There's a good argument to be made that the U.S. Supreme Court's 1948 decision in United States v. Paramount Pictures is the most misconstrued legal decision ever. The case forever changed Hollywood — but it did not ban studios from owning theaters.
The misconception that there is a ban in place is important in light of the Department of Justice announcement Aug. 2 that the government would review the Paramount Consent Decrees. No matter what happens, don't expect Disney to make a bid for AMC or Regal for the simple reason that Disney could have acquired either theater giant anytime during the past few decades and hasn't seen any need to get into the popcorn business.
What, then, would be the ramifications for Hollywood of ending the Paramount Decrees?
When the Supreme Court reviewed anti- competitive activity in the entertainment industry in the 1940s, major studios controlled nearly everything about moviemaking. The high court was particularly alarmed at how the majors were keeping independents out of the business. The justices reviewed practices such as "block-booking" (bundling multiple films into one theater license) and overbroad "clearances" (exclusive film licenses for specific geographic areas) and came down hard on such practices in a decision that would ultimately lead to the settlement known as the Paramount Consent Decrees.
The court considered a ban but in an implicit nod to ever-shifting context, the justices concluded that forcing studios to divest themselves of theaters was the more appropriate remedy. The 7-1 decision stopped short of forever making it illegal for studios to own cinemas. "We see no reason to place a ban on this type of ownership," wrote Justice William Douglas.
Times change, but even if the Justice Department decides to rip up the Paramount Consent Decrees, it can't overrule the Supreme Court. Block-booking, overbroad clearances, and other banned practices like setting minimum prices on movie tickets might invite lawsuits. On the other hand, as times change, once-restricted practices that might have been perceived as an illegal restraint of trade in one era may be given a fresh look as pro- competitive in a different era.
If Disney wished to tempt scrutiny by conditioning the license of the latest Avengers film on a theater accepting its other movies, Disney would probably point to how indie producers have access to Netflix and other alternative distribution markets.
"The market power of the studios is less than it was [in the 1940s]," says Michael Carrier, an antitrust expert at Rutgers Law School. "Per se offenses like price fixing and market allocation are still illegal. But other horizontal arrangements between competitors or vertical arrangements between companies and their partners are more likely to be upheld today."
Take clearances. If a big studio insists on packaging its movies in a license, it's easy to imagine that in the give and take of negotiations, AMC or Regal may demand geographical exclusivity. In fact, since only overbroad clearances were a no-no under the old Paramount Consent Decrees, movie exhibitors and film distributors have come to more modest clearance pacts in recent years. Those arrangements, in turn, have sparked a Justice Department investigation as well as several lawsuits around the country from aggrieved independents.
For instance, on Aug. 2, the very same day that the Justice Department announced it would be taking another look at the Paramount Consent Decrees, a federal judge in Texas was hearing summary judgment arguments in a lawsuit that alleges that AMC muscled out Houston-based Viva Cinemas Theaters by pressuring Disney, Sony and Universal into withholding first-run Spanish-language films from the smaller theater. AMC contends that only restraints that have a predictable and pernicious anticompetitive effect are deemed presumptively unlawful, that clearance agreements are now commonly used in the film exhibition industry, and that the court should recognize the procompetitive benefits of allowing big studios and big theaters to strike exclusivity bargains with each other.
At the hearing, U.S. District Court Alfred Bennett asked whether any court had ever held a clearance as per se unreasonable.
Perhaps the Paramount Consent Decrees deterred the industry from ever going too far in their pacts. Should revocation occur, will the giants of the movie business begin testing the limits of what they can get away with under antitrust law? Consider the response from Viva's attorney to the judge's question.
"No court since Paramount has held that any specific clearance was unreasonable per se," acknowledged Viva's lawyer. "But at the same time, no court has ever upheld any clearance between two theaters found not to be in substantial competition under Paramount, which prohibits such clearances... The likely reason for the above state of affairs is that no court has ever had to decide a case involving theaters not in substantial competition as here, where clearances favored a 30-screen megaplex that can exhibit every wide-release Hollywood film versus a far smaller theater primarily seeking to show Spanish-language versions of those films. Nor has any court considered the numerous changes in the industry since the 1940s."
This story first appeared in the August 15 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.