Redwood Theatres, Inc. v. Festival Enterprises, Inc.

• Decision Date: 22 April 1988
• Docket Number: No. A037916,A037916
• Court: California Court of Appeals Court of Appeals
• Parties: , 1988-1 Trade Cases P 68,065 REDWOOD THEATRES, INC., Plaintiff and Appellant, v. FESTIVAL ENTERPRISES, INC. et al., Defendants and Respondents.

Page 189

248 Cal.Rptr. 189

200 Cal.App.3d 687, 1988-1 Trade Cases P 68,065

REDWOOD THEATRES, INC., Plaintiff and Appellant, v. FESTIVAL ENTERPRISES, INC. et al., Defendants and Respondents.

No. A037916.

Court of Appeal, First District, Division 1, California.

April 22, 1988.

As Modified on Denial of Rehearing

May 19, 1988.

Review Denied Aug. 11, 1988.

Joseph L. Alioto, Lawrence Alioto, San Francisco, for plaintiff and appellant.

M. Laurence Popofsky, Judith Z. Gold, Jeffrey A. Leon, Heller, Ehrman, White & McAuliffe, San Francisco, for defendants and respondents.

NEWSOM, Associate Justice.

Redwood Theatres, Inc., (hereafter appellant) filed this action on February 28, 1985, against a competing motion picture exhibitor, Festival Enterprises, and four major film distributors, Paramount Pictures Corporation, Warner Bros. Distributing Corporation, Orion Pictures Corporation, and Twentieth Century Fox Film Corporation (hereafter respondents). The complaint seeks treble damages for antitrust violations under the Cartwright Act and, alternatively, damages for fraud. The action against Twentieth Century Fox Film Corporation was later voluntarily dismissed. Much of the record on appeal consists of extensive arguments on a discovery request: appellant's motion to compel production of the distributor defendants' "cutoff cards"--records providing a history of film rentals in each market--for six cities in Northern California where Festival Enterprises does business. After the initial trial date was continued, respondents successfully moved for summary judgment, which was entered on January 15, 1987.

The case presents simple facts and complex questions of law. Appellant operates the Briggsmore Seven Theatre in Modesto, California. In 1981 and 1982, it invested $1.7 million for renovation and conversion of the theatre into a seven-screen complex. Two other exhibitors, including the respondent Festival Enterprises, also operate theatres in Modesto. Festival Enterprises operates additional theatres in five other Northern California markets--Hayward, Stockton, Fresno, Walnut Creek, and Marin County--and in Alaska and Southern California.

From our perusal of the record, we learn that the major film distributors in the United States release films simultaneously in hundreds of markets under license agreements. Almost all of a film's revenues in a market comes from its "first run"; box office receipts tend to diminish with each week that a picture is played. Distributors will license a first-run film to only one theatre in a medium-sized market such as Modesto. Commonly, the films are licensed by competitive bidding; the distributors send out written bid invitations and evaluate the bids submitted for each market. In other cases, the distributors may contact competing exhibitors by telephone to negotiate licensing terms.

Appellant's complaint alleges that the distributor defendants "have entered into unwritten agreements with Festival [Enterprises] pursuant to which all or substantially all of the Paramount, Warner Bros. and Orion first run product is licensed to the Festival-owned theatre or theatres in Modesto, Hayward, Stockton, Fresno, and to a lesser extent, Walnut Creek-Pleasant Hill, and in Marin County, ..." Although the distributors have continued to solicit bids for Modesto showings, appellant alleges that the bids have been a sham; the distributors are committed to Festival Enterprises even before bid invitations go out. As a result, the distributors have repeatedly licensed potentially remunerative films to Festival Enterprises even though appellant has submitted demonstrably superior bids.

The alleged unwritten agreements vary somewhat among the distributor defendants. For example, Warner Bros. is said to have committed only about 80 percent of its films to Festival Enterprises during the period December 1978, to August 1982; thereafter, it licensed films more evenly among Modesto exhibitors but reserved the most financially attractive films for Festival Enterprises. There is no allegation that the distributor defendants' conspired among themselves or that they were a party to a plan to drive the appellant out of business. Rather, the agreements are alleged to be part of a business policy in which the distributor defendants dealt preferentially with theatre circuits such as Festival Enterprises.

In affidavits opposing the motion for summary judgment, appellant offers to prove the alleged agreement largely through the history of bidding. Though possessing superior facilities, it has been unable to obtain the desired first-run films even though it has frequently outbid its competitor, Festival Enterprises. Appellant also points to certain admissions of distributor's representatives which tend to some extent to corroborate this circumstantial evidence. But the history of bidding still may reflect only the distributors' disinclination to do business with appellant. To complete its case, appellant needed to show that it did not lose out in the bidding because of some factor peculiar to itself but because the distributors dealt preferentially or exclusively with Festival Enterprises throughout its circuit. This evidence arguably might be provided by the distributor's cut-off cards which list the films licensed to each theatre in each market and record the essential terms of the license agreement, box office receipts, and rental payments. The denial of its discovery motion left it without this critical evidence.

Although the agreement allegedly deprived it of access to substantially all the defendant distributors' films, appellant bases its claim for damages on bidding for twenty specific films--eight from Paramount, seven from Warner Bros., and five from Orion. In each case, it offers to prove that it submitted a bid superior to that of Festival but failed to secure the film and was forced to license a less popular motion picture. Festival earned a gross profit on the twenty films of $628,157; during the same time period, appellant made a gross profit of only $268,269 on less desirable films.

In brief, while the evidence produced in discovery is rather equivocal, appellant maintains that the requested cutoff cards would clearly establish the alleged agreements between Festival Enterprises and the three distributor defendants. The alleged agreements, which are independent of each other and seem lacking in any predatory intent, reflect the distributors' preference for dealing with theatre circuits to the exclusion of independents such as appellant. The question on appeal is whether such exclusive-dealing agreements are violative of the state antitrust laws.

Although the complaint states a cause of action under the California Cartwright Act, the briefs in this appeal have relied almost exclusively on federal precedents under the Sherman Act. (Bus. & Prof. Code, §§ 16720 et seq.) "A long line of California cases has concluded that the Cartwright Act is patterned after the Sherman Act and both statutes have their roots in the common law. Consequently, federal cases interpreting the Sherman Act are applicable to problems arising under the Cartwright Act." (Marin County Bd. of Realtors, Inc. v. Palsson (1976) 16 Cal.3d 920, 925, 130 Cal.Rptr. 1, 549 P.2d 833; G.H.I.I. v. MTS, Inc. (1983) 147 Cal.App.3d 256, 265, 195 Cal.Rptr. 211.) Since the relevant case law under the Cartwright Act is comparatively sparse, we will also rely chiefly on federal decisions.

The federal precedent of most immediate relevance to this case, United States v. Paramount Pictures (1948) 334 U.S. 131, 68 S.Ct. 915, 92 L.Ed. 1260, was forged in over a decade of litigation. It has been called "the greatest economic victory ever achieved by the Department of Justice" (Southway Theatres, Inc. v. Georgia Theatre Co. (5th Cir.1982) 672 F.2d 485, 497) and resulted in a fundamental restructuring of the industry. In a dissenting opinion, Justice Frankfurter observed, "[t]he terms of the decree in this litigation amount, in effect, to the formulation of a regime for the future conduct of the movie industry." (Id. 334 U.S. at p. 179, 68 S.Ct. at p. 939.)

The Paramount Pictures case reached the Supreme Court with two companion cases which concerned regional chains of motion picture exhibitors and dealt chiefly with charges of abuse of monopoly power. (United States v. Griffith (1948) 334 U.S. 100, 68 S.Ct. 941, 92 L.Ed. 1236; Schine Chain Theatres v. United States (1948) 334 U.S. 110, 68 S.Ct. 947, 92 L.Ed. 1245.) In the most significant of these cases, United States v. Griffith, the Department of Justice brought suit against four affiliated motion picture exhibitors which operated a circuit of theatres in 85 towns in the southwestern United States; in 53 of these towns there were no competing theatres. The exhibitors jointly negotiated licensing agreements that "lumped together towns in which the [exhibitors] had no competition and towns in which there were competing theatres." (Id. 334 U.S. at pp. 102-103, 68 S.Ct. at p. 943.) The Supreme Court held that the agreements served to monopolize trade in violation of sections 1 and 2 of the Sherman Act. ( Id. at p. 106, 68 S.Ct. at p. 945.) The opinion reasoned that an exhibitor with a monopoly of theatres in part of a circuit may not use "that strategic position to acquire exclusive privileges in a city where he has competitors, ..." ( Id. at p. 107, 68 S.Ct. at p. 945.)

In United States v. Paramount Pictures, supra, 334 U.S. 131, 68 S.Ct. 915, the Department of Justice directed its attack against the major motion picture distributors in the country. The complaint sought to enjoin a long list of anticompetitive practices, each of which was discussed ad seriatim by the Supreme Court and a distinguished three-judge panel in the lower court. We may approach the decision by first discussing its analysis of the two practices involved in this appeal--circuit dealing and franchising--and then...