Is there any excuse for a news organization to print a statement that they know is untrue, without at least trying to clue their readers into the truth? That seems to defeat the central purpose of journalism. So what should Time have done? One option might have been to go to Rove and say: We know McClellan isn't telling the truth. You either need to tell us the truth, on the record, or tell him the truth.
What if Rove had refused? One option might have been to go to McClellan and tell him that they had reason to think his statement was not accurate. And if McClellan brushed them off? They should have stopped at nothing until they found a way to report what they knew to be the truth.