U.S. District Judge Susan Illston today temporarily blocked any attempts by Dean Singleton’s MediaNews Group, owner of the Mercury News and Contra Costa Times, from jointly selling advertising or distributing newspapers with Hearst’s San Francisco Chronicle. [Click here for a PDF of the 14-page ruling.]

The newspaper companies can contest the ruling at a Dec. 6 hearing. If the judge isn’t persuaded to change her mind at that time, the restrictions will remain in place until the case goes to trial in April.

The ruling comes in a lawsuit filed by San Francisco real estate developer and political insider Clint Reilly (left), who contends that the two companies are conspiring to fix ad rates and divide up the market. Reilly pointed to Hearst’s decision to buy the Monterey Herald and St. Paul Pioneer Dispatch for $263 million and then give those papers to MediaNews in exchange for a 30% interest in MediaNews’s holdings outside the Bay Area.

Evidence cited by the judge in her ruling included an April 26, 2006 letter from Hearst senior vice president James Asher to MediaNews President Jody Asher that Reilly’s lawyers showed to the judge. Asher says in the letter that the two companies have agreed to “offer national advertising and internet advertising sales for their San Francisco Bay area newspapers on a joint basis, and to consolidate the San Francisco Bay Area distribution networks of such newspapers …”

Illston suggests that, after reading the April 26 letter, she was misled by MediaNews and Hearst. “First, the Court accepted defendants representations that Hearst’s involvement in the transactions was solely that of a passive equity investor. Though defendants offered no explanation why Hearst was willing to help finance an acquisition that would only make its competition stronger, the Court did not understand that Hearst expected, or would later receive, any quid pro quo. … However, the April 26 letter suggests, at the very least, that Hearst’s investment was specifically tied to an agreement by MediaNews to limit its competition with Hearst in certain ways.”

Illston later writes, “… the April 26 letter casts doubt on the Court’s earlier finding that ‘The San Francisco Chronicle is a strong source of competition for CNP’s (California Newspaper Partnership, majority owner MediaNews) newspapers, even after the MediaNews acquisition is finalized.'”

The judge also said it might be possible that the plan of the two companies to sell national advertising together is illegal.

Illston rejected a request by Reilly to stop MediaNews’ consolidation of the Mercury News, Contra Costa Times and other papers the company owns in the Bay Area. Those papers are laying off workers and shutting down offices. Reilly argued that these changes would be irreversable and the judge needed to stop it. The judge disagreed. “While consolidation of some aspects of the papers may make divestiture more difficult, it will not make it impossible. The San Jose Mercury News and the Contra Costa Times continue to exist despite recent events, and could be divested.”

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