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

RESPONSE OF PLAINTIFF TO DECLARATION OF GERALD A. CONNELL IN RESPONSE TO COURT'S ORDER OF JUNE 2, 2000

 

Plaintiff above-named hereby responds as follows to the Declaration of Gerald A. Connell in response to the Court's Order of June 2, 2000:

1. By Order of June 2, 2000, the Court directed defendant The Hearst Corporation ("Hearst") to provide supporting particulars for the statement made by Mr. Connell at oral argument on May 31, 2000, "That's what -- well, what we were hearing, Your Honor, was if you are going to close down The Examiner, we are going to sue you." (Transcript, p. 2444.) The Declaration provided by Mr. Connell does not support the representation made to the Court at the May 31, 2000 hearing that Hearst was told by the Justice Department that the Department would sue if Hearst closed The Examiner.

2. The Court's Order of June 2, 2000, required Hearst "to submit to the Court one or more declarations of Hearst employees or representatives who have personal knowledge of any statement or statements by the Department of Justice to Hearst to the effect that 'If you are going to close down The Examiner, we are going to sue you.'" Hearst filed only the Declaration of Mr. Connell, which is more in the nature of a brief or argument than a recitation of facts supporting Mr. Connell's representation to the Court. Although employees of Hearst, including Messrs. Asher, Thackeray, and Ganzi, attended relevant meetings with the Department of Justice, they submitted no declarations to the Court. The absence of declarations from these witnesses establishes that the Justice Department never made the statement represented to the Court by Mr. Connell.

3. To plaintiff's knowledge, the supporting documentation attached to the Declaration of Mr. Connell was never provided or produced to plaintiff by Hearst prior to the filing of Mr. Connell's Declaration, although relevant to the issues of this action and called for by plaintiff's document requests.

4. The exhibits to Mr. Connell's Declaration establish that, prior to Hearst's agreement with defendant-intervenor ExIn, LLC ("the Fangs"), the position of the Antitrust Division of the Department of Justice was the same as plaintiff's in this lawsuit in the following material respects:

(a) The Department of Justice told Hearst that sale of The Examiner subject to the Joint Operating Agreement ("JOA") "was analytically the most appropriate marketplace test of whether The Examiner would fail upon termination of the JOA." (Exhibit C to Connell Declaration, p. 1,  3.; Exhibit E, p. 1,  2.) Thus, the Justice Department agreed with plaintiff that the appropriate inquiry in considering whether The Examiner was a failing enterprise was to view The Examiner under the JOA, and that the existence of available purchasers could not be determined unless The Examiner was offered for sale subject to the JOA.

(b) The Department of Justice refused to accept the representations and analysis of Hearst that The Chronicle was subsidizing The Examiner. (Exhibit E to Connell Declaration, p. 1,  4.)

(c) The Department of Justice refused to accept Hearst's evidence and arguments that The Examiner is a failing company or enterprise. The Department thus rejected the reports of economists Rosse and McAnneny that Hearst has proffered to the Court in this trial.

5. Hearst repeatedly agreed with the Department of Justice that "In order for Hearst to satisfy the Division" The Examiner must be "shopped" as a "competing general circulation daily newspaper in San Francisco." (Exhibit B to Connell Declaration, p. 1,  3; Exhibit D, p. 1,  1.) The Examiner was not shopped in this manner, and was certainly not purchased by the Fangs as a "competing general circulation daily newspaper in San Francisco."

6. Clearly, the Department of Justice would have allowed Hearst to purchase The Chronicle had Hearst offered The Examiner for sale subject to the JOA. Had Hearst done so, Hearst would no doubt have received the present value of the future net excess payable under the JOA, estimated at approximately $90 million. Hearst, however, at all times refused to offer The Examiner subject to the JOA, although by doing so Hearst could have obtained The Chronicle and been compensated for The Examiner and its interest in the JOA. Instead, Hearst chose to transfer primarily intangible assets to the Fangs and pay the Fangs a negative purchase price of $66 million. There can be only one conclusion from this evidence. By offering The Examiner subject to the JOA, Hearst knew and believed that The Examiner would be sold to a new owner and would continue in competition with The Chronicle through the end of the JOA and afterwards. By not offering The Examiner subject to the JOA and entering into the transaction with the Fangs, Hearst knew and believed that The Examiner would not compete with The Chronicle and would ultimately fail, and that Hearst would obtain a monopoly through its acquisition of The Chronicle. Nothing else explains Hearst's conduct given that Hearst could

have obtained The Chronicle and paid no subsidy had it offered The Examiner subject to the JOA.

7. Prior to entering into its March 16, 2000 agreement with the Fangs, Hearst was never told by the Department of Justice that Hearst would be required to pay a subsidy or negative price in connection with its shopping The Examiner. Indeed, according to Mr. Connell's correspondence, the Justice Department said exactly the opposite -- that Hearst would not be required to pay a subsidy. Hearst's decision to do so is therefore explicable only in light of Hearst's intention to obtain a monopoly in the daily newspaper business in San Francisco.

Respectfully submitted,

Dated: June 8, 2000.

ALIOTO LAW FIRM

By: __________________________________

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

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