Detroit Papers’ Plan to Merge Blocked by Judge

The bitterly disputed plan to end one of the last big-city newspaper wars suffered a setback Wednesday when a judge ruled that Detroit’s two papers had failed to prove that they deserved federal approval to operate jointly.

The proposal for the Detroit Free Press and Detroit News to join business operations after nearly a century of rivalry could still win approval, however, if Atty. Gen. Edwin Meese III overrules the recommendation by an administrative law judge.

The proposal would merge the non-news operations of the nation’s seventh- and eighth-largest newspapers, which are owned by the nation’s two largest newspaper chains as measured by circulation, Gannett Co. and Knight-Ridder Newspapers. The papers would keep separate newsrooms and publish separate editions, however.

The recommendation by Judge Morton Needelman now casts doubt over the future of the 156-year-old Free Press. On Wednesday night, Knight-Ridder Chairman Alvah H. Chapman reaffirmed his testimony before Needelman last summer that if the Justice Department rejected the plan he would recommend that his board of directors close the paper.

But Needelman’s decision cast doubt on the Free Press’ claim that without such a merger it would die. The Free Press lost money, he said, because it wanted to drive the rival News out of business, not merely compete, and its bookkeeping “smacks of slippery accounting.”

“I am absolutely stunned,” said John Morton, a newspaper industry analyst who testified for the newspapers in favor of the plan. “The judge sat there listening to weeks of testimony, and it didn’t seem to make a dent on him.”

Newspaper experts considered the Detroit rivalry the fiercest newspaper war left when the companies proposed this truce in May, 1986, shortly after Gannett bought the News. Experts have called the proposed demise of competition in Detroit a death knell for big-city newspaper competition.

The ruling is unprecedented in the history of the controversial Newspaper Preservation Act, a law passed in 1970 that permits competing newspapers to form joint operating agreements if one is failing. In the two previous cases in which Justice Department hearings were held on such proposed joint operations--in Cincinnati and Seattle, Justice Department administrative law judges have recommended approval.

If Meese follows the judge’s recommendation and rejects the proposed plan, it would be equally unprecedented. No proposed joint operating agreement has ever been rejected. Currently, 21 joint operating agreements exist--18 of which were set up before the 1970 law formalized a federal review process.

Some legal authorities, including former Reagan Administration assistant Atty. Gen. for Antitrust William F. Baxter, have charged that the law’s definition of failing newspapers is too vague. And many others have charged that one reason no JOA has been rejected before is because of the enormous political clout of major newspaper chains.

The joint operating agreement “will ultimately be approved by the attorney general of the United States,” Chapman predicted in a press conference late Wednesday.

If Meese were to side with Needelman and reject the plan, Gannett and Knight Ridder could appeal the decision in federal district court and on through to the Supreme Court, Knight Ridder attorney Philip A. Lacovara said.

In Seattle, a federal court overruled the Justice Department’s approval of a joint operating agreement, but that was eventually overturned by an appellate court.

Needelman ruled that the Free Press’ “poor financial performance must be evaluated in the context of a deliberate Knight-Ridder strategy of striving for future market dominance and profitability at the expense of present profits.”

He also charged that the paper’s losses were suspect because they were based in part on management fees and other expenses charged the Free Press by its parent, Knight-Ridder.

The “discretionary aspect of the parent-subsidiary relationship lends itself to creative bookkeeping, which tends to make the Free Press’ balance sheet . . . suspect,” Needelman wrote.

‘No Dominance’

As to Chapman’s vow during the hearings that he would ask his board to close the paper if the agreement is rejected, Needelman said the record “contains no convincing evidence that he seriously considered closing the Free Press prior to his witness-stand bolt out of the blue, and accordingly I have assigned little weight to this threat.”

Needelman concluded: “There is no dominance in the Detroit market in the sense that one paper is overwhelmingly strong while the other is hanging on by its fingertips. . . . To the extent that the hallmark of dominance is the profitability of one and the losses of the other, here we have an entirely different picture: the Free Press was profitable until 1979, and both papers have had large losses since then.”

Reaction at the Free Press, housed in an ancient gray stone tower in downtown Detroit, was grim.

“There is no full-bore panic going on,” but people are a lot more pessimistic about . . . the paper’s future than they were yesterday,” said Free Press reporter Tom Hundley.

“Justice was done today, even though people will lose their jobs,” reporter Bill McGraw said. “I don’t think the law was designed for two huge papers in a huge metro area with two huge conglomerates behind them.”

Gannett declined to comment on the ruling, as did officials at the News and the Detroit Newspaper Agency, which was created to administer the business operations of the two papers.

Yet most in the industry thought Gannett seemed almost gleeful in its silence. If the agreement is eventually rejected by Meese and Knight-Ridder closes the Free Press, Gannett would have a monopoly in one of the nation’s biggest newspaper markets.

“In the months since Gannett took over the News they have increased their market share to the point of dominance,” Morton said.

At his press conference, Chapman said he had received one “informal” expression of interest from a potential buyer of the Free Press. Free Press Publisher David Lawrence later identified the potential buyer as Robert E. Page, publisher and owner of the Chicago Sun-Times.

The newspapers and community groups involved in the plan have 45 days to file responses to Needelman’s recommendation, after which Meese will make his decision.

Times Staff Writer Eric Lichtblau contributed to this story.

THE ANSWER WAS NO

Judge Morton Needelman has recommended that the Justice Department reject a bid by the Detroit Free Press and the Detroit News to merge their non-editorial operations. Here are excerpts from his opinion:

1 The losses incurred by the Free Press and the News are attributable to their strategies of seeking market dominance and future profitability at any cost, along with the expectation that failure to achieve these goals would result in favorable consideration of a joint operating agreement application.

2 The Free Press is not dominated by the News.

3 The Free Press is not in a downward spiral.

4 Applicants failed to prove that there exists in Detroit an irreversible market condition that will probably lead to domination and the downward spiral.

5 In the absence of proof that it is confronted with actual or probably domination and a downward spiral, the Free Press does not qualify as a failing newspaper.