Last week, the United States District Court for the District of Columbia largely denied a large movie-theater chain’s motion to dismiss exclusive dealing Sherman Act claims. The lawsuit was filed last year by four independent and specialty movie theaters in Denver, Detroit, and Washington, DC (the “Theaters”). The defendants are Silver Cinemas Acquisition Co., d/b/a Landmark Theaters (hereafter, “Landmark”) and 2929 Entertainment, LP (Landmark’s parent corporation). Landmark is the largest specialty film exhibitor in the nation. The Theaters alleged Landmark violated the Sherman Act by using its market power to pressure film distributors into granting exclusive exhibition licenses. Landmark moved to dismiss, and the court issued an opinion on Friday.
At the outset, Judge Emmet Sullivan dismissed 2929 Entertainment from the suit without prejudice because the Theaters did not allege it was responsible for the actions of its subsidiaries. On all other points, however, the motion was denied, and the suit will be allowed to proceed.
Background of Movie Theater Showings
Judge Sullivan discussed at length the movie distribution and movie theater industry. Distributors act as “middlemen” between a movie’s production studio and a movie theater (often referred to as an “exhibitor”). A distributor and theater negotiate the terms of a movie showing. In some cases, license agreements may include exclusive rights to show a film, called a “clearance.”
In the case of a clearance, a distributor will agree to not license a film to any other theater (or select theaters in the same geographic region) for the first few weeks a film is shown. The Theaters alleged that Landmark leveraged its market power to obtain nationwide “blanket clearances” whereby rather than negotiating clearances on an individual theater-by-theater, film-by-film basis, Landmark was able to obtain clearances for more than one film or theater. The Theaters alleged that Landmark would threaten not to show distributors’ films if the distributors did not acquiesce to its demands.
In addition to these general facts, one plaintiff, West End Cinema, alleged that these practices put it out of business. After operating in DC since 2010, the West End Cinema ultimately closed in 2015 (allegedly due to the behavior attributed to Landmark in the complaint). Shortly after closing, Landmark opened its own theater in the same spot, called Landmark West End Cinema.
Circuit Dealing Claims Survive Motion to Dismiss
Until antitrust challenges ended the structure and practices, movie studios used to own movie theatres and also utilized block booking of popular and less popular films in negotiations with independent theatre owners. In fact, Judge Sullivan relied heavily on one of the seminal cases from the earlier era, US v. Paramount Pictures, 334 U.S. 131 (1948), as well as a more recent case, Cobb Theatres III, LLC v. AMC Entm’t Holdings, Inc., 101 F. Supp. 3d 1319 (N.D. Ga. 2015).
As discussed in those cases, and relied upon by Judge Sullivan, circuit dealing arises in two scenarios:
1. Where a theater pools the purchasing power of an entire circuit to negotiate agreements covering more than one theater in a particular circuit, thus foreclosing on the possibility of other theaters bidding for films; and
2. Where, with a monopoly of theatres in any one town, a theater uses that monopoly power to acquire exclusive privileges in a city where it has competitors.
Judge Sullivan first took up plaintiffs’ allegations related to Landmark’s use of its alleged monopoly power. The opinion noted Landmark’s position as the largest specialty film exhibitor in the nation, with 51 theaters in 22 major geographic markets, and noted its market share in D.C. (68%), Denver (73%), and Detroit (60%), among other cities. At the motion to dismiss stage, these allegations are presumed true; the court also focused upon Landmark’s “plausibly coercive conduct” whereby distributors were forced to cancel bookings at plaintiffs’ theaters “due to Landmark’s clearance demands.” Essentially, the Theaters alleged that Landmark made the types of threats one would expect to see in a prima facie violation – that Landmark would refuse to show a distributor’s film without an exclusive clearance.
Second, and dealt with more cursorily with respect to negotiation of blanket clearances, Judge Sullivan held that the Theaters sufficiently pled that Landmark negotiated a clearance for multiple theaters in the Denver market, similar to AMC’s behavior in Cobb Theatres, where AMC was alleged to have negotiated clearances for two Atlanta theaters simultaneously.
Interestingly, Judge Sullivan took note of Landmark’s 2016 antitrust suit against Regal Cinemas in what can be fairly described as a “what’s good for the goose is good for the gander” position. He noted, “Indeed, plaintiffs’ allegations are not unlike those made by Landmark in its 2016 complaint charging Regal Entertainment Group (“Regal”) with anticompetitive conduct and circuit dealing.” Judge Sullivan continued to directly quote from Landmark’s 2016 opposition to Regal’s motion to dismiss.
Monopolization and Attempted Monopolization Claims Similarly Survive
Relying on the same conduct, the Theaters have also alleged monopolization and attempted monopolization claims under Section 2 of the Sherman Act, which survived the motion to dismiss. Judge Sullivan specifically noted that “at this stage of the proceedings, the Court cannot agree with Landmark that ‘there are no allegations that Landmark took advantage of its position in closed geographic markets to strengthen its hand in negotiations with distributors.’” At this stage, the Theatres’ allegations that Landmark used its nationwide dominant position to coerce distributors into favorable agreements were sufficient, and the court would not – nor should it have – make findings of fact with respect to these allegations.
This case, only one year old, has a long way to go, and will likely be an interesting one to watch. The specialty movie industry is a small niche market, with there being fewer and fewer such theaters in each city. Particularly as the film industry begins transitioning towards on demand content delivered instantaneously to consumers’ home televisions and mobile devices, viewing movie theatres as a distinct market may become a contestable issue, even as this industry is likely continuing to shrink; thus the Landmarks of the world may gain more and more market share (even as the case proceeds). It remains to be seen whether and how these evolutions in the industry may play into the ultimate disposition of the case.