfer of The Examiner to the Fangs.  The overwhelming weight of the evidence, however, is to the contrary, including the unanimous opinion of the experts for both sides that no one can successfully operate a daily newspaper against The Chronicle on a budget of $25 million, much less the Fang’s proposed $15 million budget, for which Hearst is paying the Fangs a takeaway incentive bonus of $5 million.  No matter how sincere, well-intentioned, and ambitious the Fangs may be, they cannot publish a major metropolitan daily newspaper for $15 million or even $25 million a year, just as they cannot fly no matter how hard they flap their arms.  Moreover, there is substantial evidence in the record that puts a much darker cast on the Fang transaction and the bona fides of all involved in it.  That evidence will speak for itself at trial.
	Defendants will simply be unable to convince this Court, or anyone else, that the Fang transaction is not a sham, or raises even the slightest likelihood of preserving daily newspaper competition in San Francisco.  Under the JOA, the people of San Francisco are guaranteed newspaper competition through 2005, if not beyond, given Hearst’s oft-stated intention to remain in this market.  This Court should not permit Hearst to rob them of that benefit by the shabby and illusory substitution of an undercapitalized imposter.

3.	The Examiner is Not a Failing Enterprise that Hearst Should be Allowed to Close
	A readily apparent problem with Hearst’s third defense is that it contradicts the second.  If the Fangs can make a go of The Examiner, then it cannot be a failing company.  If it is a failing company, then the Fangs cannot make a go of it.  Defendants ought to decide which position to take, instead of flip-flopping between the two, as they did in the hearings on March 30 (when they said the Fangs would succeed) and April 13 (when they said no one could succeed).
	Although defendants’ experts incline to the latter view (failing company), under the JOA The Examiner is highly profitable, and will continue to be so through 2005.  Given the pace of technology and the uncertainty of prognostication, no one can say that at the end of the JOA The Examiner will be doomed.  With ownership of half the Agency’s assets and half its profits, The Examiner has easily covered its news and editorial costs up to now, and been left with a tidy profit.  When one adds Hearst’s enthusiasm for the San Francisco market and its desire to remain in this market, one cannot find The Examiner to be a failing company.
	A “failing company” defense under Clayton section 7 requires a showing that a business “is on the brink of collapse, its prospects for reorganization are dim or nonexistent, and no other noncompeting buyers are available.”  Committee for an Independent P-I v. Hearst Corp., 704 F.2d 467, 473-74 (9th Cir. 1983).  Hearst can establish none of these elements.  The Examiner is not on the brink of collapse; its prospects and profits are assured through at least 2005, the term of the JOA.  Its prospects for reorganization are not dim; supported by the assets and revenue of the Agency, Hearst could easily move The Examiner to the morning were CPC to consent.  Moreover, because The Examiner is financially healthy, it has no need to reorganize.  Finally, Hearst cannot show an absence of non-competing buyers, because Hearst has never offered The Examiner for sale with all its assets, including its one-half interest in JOA profits and Agency property.  Under the law, The Examiner is not a failing company.
4.	Public Policy is Served, Not Offended, by an Injunction in This Case
	Hearst’s final defense is that antitrust policy and allocative efficiency are disserved by an injunction forbidding Hearst to buy The Chronicle, end the JOA, and close The Examiner if no one will buy it.  This argument calls into question the interface between the antitrust laws and the Newspaper Preservation Act.
	The argument, as made by Hearst to the Justice Department, is essentially: (1) all economic competition in the newspaper market in San Francisco ended in 1964 with the JOA; (2) since the JOA supplants competition with price-fixing, antitrust policy favors the JOA’s dissolution; (3) since no viable daily newspaper competition is possible any longer in San Francisco, antitrust policy requires that Hearst be allowed to buy The Chronicle and close The Examiner; and (4) denying The Chronicle to Hearst while it owns The Examiner so as to preserve two newspaper voices in San Francisco is an impermissible use of the antitrust laws to foster a policy unrelated to economic competition.
	The flaws in this argument are numerous and profound.  First, defendants ignore the “gloss” that the Newspaper Preservation Act places on the antitrust laws, to use this Court’s term.  Hearst and CPC for 35 years have enjoyed antitrust immunity and monopoly profits.  For this dispensation, however, they have paid a price and made a Faustian bargain.  In return for their access to an economic monopoly, they have been required to publish editorially independent newspapers.  They are stuck with that bargain.  Although the antitrust laws are ordinarily concerned with competition, not competitors, Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962), the “gloss” placed upon the antitrust laws by the Newspaper Preservation Act is that in the newspaper industry, competitors become as important as competition.  Rather than following the traditional price-based model of competition, the Act says that in the newspaper industry, the antitrust laws shall be modified so as to preserve the number of competitors, i.e., independent editorial voices, as a paramount objective.  This means that when actions are taken to reduce the number of competitors, an antitrust violation may result.  Thus, forbidding Hearst’s ownership of The Chronicle while it owns The Examiner does promote antitrust policy, as modified by the Newspaper Preservation Act.
	Second, to say that all economic competition is eliminated by the JOA is incorrect.  Here, the JOA specifically reserves to CPC and Hearst the right to set their own newsstand and other prices; and they have done so.  The JOA also is of finite duration.  In 2005, it will end, and whatever competition has been suspended by its operation will resume.  Certainly, here, the past three years have been marked by continual jockeying for position by Hearst and CPC to gain whatever advantages can accrue towards the day when the JOA ends, and full competition can resume.  Antitrust policy requires a prohibition against conduct that threatens the resumption of such suspended competition as has occurred here with Hearst’s would-be purchase of The Chronicle.  The antitrust laws are as much concerned with the elimination of potential competition as they are with actual competition.  United States v. Aluminum Company of America, 148 F.2d 416, 431 (2d Cir. 1945, L. Hand, J.); American Tobacco Co. v. United States, 328 U.S. 781, 797 (1946); United States v. Griffith, 334 U.S. 100, 107 (1948) (“The antitrust laws are as much violated by the prevention of competition as by its destruction.”)   Hearst’s acquisition of The Chronicle therefore has serious and substantial anticompetitive effects falling within the cognizance of the antitrust laws: first, the elimination of actual price competition between The Chronicle and The Examiner; and, second, the elimination of their future competition at the end of the JOA.
	Third, defendants’ argument founders on the evidence, in that The Examiner is not a failing enterprise with no prospect of ever competing against The Chronicle.  Therefore, Hearst is not being required to continue a business that the market cannot sustain.
	Finally, the law does not require defendants to continue in any event with the JOA and engage in per se antitrust violations against their will (although defendants’ protestations that they can no longer endure committing antitrust felonies, e.g., dividing markets, ring somewhat hollow after their 35 years of profitable law-breaking).  Defendants are free to end their per se antitrust violations and dissolve the JOA.  What they cannot do is combine to form a single-newspaper monopoly, under either the antitrust laws or the Newspaper Preservation Act.  That is all plaintiff seeks to prevent in this lawsuit, a result fully consistent with the antitrust laws, the Newspaper Preservation Act, and public policy.
	C.	PLAINTIFF’S ANSWERS TO THE COURT’S SIX QUESTIONS
	At the status conference on April 13, this Court raised six questions for the parties’ consideration.  After full reflection with the benefit of the hearing transcript, plaintiff provides the following answers:
	1.	“First, does the Newspaper Preservation Act apply at all to this transaction, or is it to be analyzed under traditional antitrust theories in the absence of the Newspaper Preservation Act?”  (Transcript, pp. 8-9.)  Answer:  This is an action brought under section 16 of the Clayton Act, 15 U.S.C. § 26, to enforce section 7 of the Clayton Act and sections 1 and 2 of the Sherman Act, which must, however, be construed and reconciled with the Newspaper Preservation Act, as described above.
	2.	Is a termination agreement under the Newspaper Preservation Act an amendment of a JOA as set forth in the Act?  (Transcript, pp. 9-10.)  Answer:  This question need not be resolved, because no consequences affecting this case flow from the answer.  This JOA was entered into in 1964 before the Act’s passage in 1970, and amendments are not subject to review and approval by the Department of Justice.  The only requirement is filing.
	3.	Are pre-1970 JOAs subject to less stringent “failing company” standards than post-1970 JOAs?  (Transcript, pp. 9-10.)  Answer:  Yes.  Pre-1970 JOAs were permissible for companies not “likely to remain or become a financially sound publication”; post-1970 JOAs were permissible for companies “in probable danger of financial failure.”  Both standards are of course far more lenient than the requirements for a failing company under Clayton section 7,  Citizen Publishing Co. v. United States, 394 U.S. 131 (1969), requirements Hearst cannot satisfy in this case.
	4.	“If a termination agreement is, in fact, an amendment for purposes of the Newspaper Preservation Act, is not it to be analyzed pursuant to Subsection B of Section 1803?  That is, subject to the more stringent, probable danger of failure standard.”  (Transcript, p. 10.)  Answer:  Because this JOA was entered into in 1964, before the Act, amendments are not subject to review by the Department of Justice under 15 U.S.C. § 1803(a) or (b).
	5.	“What’s the standard of review the Court should apply here?”  (Id.)  Answer:  No standard of review applies.  This is an original action under the antitrust laws, not a proceeding to review an agency decision by the Department of Justice.
	6.	“What is the effect of the Attorney General’s decision here at all?”  Answer:  None.  United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).
IV.  CONCLUSION
	Accordingly, on the basis of the evidence of record and the applicable law, plaintiff hereby requests a permanent injunction prohibiting Hearst from acquiring The San Francisco Chronicle newspaper, the effect of which will be to preserve two daily newspapers in San Francisco through at least 2005, if not beyond.
						Respectfully submitted,
Dated:  April ___, 2000.
	ALIOTO LAW FIRM

	By: __________________________________
		Joseph M. Alioto
						Angelina Alioto-Grace, Pro Hac Vice
One Embarcadero Center, Suite 4000
San Francisco, CA  94111-3607
Telephone:  415-434-8900
Facsimile:  415-434-9200

SHULMAN, WALCOTT & SHULMAN, P.A.
Daniel R. Shulman, Pro Hac Vice
	James Hilbert, Pro Hac Vice
	121 West Franklin Avenue
	Minneapolis, MN  55404
	Telephone:  612-871-2909

	Attorneys for Plaintiff Clinton Reilly