United States: As DOJ Reconsiders Watershed Consent Decrees, Claims Of Unlawful "Circuit Dealing" Proceed Against Landmark Theaters

Last Updated: October 12 2018
Article by Timothy H. Gray and Robert P. LoBue

Hollywood and the antitrust laws go way back. Indeed, antitrust suits have resulted not only some of the most significant cases in the evolution of American antitrust law, but many of the most consequential developments in the history of the movie industry. Chief among these is United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948), which held unlawful the then-existing vertical integration of production studios, distributors, and exhibitors (i.e., theaters); it also held various prevailing practices—"block booking" (bundling movie licenses and strong-arming theaters into accepting all of a studio's movies); "circuit dealing" (obtaining mass licenses for entire theater chains, instead of for individual theaters and films); overbroad "clearances" (selling exclusive exhibition licenses for certain geographical areas); and setting minimum movie-ticket prices—to be impermissibly anticompetitive. By effectively abolishing the so-called "studio system" and requiring the studios to divest themselves of their theater chains, the Paramount case and the resulting consent decrees fundamentally altered the relationships among producers, distributors, and exhibitors, and led to the industry structure that has survived to date.

But in August, citing the "considerable change" in the industry since the Paramount case, the Department of Justice announced that it would revisit the 1948 Paramount Consent Decrees, which bar block booking, circuit dealing, overbroad clearances; and minimum ticket price maintenance. Among other things, the DOJ observed that "none of the Paramount defendants own a significant number of movie theatres" and that "unlike seventy years ago, most metropolitan areas today have more than one movie theatre" which often "have multiple screens showing movies from many different distributors at the same time." It also cited the "[n]ew technology [that] has created many different distribution and viewing platforms that did not exist when the decrees were entered into," which permit "today's consumers [to] view motion pictures on cable and broadcast television, DVDs, and over the Internet through streaming services." The period for public comment on "whether the Paramount Consent Decrees still are necessary to protect competition in the motion picture industry" ended on October 4, and the DOJ has yet to comment further.

For now, however, the decrees remain in place—and, more to the point, the practices they proscribe continue regularly to crop up in litigation. While perhaps not, like Paramount, a blockbuster, a recent decision—2301 M Cinema LLC v. Silver Cinemas Acquisition Co.—well illustrates several of these core movie-industry antitrust issues.

The plaintiffs in Silver Cinemas are four independent movie theaters in Washington, DC, Denver, and Detroit who want to exhibit "specialty films"—e.g. documentaries, foreign-language films, and "art films"—but allege that they have been stymied by the anticompetitive practices of a large competitor, Landmark Theaters, "the largest specialty film movie theater chain in the country" with 51 specialty film theaters in 22 geographic markets all around the country. On the basis of these advantages of scale, the plaintiffs allege, Landmark is using "circuit dealing" to obtain broad geographical "clearances" in its license agreements with specialty-film distributors, in violation of Section One of the Sherman Act. Plaintiffs also allege that Landmark is monopolizing and attempting to monopolize the specialty-film exhibition market, in violation of Section Two of the Sherman Act, by currently holding monopoly power and using leverage to further exclude competitors from the market.

Landmark moved to dismiss, arguing that the plaintiffs insufficiently alleged actual "circuit dealing" as opposed to permissible "theater-by-theater, city-by-city" clearance agreements; that, in any event, plaintiffs failed to allege concerted action or agreements between Landmark and distributors; and that plaintiffs did not plead "antitrust injury," only injury to their individual theaters. Landmark also argued that the monopolization and attempted monopoly allegations did not state a claim because they failed to include enough detail about the nature of Landmark's negotiations and monopoly power. The district court denied the motion in all but one respect—Landmark's parent company was dismissed without prejudice from the case because the plaintiffs failed to allege any facts connecting it to the actions of its subsidiaries.

First, as to the Section One claims, the court held that the plaintiffs plausibly and adequately alleged that Landmark uses its market power across and within geographical markets to compel distributors to agree to exhibition licenses with substantial "clearances" in geographical areas that serve to cut Landmark's smaller competitors out of the market, and that the facts alleged supported an inference of actual coercion by threats of retaliation. (The court wryly noted that Landmark itself had alleged substantially similar facts in a 2016 circuit-dealing and monopolization suit of its own against Regal Entertainment Group, arguing at the time that it could not allege more "[w]ithout the benefit of discovery.") It also held that plaintiffs pleaded an "agreement" because their allegations contained more than "parallel conduct" explicable by unilateral action in response to market forces. Finally, it held that plaintiffs had pleaded "antitrust injury" in the form of, inter alia, "decreased output and revenues for distributors" and "fewer exhibitor choices[,] . . . increased movie prices[,] and decreased theater quality" for consumers.

As to the Section Two claims, the court rejected Landmark's argument that plaintiffs were required to allege "that it combined its open [i.e. competitive] and closed [i.e. noncompetitive] towns" to increase its leverage when negotiating with distributors, holding that the plaintiffs were not required to plead such specific facts for purposes of a motion to dismiss; their allegation that Landmark "leveraged its dominant position nationwide" was enough. The court also held that Plaintiffs adequately alleged Landmark's monopoly power; allegations included Landmark's owning "fifty-one theaters in twenty-two major geographic markets nationwide," including a number of cities in which it held up to 80% of the market, and substantial barriers to entry.

We'll continue to follow this case, as well as any developments from the DOJ's review of the Paramount Consent Decrees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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