United States v. Capitol Service, Inc.

• Decision Date: 16 June 1983
• Docket Number: No. 80-C-407.,80-C-407.
• Citation: 568 F. Supp. 134
• Court: U.S. District Court — Eastern District of Wisconsin
• Parties: UNITED STATES of America, Plaintiff, v. CAPITOL SERVICE, INC., Kohlberg Theatres Service Corporation, Marcus Theatres Corporation and United Artists Theatre Circuit, Inc., Defendants.

568 F. Supp. 134

UNITED STATES of America, Plaintiff, v. CAPITOL SERVICE, INC., Kohlberg Theatres Service Corporation, Marcus Theatres Corporation and United Artists Theatre Circuit, Inc., Defendants.

No. 80-C-407.

United States District Court, E.D. Wisconsin.

June 16, 1983.

Fred E. Haynes, John F. Greaney, J. Robert Kramer, Dorothy E. Hansberry, Attys., Antitrust Div., U.S. Dept. of Justice, Washington, D.C., for plaintiff.

Steven E. Keane, Trevor J. Will, Foley & Lardner, Milwaukee, Wis., and Peter M. Fishbein, Alan L. Mittman, Kaye, Scholer, Fierman, Hays & Handler, New York City, for defendants.

DECISION AND ORDER

WARREN, District Judge.

This is a civil antitrust action brought by the Government against four motion picture exhibitors who operate theatres in the Milwaukee area. The defendants, Capitol Service, Inc. ("Capitol Service"), Kohlberg Theatres Service Corporation ("Kohlberg"), Marcus Theatres Corporation ("Marcus"), and United Artists Theatre Circuit, Inc. ("UATC"), operate most of the first-run motion picture theatres in and around Milwaukee. The Government challenges as violative of Section 1 of the Sherman Act the defendants' practice of "splitting," or allocating among themselves, the rights to negotiate for films released by motion picture distribution companies. The Government contends that the defendants' split agreement constitutes a restraint of trade which is per se illegal under the Sherman Act. The defendants maintain that the split does not restrain competition and that, even if it does create a restraint, the split is nonetheless "reasonable" when examined under the rule of reason.

Beginning on August 16, 1982, the Court conducted a 4½ week bench trial. The parties have submitted lengthy proposed findings of fact and conclusions of law as well as post-trial briefs. In addition, the amici curiae motion picture distribution companies have filed a post-trial brief. The Court now issues this opinion, which shall serve as its findings of fact and conclusions of law required by Rule 52(a) of the Federal Rules of Civil Procedure. Part I of this decision describes the motion picture industry generally and the manner in which films are licensed by distributors to exhibitors. Part II provides background information regarding the motion picture exhibition market in Milwaukee, including information about the defendants and a description of motion picture licensing in Milwaukee prior to the present split agreement. Part III describes the split agreement challenged by the Government here, including its purpose, its terms, and its effect on the licensing of motion pictures in Milwaukee. Part IV discusses the caselaw applicable to the facts as determined by the Court and, in particular, why the Milwaukee split must be condemned as per se illegal under the Sherman Act. Finally, Part V considers the scope of relief to be granted in view of the Court's determination of per se illegality.

I. THE MOTION PICTURE INDUSTRY

The motion picture industry encompasses three operations: production, distribution, and exhibition. Producers make motion pictures and enter into agreements with distributors to have their films placed nationally into theatres owned and operated by exhibitors. Some distributors are also motion picture producers. In some instances, distributors will finance the production of films by independent producers.

There are seven major distributors of motion pictures: Buena Vista Distribution Co., Inc. ("Buena Vista"), which distributes Walt Disney pictures; Columbia Pictures Industries, Inc. ("Columbia"); Paramount Pictures Corp. ("Paramount"); Twentieth Century-Fox Film Corp. ("Fox"); MGMUA Entertainment Co. ("UA" or "United Artists"); Universal Film Exchanges, Inc. ("Universal"); and Warner Brothers Distributing Corp. ("Warner Bros."). Metro-Goldwyn-Meyer was formerly a major distributor. In 1982 it merged with United Artists. In addition to the major distributors, there are a large number of so-called "independent" distributors. Among the largest of the independents (in terms of annual rental revenue) are Embassy Pictures Corp. ("Embassy", formerly "Avco Embassy") and Orion Pictures, Inc. ("Orion," formerly Filmways, Inc., "Filmways").

Although the structure of the distributor network varies somewhat from distributor to distributor, major distributors and some of the prominent independents generally market their pictures through nationwide marketing networks consisting of branch, district, and regional offices, each having responsibility for distribution in a particular geographic area. The distributors are responsible for planning and financing national, regional, and local advertising campaigns and promotional efforts in regard to the exhibition of their films. At the national level, the distributors assume the full cost of such efforts. At the local levels, the distributors pay most of the advertising costs during the early weeks of a film's exhibition, although the exhibitors also contribute.

Motion pictures are licensed (rather than sold) to exhibitors by distributors on a picture-by-picture, theatre-by-theatre basis in each local market. License agreements for the exhibition of pictures generally include, among other things, percentage terms for film rental, specific playdates and length of playtime (including holdover provisions). The agreements may also include guarantees and advances.

The percentage terms for film rental generally provide for the distributor to receive a percentage of the gross or net box office receipts. Typical percentage rental terms are calculated on the basis of "90/10 versus the floor." Under this formula, the exhibitor pays to the distributor for each week of playtime the higher of (a) 90% of the gross box office income after the theatre's "house allowance" has been deducted or (b) a percentage of the gross box office without any deductions (the "floors"). A typical rental provision in Milwaukee for an eight-week long run might be as follows: the first two weeks at 70%; the second two weeks at 60%; the third two weeks at 50%; the fourth two weeks at 40%; and a holdover provision of 35% for each holdover week.

A guarantee is a minimum film rental payment that the exhibitor promises to pay the distributor regardless of the amount of film rental earned under the percentage rental terms in the contract. In the event that the film rental earned under the percentage rental terms in the contract exceeds the amount of the guarantee, the film rental earned in excess of the guarantee is also paid to the distributor. A guarantee is generally paid prior to a film's exhibition. An advance is an advance payment of film rental which is applied against the film rental actually earned under the percentage rental terms of the contract. Unlike a guarantee, any portion of the advance not earned under the percentage rental terms in the contract is refunded or credited to the exhibitor. The existence of guarantees or advances in a license agreement is important to a distributor's decision to award a film license.

Guarantees are important to distributors in a number of respects. As indicated above, if the percentage film rental is less than the amount of the guarantee, the distributor still receives the guaranteed film rental. In effect, the guarantee is a method by which the exhibitor shares with the distributor some of the risk inherent in producing and distributing motion pictures. Guarantees are also important to distributors because, as advance payments, they allow a distributor to recoup part of its investment before a picture is actually exhibited. In addition, guarantees assure prompt payment from exhibitors, who sometimes withhold portions of amounts due under a license agreement if a picture does not do particularly well at the box office.

The first exhibition of a motion picture in a market is referred to as its "first-run." Subsequent runs of pictures in the same market are known as "sub-runs." However, certain pictures (often classics such as Walt Disney's "Fantasia" and "Bambi") are re-released from time to time and are treated as first-run pictures.

Distributors frequently inform exhibitors of the release of new films by exhibitor solicitation letters. Such letters typically contain a synopsis of the film, the director and cast, the film's release date, the date bids are due, and suggested minimum terms. Often a distributor's suggested terms are called "national terms," meaning that the terms suggested are the same nationally for similar local markets.¹

The manner in which film licenses are awarded may vary from market to market or from time to time in any particular market. In some markets, licenses are awarded through a process of bidding, in which competing exhibitors submit bids for the right to play particular films at particular theatres. Often this bidding process results in a distributor awarding a license which provides for terms which exceed those suggested in solicitation letters. Sometimes film licenses are awarded through a process of competitive negotiations. Rather than solicit bids, a distributor will negotiate with more than one exhibitor for the right to play a particular film. By industry custom, licenses awarded by bidding or by competitive negotiation are not subject to "adjustment," i.e., the downward adjustment of rental owed by the exhibitor after the picture has played and not done as well as expected at the box office. Licenses which are not subject to adjustment are considered in the industry to be "firm." In some instances, film licenses are awarded by noncompetitive negotiation. This is the case in so-called "closed towns," i.e., markets in which only one exhibitor has theatres. Where noncompetitive negotiations occur, license terms generally are not firm but rather are subject to adjustment.²

In any given exhibition market, certain theatres may be considered superior in terms of grossing potential. Sometimes...