The Darrow Difference

The Milwaukee Journal Sentinel just can’t shake its circulation problems.

Last year, a suit by Shorewest Realty claiming the newspaper had inflated its circulation was settled out of court. The May 2006 settlement led Journal Communications Inc. to cut second-quarter 2006 revenues by $5.1 million. It included payments of $650,000 to Shorewest, mostly for attorney fees, and credits on future advertising bills for Shorewest and other companies in the class-action suit.

But one heavy hitter opted out of the agreement. Auto dealer Russ Darrow Group Inc. has filed a separate suit against the media conglomerate, alleging that pumped-up circulation numbers fraudulently raised advertising rates. Unlike the Shorewest suit, however, Darrow’s has yet to be reported by the Journal Sentinel.

The suit alleges a series of strategies to goose the Journal Sentinel’s paid circulation numbers: counting returned papers, as well as free papers distributed to homes or businesses, on street corners, and at festivals and sporting events.

The lawsuit also alleges the JS improperly counted papers distributed to apartment complexes where a free subscription was included in the rent, and that the paper later kicked back subscription fees to apartment managers. The suit claims violations of the Wisconsin Deceptive Trade Practices Act, breach of contract, misrepresentation and negligence, and seeks punitive damages.

The claims resemble those in the Shorewest case, which was settled to avoid the cost of the trial and without either side agreeing on the merits.

The Darrow lawsuit pointedly contrasts the newspaper’s alleged behavior with its vaunted ethics policies, “which purport to require [Journal Sentinel] employees to ’embrace not only the letter of the law, but also the spirit of the law.'”

Journal Communications has denied the allegations. In a Securities and Exchange Commission filing, the company promised to “defend the action vigorously.” A routine offer from Darrow’s lawyer to settle for $1.2 million seems unlikely to be accepted.

Seeking a dismissal – which the judge denied – a lawyer for the paper said in court in May that circulation was just one factor in ad rates, and that the alleged discrepancies were an insignificant 1 to 3 percent. “There is no correlation at all between what we can charge for the newspaper advertising based on those differences,” said Doug Hinson.

“I was absolutely shockedÓ by the claim, Darrow’s lawyer, William Cannon of Cannon & Dunphy, told Pressroom. “That’s completely contrary to what they have told their customers in the past.”

Why didn’t Darrow sign the Shorewest settlement? To answer that question, Cannon – who contends the differences are much greater than 1 to 3 percent – pointed to Paragraph 57 of the Darrow suit:

“The Darrow Group has overpaid for advertising and therefore sustained pecuniary harm because of the false, deceptive and/or misleading statements made by [the Journal Sentinel] regarding circulation,” the lawsuit states.

Translation: Darrow thinks the class-action settlement didn’t pay out enough, and more intriguingly, thinks it didn’t adequately uncover all the alleged improprieties at the newspaper. “We don’t know what went on there,” Cannon says.

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Meanwhile, life has gotten more secure for top brass at Journal Communications. Given speculation the company might be sold, industry insiders took note of actions earlier this year to further gild the golden parachutes of top executives – ensuring a sale would leave them financially comfortable and thus less inclined to fight it.

Five top executives – Chairman and CEO Steve Smith; President Douglas Kiel; executive vice president and Journal Sentinel Publisher Elizabeth Brenner; executive VP and chief financial officer Paul Bonaiuto; and senior VP and general counsel Mary Hill Leahy – all got new perks that kick in if they’re fired, quit for “good reason,” or if the company gets new owners. They will get pro-rata bonuses, multiples of base salary at the time of termination (three times for Smith; double for Kiel and Brenner; and 1.5 times for Bonaiuto and Leahy), and continued health insurance (three years for Smith; two years for Kiel and Brenner; and 18 months for Bonaiuto and Leahy).

Rank and file employees haven’t done as well. The new severance plan was announced just two months after the company – still struggling with declining revenue Ð told employees 50 and younger they’d no longer get health insurance after retiring.

But the new perks don’t necessarily mean a buyer is in the wings. Despite Rupert Murdoch’s eye-popping offer in May to buy Wall Street Journal parent company Dow Jones for $60 a share, newspapers arenÕt the prize they once were. And once-logical buyers such as Tribune Co. or Knight Ridder now seem unlikely possibilities, both having been bought out themselves.

One sign that a company sale is in the works: if JCI rushes the Darrow lawsuit to settlement. No one seems to be betting on that for now.