Bad Blood   

Bitter and deep-seated rivalries come to the fore in a legal battle over the future of the Chronicle and the Examiner.

IT PLAYED OUT LIKE a cross between grand opera and an HBO miniseries: a newspaper antitrust trial with plot contortions worthy of Puccini and a roster of characters straight from central casting.
That there was a trial at all is a tribute of sorts to two of the players: Clint Reilly, a former political operative looking for both respectability and vengeance by challenging in court the Hearst Corp.'s plan to buy the San Francisco Chronicle and unload the Examiner; and U.S. District Court Judge Vaughn Walker, a conservative maverick whose free-market sensibilities were offended by a business deal that seemed to smack too much of political machinations at City Hall and the Justice Department. The beneficiaries of those machinations would be the Fangs, a locally powerful Chinese American publishing family with ties to Mayor Willie Brown and ambitions to own a daily newspaper.
In the latest plot twist, Walker has asked the Justice Department to explain its support for the transaction before he makes a final ruling. At AJR's deadline, the deal by which Hearst would acquire the Chronicle for $660 million and simultaneously pay the Fangs a subsidy of $66 million to rid itself of the failing Examiner was in limbo.
To fully appreciate just how exquisite the torture of delay and uncertainty must be for the major figures in the case, it helps to know the back story, which, in highly abbreviated form, goes something like this:
The folks from the Chronicle and the folks from Hearst's Examiner have feuded for more than a century. Reilly and Brown have feuded for nearly two decades. The Fangs, who publish a thrice-weekly giveaway newspaper called the San Francisco Independent, can't stand the Examiner because of disputes over advertising practices and their perception that the Examiner's coverage of the family is racially biased.
The Examiner can't stand Reilly because it considers him ruthless and sometimes ill-tempered. Reilly can't stand the Examiner because he thinks its reporters and editors are out to get him. He made the paper cough up a lot of money to settle the assault and battery suit he filed in 1993 after an infamous closed-door meeting with then-Examiner Publisher Will Hearst and Examiner Executive Editor Phil Bronstein. Accounts of what happened vary, but Reilly suffered a broken ankle and left the meeting on a stretcher after a scuffle with Bronstein.
Bronstein can't stand the Fangs because the Independent publishes vicious cartoons lampooning his marriage to actress Sharon Stone. Reilly can't stand the Fangs because they've been big backers of Brown. Reilly ran for mayor against Brown last year, burning up $4 million of his own money and still coming in behind former Mayor Frank Jordan, who lost to Brown in 1995 and ran again last year for reasons nobody quite understands.
Jordan was the Fangs' candidate back in the 1991 mayoral campaign, and Reilly was Jordan's political strategist that year, as he was again in 1995. Brown's political strategist in the 1995 mayoral campaign as well as in last year's race was Jack Davis. Davis, once Reilly's protégé and collaborator, is now his bitter enemy. He helped sink Reilly's mayoral campaign by spreading details of a domestic violence incident in Reilly's distant past. Davis is also a very close friend and political adviser to the Fangs.
The sheer weight of all that bad blood and shared history set the stage for a riveting trial. Hearst's attorneys must have thought so, too. They issued a cautionary press release for reporters covering the proceedings. It said that the case to be presented by Joseph Alioto, Reilly's lawyer and the son and namesake of the late San Francisco mayor, "is designed to garner media attention and to make headlines. What you see and hear will be entertaining, often misleading and untrue▀but it will also be largely irrelevant to the antitrust issues."
Maybe. In any event, the opening act on May 1 was a stunner. Examiner Editor and Publisher Timothy White testified about a lunch last August in which he did some "horse trading" with the mayor, offering more favorable treatment in the paper's editorial pages if Brown would support Hearst's acquisition of the Chronicle. White would later say in a statement that he'd been "tired and confused" while testifying and didn't mean to suggest that the pages of the Examiner could be "influenced." He was suspended indefinitely by Hearst after his courtroom appearance; Bronstein, also present at the lunch, issued a statement saying there had been no negotiation of press coverage of any kind. And from sea to shining sea, every hand-wringing scribe and tongue-clucking media critic weighed in.
A week later, with the Chronicle and Examiner newsrooms in an uproar, George Irish, president of Hearst's newspaper division, took the witness stand. He didn't know or remember anything about White's conversations or dealings with the mayor, he said. Even as he spoke, a large projection screen, fully visible to everyone in the courtroom, displayed e-mail and Irish's own handwritten notes indicating that White had kept his superiors quite fully informed.
Judge Walker appeared mostly bemused by the flap over journalistic ethics, but he seemed to find the contacts between Hearst executives and Brown over the purchase of the Chronicle and the disposition of the Examiner more troubling. In retrospect, the Hearst press release was the corporate equivalent of what the Great Oz kept telling Dorothy: Don't pay any attention to the man behind the curtain.

T HE EVENTS THAT LED Reilly, the Fangs, the top corporate brass of both newspapers and a corps of reporters to Walker's courtroom on the 17th floor of the San Francisco federal building were set in motion just over a year ago. After a decade of battling each other, descendants of the de Young family on June 17, 1999, agreed to put the Chronicle Publishing Co., including the San Francisco Chronicle, up for sale (see "Family Feud").
Hearst, which had long sought the paper, announced on August 6 that it had made a deal to purchase it and was immediately putting the Examiner on the market. As Hearst Corp. President Frank A. Bennack Jr. explained it to the staff in the Chronicle newsroom that day, the company assumed publishing both papers would violate antitrust law; if no buyer for the Examiner emerged in three to six weeks, the 135-year-old paper would be history.
What happened next is the subject of considerable dispute and the basis for much of what got thrashed out in court. Did local politicians intercede with the Justice Department to arrange the "sale" of the Examiner to the Fangs? And even if they did, does that have anything to do with antitrust laws or in any way affect Hearst's purchase of the Chronicle?
In theory, Hearst should have faced the relatively simple task of unwinding the Joint Operating Agreement that has bound the Chronicle unhappily to the Examiner since 1965. Under that agreement, otherwise due to expire in 2005, the papers have shared printing, advertising and circulation operations while maintaining separate editorial staffs.
The bitter rivalry between the two newsrooms was only exacerbated by the mutual misery of the JOA, which, among other things, turned the Examiner into an afternoon paper. In 1965, when both papers were losing money and circulation was about even, the arrangement made sense. But as the Examiner's circulation began to shrink dramatically--it's now just 109,000, less than a quarter of the Chronicle's--the JOA, with its 50-50 profit split, became the instrument that crippled investment and initiative at each of the papers.
Hearst's expectations of smooth sailing for the Chronicle purchase were not unreasonable. The last time the Justice Department intervened to block the dissolution of a JOA was in 1983. But instead of simply giving Hearst a green light for shutting down the Examiner and taking over at the Chronicle, the Justice Department's antitrust division notified the media giant in September that it wanted to take a closer look.
Reilly contends that the subsidized sale of the Examiner to the Fangs is a "sham" designed to ensure that the paper fails. He says that would leave Hearst with an illegal newspaper monopoly in San Francisco, positioned to increase advertising and subscription rates. Alioto argued in court that Hearst used the JOA as "a stepping stone to monopoly." Its provisions barring either JOA partner from selling to newspapers within a 60-mile radius of San Francisco and granting each partner the right to match any offer for the other paper are themselves violations of antitrust law, Alioto contends. Reilly has asked the judge to block the Chronicle sale and offer the paper once again to other potential bidders.
Hearst contends that the Examiner is a failing enterprise that could not survive outside the JOA and that the corporation has a right to dispose of it as it sees fit. Hearst says it agreed to the unusual deal with the Fangs to satisfy the Justice Department's antitrust concerns.

O N THE MORNING AFTER final arguments in the trial, Clint Reilly summoned reporters to a press conference at the Merchants Exchange Building in San Francisco's financial district. The lavishly refurbished turn-of-the-century landmark is one of a string of tony commercial properties he quietly began acquiring six or seven years ago.
"Thank you for coming this morning," he began, addressing a half-dozen reporters seated before him on utility chairs in a stately woodpaneled room that was otherwise empty and looked to be roughly the size of a football field. "We're here today in the Julia Morgan Ballroom, and I'd like to point out that Julia Morgan was California's first woman architect, who had her office here in the Merchants Exchange Building for 54 years. From that office, she not only designed Hearst Castle, but she designed the Hearst Building as well, at Third and Market where the Examiner was published for many years."
Nobody ever accused Clint Reilly of subtlety.
San Francisco politics aren't really more treacherous than politics in any other town, only more factional. Because the city is small and Democrats control all of it, the ever-shifting feuds and alliances take on exaggerated importance, as do the political consultants who serve as battering rams for the warring factions.
Elected officials with perfectly safe districts often hire consultants just to make sure they won't be tempted to go out and drum up opposition candidates.
Reilly helped invent that world, and during the two decades in which he dominated it, he was known for chutzpah, an explosive temper and expensively produced political brochures. Local lore has it that, in addition to the standard 15 percent commission consultants earn on political mail, Reilly charged commission on the postage stamps as well.
But at 53, the former Jesuit seminarian turned high-powered politico turned successful real estate developer turned failed mayoral candidate seems determined to reinvent himself yet again as a civic crusader with his suit against Hearst. Reilly filed to block the Chronicle acquisition in early January, at a time when Hearst was being pressured by the Justice Department to find a buyer for the Examiner by offering better terms and by other pols who were sending signals that the buyer should be the Fangs.
In February, Reilly made his own bid to buy the Examiner, asking for a large subsidy to run it as well as several pieces of choice real estate owned by the Hearst Corp. The bid was rejected. Hearst's deal with the Fangs was announced in March and was promptly blessed by the Justice Department.
Far across the city from Reilly's elegant base of operation, in a neighborhood where shabby apartments, auto repair shops and rusting warehouses line the streets, Ted Fang publishes the Independent. It is the flagship of a family business that also includes a chain of weeklies in counties south of San Francisco; Asian Week, a nationally distributed paper aimed specifically at Asian Americans; Chinese TV Guide; a printing plant; and the Grand Palace restaurant in San Francisco's Chinatown.
Politics and journalism run in the family bloodlines. Fang's father, John, was a Shanghai newspaperman who came to the United States in 1952. In the early 1960s he launched Grant Printing, the real financial core of the family's business network, and by the mid-1970s he had built a role as a political gatekeeper for white politicians seeking introductions and support in San Francisco's Chinatown.
"I stayed away from journalism as a kid. Growing up, I didn't see the rewards," says the 37-year-old Ted Fang, who took on the publishing job when his family purchased the Independent in 1987.
The paper is a free broadsheet of greatly uneven quality, often a screed for the Fang family's cause du jour, and sometimes the vehicle for news features on government agencies or community events and personalities that the two dailies ignore. Fang makes no apologies for its excesses.
"I'm not interested in producing another Chronicle or another Examiner," Fang says. "I believe newspapers should offer perspective on what's going on in the city, and to me that's what the battle in San Francisco has been all about, a diversity of voices vs. many that say the same thing."
During trial testimony about his plans for the new Examiner, Fang said it would have the look and feel of a suburban daily, with San Francisco as the burb. The streamlined 40- to 50-page paper, in which the Fang family will be investing no money of its own, would employ 30 to 40 people on the editorial staff, a fraction of the 210 who make up that staff at the current Examiner. Reporters, Fang says, would be expected to write six stories a week, something he characterized as just below the industry average. In words that would come to haunt Hearst executives and fascinate Judge Walker, Fang described the essence of the new Examiner: "We are not going to make any pretense of being a metropolitan newspaper. We are going to be a local newspaper."

"A GOOD SETTLEMENT IS better than a good trial," Walker announced to a packed courtroom as he convened the first day of proceedings on May 1. There were no takers. Besides, it was clear from the very beginning that the 56-year-old jurist, an antitrust expert from the bluest of San Francisco's blue chip law firms, relished the chance to preside over a case that would set some of the city's best known political figures at each other's throats.
Legal experts and lawyers who have tried cases before him describe Walker, who was appointed by President Reagan, as quirky, unpredictable and very smart--traits he displayed throughout the trial. In court, the judge repeatedly gave Reilly's lawyers broad latitude in presenting evidence of backroom dealing that Hearst's lawyers insisted was irrelevant.
Walker took an active role in questioning witnesses himself, often cutting through some of the more tedious recitations of rival theories of monopolistic behavior or of advertising rate structure in competitive markets. During one particularly protracted explanation from Stanford economist James Rosse, one of Hearst's expert witnesses, of why the Examiner was a financial drag on the Chronicle, Walker interrupted: "So I guess your testimony is that the Monarch of the Dailies is better dead than read."
By the end of the trial in early June, Walker was openly irritated at Hearst's lawyers, particularly over statements about precisely what kind of competition might exist between a Fang-owned Examiner and a Hearst-owned Chronicle. Hearst and the Justice Department had implied head-on competition of two metropolitan dailies, Walker said. Fang seemed to be describing something quite different. Walker persistently grilled the Hearst team about why, if the Examiner really was a failing business absent the JOA, the corporation had gone to all the trouble of locating a subsidized "buyer" for it. Hearst attorney Gerald Connell said Justice had threatened an antitrust suit if the Examiner did not go to the Fangs.
It is hard to exaggerate the fear and suspicion that the Chronicle and Examiner editorial staffs have of one another or the apprehension in both newsrooms about how they would combine and function in a Hearst-owned Chronicle. But in the months immediately before the trial, there seemed to be a cautious, growing optimism on the two staffs that cooperation was possible and that the new Chronicle could be a stronger, better paper than the one that exists today.
According to employees at both newspapers, Examiner Publisher White was a big reason for the improved mood. Reporters and editors liked him, thought he seemed like someone committed to making newspapers better. His horse-trading testimony--and Hearst's response to it--shattered all that.
Yet for all the anxiety over White's courtroom appearance and the aftermath, nothing seemed more humiliating or indeed a more chilling preview of what lies ahead than the testimony of Hearst President Bennack.
"Is the Chronicle a world-class newspaper?" Alioto asked him.
"No, I don't believe it is," Bennack replied.
"After you pay the $660 million, how much, or have you ever budgeted how much, you might spend or plan to spend to make the Chronicle a world-class newspaper?" Alioto continued.
"No," Bennack said. "You have to generate increased cash so that you have the resources to do that."
Alioto then wanted to know whether any of Hearst's 12 dailies or 18 weeklies were world class. No, Bennack said. The Houston Chronicle was the closest, but it wasn't there yet, either.
Alioto didn't ask in so many words, but it's worth pondering what the $66 million subsidy Hearst promised the Fangs to unload the Examiner might buy at a Hearst-owned Chronicle. Not a world-class paper, certainly--but perhaps a downpayment on one.