Diane Keaton was just doing her job. A seasoned journalist, she was gathering information on the paper and pulp industry, interviewing sources and writing news stories for Los Angeles-based ForestWeb Inc.’s PriceBeat, a news site devoted to the paper and pulp industry.

Now she’s being sued. Paperloop.com Inc., the online arm of the trade publication Pulp and Paper Week and Keaton’s former employer, is suing ForestWeb, Keaton and two other former Pulp and Paper Week employees that jumped ship for ForestWeb.

The reason: stealing sources. At issue is whether a reporter’s sources are the property of the publication for which the reporter works.

That, said ForestWeb attorney Phillip Maltin, senior counsel at Los Angeles firm Konowiecki & Rank LLP, is “an extreme, unsubstantiated position” and a one-of-a-kind claim.

Paperloop has laid claim to its reporters’ sources and hired the San Francisco law firm Heller Ehrman White & McAuliffe to argue its case. “When Paperloop reporters contact these sources and help develop new sources, they do so within the scope of their employment with Paperloop,” according to the complaint. “The sources, therefore, belong to Paperloop.”

“We’re not trying to suppress free speech or competition,” said Paperloop attorney Lawrence Weiss. “What we’re trying to do is protect the fruits of our labor, the results of hard work that we have put into developing our information.”

The complaint, which alleges unfair competition and misappropriation of trade secrets, is a testament to how competitive the pulp and paper trade publication business has become. While these magazines and Web sites are not household names, they serve a massive industry that one analyst estimated at $750 billion a year.

Paperloop was founded in January 2000 as a joint venture of Pegasus Capital Advisors and Miller Freeman Inc., a well-established San Francisco trade publisher and Pulp and Paper Week’s publisher. Many of Miller Freeman’s properties, including Paperloop, are now part of United Kingdom-based media giant United Business Media PLC.

Challenge from an upstart

ForestWeb is a fast-growing newcomer that was started in Los Angeles two years ago by Rami Ghandour. Ghandour launched the online news service PriceBeat last March, about a year after Pulp and Paper Week launched Paperloop.com. Both sites provide information on paper and pulp industry prices, trends and deals tantalizing stuff to paper and pulp industry executives.

Ghandour hired Keaton away from Pulp and Paper Week, where she had been a reporter since 1994. He also hooked Ola Jane Webb as his site’s publisher and James McClaren as a reporter. McClaren and Webb had already left Pulp and Paper Week when Ghandour first interviewed them.

Paperloop asserts in the suit that it provides all its employees with a handbook instructing them to keep trade secrets confidential, even after they move onto new jobs.

But nowhere in the handbook are reporters’ sources identified as trade secrets, and ForestWeb identified several former senior Miller Freeman managers who said they had never heard of such a policy.

Stifling competition?

ForestWeb argues the case is “a transparent effort to bleed a smaller competitor to death by way of the litigation process and its attendant expense.”

It’s also a classic SLAPP suit, ForestWeb asserts, and should be dismissed because of California’s anti-SLAPP statute. SLAPPs an acronym for Strategic Lawsuits Against Public Participation are complaints in which the alleged injury was the result of free speech activities protected by the First Amendment. There are questions about the legal merits of most SLAPPs, which nevertheless have been effective at achieving their intended purpose: to tie up their victims in expensive legal wrangling.

“This is not a first amendment issue,” Weiss said. “We invite competition. We just don’t think other people should benefit off our hard work.”

He declined to comment on how a decision in Paperloop’s favor would impact journalism. “In a way it’s the highest form of compliment,” Ghandour said. “Paperloop seems to be saying they can’t compete in the same space.”

Ironically, if Paperloop wants to prove its case, it will have to drag the very sources it has been trying to protect into court. “It could severely damage the reputation that it has worked so hard to achieve,” said Maltin.

How is it impacting reporters like Keaton?

So far, no editorial changes have been made at ForestWeb and Ghandour said he had no intention of steering his reporters away from sources.

“I wouldn’t agree to that anyway,” said Keaton, who is still “dumbfounded” by the complaint. “I’ve never heard of such a thing.”

The court date has been set for September 5.