Motion Picture Herald (May-Jun 1946)

MOTION PICTURE HERALD 14! to follow Federal Trade Commission v. Paramount Famous-Lasky Corp., 57 F. 2d 152 (C. C.A. 2), for the reason we have given and particularly because of recent decisions of the Supreme Court. As Stone, C. J., said in Ethyl Gasoline Corp. v. United States, 309 U. S. 436, 459,— when dealing with the use of one patent to exploit another : ■< * * * It [Ethyl Gasoline Corporation] has chosen to exploit its patents by manufacturing the fluid covered by them and by selling that fluid to refiners for use in the manufacture of motor fuel. Such benefits as result from control over the marketing of the treated fuel by the jobbers accrue primarily to the refiners and indirectly to appellant, only in the enjoyment of its monopoly of the fluid secured under another patent. The licensing conditions are thus not used as a means of stimulating the commercial development and financial returns of the patented invention which is licensed, but for the commercial development of the business of the refiners and the exploitation of a second patent monopoly not embraced in the first. The patent monopoly of one invention may no more be enlarged for the exploitation of a monopoly of another, see Standard Sanitary Mfg. Co. v. United States, supra, than for the exploitation of an unpatented article. United Shoe Machinery Co. v. United States, supra; Carbice Corporation v. American Patents Corp., supra ; Leitch Manufacturing Co. v. Barber Co., supra ; American Lecithin Co. v. Warfield Co., 105 F. 2d 207, or for the exploitation or promotion of a business not embraced within the patent. Interstate Circuit v. United States, supra, 228-230." See also United States v. Crescent Amusement Co., 323 U. S. 173; Hartford-Empire Co. v. United States, 323 U. S. 386, 415, 452-3 ; MerGoid Corp. V. Mid-Continent Investment Co., 320 U. S. 661, 670; Mercoid Corp. v. Minneapolis-Honeywell Regulator Co., 320 U. S. 680, 684; United States vs. Masonite -Corp., 316 U. S. 265, 277-8; Interstate Circuit, Inc. v. United States, 306 U. S. 208, 227-230 ; Stokes & Smith Co. vs. Transparent-Wrap Machine Corp., decided by Second Circuit Court of Appeals May 1, 1946. We, however, declare illegal only that aspect of block-booking which makes the licensing of one copyright conditional upon an agreement to accept a license of one or more other copyrights. A distributor may license to an exhibitor at one time as many films as the latter wishes to receive, but the distributor may not constitute groups of pictures which it refuses to license separately. The distributor may of course not license his pictures at all, but if he does license them, he must do so severally and, in accordance with the bidding procedure previously indicated, must license them to the exhibitor or exhibitors who are qualified and offer the best terms for the various runs. Blind-selling does not appear to be as inherently restrictive of competition as block-booking, although it is capable of some abuse. By this practise a distributor could promise a picture of good quality or of a certain type which when produced might prove to be of poor quality or of another type — a competing distributor meanwhile being unable to market its product and in the end losing its outlets for future pictures. The evidence indicates that trade-shows, which are designed to prevent such blind-selling, are poorly attended by exhibitors. Record pp. 1178-9. Accordingly, exhibitors who chose to obtain their films for exhibition in quantities, need to be protected against burdensome agreements by being given an option to reject a certain percentage of their blind-licensed pictures within a reasonable time after they shall have become available for inspection. Such right of rejection has been incorporated in numerous licenses given by the defendants and should be afforded whenever licenses of unproduced films and films not trade-shown are secured by an exhibitor who has made the best competitive bid for them. The only group lice-^sing we are prepared to sanction is licensing by which the group is not offered on condition that the licensee shall take all the pictures included in it, or none, but in which the pictures are separately priced, and each picture is to be sold to the highest duly qualified bidder. As we have already indicated in discussing formula deals, master agreements, and franchises, the offering of pictures should be theatre by theatre, and if more than one picture is included in a license agreement, it will be only because of business convenience and to the extent that each picture so included has received the best bid. "Pooling" Agreements It is claimed by plaintiff that the theatre-owning defendants have combined with each other and with independent theatre-owners by "pooling" their theatres through operating agreements, leases, joint stock ownership of theatreoperating corporations, or through joint ownership of theatres in fee. We are asked to determine the validity of these various means of joining interests. By far the most numerous type of agreement in evidence is that by which given theatres of two or more exhibitors, normally in competition with each other, are operated as a unit or most of their business policies collectively determined by a joint committee, or by one of the exhibitors, and by which profits of the "pooled" theatres are divided among the owners according to pre-agreed percentages. See, e.g., Plaintiff's Exhibits 9, 100, 200, 206, 213, 218, 220-1 223, 226, 226A, 232. Some of the agreements provide that the parties thereto may not acquire other theatres in the competitive vicinity without first offering them for inclusion in the "pool." See, e.g., Plaintiff's Exhibits 201, 205-6, 219. These operating agreements we hold to be in clear conflict with the Sherman Act, for through them a defendant-exhibitor reduces to a minimum opposition between its own and other theatres in the "pool." Cooperation, rather than competition, characterizes their operation, and in view of the exhibitor-defendants' financial strength, control of first-class film distribution, ownership of concentrated numbers of first-run theatres, and especially ttieir combination to reduce competition in exhibition through systems of price-fixing and clearances, such restraints as these agreements impose upon free commerce in motion pictures are far less than reasonable. The result is to eliminate competition pro tanto both in exhibition and in distribution of films which would flow almost automatically to the theatres in the earnings of which they have a joint interest. Other forms of operating agreements are between major defendants and independent exhibitors rather than between major defendants, see e.g.. Plaintiff's Exhibits 97, 118,_ 208, 238-9, 358, but we are not of the opinion that this renders them legal. The effect is to ally two or more theatres of different ownership into a coalition for the nullification of competition between them and for their more effective competition against theatres not members of the "pool." Even if the parties to such combinations were not major film producers and distributors, but were all wholly independent exhibitors, such agreements might often be regarded as beyond the reasonable limits of restraint allowance under the Sherman Act. This result is certain when some of the parties are of major stature in the movie industry and have in other ways imposed unlawful restraints upon it, as we have found to be the case upon the record before us. In certain other cases the operating agreements are accomplished by leases of theatres, the rentals being determined by a stipulated percentage of profits earned by the "pooled" theatres, see e.g.. Plaintiff's Exhibits 9, 106, 118, 204. This appears to be but another means of carry.ing out the illegal objection discussed above. While a theatre-owner may of course remove itself from the business of operating theatres by leasing them to anyone it deems fit upon a fixed rental basis, so long as a monopoly in ex hibition is not thereby achieved by the lessee, any arrangement whereby one of the exhibitordefendants in this case allies its theatres with those of a competing exhibitor, independent or affiliated, and yet itself remains in the trade of exhibiting motion pictures by retaining an interest in the profits earned by the allied theatre, is unlawful under the anti-trust acts. Many thetares, or the corporations owning them, are held jointly by one or more of the exhibitor-defendants, in some cases in conjunction with independents. See, e.g., Plaintiff's Exhibits 8, 9, 46, 48, 62, 164, 355, 387; RKO's Exhibit 11. All these joint interests enable the major defendants to operate theatres collectively, rather than competitively, we find them illegal for the reasons above stated. Appropriate steps should be taken so that no exhibitor-defendant will own theatres (whether represented by fee, beneficial, or stock interests) jointly with other exhibitor-defendants, regardless of the size of the interests involved. Appropriate steps should also be taken so that no exhibitor-defendant or defendants will jointly own a theatre or stock interest therein with any independent exhibitor, except when a defendant or an independent owns an interest of five per cent or less, which we deem de minimis and only to be treated as an inconsequential investment in exhibition. See injra p. 71. This result may be reached in situations like Florida, Texas, Minnesota and Michigan by a sale, purchase, or exchange of interests in jointly-owned theatres so long as the transaction sought to be achieved will not result in an unreasonable restraint of competition in exhibition within the particular com.petitive area. To this end the court will control the manner in which rearrangements of these joint interests are effected. It seems impracticable to do more than lay down general rules as to the foregoing situations. If further details are required to cover specific provisions of the various pooling agreements, they should be set forth in the decree to be hereafter entered. It should be added that in our opinion there can be no objection to operating, booking, or film buying through agents, provided the agent is not also acting in respect to theatres owned by other exhibitors, independent or affiliated, and provided that in case the agent is buying films for its principal he does this through the bidding system, theatre by theatre. Discrimination Among Licensees The amended and supplemental complaint alleges that in licensing films each of the distributor-defendants has discriminated against small independent exhibitors and in favor of the large affiliated and unaffiliated circuits. Of the various contract provisions by which such discriminations are said to have been accomplished, plaintiff sets forth the following in its brief: suspending the terms of a given contract, if a circuit theatre remains closed for more than eight weeks, and reinstating it without liability upon re-opening. Plaintiff's Exhibits 188, 265-6, 383-4, 472-3 ; allowing large privileges in the selection and elimination of films. Plaintiff's Exhibits 172, 177, 192, 263-6, 383-4, 472; allowing deductions in film rentals if double bills are played, Plaintiff's Exhibits 183-4, 190, 199, 242, 245, 247, 258-9, 262, 264-6, 271-2a, 274, 382-3, 473 : granting moveovers and extended runs, Plaintiff's Exhibits 182-2a, 199, 260, 262, 265, 267, 274, 383-4, 474, 476; granting road-show privileges. Plaintiff's Exhibits 187-8, 199, 232, 265-6, 383-4, 472 ; allowing overage and underage. Plaintiff's Exhibits 190-1, 194, 259, 265-6, 383 ; granting unlimited playing time. Plaintiff's Exhibits 241, 267, 269, 471 ; excluding foreign pictures and those of independent producers. Plaintiff's Exhibits 173-4, 181, 190-1, 194, 199. 262, 265-6, 272a, 383-4, 395, 470-2; granting rights to question the classification of features for rental purposes. Plaintiff's Exhibits 187, 232, 259, 265, 472-3 ; and especially, discriminating in film rentals, clearances, and minimum admission prices, see Plaintiff's Brief pp. 56-70, 75-85. These provisions are found most frequently in