Antitrust Law Daily Justice Department secures termination of legacy Paramount decrees
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Friday, August 7, 2020

Justice Department secures termination of legacy Paramount decrees

By Peter Reap, J.D., LL.M.

The decrees affecting the movie industry and film distribution were terminated immediately except for a two-year sunset period for certain provisions.

The Department of Justice succeeded in its request to the federal district court in New York City to immediately terminate (except for a two-year sunset period for certain provisions) the series of legacy consent decrees known as the Paramount Decrees (the Decrees) which for over seventy years have regulated how certain movie studios distribute films to movie theatres, the agency announced. The court accepted the government’s "reasonable and persuasive explanation" that the termination of the Decrees served the public interest in free competition. A two-year sunset period for the Decrees’ block booking and circuit dealing provisions which would provide movie theaters a transitional time period to adjust their business models and strategies to any proposals to change the film-by-film, theater-by-theater licensing regime and responded to concerns raised in public comments. Changes in technology, the marketplace, and business models wrought fundamental changes to the industry since the decrees were entered into between 1949 and 1952 to remedy competitive harms, and changes in antitrust law have made it unlikely those harms would occur absent the Decrees. Further, the public comments received on the government’s request did not provide a sufficient basis for denying the request (U.S. v. Paramount Pictures Inc., August 7, 2020, Torres, A.).

Background. In 1938, the Department of Justice brought an antitrust action against eight companies that dominated the production and distribution of motion pictures in the United States. Five of the Defendants (the Major Defendants) owned large movie theater circuits, including over seventy percent of the best and largest "first-run" theaters in the ninety-two largest cities in the United States. This market structure eventually led to cooperation and collusion, wherein Defendants established a cartel for the purposes of (1) limiting the first run of their pictures, as much as possible, to the theaters that the Major Defendants owned and controlled; and (2) closing off first-run theaters to their competitors, independent motion picture distributors.

At trial, the district court found that the defendants had (1) monopoly power in the distribution market for first-run motion pictures; and (2) engaged in a conspiracy to fix licensing practices, including admission prices, run categories, and "clearances" for substantially all theaters located in the United States. The Supreme Court in U.S. v. Paramount, 334 U.S. 131 (1948) affirmed the district court’s finding that Defendants were liable under the Sherman Act, and remanded the matter to the district court to fashion relief. The resulting Decrees required the Major Defendants to sell their theaters to new independent companies and restricted the ways in which all of the defendants could license and distribute movies to theaters.

In 2018, the Justice Department announced that it was looking into terminating the Decrees as part of its initiative to review, and where appropriate, terminate or modify "legacy antitrust judgments that no longer protect competition." Following a public comment period on whether to retain the Decrees, the agency decided to seek their termination, and, in response to the comments received, proposed to add a two-year sunset period to the Decrees’ block booking and circuit dealing provisions to provide a transition period to minimize market disruption.

Termination is in the public interest. The issue before the court was whether the termination of the Decrees was in the public interest. Their termination, as argued for by the government, was in the public’s interest in free competition, the court decided.

First, as contended by the government, the Decrees are no longer necessary. Both the market structure and distribution system that facilitated that collusion are no longer the same. seventy years of technological innovation, new competitors and business models, and shifting consumer demand have fundamentally changed the industry.

Specifically, Today, subsequent theatrical runs, as well as subsequent-run theaters, no longer exist in any meaningful way. Instead, major films are released broadly to thousands of multiscreen theaters at the same time in a single theatrical run. Further, as Internet movie streaming services proliferate, film distributors have become less reliant on theatrical distribution. Additionally, the competitors have also changed since the advent of the Decrees. Some of the original defendants have gone out of business, distribute far fewer films, and motion picture distributors that are not subject to the Decrees have entered the market since the 1940s. Significantly, the largest distributor today is one such entity, The Walt Disney Company. Given this changing marketplace, it is unlikely that the remaining defendants would collude to once again limit their film distribution to a select group of theaters in the absence of the Decrees. Thus, the requested termination was in the public interest.

Changes in antitrust law also suggested that the potential for future violation is low, the court reasoned. For example, the Decrees outlawed vertical integration in order to end the defendants’ horizontal conspiracy. Today, vertical integration would be reviewed under a different standard—a fact-based "rule of reason" analysis. Under that standard, a court must weigh the competitive harm of foreclosing competitors—either motion picture distributors from theaters, or movie theaters from a movie distributor’s films—against any procompetitive efficiencies to determine whether a transaction violates the antitrust laws.

Statutory merger law also has changed significantly, the court noted. At the time the Decrees were entered, companies could merge without any notification to the antitrust authorities. However, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act) requires parties who engage in a significant merger transaction to notify the federal antitrust agencies and permit them to investigate before their transaction can close. Marketplace changes mean that there is less danger that a block booking licensing agreement would create a barrier to entry that would foreclose independent movie distributors from sufficient access to the market. Market changes have also limited any dangers posed by the practice of circuit dealing, the court observed. Moreover, the two-year sunset period for the Decrees’ block booking and circuit dealing provisions provide movie theaters a transitional time period to adjust their business models and strategies to any proposals to change the film-by-film, theater-by-theater licensing regime.

The legal framework used to evaluate the Decrees’ film licensing practices—including block booking, circuit dealing, and resale price maintenance—has also changed. Although per se illegal seventy years ago, today, courts would analyze such restraints under the rule of reason today.

Finally, maintaining the Decrees in perpetuity would be inconsistent with the current Department of Justice Antitrust Division policy of limiting consent judgments to a period of ten years. Termination of the Decrees was in the public interest because these changes in antitrust law and administration have diminished the importance of the Decrees’ restrictions, while still providing protections that will keep the probability of future violations low, the court held.

Public comments. The comments received by the government and the court did not provide sufficient basis for denying the government’s motion. Commenters argued that terminating the ban on vertical integration would allow major movie studios to merge with one of the large national theater circuits—AMC, Cinemark, or Regal. But changes to antitrust administration, in particular, the HSR Act, provide federal antitrust agencies with notice and the opportunity to evaluate the competitive significance of any major transaction between a movie distributor and a theater circuit, making a potential future violation unlikely, the court explained.

Commenters also argued that the restrictions on block booking and circuit dealing should be preserved. But the two-year sunset period for the Decrees’ block booking and circuit dealing provisions provide movie theaters a transitional time period to adjust their business models and strategies to any proposals to change the film-by-film, theater-by-theater licensing regime, the court found.

Delrahim statement. "We appreciate the Court’s thoughtful opinion and ruling today granting our motion to terminate these outdated Paramount Decrees," said Makan Delrahim, Assistant Attorney General for the Justice Department’s Antitrust Division. "As the Court points out, Gone with the Wind, The Wizard of Oz, and It’s a Wonderful Life were the blockbusters when these Decrees were litigated; the movie industry and how Americans enjoy their movies have changed leaps and bounds in these intervening years. Without these restraints on the market, American ingenuity is again free to experiment with different business models that can benefit consumers."

This case is No. 1:19-mc-00544-AT.

Attorneys: Mark Merva, U. S. Department of Justice, for the United States. Wayne Dale Collins (Shearman & Sterling LLP) for Paramount Pictures Inc.

Companies: Paramount Pictures Inc.

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