The Justice Department Attempts to Justify End of Paramount Decrees

Expect more, not less, antitrust fights in the future thanks to U.S. government's move.
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The move by the Department of Justice to seek the elimination of the Paramount Consent Decrees is not the end of the story. First up, the DOJ will need to convince a federal judge that the long-standing rules governing the relationship between certain movie distributors and theatrical exhibitors "no longer meet[s] consumer interest," as DOJ antitrust chief Makan Delrahim put it in his Nov. 19 announcement.

On Friday, the Justice Department made this very step with a motion in New York federal court to terminate the stipulated conditions put in place after various Hollywood studios lost a huge 1948 Supreme Court decision that examined the monopolization of first-run film distribution.

In the filing (read here), the DOJ attempts to justify, for instance, why some of the defendants in the old case should no longer have to seek court approval to acquire movie theaters.

For years, there's been a misconception that there's a ban in place on studios owning theaters. Not quite true. As the DOJ points out, the Paramount consent decrees required that studios in the 1950s divest themselves of theaters. Warner Bros. and Fox also agreed they'd be prohibited from acquiring theaters unless they could get a court to find such acquisitions as not unreasonably restraining competition. (Of course, since the mid-70s, the law requires any company engaging in a transaction valued over $90 million to notify federal antitrust regulators before a transaction closes.) Other defendants — Paramount, RKO, Universal, Columbia, and United Artist — settled without such condition. They were always free to acquire movie theaters. And of course, Disney wasn't a defendant in the original case, and as such, could have attempted to buy out AMC or Regal if it really had wanted. 

"[T]he fact that movie distributors that are not subject to the Decrees have shown no propensity to acquire major movie theatre circuits or to engage in the type of collusive practices that the Paramount case quashed in the 1940s further underscores the obsolete nature of the Decrees," argues the Justice Department.

The larger argument from the DOJ is that the marketplace has radically changed.

"In the 1930s and 40s, the only way that the public could view a motion picture was in a single-screen movie theatre – multiplexes, broadcast and cable television, the Internet, and DVDs did not exist," states the motion, soon pointing to the proliferation of streaming services and new players like Netflix largely bypassing theatrical exhibition altogether.

The DOJ's Antitrust Division received over 80 comments in reaction to its multiyear review over the Paramount Decrees — with most concerned about distribution practices. Many independent theaters are anxious that the end of the Paramount Decrees may lead to studios again flexing their might with licensing demands like bundling and geographic exclusivity. Larger chains worry about having less choice when studios aim to ensure long runs for their tentpoles. The Writers Guild sent its own comment about how increased market power and less output would damage its members.

The DOJ responds to such comments while accepting that a two-year sunset period to provisions on block booking and circuit dealing is appropriate.

Sticking up for vertical integration in certain instances, the DOJ writes that some alignment between production and distribution "can create efficiencies," including lower prices and better products.

With respect to how independents may be excluded, the DOJ lawyers state, "Given that there is no shortage of theatres and screens, there is little 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."

The DOJ also responds to concern from the National Association of Theatre Owners that movie studios will now have increased bargaining power to gain more favorable licensing terms: "But standing alone, this increased leverage, if true, would not present an antitrust issue unless it resulted from changes in competition among movie distributors or, for that matter, from any horizontal agreements among movie distributors to restrain competition."

Even if the DOJ successfully rips up the Paramount Decrees, expect more ­— not fewer — antitrust fights.

Studios may become emboldened to seek more aggressive licensing pacts with theaters, but just because the stop signs have been ripped from the ground doesn't mean practices like "block booking," "circuit dealing" and overbroad "clearances" won't go unchallenged. Those suffering competitively will take new shots in court objecting to the dealmaking. It would then be up to studios to defend the arrangements as legitimately pro-competitive under a fact-based rule of reason analysis.

It's a point made by the DOJ today.

"Absent the Decrees, injured motion picture producers and theatres could sue under the Sherman Act and state antitrust statutes," states the motion. "Indeed, theatre owners have challenged clearances and other licensing terms under state and federal law. As these and other cases make clear, absent the Decrees, any plaintiff, whether the United States or a private plaintiff, still could have the advantage of the Supreme Court’s and this Court’s rulings in the Paramount litigation that resulted in the Decrees."