MEDIA: Daily News sued by co-founder

Lawsuit follows partner's ouster three years ago

by Don Kazak

One of the co-founders of the Palo Alto Daily News has taken his former partners to court three years after his ouster from the newspaper's management.

In his lawsuit, filed last week in Santa Clara County Superior Court, David Danforth alleges financial mismanagement of the Daily News and favoritism toward advertisers. Those charges are denied by Dave Price and Jim Pavelich, the remaining co-founders.

Danforth also alleges that Pavelich and Price violated the trio's original operating agreement by removing him from company management and later deciding to compensate themselves.

Before his ouster, Danforth said neither he nor Pavelich--who provided most of the money to start the newspaper--received any compensation.

According to the lawsuit, Pavelich and Price now receive $120,000 a year apiece, which Danforth calls a "diversion" of the company's profits.

"Almost all the numbers in the lawsuit are wrong," Price said.

The falling-out occurred in August 1996, just nine months after the three former Colorado newspaper owners and editors started the Daily News, which is known for a sometimes feisty and aggressive brand of news reporting.

To hear Danforth tell the story--as he did last year to reporters at other newspapers--Price and Pavelich have done little right. The lawsuit charges the newspaper's reputation has been hurt by alleged favoritism toward advertisers.

Price, the editor, strongly disputes those allegations.

"He's crazy if he thinks the newspaper has been mismanaged," Price said. "We've grown faster than some Internet companies."

"Three guys started the newspaper and two decided he shouldn't be involved anymore," Pavelich said. "He's mad because we're working and paying ourselves."

The lawsuit also asks that the terms of the original partnership agreement be upheld and re-established, and that Pavelich and Price return the money they've been paying themselves to the company.

Danforth said the company's operating agreement has an "anti-freeze-out" provision, "so there are no 2-1 freeze-outs."

For Danforth to win in court, he has to "show that the freeze-out was contrary to the agreement they had," said Alan Bankman, a Stanford law professor. "Then, the question is what's in the agreement. It may depend on what is meant by freeze-out, and what's being effectuated. You have to know exactly what's going on."

The language of the company's operating agreement, submitted as an exhibit to the lawsuit, suggests that Pavelich and Price had the power to remove Danforth as one of the company's two managers in 1996 and replace him with Price:

"Managers shall be elected by the affirmative vote or written consent of members holding a majority interest."

Pavelich said he expected the lawsuit to be settled through arbitration.

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