updated 6/30/2005 3:36:20 PM ET 2005-06-30T19:36:20

Washington's state Supreme Court on Thursday dealt The Seattle Times a major victory in its efforts to end a joint operating agreement with the Seattle Post-Intelligencer — a ruling that could lead to the P-I's closure, though more legal battles remain.

"We recognize this day is not a happy day in the ongoing story of Seattle as a two-newspaper town," the high court ruled in its unanimous decision, written by Justice Tom Chambers. "We genuinely hope that both the Seattle Times and the Seattle P-I will continue to serve our communities and prosper."

The Times has been trying to get out of the agreement with the P-I's parent company, The Hearst Corp., since April 2003, saying the agreement is no longer profitable because of changes in the market. The Times seeks to invoke a clause in the contract that allows either paper to end the agreement if it suffers three consecutive years of losses.

Hearst argued that the Times shouldn't be allowed to count losses caused by extraordinary events, such as the 49-day strike against both dailies in late 2000. The Times argues that under the language in the contract, no such exception exists, and the court agreed.

"By the plain terms of the agreement, labor costs, including those occasioned by strikes, are 'agency expenses' under the terms of the contract," the court wrote. "The Times may use those 'agency expenses' to calculate 'agency revenues' for application of the loss operations clause, which permits either party the right to terminate the agreement after three consecutive years of losses."

In February, the high court heard arguments from the Post-Intelligencer attorneys, who argued the paper would collapse without the agreement.

Last year, a three-judge state Court of Appeals panel unanimously ruled that The Times had a right to seek an end to the JOA, which has been in place since 1983. Hearst has said the P-I can't survive without it, because it lacks staffing and facilities for key business functions, including printing.

"It is our hope that the Hearst Corporation will join The Times in modifying the JOA contract to reflect today's difficult newspaper economics so that The Times has a fair chance to become profitable again," said Times publisher Frank Blethen. "A return to profitability will enable The Times to remain locally owned and focused on quality, independent journalism for our city and our region."

Under the agreement, The Times _ owned by the Blethen family with a minority share held by Knight Ridder _ handles printing, distribution and advertising at both papers in exchange for 60 percent of their joint revenues.

The Times said it suffered financial losses under the agreement in three consecutive years _ 2000, 2001 and 2002 _ thus triggering an 18-month period during which The Times and the P-I could negotiate the P-I's closure.

But Hearst sued, arguing that the strike was an extraordinary event, and could not be counted toward three consecutive years of losses. A King County Superior Court judge agreed with that argument in 2003, but the state Court of Appeals reversed that ruling last year.

Hearst lawyer Kelly Corr said the P-I would continue to fight the Times' efforts by arguing that the Times' deliberately lost money so that it could seek to end the agreement.

"After the strike years, the Times spent money like a drunken sailor to manufacture that magical third year of loss," Corr said. "We're going to closely examine the losses from 2000 and 2001 aside from the strike as well."

JOAs are an exception to federal antitrust law that are allowed by the Newspaper Preservation Act of 1970. The law was designed to maintain multiple editorial voices in markets that might not otherwise support more than one major newspaper.

The court, while expressing hope that both papers would remain, argued that it couldn't' change the contract based on the desire to keep Seattle a two-newspaper town.

"Because only the Times' interpretation of the JOA is reasonable, the strong public policy favoring the maintenance of diverse reportorial and editorial voices in the same community cannot be a basis to rewrite the contract," the ruling said.

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