Antitrust Law Daily Art house theater failed to show film licensing agreements harmed competition
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Tuesday, September 8, 2020

Art house theater failed to show film licensing agreements harmed competition

By Nicole D. Prysby, J.D.

The defendant theater-circuit owner’s entry into film licensing agreements covering its theaters caused no net harm to competition.

An art house theater failed to show that the film licensing agreements covering a chain of multiplex theaters harmed competition, and therefore its restraint of trade claim based on circuit dealing failed, a California state appellate court has decided in reversing a trial court’s judgment. The art house theater claimed that a large theater chain used the chain’s leverage in the broader market to deny it access to desirable movies, thus driving it out of business. The court rejected the theater’s relevant geographic market definition as too limited, because there was no evidence that consumers would not travel just a few miles outside of the Rancho Mirage zone to watch a movie. And the theater failed to present substantial evidence of anticompetitive effects. There was no reduction in the output of film licenses, because the challenged agreements affected not how many licenses were issued, but how a static number of license were divided between theaters in the zone. Nor did the agreements harm competition by creating significant barriers for theaters trying to enter the zone. There was no showing of harm in the broader market (the Coachella Valley) proposed by the multiplex chain, as there was no evidence that art films could not find another home after the theater closed or that the amenities offered by the theater were not offered elsewhere (Flagship Theatres of Palm Desert, LLC v. Century Theatres, Inc., September 2, 2020, Rothschild, F.).

Flagship Theatres of Palm Desert owned a single multi-screen movie theatre complex in Palm Desert, California. Century Theatres (later acquired by Cinemark USA) owned a multi-screen movie theatre complex in nearby Rancho Mirage, California, as well as many other multiplexes across the Western United States.

In 2006, Flagship brought claims, alleging that Century had engaged in the practice of "circuit dealing" in violation of California’s Cartwright Act. "Circuit dealing" occurs when a large theater chain uses its leverage in the broader market to deny a smaller competitor access to desirable movies. Flagship pursued a non-monopoly circuit-dealing claim, based on Century’s licensing agreements that covered multiple theaters. As to this claim, the trial court concluded that the rule of reason applied. Thus, the court instructed the jury that, in order for Flagship to prove its non-monopoly circuit-dealing claim, Flagship had to prove both the elements of that claim and that the multi-theater licensing agreements underlying the claim caused an "anticompetitive effect" that "outweighed any beneficial effect on competition."

Flagship obtained a jury verdict against Century. Century appealed, arguing that substantial evidence did not support the jury’s findings that Century’s agreements harmed competition.

Geographic market definition. The court held that substantial evidence did not support the relevant geographic market definition Flagship identified at trial. Flagship asserted that the geographic market is the "competitive zone" in which the clearances were granted: the Rancho Mirage clearance zone. Ample evidence established that only the Palme (Flagship’s theater) and The River (Century’s theater) competed for film licenses in the Rancho Mirage clearance zone, as they were the only two theaters in this zone. But no evidence Flagship presented at trial suggested that consumers in the Rancho Mirage clearance zone could not or would not travel outside of that zone to view a film—for example, at the Regal Rancho or Mary Pickford theaters located approximately 6 miles away from the Palme and approximately 4.5 to 5.5 miles away from The River. For antitrust movie theater industry claims, the relevant geographic market must be based on the area in which moviegoers are willing to travel to see movies, according to the court.

Harm to competition. Even if Rancho Mirage could serve as a proper antitrust relevant geographic market in this case, Flagship failed to offer substantial evidence of anticompetitive effects in that market. Flagship identified three types of alleged harm in the Rancho Mirage market, all of which the court rejected. There was no reduction in the output of film licenses in the Rancho Mirage clearance zone, because the challenged agreements affected not how many licenses each distributor issues, but how the distributor will divide up a static number of license between theaters in the zone. Even if the agreement caused there to be fewer theaters in Rancho Mirage, there was no evidence suggesting consumers will not travel outside the Rancho Mirage clearance zone to see a movie. And the challenged agreement did not harm competition by creating significant barriers for theaters trying to enter the Rancho Mirage clearance zone. In fact, another theater entered the market shortly after Flagship’s theater closed.

There was also insufficient evidence of competitive harm in the broader market (as defined by Century) of the Coachella Valley. There was no evidence to support Flagship’s claim that the closure of its theater reduced the output of independent and artistic films. The record did not include substantial evidence supporting that the challenged licensing agreements proximately caused the Palme to go out of business.

Even if the evidence did support that the Palme closed as a result of the challenged agreements, there was no evidence speaking to the total number of unique or independent films exhibited in the Coachella Valley after the Palme’s closure. There was no evidence that the films that might have been shown at the Palme could not find another home after the Palme closed. Flagship also argued that the challenged agreements caused a reduction in output of a unique and valuable type of theater, the unique art house theater. But there was no evidence that the amenities or overall theater experience offered by the Palme were not offered by another theater after the Palme closed (such as the theater that opened in the same space as the Palme).

Because Flagship’s non-monopoly circuit-dealing claim was subject to the rule of reason, the lack of substantial evidence to support a finding of anticompetitive harm mandated reversal of the judgment.

This case is No. B292609.

Attorneys: Thomas L. Boeder (Perkins Coie LLP) for Flagship Theatres of Palm Desert, LLC. Peter H. Mason (Norton Rose Fulbright LLP) for Century Theatres, Inc.

Companies: Flagship Theatres of Palm Desert, LLC; Century Theatres, Inc.

MainStory: TopStory Antitrust GCNNews CaliforniaNews

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