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UNITED STATES v. SCHINE CHAIN THEATRES

October 8, 1945

UNITED STATES
v.
SCHINE CHAIN THEATRES, Inc., et al.



The opinion of the court was delivered by: KNIGHT

This suit is brought by the United States to restrain violations of Sections 1 and 2 of the Sherman Act. 26 Stat. 209, 15 U.S.C.A. §§ 1 and 2. Schine Chain Theatres, Inc., a New York holding and service corporation, five other corporations in which Schine Chain Theatres, Inc., owns all of the stock, to wit, Schine Theatrical Co., Inc., an operating company, Schine Enterprise Corporation, a service corporation, Schine Circuit, Inc., a service corporation, and Chesapeake Theatre Corporation, a holding corporation, and also three individuals, J. Meyer Schine, Louis Schine and John A. May, are the defendants. Hereinafter the corporate defendants will be referred to as 'Schine,' the 'Schine Circuit' or as 'the Circuit.'

This organization has seen an exceedingly rapid growth. Its origin was the purchase by defendants J. Meyer Schine and Louis Schine of three theatres in Gloversville, New York, in 1920. In the twenty-one years following, these defendant corporations acquired, either as purchaser or as lessee, an interest in 175 theatres and in addition some 42 separate parcels of real estate for theatre purpose, or connected with such purpose. The development came about in this manner: Schine Chain Theatre, Inc., the parent corporation, was organized in 1920. The above-named subsidiary corporations came into being in the several years 1926, 1935, 1936, 1937, and 1938.

 Steps following in line with the purpose of the 'Schine Circuit' were the organization of realty holding corporations and what may be termed local corporations, or the taking over of others of such for the operations of theatres. Since 1931, there have been 118 theatre corporations in which an interest has been acquired by 'Schine.' As of the time of the commencement of this suit there were 62 of such operating corporations and in 48 of these 'Schine' owned 100 per cent. of the stock, in 12, 50 per cent. Schine operates 93 theatres in 73 towns (including cities). The towns run generally in population from 5000 to 35000 and include 39 in New York, 16 in Ohio, 8 in Kentucky, 7 in Maryland, 2 in Delaware and 1 in Virginia. In addition to its theatrical and realty operations, 'Schine' has booked and bought for and supervised 37 theatres since 1931, and when this suit was brought there were 27 for which it so acted. Since 1928 the closed towns (those in which there was no opposition) show a total increase of 56. In 1941 there were only 3 towns in which Schine's competitors (hereinafter called independents) were playing major film product. In a single season, 1939-1940, Schine paid $ 1,647,000 to six film companies. The 'Schine Circuit' buying power beyond peradventure was extremely large, and its opportunity to utilize this power in the purchase of films to the detriment of its competitors is apparent. These defendants together control the largest independent theatre circuit in the country. For theatre acquisitions and capital improvements there has been expended admittedly upwards of $ 10,948,100, not including dividend payments on operating expenses and cash on hand.

 Some of the computations as hereinbefore shown are not the same as those claimed either by the government or by the defendants. These computations are made from defendants' extensive answers to interrogatories. The differences are not of material moment. There are eight so-called major film companies: Fox, Loew, Paramount, Radio-Keith-Orpheum (RKO), Warner, Columbia, Universal and United Artists. Columbia and Universal produce and distribute films; United Artists only distributes; and the other companies both produce and distribute films and operate theatres. These eight companies supply 'Schine' a large per cent. of the total films used by him and together receive upwards of 75 per cent. of the total film rental paid by Schine. All of them originally were made parties to this suit, but all have since been dropped as such. However, each is claimed to have participated separately with Schine in the conspiracy charged and in aid of Schine's monopolization of the film exhibiting business. The principal sales office of each major distributor company is in New York City and that city serves theatres here involved. The methods of licensing and servicing of films is similar with each. Each has its district manager and branch manager. The feature films are mostly produced in California where the negatives are taken, the prints being generally manufactured in New York and New Jersey. Film license applications are solicited by salesmen from the branch office, and the delivery and return of films are made through the branch. Prints of films are sent from the various exchange offices in the various states to the exhibitors of the main office, though the recommendation for approval ordinarily is made by the branch manager who is close to the situation. It was the usual custom for the distributors to make license agreements for feature films for a period of a year commencing about September. These license agreements were made before the films were produced. Ordinarily each major producing company put out 40 to 60 feature films a year and these were released at the rate of about one a week. Now the practice generally is to sell group pictures only after production and in groups rather than for a year.

 The individual defendants hold the principal offices in the defendant corporations and hold other offices in the various so-called local corporations. They are the principal stockholders in the parent corporation and have general supervision of the operations of the circuit. The film buying for the circuit and the companies in which it had an interest was conducted through 'Schine' or one of its subsidiaries. Lazar, a regional manager for 'Schine' covering several states, and Silverman and Hensler, district managers, and one Insley, principally carried on negotiations for acquisitions, though the defendants Schine and May engaged directly in some, while one Lynch was 'the Circuit's' chief film buyer. In Circuit buying 'Schine' generally negotiated deals with the division manager. The agreements so made are referred to as 'master agreements and deal sheets,' but these were usually followed by license agreements signed by the chief sales executive of the distributors.

 To substantiate its claims that these defendants have violated the aforesaid provisions of the Sherman Act, the government contends that they have used their great buying power to suppress competition by bringing about various restrictions on the competitors' ability to compete, resulting in persuading the competitor either to sell to 'Schine,' operate on an inferior basis or join in pooling his interests with 'Schine'; that this suppression has been brought about in various ways, to wit: by depriving independents of first and second run products, either entirely or to such a time as materially lessened income and force sales or abandonment, by implied threats voicing 'Schine's' great buying power, by threats to construct theater buildings to discourage other construction, by cutting admission prices, by inducing theatre sales through agreements to employ sellers, by fixing by agreement the duration of time and the distance within which an independent selling should not be permitted to compete and by unreasonable clearances obtained from the distributor. These generally are the claims. The defendants' denial makes the issues.

 Section 1 of the Sherman Act provides that 'Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade of commerce among the several States * * * is hereby declared to be illegal * * * ,' and

 Section 2 of that Act provides that 'Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, * * * shall be deemed guilty of a misdemeanor.'

 Said the court in Northern Securities Co. v. United States, 193 U.S. 197, 404, 24 S. Ct. 436, 469, 48 L. Ed. 679: 'All that is added to the 1st section by § 2 is that like penalties are imposed upon every single person who, without combination, monopolizes, or attempts to monopolize commerce among the states; and that the liability is extended to attempting to monopolize any part of such trade or commerce.' ' * * * the two sections overlap in the sense that a monopoly under § 2 is a species of restraint of trade under § 1.' United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 226, 60 S. Ct. 811, 846, 84 L. Ed. 1129.

 Any question as regards the applicability of the Sherman Act, 15 U.S.C.A. §§ 1-7, 15 note, in certain respects here shown has been clearly answered by the decision of the Supreme Court in United States v. Crescent Amusement Co., 323 U.S. 173, 65 S. Ct. 254. Under definitely comparable facts that Court held: 1. That this court has jurisdiction. 2. That it is immaterial whether the distributors or any one of them were members of a conspiracy or joined in the effort to monopolize. 3. That while the business or the showing of motion pictures is local, a combination of exhibitors may violate the Sherman Act by using their collective buying power to restrict or restrain competitors. 4. That the relationship between the circuit members is such that they may be capable of conspiring or combining with each other in violation of the Act. 5. That the circuit, in essence, is not a single exhibitor. 'All these phases of the motion picture business * * * constitute a part of interstate commerce.' William Goldman Theatres, Inc., v. Loew's, 3 Cir., 150 F.2d 738, 742.

 In the Crescent case (323 U.S. 173, 65 S. Ct. 259) twelve theatre operating companies, and certain individual stockholders, as well as distributor companies, were charged with the violation of the Sherman Act in combining with each other and with major distributors to effect monopolies. This language from the opinion supports the statement as to the aforesaid conclusions: 'And as we have said, the course of business which involves the regular exchange of films in interstate commerce is adequate to bring the exhibitors within the reach of the Sherman Act.' and 'The District Court found that some of the exhibitors were co-conspirators on certain phases of the program. But we can put that circumstance to one side * * * . For it is immaterial whether the distributors technically were or were not members of the conspiracy.' and 'But action by a combination of exhibitors to obtain an agreement with a distributor whereby commerce with a competing exhibitor is suppressed or restrained is a conspiracy in restraint of trade and a conspiracy to monopolize a part of the trade or commerce among the States.' Sustaining the action, the court necessarily held the Circuit is not in essence a single exhibitor; and that there can be concerted action between a corporation and its wholly owned subsidiaries, and the fact that defendants owned one-half or less percent. of the stock of corporations who are not parties herein does not preclude consideration of acts done by these corporate officers or by defendant's acts in connection with such corporation. Vide also: Chicago Board of Trade v. United States, 246 U.S. 231, 38 S. Ct. 242, 62 L. Ed. 683; Paramount Famous Lasky Corporation v. United States, 282 U.S. 30, 51 S. Ct. 42, 75 L. Ed. 145; Interstate Circuit v. United States, 306 U.S. 208, 59 S. Ct. 467, 83 L. Ed. 610; United States v. General Motors Corporation, 7 Cir., 121 F.2d 376, certiorari denied 314 U.S. 618, 62 S. Ct. 105, 86 L. Ed. 497; General Motors Corporation v. United States, 314 U.S. 708, 62 S. Ct. 52, 86 L. Ed. 565.

 The defendants assert that buying the only theatre in a town and building additional theatres, or buying additional theatres, or advising of intention to open another theatre, or making known the product buying ability of the chain, or buying product on better terms than a competitor, or becoming large by normal growth, causing inability of inferiorly operated theatres to get good product, or agreeing with the seller of a theatre not to compete within defined limits for any period of time, cutting or raising admission prices, obtaining clearances, or using so many pictures that demand for product of minor distributors is increased, does not monopolize or restrain trade or commerce among any of the several states. 'We may assume that if a single exhibitor launched such a plan of economic warfare he would not run afoul of the Sherman Act.' Crescent case, supra. Obviously, doing any one of the aforementioned things, disassociated from any other act, would not be violative of the Sherman Act; but surely a circuit may so utilize one or more of such efforts as to illegally stifle competition or monopolize the theatre business in different locations. Motive is essential.

 The defendants say that the Sherman Act prohibits only unreasonable restraint of trade and that it must affect trade or commerce between states. Apex Hosiery Co. v. Leader, 310 U.S. 469, 60 S. Ct. 982, 84 L. Ed. 1311, 128 A.L.R. 1044. There can be no question that this is a correct statement of law. The Act does not condemn monopolies as such, but prohibits monopolization or attempts to monopolize trade or commerce between the states. The verb monopolize comprehends conduct or actions. Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 31 S. Ct. 502, 55 L. Ed. 619, 34 L.R.A., N.S., 834, Ann.Cas. 1912D, 734. Through monopolization a monopoly may be secured. We are concerned here with what are claimed to be unreasonable restraints of trade. The word unreasonable as so used is broad enough to include a conspiracy in restraint of trade and monopolization of a business in restraint of trade. Unreasonable, as used in the statute, refers to a degree of restraint. Defendants further assert that the Act does not condemn restraints of trade which do not have a direct and immediate effect upon interstate commerce. The contrary of this assertion, as applicable here, is decided by the Crescent case, supra. Defendants also say that an agreement for purchase of product coupled with clearances over succeeding runs is valid, citing Standard Oil Co. v. United States, supra. Of course, the mere agreement for the purchase of first runs and reasonable clearances is within the law; but the charge of a conspiracy contemplates a 'combination of two or more persons by some concerted action to accomplish * * * an unlawful purpose' and monopolization contemplates acts to monopolize or control trade or commerce between the states to the exclusion and disadvantage of others.

 The record herein includes 4728 pages of testimony and 1380 exhibits. We are here concerned with 32 different situations, each involving the testimony of various witnesses and numerous exhibits. It is not only practically impossible to set out in this opinion every phase of the testimony which has been presented, but it is unnecessary.

 Many objections were raised by the defendants to the reception of evidence of inter-department communications and statements of and communications from representatives of the distributors. These objections were based, both on the ground that such were incompetent in the absence then of proof of a conspiracy, and also that there was no proof of the authority of such representatives to make the declarations or give the communications.

 It is not necessary that proof of the conspiracy be made before overt acts are proved. The order of the proof lies within the discretion of the court. 'There is no hard and fast rule that the evidence of concert should be first put in. * * * The order of production of evidence is one largely in the discretion of the court.' Doyle v. United States, 6 Cir., 169 F. 625, 627. Among other cases supporting this view are: Eastern States Retail Lumber Ass'n v. United States, 234 U.S. 600, 34 S. Ct. 951, 58 L. Ed. 1490, L.R.A. 1915A, 788; Cohen v. United States, 2 Cir., 157 F. 651, certiorari denied 207 U.S. 596, 28 S. Ct. 261, 52 L. Ed. 357; Paramount Pictures, Inc., v. United Motion Picture T.O., 3 Cir., 93 F.2d 714. Glaser v. United States, 315 U.S. 60, 62 S. Ct. 457, 86 L. Ed. 680, cited by the defendants, does not support their view.

 Statements and acts of agents or representatives within the scope of their authority indubitably are admissible to show a conspiracy. Hitchman Coal & Coke Co. v. Mitchell, 245 U.S. 229, 38 S. Ct. 65, 62 L. Ed. 260, L.R.A.1918C, 497, Ann.Cas. 1918B, 461; New York, Lake Erie R. Co. v. Winter's Administrator, 143 U.S. 60, 12 S. Ct. 356, 36 L. Ed. 71; Johnson v. . H. Yost Lumber Co., 8 Cir., 117 F.2d 53. Further, in conspiracy cases a great deal of latitude is permitted the court in the reception of evidence. '(The rule) will be sustained, if the testimony which is admitted tends even remotely to establish the ultimate fact.' Clune v. United States, 159 U.S. 590, 16 S. Ct. 125, 126, 40 L. Ed. 269. See also: Williamson v. United States, 207 U.S. 425, 28 S. Ct. 163, 52 L. Ed. 278; Wilborg v. United States, 163 U.S. 632, 16 S. Ct. 1127, 1197, 41 L. Ed. 289; Isenhouer v. United States, 10 Cir., 256 F. 842; White v. United States, 4 Cir., 80 F.2d 515.

 There is a conflict in the testimony in many of the situations. The court recognizes the burden is cast upon the plaintiff to establish its cause and/or causes of action by a fair preponderance of the proof. It is quite patent from the nature of the charges here that they have to be established by numerous acts and transactions having relation some way to the charge. These acts must be considered together to show intent, and intent to 'combine,' 'conspire' and/or 'monopolize' must be the reasonable and natural conclusions from the acts or transactions, as believed by the court. Ordinarily proof of such acts comes from circumstantial evidence and the inferences which are ordinarily drawn from these. As was said in William Goldman Theatres, Inc., v. Loew's, supra: 'The picture of conspiracy as a meeting by twilight of a trio of sinister persons with pointed hats close together belongs to a darker age.' And further: 'The requirement here is to fit the inference facts into the framework of the primary facts * * * .' 'It is elementary, however, that conspiracies are seldom capable of proof by direct testimony, and may be inferred from the things actually done, * * * .' Eastern States Retail Lumber Ass'n v. United States, supra (234 U.S. 600, 34 S. Ct. 95.)

 It is the opinion of this court that the defendants have violated Section 1 and Section 2, supra, of the Sherman Act, in that they have maintained an unlawful combination among themselves by means of which they have unreasonably restrained trade or commerce among the several states and have monopolized the business of operating theatres and the supplying of major films in various towns and cities, and that each of the major distributors hereinbefore named, by the methods which it has employed in its dealings with Schine and the independents, has aided and abetted these defendants in unreasonably restraining trade or commerce between the states and the 'monopolization' of theatre operations.

 The great film buying power of the defendant corporations gave opportunity to exert pressure on the distributors to obtain preferences. The extent of this film buying is demonstrated by the exceedingly large number of theatres controlled by 'Schine' and the large amount of money which must had been paid for film rentals. The aggregate of the amount paid all distributors in total or for one season is not shown, but what the 'Circuit' paid six of the major distributors, for features for a single season, does appear. This buying power included both closed and open towns. By combining the open and closed towns in Schine's deals with the distributors, Schine was enabled to dictate terms to the distributors. This ability to dictate terms was further increased by the authority of Schine to buy product for theatres not owned or operated by it. Schine acquired by purchase or lease 55 theatres from 1922 to 1931, and 80 from 1936 to 1941, inclusive, 15 in 1938 and 15 in 1939.

 The means and methods employed by the different defendant corporations through their officers and authorized representatives to obtain a 'monopolistic' control were numerous. Principally among these were arbitrarily depriving independents of first and second run pictures, securing unreasonable clearances, making threats to build or open closed theatres to prevent construction or operation by independents, lowering admission prices, obtaining rental concessions, restricting independents who sold to Schine as to periods and places of operation, making long time franchise agreements covering the 'Circuit.'

 Standing out as clearly indicative of intent to 'monopolize' are communications and statements made by May, Lynch, Lazar, Hensler and Insley, undisputedly authorized representatives of the defendant corporations. There are others from defendant J. Meyer Schine as well.

 Some specific instances showing the predatory means used by 'schine' follow.

 The Schine defendants arbitrarily deprived independents of the first run product which they had previously enjoyed in several towns. Independents were deprived of 1936-37 Columbia product as Norwalk; 1935-36 Fox product at Van Wert and Bucyrus; Loew's product for 1930-31 at Bellefontaine and for 1935-36 at Van Wert; Paramount's 1935-36 product at Van Wert and Bucyrus; RKO product for 1933-34 at Auburn and 1935-36 at Norwalk; of United Artists for 1936-37 at Norwalk; and of Warner for 1933-34 at Norwich, 1936-37 at Norwalk, and 1941-42 at Harlan.

 Independents were arbitrarily deprived of second run product which they had previously exhibited, losing 1938-39 Columbia at Rochester, Loew's 1935-36 at Van Wert and 1934-35 Warner at Watertown. After 'Schine' secured the product from the independents for the aforementioned seasons, he retained it and the independent was unable to secure it in subsequent seasons. Relative to six towns including Corning, Lynch wrote on October 21, 1933, Metro: 'If there are any other opposition towns where you believe you can sell a second run, I would appreciate it if you would take the matter up with me first before selling.' In 1932 Lynch wrote Flynn a letter saying, among other things: 'I want you to refrain from selling him (independent) any pictures whatsoever.' and Metro through Flynn agreed not to do so. Lynch also wired Fox to withhold selling to this independent and wrote Fox' agent saying 'have also asked him (Schmertz-Fox agent) to refrain from selling this man second run.'

 'Schine' was able to secure unreasonable clearances year after year in many towns. A few only need be mentioned. At Corning, New York, RKO permitted 90 to 180 days, and Fox permitted 160 days. At Seneca Falls, New York, Columbia and United Artists permitted 120 days. At Little Falls, New York, RKO, Columbia and Universal permitted 120 days and United Artists permitted 115 days. At Carthage, RKO permitted 120 days and United Artists 90. United Artists permitted 90 days at Watertown, New York, and 90 days at Amsterdam, New York; Bucyrus, Kent, Norwalk, Tiffin and Fostoria, Ohio; and Lexington and Van Wert, Kentucky.

 The license contracts with 'Schine' in many instances specified minimum admission prices for the various runs as well as clearance period. To an extent this affects adversely the time given the competitor. Interstate Circuit v. United States, supra, clearly points the reasons for condemning such provisions in a film license contract ...


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