Trade Regulation & Antitrust Concerns for the Movie Industry
The Paramount Pictures Case set the precedent when it comes to trade and antitrust regulations for the movie industry. The Federal Trade Commission regulates the antitrust laws like the Sherman Antitrust Act and the Clayton Antitrust Act. Removing antitrust regulations will impact the theater industry although the specific effects remain unknown.
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UPDATED: Jan 4, 2021
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President Trump’s Justice Department has made it a goal to review and possibly revoke the Paramount Consent Decrees that have regulated how the movie industry can distribute movies for the last seventy years.
While most people may not be concerned, removing trade and antitrust regulations for the movie industry will have far-reaching impacts.
The Justice Department recently moved the federal court in New York to end the consent decrees enacted following the Supreme Court’s decision in the seminal antitrust case United States v. Paramount Pictures, Inc.
The Paramount Pictures case and resulting consent decrees operated to impose restrictions on Hollywood movie studios. The consent decrees prevented the major film studios from monopolistic behavior in the movie industry for over seven decades.
This article discusses the importance of the Paramount Pictures case, antitrust law basics, and the implications of the Trump Administration’s decision to end the consent decrees that have regulated movie production and distribution for decades.
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The Paramount Pictures Case
From the beginning of Hollywood in the early 20th Century, production studios enjoyed nearly absolute power over the production and release of movies to the public.
Large movie studios either owned their own movie theaters or had tight contractual relationships with theaters, which allowed the studios and theaters to collude to fix ticket prices, only show films from certain studios, and control how many times a film played.
The major movie studios engaged in unfair practices where they would charge smaller movie theaters more money to show a picture versus theaters owned by the studios.
This system of collusion led to monopolies operated by the major studios. In order to break up the monopolization created by unfair contracts between studios, distributors, and theaters, the Department of Justice sued the major movie studios.
In United States v. Paramount Pictures, the Justice Department sought an injunction against three types of defendants:
- Companies that distributed and showed films, including Paramount, Lowe’s, Radio-Keith-Orpheum, Warner Brothers Pictures, Twentieth Century Fox
- Companies that produced films and their subsidiaries, including Columbia Pictures and Universal
- United Artists, a distributor of movies.
The Justice Department sought a court order to stop the defendants from violating Sections 1 and 2 of the Sherman Antitrust Act. The complaint claimed that the producer defendants tried to monopolize the production of movies and engaged in a conspiracy to monopolize the industry.
The district court found the defendants engaged in a variety of activities that violated the Sherman Act. First, the court found the defendants engaged in price fixing. Movie exhibitors could only show copyrighted movies under licenses.
When the defendants issued licenses to show movies, they fixed minimum admissions prices that the exhibitors agreed to charge.
The district court found that two price-fixing conspiracies took place — a horizontal conspiracy between defendants and a vertical one between each distributor defendant and the businesses it sold licenses to. The district court granted the government’s request for an injunction preventing defendants from continuing to grant licenses only to their own theaters and from price fixing.
Next, the district court found defendants engaged in a conspiracy regarding clearances. A clearance is the period that must elapse between runs of the same movie in an area or theater.
Runs are successive exhibitions of a movie in a certain area.
The district court’s injunction prevented defendants from maintaining or agreeing with distributors to maintain a system of clearances that prevented competition with other movies.
The injunction further prevented defendants from engaging in pooling agreements. Under pooling agreements, movie exhibitors agreed with each other and their affiliates to operate theaters as a unit that was managed by a committee where the theaters shared profits.
The lower court found that these agreements prevented competition because the parties would naturally direct films to those theaters that they had a financial interest in.
The court also found that the defendants engaged in block-booking. This is the practice of licensing one or more movies on a condition that the exhibitor will also license other features released by the distributors in each period.
The films are licensed in blocks before they are made, and exhibitors were not allowed to bid on licenses for a single feature based upon the merits of the film. This meant distributors had to buy licenses for groups of movies sight unseen.
The district court held this practice was illegal because it “adds to the monopoly of a single copyrighted picture that of another copyrighted picture which must be taken and exhibited in order to secure the first.”
Additionally, the district court found that defendants discriminated against small, independent exhibitors versus larger affiliated theaters through various contractual provisions. Defendants gave the larger theaters competitive advantages, such as allowing more privileges in selecting or eliminating films, granting extended runs and unlimited playing times.
These competitive advantages given to larger theaters were so significant that they amounted to a conspiracy. The district court issued a list of decrees to stop the defendants’ illegal conduct.
One of the decrees required films to be licensed on a competitive basis.
The defendants appealed to the Supreme Court, and the Supreme Court affirmed the majority of the district court’s factual findings. However, the Supreme Court held the lower court did not go far enough in enjoining the defendant’s unlawful activity, undoing the conspiracy, and requiring divestiture to break up the monopoly.
The Supreme Court also invalidated the decree that films must be licensed on a competitive basis. The Court reasoned that requiring such a scheme would require the judiciary to be too involved in the daily operation of the theater business on a daily basis and would uproot established business relationships and would not be likely to actually open up competition in the markets.
As a result of this lawsuit, the defendants were ultimately required to agree to strict consent decrees with the Justice Department that ended the illegal practices. These decrees required a separation between film distributors and exhibition and required defendants that owned theaters to divest from distribution or their theaters.
The decrees also outlawed block booking and ticket price setting, among other practices.
Now, the Justice Department seeks to revisit the decrees to determine whether they should be modified or terminated given the changes the movie industry has experienced since the decrees.
New technology, like streaming services and cable, allows people to watch movies from the comfort of their own homes rather than going to theaters. Thus, the Justice Department claims the decrees are no longer needed.
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Federal Antitrust Laws
Antitrust laws are consumer-protection laws that regulate businesses to prevent unfair or illegal practices that ultimately affect consumers. Antitrust laws prevent businesses from monopolizing a certain industry and ensure there is fair competition in the open market.
Antitrust laws aim to prevent a variety of unfair practices. Price fixing is one such practice that occurs when multiple businesses or an entire industry comes together to set a price for a good or service.
The price may be profitable for the industry but not competitive for the public based on the market value. This causes consumers to pay more for a given product or service.
Antitrust laws also aim to prevent the creation of monopolies. A monopoly occurs when one business dominates an industry, usually through unfair or anti-competitive practices that eliminate competition. This can occur through acquisition of competitors, price fixing, exclusivity agreements, or requiring the purchase of one product to buy a second product.
The United States has three main laws enacted by Congress that comprise federal antitrust law.
The Sherman Antitrust Act
The first, the Sherman Antitrust Act, was passed in order to break up trusts that monopolized certain industries, like railroads and oil, in the early 20th Century. The Act prohibits any contract that restrains interstate or foreign commerce. It also prohibits attempts to monopolize any aspect of commerce.
The Clayton Antitrust Act
The Clayton Antitrust Act further expands the Sherman Act by prohibiting mergers and acquisitions that substantially lessen competition or create a monopoly. It also prohibits discriminatory prices and services.
Individual parties have the right to sue businesses under the Act, which allows them to collect triple damages when they have been financially harmed by a violation of the Sherman Act and Clayton Antitrust Act.
The Federal Trade Commission
The Federal Trade Commission Act created the Federal Trade Commission as a regulatory agency to monitor mergers and acquisitions by large companies. The Act prohibits any unfair methods of competition or deceptive acts or practices.
The Federal Trade Commission is the only party authorized to sue for a violation of the Act. Additionally, most states have modeled state level antitrust laws after these federal statutes aimed at protecting consumers from deceptive practices.
Consequences of Undoing Paramount Pictures
Terminating the Paramount Pictures decrees would allow movie studios and distributors to return to the practices forbidden by the decrees. It would allow large distributors and studios to buy theaters and prioritize the showing of their films. The changes would also allow block booking after a two-year sunset period.
The National Association of Theater Owners, an association that represents movie theater owners, strongly opposes a return to block booking.
Some theaters, like AMC, are in financial trouble and on the brink of bankruptcy due to the Coronavirus economic shutdown. Allowing studios and distributors to return to the practices prohibited by the decrees may further hurt movie theaters even more because it would potentially allow block booking and price fixing schemes that benefit production studios at the expense of theaters.
Given the popularity of streaming services, it is ultimately unclear what the long-term effects terminating the decrees will have on the theater industry. No matter what kind of legal help you need, you can use our FREE quote tool to find the right legal counsel.