Allied Artists Picture Corp. v. Rhodes

• Decision Date: 04 June 1982
• Docket Number: Nos. 80-3566,80-3600,s. 80-3566
• Citation: 679 F.2d 656
• Parties: , 1982-2 Trade Cases 64,769, 1982 Copr.L.Dec. P 25,407 ALLIED ARTISTS PICTURE CORP., Plaintiff, and Avco Embassy Pictures Corp., et al., Plaintiffs-Appellants, Cross-Appellees, v. James A. RHODES, Defendant-Appellee, Cross-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 656

679 F.2d 656

215 U.S.P.Q. 1097, 1982-2 Trade Cases 64,769,

1982 Copr.L.Dec. P 25,407

ALLIED ARTISTS PICTURE CORP., Plaintiff and Avco Embassy Pictures Corp., et al., Plaintiffs-Appellants Cross-Appellees, v. James A. RHODES, Defendant-Appellee, Cross-Appellant.

Nos. 80-3566, 80-3600.

United States Court of Appeals Sixth Circuit.

Argued Oct. 7, 1981.

Decided June 4, 1982.

Earl F. Morris, Harry Wright, III, Porter, Wright, Morris & Arthur, Columbus, Ohio, Robert W. Trafford, Dixon F. Miller, Alan Dershowitz, Cambridge, Mass., for Avco Embassy Pictures Corp., et al.

William J. Brown, Atty. Gen. of Ohio, Alan C. Witten, Asst. Atty. Gen., Gregory E. Young, Antitrust Section, Columbus, Ohio, for Rhodes.

Before LIVELY and MERRITT, Circuit Judges, and CECIL, Senior Circuit Judge.

MERRITT, Circuit Judge.

An Ohio statute regulating the marketing of motion pictures outlaws "blind bidding" and instead requires suppliers of motion pictures to screen their films in Ohio for all interested theater operators prior to negotiations or bidding. The second feature of the statute under attack is a set of competitive bidding guidelines. Although the statute allows producers and distributors to market films to exhibitors through negotiations rather than competitive bidding, the statute establishes guidelines for competitive bidding if distributors choose bidding as the method of marketing a film. In particular, the statute requires a disclosure of invitation-to-bid lists and the bids themselves; and if a distributor "rejects all bids submitted pursuant to an invitation to bid, he shall issue a new invitation to bid" rather than negotiate individual contracts with exhibitors. The third feature of the statute under attack significantly restricts the distributors' ability to charge theaters advance and guaranteed payments in addition to charging a percentage of box office receipts. ¹

Plaintiff-appellants-the country's nine major producers and distributors of films, who account for approximately ninety percent of film industry revenues-contend that the challenged provisions abridge free speech and violate the commerce clause as well as the antitrust and copyright laws. In a comprehensive opinion describing in detail the motion picture industry and its marketing practices, District Judge Duncan found no violation of federal law. 496 F.Supp. 408 (S.D.Ohio 1980). We uphold as valid the trade screening requirement and the bidding guidelines including the rebidding requirement. We remand for further consideration under the commerce clause the provisions of the statute relating to pricing methods.

I.

The Ohio statute, like similar statutes in at least eighteen other states, ² is an outgrowth of the historical tug-of-war between the major companies that produce and supply motion pictures and the theaters where they are shown. Judge Duncan found that the basic state interests supporting the statute are the need to provide exhibitors with sufficient information to assess new films and reject poor ones, the need to assure fairness in bidding procedures to counteract deceptive and unfair trade practices, and the need to redress a perceived imbalance in the bargaining or market power of the major producers and the exhibitors. The statute does not have a preamble or any recorded legislative history which clarifies its purposes or articulates the underlying state interests. We are left, as was the District Court, to articulate those purposes from the text itself.

The State combines several distinct arguments in support of its view that additional information about films and fair bidding procedures are needed and that exhibitors lack adequate negotiating strength. Judge Duncan found that under blind bidding the information available to the exhibitor is often insufficient to judge the quality of the film and at times deceptive. He found that the purpose of the bidding guidelines is to counteract deception, collusion and unfair trade practices.

Judge Duncan also found that a purpose of the statute is to shift risks of loss to distributors in order to redress an imbalance in bargaining power. The perceived imbalance in bargaining power arises from the fact that movie production and distribution are concentrated in the hands of a few large companies while the theaters are more widely held by smaller entities. The story and the film techniques used, as well as the star system promoted by the producers, give some pictures a unique quality; and the copyright laws give the distributor a monopoly in the market for individual films. Movie production for network and cable television and video cassettes bypasses theaters and gives producers a strong additional market for films. As home viewing has increased, the number of theaters has declined creating an atmosphere of market uncertainty and insecurity for exhibitors. In addition, in the 1940s and 1950s federal antitrust decrees prohibited certain tying arrangements, refusals to deal and reciprocal arrangements engaged in by producers, and the decrees required producers to divest themselves of ownership of theater circuits through which they controlled exhibition of first run movies. In effect the exhibitors and the State claim that these decrees have not adequately redressed the balance of bargaining power between the two sides and that state legislation is needed to shift the risk of loss.

The producers argue that the perceived need for additional information and fairer bidding procedures does not exist. They argue that the perceived imbalance in bargaining power also does not exist, and that even if it does, the State's attempt to shift risks away from in-state exhibitors to out-of-state distributors-one legislative purpose found by Judge Duncan to underlie the statute-is invalid under the commerce clause. They point out that neither the legislature nor the court below found any antitrust liability, monopoly power, predatory pricing or any "coercive or collusive distributor conduct," nor "any fraudulent or deceptive purpose in blind bidding." (Appellants Brief at 9.) The producers argue that the prohibition of "blind bidding"-or as they prefer to call it, "advanced licensing"-and the restrictions on bidding procedure significantly delay the exhibition of films in "a complex, high risk business requiring multi-million dollar investments, which depend on the vagaries of public taste," "fresh" material, and "timely release." (Id. at 3-5.) They argue that the statute significantly increases distributor costs and interferes with customary planning and national promotional efforts, particularly "wide release," i.e., the simultaneous release of a film in theaters across the country. They assert that the statute simply seeks "to protect the profitability of local business (theaters) at the expense of out of state business (producers and distributors)" (id. at 10) and reduces competition among exhibitors for films by limiting advance and guaranteed payments and by requiring full disclosure of bidders and the terms of bids. They contend that given the absence of any legitimate state interest in regulating an interstate communications industry, Ohio has exceeded its constitutional authority.

II. THE VALIDITY OF THE TRADE SCREENING REQUIREMENT

In United States v. Paramount Pictures, 334 U.S. 131, 68 S.Ct. 915, 92 L.Ed. 1260 (1948), the seminal antitrust case which restructured the film industry, see M. Conant, Antitrust in the Motion Picture Industry (1960), the Supreme Court defined "blind bidding" as the "practice whereby a distributor licenses a feature before the exhibitor is afforded an opportunity to view it." 334 U.S. 157, n. 11, 68 S.Ct. at 929, n. 11. The Court approved a district court antitrust decree designed "to remedy the problems"-mainly misrepresentation and deceptive trade practices-"created by that practice." Id. The Court quoted language from the decree setting out some of the reasons exhibitors need accurate information about films before licensing negotiations take place. It appears from the Supreme Court opinion and from the record in this case that potential abuses arising from blind bidding have been a legitimate concern of exhibitors for many years and a bone of contention within the industry. Judge Duncan found that the exhibitors' need for accurate information about films before they buy is real and that trade screening is the best remedy. 496 F.Supp. at 421. Judge Duncan stated that "by permitting Ohio exhibitors to view the film before bidding, it permits the exhibitors to use their own business judgment in determining whether and on what terms, to bid for a motion picture license. It effectively removes the unfairness inherent in the blind bidding process exhibitors described as 'buying a pig in a poke.' " 496 F.Supp. at 431.

State statutes repealing the doctrine of caveat emptor in its various forms in order to restrain possible deceptive trade practice in various industries are common. Statutes which require that buyers and sellers provide each other with accurate information about their products and services in order to counteract deceptive and misleading practices are based on legitimate state interests. The trade screening requirement here is a variation on that statutory theme. The fact that one purpose of trade screening may be, as Judge Duncan found, to redress an imbalance in bargaining power in favor of in-state exhibitors-a state interest we find highly suspect under the commerce clause (as explained in section IV below)-does not render invalid the state's legitimate interest in restraining deceptive trade practices by encouraging the flow of accurate information prior to contracting.

The District Court found as fact that the delays in film release caused by the trade screening requirement, although possible, appear to be infrequent and relatively minor in nature. We do not view this finding as clearly erroneous. Trade screening has been used in...