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From Antitrust Law Daily, October 1, 2018

Landmark theaters could have violated antitrust laws through exclusive licensing, clearance practices

By E. Darius Sturmer, J.D.

Four independent movie theaters and programmers located in the District of Columbia, Denver, and Detroit sufficiently stated federal antitrust claims against "the largest specialty film movie theater chain in the country," based on allegations that the defendants—Silver Cinemas Acquisition Co. ("Landmark") and its parent entity—used the chain’s national market power to coerce film distributors into granting Landmark exclusive licenses, the federal district court in Washington, D.C. has ruled. The alleged conduct could amount to circuit dealing prohibited under Sec. 1 of the Sherman Act, as well as to the unlawful use or attempted use of monopoly power in violation of Sec. 2 of the Act, the court found. However, the complaint failed to include any averment that Landmark’s parent entity 2929 Entertainment, LP ("2929") was responsible for the actions of its subsidiaries, so 2929 was dismissed from the action without prejudice. The defendants’ motion to dismiss was therefore granted in part and denied in part (2301 M Cinema LLC v. Silver Cinemas Acquisition Co., September 28, 2018, Sullivan, E.).

The four plaintiffs in the lawsuit all primarily show "specialty films," a broad category "not intended to appeal to a broad audience," that includes independently produced films, art films, foreign films, and documentaries. The first two—West End Cinema and The Avalon—are theaters in Washington D.C., the former of which was "forced" out of business in 2015 "allegedly by Landmark’s anticompetitive licensing practices," but the other of which remains in operation. The third, the Denver Film Society, provides specialty film programming via "year-round screening, film festivals, and other special events" and operates a specialty film theater known as the Sie FilmCenter. Lastly, Cinema Detroit is a non-profit specialty film theater in Detroit, Michigan. According to their complaint, defendant Landmark operates 51 specialty film theaters in 22 geographic markets and is purportedly opening new theaters on a regular basis. All are deemed "exhibitors" in the common terminology of the industry.

Alleged antitrust violations. The plaintiffs charge that Landmark, as the "dominant theater ‘circuit’ for the exhibition of specialty films in the United States," leverages its market position to obtain blanket clearance agreements nationwide, covering more than just one film or theater, "from distributors that accede to Landmark’s demands for fear of retribution and loss of Landmark’s business." Clearances, whether for a "first-run" or for the entire period a film is screened by an exhibitor, are negotiated on a theater-by-theater, film-by-film basis, the complaint notes. Citing U.S. v. Paramount Pictures, 334 U.S. 131 (1948), the court noted that exhibitors may not engage in "circuit-dealing," in which a dominant movie theater chain "uses its market power to obtain preferential agreements from distributors for the licensing of films … in multiple geographic markets."

Circuit dealing. The plaintiffs stated a plausible circuit dealing claim, the court held. Rejected in turn were arguments by Landmark that the plaintiffs failed to allege coercive use of national circuit power or unlawful blanket clearances, failed in the alternative to allege concerted action or agreement between Landmark and the distributors, and failed to allege an injury to competition and consumers. Circuit dealing, a per seviolation of the Sherman Act, occurs when an exhibitor "pools the purchasing power of an entire circuit to eliminate the possibility of bidding for films on a theatre by theatre basis," but can also occur in a monopoly leveraging context when an exhibitor "with a monopoly of theatres in any one town uses that strategic position to acquire exclusive privileges in a city where the exhibitor has competitors," the court noted.

The plaintiffs offered sufficient allegations that Landmark leverages its monopoly power by coercing film distributors to accept clearance agreements that favor Landmark and to deny the plaintiffs’ requests to show specialty films, in the court’s view. The court pointed to assertions that Landmark occupies the majority of the specialty film exhibitor market in several major markets, including St. Louis, Houston, Philadelphia, and the plaintiffs’ own three cities, in drawing the inference that distributors may be inclined to accede to Landmark’s demands.

Moreover, the plaintiffs charged plausibly coercive conduct, contending that Landmark has given a clear message to distributors that there would be broader retaliation upon them for licensing films to theaters that competed against Landmark’s theaters. Anticompetitive conduct could also be inferred by the distributors’ assent to Landmark’s demands. Coercive conduct was reflected in the favorable clearances and the advantageous terms that Landmark allegedly obtained from distributors across the three markets at issue, the court explained. The plaintiffs additionally alleged Landmark’s plausible participation in circuit dealing from its negotiation of blanket clearance agreements that unlawfully covered exhibition in two or more theatres in a particular circuit, the court found.

Landmark’s argument that the plaintiffs did not allege a viable circuit dealing claim because they did not allege facts permitting a plausible inference of concerted action or agreement between Landmark and the distributors was snuffed by the court, which observed that the plaintiffs had indeed alleged Landmark’s entry into anticompetitive clearance agreements and had refused to license films to the plaintiffs. The "[p]laintiffs place their allegations of Landmark’s and the distributors’ parallel conduct ‘in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action’" the court noted, quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). As such, the allegations sufficiently raised a reasonable expectation that discovery would reveal evidence of illegal agreement, the court remarked.

The allegations of antitrust injury sufficed as well. The plaintiffs alleged harm not just to themselves but to competition and consumers throughout the complaint, in the form of decreased output and revenues for distributors. They also averred that consumers had fewer exhibitor choices and endured increased movie prices and decreased theater quality as a result of the purportedly illegal clearance agreements.

Monopolization, attempted monopolization. The court determined next that the plaintiffs adequately pled monopolization and attempted monopolization. It was unpersuaded by Landmark’s arguments that the plaintiffs had not alleged leveraging conduct or monopoly power. The Sec. 2 claims relied on the same allegations of anticompetitive behavior as their Sec. 1 claim, the court observed. "As discussed, plaintiffs allege that Landmark is the dominant specialty film exhibitor and that it wields considerable market power to obtain favorable clearance agreements in competitive markets," it explained. It was not fatal to the claims that the plaintiffs had not specifically identified all of the non-competitive markets. Furthermore, the plaintiffs’ description of Landmark as the largest specialty film exhibitor in the nation, of its dominant market shares in several major cities, and of the high entry barriers to entering the special film exhibitor market added up to an inference that Landmark could possess, or to have a dangerous possibility of acquiring, monopoly power.

Tortious interference. Given the parties’ agreement that the plaintiffs’ tortious interference with business relations claim against Landmark and its parent entity rose or fell with their Sherman Act claims, and the latter two antitrust claims were sufficiently stated to survive dismissal, the defendants’ motion to dismiss the tortious interference claim was necessarily denied as well.

This case is No. 1:17-cv-01990-EGS.

Attorneys: Sathya S. Gosselin (Hausfeld LLP) for 2301 M Cinema LLC d/b/a West End Cinema and Avalon Theatre Project, Inc. Barry J. Reingold (Perkins Coie LLP) for Silver Cinemas Acquisition Co. d/b/a Landmark Theatres.

Companies: 2301 M Cinema LLC d/b/a West End Cinema; Avalon Theatre Project, Inc.; Silver Cinemas Acquisition Co. d/b/a Landmark Theatres

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