United States v. Paramount Pictures, Inc., 334 U.S. 131 , was a landmark United States Supreme Courtantitrust case that decided the fate of film studios owning their own theatres and holding exclusivity rights on which theatres would show their movies. It would also change the way Hollywood movies were produced, distributed, and exhibited. The Supreme Court affirmed in this case that the existing distribution scheme was in violation of the United States antitrust law, which prohibit certain exclusive dealing arrangements. The case is important both in U.S. antitrust law and film history. In the former, it remains a landmark decision in vertical integration cases; in the latter, it is responsible for putting an end to the old Hollywood studio system.
Background
The legal issues originated in the silent era, when the Federal Trade Commission began investigating film companies for potential violations under the Sherman Antitrust Act of 1890. The major film studios owned the theaters where their motion pictures were shown, either in partnerships or outright. Thus specific theater chains showed only the films produced by the studio that owned them. The studios created the films, had the writers, directors, producers and actors on staff, owned the film processing and laboratories, created the prints and distributed them through the theaters that they owned: In other words, the studios were vertically integrated, creating a de facto oligopoly. By 1945, the studios owned either partially or outright 17% of the theaters in the country, accounting for 45% of the film-rental revenue. Ultimately, this issue of the studios' then-alleged illegal trade practices led to all the major movie studios being sued in 1938 by the U.S. Department of Justice. As the largest studio, Paramount Pictures was the primary defendant, but all of the other Big Five and Little Three were named, and additional defendants included numerous subsidiaries and executives from each company. Separate cases were also filed against large independent chains, including the 148-theater Schine. The federal government's case was initially settled in 1940 in the District Court for the Southern District of New York with a consent decree, which allowed the government to resume prosecution if studios were noncompliant by November, 1943. Among other requirements, the District Court-imposed consent decree included the following conditions:
The Big Five studios could no longer block-book short film subjects along with feature films ;
The Big Five studios could continue to block-book features, but the block size would be limited to five films;
Blind buying would be outlawed and replaced with "trade showing," special screenings every two weeks at which representatives of all 31 theater districts in the United States could see films before theatres decided to book a film; and
The creation of an administration board to enforce these requirements.
The studios did not fully comply with the consent decree. In 1942, they instead, with Allied Theatre Owners, proposed an alternate "Unity Plan". Under the Plan, larger blocks of theatres were blocked with the caveat of allowing theaters to reject films. Consequently, the Society of Independent Motion Picture Producers came into existence and thence filed a lawsuit against Paramount Detroit Theaters, representing the first major lawsuit of producers against exhibitors. The government declined to pursue the Unity proposal and instead, owing to noncompliance with the District Court's binding consent decree, resumed prosecution via the 1943 lawsuit. The 1943 case went to trial on October 8, 1945, one month and six days after the end of World War II. The District Court ruled in favor of the studios, and the government immediately appealed to the Supreme Court. The case reached the United States Supreme Court in 1948; their verdict went against the movie studios, forcing all of them to divest themselves of their movie theater chains. This, coupled with the advent of television and the attendance drop in movie ticket sales, brought about a severe slump in the movie business, a slump that would not be reversed until 1972, with the release of The Godfather, the first modern blockbuster. The Paramount decision is a bedrock of corporate antitrust law and as such is cited in most cases where issues of vertical integration play a prominent role in restricting fair trade.
Decision
The Supreme Court ruled 7-1 in the government's favor, affirming much of the consent decree. William O. Douglas delivered the Court's opinion, with Felix Frankfurter dissenting in part, arguing the Court should have left all of the decree intact except its arbitration provisions.
Douglas
Douglas's opinion reiterated the facts and history of the case and reviewed the Supreme Court's opinion, agreeing that its conclusion was "incontestable". He considered five different trade practices addressed by the consent decree:
Clearances and runs, under which movies were scheduled so they would only be showing at particular theatres at any given time, to avoid competing with another theater's showing;
Pooling agreements, the joint ownership of theaters by two nominally competitive studios;
Formula deals, master agreements, and franchises: arrangements by which an exhibitor or distributor allocated profits among theaters that had shown a particular film, and awarded exclusive rights to independent theatres, sometimes without competitive bidding;
Block booking, the studios' practice of requiring theaters to take an entire slate of its films, sometimes without even seeing them and sometimes before the films had even been produced, and
Discrimination against smaller, independent theaters in favor of larger chains.
Douglas let stand the Court's sevenfold test for when a clearance agreement could be considered a restraint of trade, as he agreed they had a legitimate purpose. Pooling agreements and joint ownership, he agreed, were "bald efforts to substitute monopoly for competition... Clearer restraints of trade are difficult to imagine." He allowed, however, that courts could consider how an interest in an exhibitor was acquired; thus, he remanded some other issues back to the District Court for further inquiry and resolution. He set aside the lower court's findings on franchises so that they might be reconsidered from the perspective of allowing competitive bidding. On the block booking question, he rejected the studios' argument that it was necessary to profit from their copyrights: "The copyright law, like the patent statutes, makes reward to the owner a secondary consideration". The prohibitions on discrimination he let stand entirely.
Frankfurter
Frankfurter took exception to the extent to which his colleagues had agreed with the studios that the District Court had not adequately explored the underlying facts in affirming the consent decree. He pointed to then-contemporary Court decision, International Salt Co. v. United States that lower courts are the proper place for such findings of fact, to be deferred to by higher courts. Also, he reminded the Court that the District Court had spent fifteen months considering the case and reviewed almost 4,000 pages of documentary evidence: "I cannot bring myself to conclude that the product of such a painstaking process of adjudication as to a decree appropriate for such a complicated situation as this record discloses was an abuse of discretion." He would have modified the District Court decision only to permit the use of arbitration to resolve disputes.
Consequences
The court orders forcing the separation of motion picture production and exhibition companies are commonly referred to as the Paramount Decrees. Paramount Pictures Inc. was forced to split into two companies: the film company Paramount Pictures Corp. and the theater chain, which itself merged in 1953 with the American Broadcasting Company. Consequences of the decision include:
The weakening of the Production Code, because of the rise of independent and "art house" theaters which showed foreign or independent films made outside of the Code's jurisdiction.
Following the decision, and with the rise of television, the major studios felt that the loss of their exclusive theatre arrangements would reduce the opportunity to re-release products from their extensive film libraries. Paramount, for example, sold its pre-1950 sound feature film library to MCA, which created EMKA to manage this library. Other studios, such as 20th Century Fox and Warner Bros., also sold or leased their classic back-catalogs to other companies such as Associated Artists Productions or National Telefilm Associates. By contrast, Walt Disney believed his film library was much more valuable than RKO had estimated it to be. In 1953, he formed a holding company that both held rights to his pre-1953 works and distributed new material from his studio. That company became its own in-house distribution unit, Walt Disney Studios Motion Pictures. The growth of television in subsequent years has resulted in these supposedly "worthless" films earning billions of dollars in rentals from television stations and networks.
Effort to Terminate the Paramount decrees
The United States Department of Justice Antitrust Division began a review of antitrust decrees that did not have expiration dates. On November 18, 2019, the DOJ announced it would seek to terminate the Paramount Decrees, which would include a two-year sunset period as to the practices of block booking and circuit dealing to allow theater chains to adjust. The Department stated it was "unlikely that the remaining defendants can reinstate their cartel" as reasoning for terminating the decrees. The DOJ formally filed its motion for a court order to terminate the decrees on November 22, 2019. The move was opposed by independent movie theater owners, including the Independent Cinema Alliance, and independent filmmakers.
