Cinemark Reverses $3.75M Antitrust Loss on Appeal

Cinemas Palme d'Or Theater - Publicity -H 2016
Courtesy of Flagship Theatres of Palm Desert, LLC

Just a month ago, the Paramount Consent Decrees officially terminated. If the end to decades-old rules that governed the relationship between film studios and movie theaters wasn't enough proof of a new day in the exhibition business, now comes a California appeals court wiping out a $3.75 million judgment against Cinemark for using its nationwide footprint to score exclusive first-run movies to the detriment of one independent theater.

On the losing end of the latest appellate decision is Flagship Theatres of Palm Desert, which was owned by an investment group that included Breaking Bad star Bryan Cranston. Flagship operated the Cinemas Palme d'Or in Palm Desert, Calif., before it closed in 2016, or more precisely, before that theater was taken oven by new management. The Cinemas Palme d'Or competed with another theater two miles away called Century at the River, which was acquired in 2006 by Cinemark.

Flagship sued in 2007, and in a marathon case that was previously revived by an appeals court, the plaintiff alleged that Century's owner leveraged its power as the owner of numerous theaters across the country  to pressure distributors into granting The River clearances over the Palme, and Century’s practice of negotiating multi-theater licensing agreements exerted pressure on distributors to shun the Palme.

The case went to trial, and the jury found that while the defendants hardly had a monopoly, the multi-theater agreements caused harm to competition in the relevant geographic and product market by decreasing output of films.  The jury awarded Flagship $1.25 million in damages, which was automatically trebled to $3.75 million, pursuant to the Cartwright Act, California's antitrust law.

California's Second Appellate District reverses.

In the opinion, Justice Frances Rothschild takes a review that goes all the way back to United States v. Paramount Pictures, the 1948 Supreme Court case that examined vertically integrated film distributors. Rothschild also notes how the U.S. Department of Justice recently and successfully ended the Paramount Consent Decrees, which had resulted from the Supreme Court's decision and included bans on certain kinds of circuit dealing. Like the federal judge who agreed to termination, Rothschild notes changes in the structure of the entertainment industry that arguably make the old rules outdated, and in any event, he says Paramount Pictures is not dispositive.

In tackling so-called vertical restraints, Rothschild ultimately comes to the conclusion that film licensing circuit dealing —agreements that cover multiple theaters — can't be deemed per se illegal.

" Certainly, as the Supreme Court recognized many years ago, such agreements hold the potential to block new market entrants, or stunt the ability of smaller theaters to serve as viable competitive threats to their larger counterparts," states the opinion. "These consequences might ultimately harm consumers by increasing prices, reducing product quality, and/or reducing output to an extent that outweighs any countervailing procompetitive benefits of the agreements. But the fact that such agreements might so harm competition does not mean they always will."

Given this, the opinion then adds that those who assert violation of the Cartwright Act " must prove not only that a theater-circuit owner entered into film licensing agreements covering more than one of its theaters, but that such agreements caused net harm to competition, as determined by the balancing of anti and procompetitive effects under the rule of reason."

And in this case, reviewing the evidence, the California appeals court concludes there wasn't enough to sustain a jury verdict favoring Flagship.

Rothschild writes that the record shows a newcomer "entered the market immediately following the Palme’s closure, apparently unaffected by the theoretical barriers Flagship posits. Nor is there any evidence in the record suggesting that the Tristone [the newcomer] has been unable to expand because of barriers created by Century’s licensing agreements."

Here's the full opinion.