Flagship Theatres of Palm Desert, LLC v. Century Theatres, Inc.

CourtCalifornia Court of Appeals
Citation269 Cal.Rptr.3d 446,55 Cal.App.5th 381
Decision Date02 October 2020
Docket NumberB299014,B292609
Parties FLAGSHIP THEATRES OF PALM DESERT, LLC, Plaintiff and Respondent, v. CENTURY THEATRES, INC., et al., Defendants and Appellants. Flagship Theatres of Palm Desert, LLC, Plaintiff and Appellant, v. Century Theatres, Inc., et al., Defendants and Respondents.

Norton Rose Fulbright, Peter H. Mason, Joshua D. Lichtman, Los Angeles, Lesley Holmes, Michael A. Swartzendruber and Barton W. Cox, for Defendants and Appellants (B292609) and Defendants and Respondents (B299014).

Perkins Coie, Thomas L. Boeder, Elvira Castillo, Donald J. Kula, Los Angeles, Sunita Bali, San Francisco, and Alisha C. Burgin, Los Angeles, for Plaintiff and Appellant (B299014) and Perkins Coie, Thomas L. Boeder, Elvira Castillo and Donald J. Kula for Plaintiff and Respondent (B292609).

ROTHSCHILD, P. J.

This appeal arises from an antitrust dispute involving the licensing of motion pictures to movie theaters for public exhibition. Plaintiff Flagship Theatres of Palm Desert, LLC (Flagship), which previously owned the movie theater Palme d'Or in the Coachella Valley, obtained a jury verdict against defendants Century Theatres, Inc. and Cinemark USA, Inc. (collectively, Century),1 which owned The River, a theater located two miles away from Palme d'Or. Century owns a circuit of theaters throughout the country as well. The jury found true Flagship's allegations that Century had engaged in a practice known as "circuit dealing" by entering into licensing agreements with film distributors that covered licenses to play films not just at The River, but at multiple other Century-owned theaters as well, and using these agreements to pressure distributors into refusing to license films to Palme d'Or.

In reaching this verdict, the jury made several more specific findings regarding the competitive effects of the agreements, including that the agreements harmed competition in the relevant market. On appeal (case No. 292609), Century argues substantial evidence does not support these findings, that there can be no antitrust liability without such evidence, and that the judgment in Flagship's favor should therefore be reversed. In the alternative, Century argues that the court committed reversible error by admitting into evidence certain testimony and emails Century argues are inadmissible prejudicial hearsay, and that the jury's verdict is an impermissible "compromise verdict."

We agree with Century that Flagship did not present substantial evidence of anticompetitive effects in the relevant market. We further agree with Century that this failure of proof warrants reversal, as circuit dealing based on multi-theater licensing agreements is not per se illegal under the Cartwright Act. We therefore reverse the judgment and need not reach Century's remaining arguments on appeal. Nor need we address Flagship's appeal (case No. B299014)2 from the court's postjudgment order awarding Flagship attorney fees in an amount lower than Flagship had requested.

FACTUAL AND PROCEDURAL BACKGROUND
A. Film Industry Background

In the motion picture industry, film studios, also known as distributors, own the copyrights to films, and grant licenses to theaters, also known as exhibitors, to play those films to the general public.

A group of film distributors, referred to as the "major" and "mini-major"3 film studios, collectively distribute the majority of "first-run commercial films in the United States." First-run films are "new films that exhibitors play immediately following the release date." A "commercial film" is one that has high "grossing ability" because it will appeal to a large audience. "[O]n the other end of the spectrum" from "commercial films" are the "more artistic class movies," "class title[s] that might come out on a more limited release basis."

Distributors usually license first-run films on a "day and date" basis, meaning they grant licenses to a theater regardless of whether nearby theaters are also licensing the film at the same time. When two or more theaters are located very close to each other, however, distributors license a film to only one of those theaters for a period immediately following a film's initial release. This is referred to as a "clearance" situation, or a "competitive zone." A clearance is "an exclusive right that a film distributor grants to a theater in connection with the licensing of a film" that "prohibits the distributor from licensing the film for exhibition at certain other theaters ... while the film is being shown at the theater that obtained the clearance." ( Flagship Theatres of Palm Desert, LLC v. Century Theatres, Inc. (2011) 198 Cal.App.4th 1366, 1375, 131 Cal.Rptr.3d 519 ( Flagship I ).)

After the initial period of time covered by a clearance, a distributor may choose to license the film to the other theater or theaters in the clearance zone. At that point, however, the film is no longer a first-run film, but a less lucrative "moveover."

Although a clearance by definition means only one theater in the zone may exhibit a given film during the clearance period, distributors do not necessarily grant clearances to all their films to the same theater. Instead, a distributor may choose to allocate films between theaters in the zone, granting one theater clearances to some films, and the other theater (or theaters) in the zone clearances to other films.

During the relevant time period for this case (20032016), clearances were common throughout the country.4 A particular clearance may violate antitrust laws if it is shown to cause actual harm to competition that outweighs any procompetitive benefits of the clearance. ( Orson, Inc. v. Miramax Film Corp. (3d Cir. 1996) 79 F.3d 1358, 1372 ( Orson ).) But clearances have withstood antitrust scrutiny on several occasions because they can and often do generate a net benefit to consumers by increasing the selection of films that theaters offer and stimulating competition on bases other than film selection. (See, e.g., ibid. ; Theee Movies of Tarzana v. Pacific Theatres, Inc. (9th Cir. 1987) 828 F.2d 1395, 1399 ( Tarzana ); Soffer v. Nat'l Amusements Inc. (D.Conn. Jan. 10, 1996, No. CIV 3:91CV472(AVC)), 1996 WL 194947 *6 ( Soffer ) [clearances "increased the overall choice of films to customers" in that market].)

B. The River and Palme d'Or Theaters

Century Theaters was an exhibitor that owned 80 theaters, including a theater called The River in Rancho Mirage, California. In 2006, another exhibitor, Cinemark USA, acquired Century Theatres. Following this acquisition, the combined entity (Century) operated approximately 300 theaters throughout the country, including The River.

Flagship owned and operated a single theater in Palm Desert, Palme d'Or (the Palme), from 2003 until mid-2016. Flagship's investors (and thus, the Palme's owners) include the actor, Bryan Cranston.

Both The River and the Palme were located in the Coachella Valley, a collection of towns largely populated by an older, more affluent demographic. State Route 111 (Route 111) is the valley's main thoroughfare, facilitating travel between these towns, which include Palm Springs, Cathedral City, Palm Desert, Rancho Mirage, Indian Wells, and La Quinta. The River and the Palme are approximately two miles apart from each other on Route 111.

The Coachella Valley has "a lot of theatres," most of which are located on or minutes off of Route 111. Multiple theaters are located "not all that far from" The River and the Palme in terms of both drive time and distance. At trial, Flagship witnesses testified that the Palme competed for patrons with these theaters, including The River, the Mary Pickford 14 in Cathedral City, the Regal Rancho 16 in Rancho Mirage, the Regal in Palm Springs, the Regal Metro 8 in Indio, and the La Quinta in La Quinta. Although the specific driving distances between the Westfield Mall in Palm Desert (where the Palme was located) and these other theaters are not included in the record on appeal, on the court's own motion, we take judicial notice of these distances as being approximately 2 miles, 6 miles, 6 miles, 12.5 miles, 10 miles, and 6.5 miles, respectively.5

Differences in what The River and the Palme offered their patrons are central to the parties’ arguments on appeal. The River has 15 screens and is located in an outdoor shopping area. The River is a typical commercial movie theater with stadium seating and a typical movie theater concession area. It caters to adult, teen, and family audiences.

The Palme had 10 screens and was located in an indoor mall. The Palme is an "art house theater" with a stated mission of offering a wide selection of independent, foreign, and other artistic class films that otherwise would not be seen in the Coachella Valley. Accordingly, the films the Palme exhibited excluded "very commercial titles,"6 although the Palme did seek to show some "high-end adult commercial" pictures.7 This mix of offerings was designed to appeal to "sophisticated, discerning film fans" seeking "upscale, adult programming." The theater "[did] not have a youth audience, at all," and instead "focus[ed]" on "a cultured adult audience and seniors."

When the Palme opened, it made its desired mix of films known to distributors. It explained to distributor Sony, for example, that the Palme "will not be asking for, nor expecting, most Sony product, as this is not a typical mainstream venue. Please continue to sell ... [T]he River all the very commercial titles." Universal similarly understood that the Palme "[was] only interested in certain films. They didn't really care about a lot of them."

The Palme's decor and amenities were designed to create an upscale art house theater experience as well. Flagship redecorated the building's interior, creating an "elegant" lobby of granite, slate, and hand-painted decorations. It had a café that offered "gourmet" food and "bistro fare" such as espresso...

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