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FANCHON & MARCO, INC. v. PARAMOUNT PICTURES

June 11, 1952

FANCHON & MARCO, Inc., et al.
v.
PARAMOUNT PICTURES, Inc., et al.



The opinion of the court was delivered by: LEIBELL

The defendant, Paramount Pictures, Inc., and the defendant-intervenor, United Paramount Theatres, Inc., moved in the regular motion part of this Court for an order dismissing the plaintiffs' amended complaint and for other relief. The judge sitting in that part referred the motion to me, as the pre-trial judge before whom the case was then pending.

The amended complaint states: 'Fanchon & Marco, Inc. brings this suit in its own behalf. As a stockholder, and in behalf of all other stockholders similarly situated of Paramount Hollywood Theatre Corporation, Fanchon & Marco, Inc. also brings this suit for and in the name of Paramount Hollywood Theatre Corporation, for the relief hereinafter prayed'. Paramount Hollywood Theatre Corporation is itself a plaintiff.

 The amended complaint alleges, in the first cause of action, that on October 21, 1941, and for many years prior thereto, the defendant 'Paramount Pictures Inc. and other corporations and persons engaged in the production, distribution and exhibition of motion pictures throughout the United States and in Los Angeles, were engaged in a conspiracy to restrain and monopolize interstate trade and commerce in motion pictures, in violation of the Acts of Congress known as the anti-trust laws'; that a part of the conspiracy was to monopolize for Paramount Pictures, Inc., the business of exhibiting first run feature pictures in Hollywood and Los Angeles, California, and to exclude all other persons from engaging in that business, save on conditions and terms established by the parties to the conspiracy; that at that time, the plaintiff, Fanchon & Marco, Inc., was desirous of leasing a large theater in Hollywood for the purposes of showing feature films; that in order to do so, it was required to enter into a contract with Paramount Pictures, Inc., which it did, on October 22, 1941; that among other things the parties agreed (according to the allegations of the following paragraphs of the amended complaint):

 '11. That Fanchon & Marco, Inc., should make a lease for the theatre for ten years, with an option for an additional ten years, and should assign the lease to a corporation to be organized by Fanchon & Marco, Inc., and Paramount Pictures, Inc.;

 '12. That both parties should make equal contribution of money capital to the corporation, for which the stock of the corporation and representation on the board of directors should be divided equally between them;

 '13. That Fanchon & Marco, Inc., should manage and operate the theatre for the corporation, for which they should receive five percent of the gross receipts after the deduction of admission sales taxes, and other taxes on gross receipts;

 '14. That Paramount Pictures, Inc., should furnish motion pictures for use in the theatre during the term of the lease, and should enter into a contract with the corporation for that purpose.'

 The amended complaint further alleges that pursuant to the terms of the contract of October 22, 1941, Fanchon & Marco, Inc., leased the theater; that the theater was given the name 'Paramount Theatre'; that Fanchon & Marco, Inc., and Paramount Pictures, Inc., organized Paramount Hollywood Theatre Corporation, as a Delaware corporation, on February 4, 1942; that each of the parties contributed one-half of the money for the capital stock and each has had equal representation on the board of directors at all times; that Fanchon & Marco, Inc., entered into a contract to manage the theatre for five percent of the gross; that Fanchon & Marco, Inc., made an assignment of the lease to Paramount Hollywood Theatre Corporation on March 1, 1942.

 The amended complaint also alleges that on September 5, 1944, Paramount Pictures, Inc., entered into a contract with Paramount Hollywood Theatre Corporation, as of March 19, 1942, to furnish for exhibition first run at the theatre all of the feature, short subject and newsreel motion pictures (which Paramount Pictures, Inc., should have the right to license and which should be generally released by Paramount Pictures, Inc.) until September 30, 1951; that the contract provided that on or before any first of each year Paramount and the theatre corporation should endeavor to agree upon the rental fees of the films and that such fees should be fair and reasonable.

 The amended complaint further alleges that both Fanchon & Marco, Inc., and Paramount Hollywood Theatre Corporation have been unlawfully deprived of a 'lawful condition of competition and unrestrained trade for the procurement of motion pictures', because of the conspiracy; and have been unlawfully deprived of the independent and competitive services of Paramount Pictures, Inc.; that Paramount has required the theatre to pay excessive and unreasonable fees for the films, in the sum of $ 628,000 for feature films and $ 41,506 for shorts and newsreels.

 The amended complaint also charges that the construction of another theatre, on certain land on Wilshire Boulevard, Beverly Hills, purchased by Paramount Hollywood Theatre Corporation, has been prevented by the defendant and that as a result the land has accumulated tax charges and other charges, all resulting in damage to the plaintiffs in the sum of $ 200,000.

 It is also alleged that by virtue of its monopolistic powers Paramount Pictures, Inc., has compelled Paramount Hollywood Theatre Corporation to pay to Paramount Theatres Service Corporation, a wholly owned subsidiary of Paramount Pictures, Inc., $ 73,600 for 'services' which were never rendered.

 The second cause of action alleged in the amended complaint repeats nearly all of the allegations of the first, and further alleges:

 '30. An essential consideration to Fanchon & Marco, Inc., and Paramount Hollywood Theatre Corporation, for the performance of the agreements on their part, as aforesaid, including the making and assignment of the lease to Paramount Hollywood Theatre Corporation, the contribution of money capital to that corporation, the making and performance of the management contract for Paramount Theatre, the delivery and transfer to Paramount Pictures, Inc., of one-half of the stock of Paramount Hollywood Theatre Corporation, the submission to the exclusive dealing contract for pictures with Paramount Pictures, Inc., the submission to the yearly contracts stated in paragraphs 22, 23 and 24, and the submission to and payment of the excessive and unreasonable fees for pictures, was the assurance provided by the exclusive dealing contract that Paramount Pictures, Inc., would furnish the necessary supply of pictures for the Paramount Theatre until September 30, 1951.

 '31. On or about March 26, 1947, Paramount Pictures, Inc., informed Fanchon & Marco, Inc., and Paramount Hollywood Theatre Corporation, that as of March 31, 1947, it would no longer perform the contract for pictures of September 5, 1944. Thereafter Paramount Pictures, Inc., without any legal cause or justification, has failed and refused to perform that contract, and has failed and refused to return to Fanchon & Marco, Inc., and Paramount Hollywood Theatre Corporation any part of the consideration which it has received for the performance of that contract, including one-half of the stock of Paramount Hollywood Theatre Corporation.

 '32. Since March 21, 1947, Paramount Pictures, Inc., has produced, distributed and licensed for exhibition first run in Los Angeles by other persons than Fanchon & Marco, Inc., and Paramount Hollywood Theatre Corporation, many pictures of great revenue producing value in the exhibition thereof, which Paramount Hollywood Theatre Corporation was entitled to have for first run exhibition under the contracts of October 21, 1941, and September 5, 1944.

 '33. Because of the breach of these contract, Paramount Hollywood Theatre Corporation, since March 31, 1947, has been forced to procure and use pictures which have produced greatly less revenue at the Paramount Theatre, than pictures licensed by Paramount Pictures, Inc., and which Paramount Hollywood Theatre Corporation would have exhibited; and as the result Fanchon & Marco, Inc., and Paramount Hollywood Theatre Corporation have suffered loss of profits in the sum of fifty thousand dollars.'

 In addition to the money damages sought, which plaintiffs claim should be trebled, they seek to have Paramount and defendant-intervenor enjoined 'from voting or attempting to vote the stock of Paramount Hollywood Theatre Corporation'. Plaintiffs have also prayed that defendant and defendant-intervenor be directed to return to Paramount Hollywood Theatre Corporation the stock issued to it by that corporation, on the ground that the stock was issued as consideration for the performance of obligations incurred under the various contracts to which Fanchon & Marco, Inc., Paramount Hollywood Theatre Corporation and Paramount Pictures, Inc., were parties and which Paramount has allegedly failed to fulfill.

 United Paramount Theatre, Inc., has been permitted to intervene in this action by order of Judge Noonan, dated October 18, 1951, but only as to plaintiffs' claim arising out of the alleged breach of the contract of September 5, 1944. In its answer to the original complaint, United Paramount Theatre, Inc., counterclaimed for a judgment declaring it to be the lawful owner of the 400 shares of (Class B) stock, and enjoining the plaintiffs from interfering with the proper exercise of its rights as a stockholder. The intervenor's interest arises out of an anti-trust suit instituted by the United States against Paramount Pictures, Inc. which terminated in a decree against that defendant, which was entered on March 3, 1949. The judgment directed that the defendant divest itself of all its domestic theatre assets. In accordance with the terms of the judgment directed that the defendant divest itself defendant organized United Paramount Theatre, Inc., and shortly after January 1, 1950, transferred to it the 400 shares of (Class B) common stock of Paramount Hollywood Theatre Corporation. Plaintiffs have denied the efficacy of this transfer, on the ground that the certificate of incorporation of Paramount Hollywood Theatre Corporation provided that no transfer could be made by either of the stockholders, unless an opportunity was first given to the other stockholder to purchase the stock about to be transferred.

 Following the service of the amended complaint the defendant brought this motion, under Rule 12 of the Federal Rules of Civil Procedure, 28 U.S.C.A., for an order-

 '(a) dismissing the action in so far as it purports to be brought by Paramount Hollywood Theatre Corporation upon the ground that said Corporation has not been authorized by proper corporate action to institute or maintain this action;

 '(b) dismissing the action in so far as it purports to be brought by Fanchon & Marco, Inc. suing as a stockholder on behalf of Paramount Hollywood Theatre Corporation upon the ground that said amended complaint fails to state a claim upon which relief can be granted;

 '(c) in the event that the Court should deny the relief requested in (a) above, dismissing the action in so far as it purports to be brought by Fanchon & Marco, Inc. as a stockholder on behalf of Paramount Hollywood Theatre Corporation upon the ground that a stockholder cannot sue derivatively when the Corporation is also purportedly suing in its own name; and

 '(d) dismissing the action in so far as it purports to be brought by Fanchon & Marco, Inc. suing on its own behalf upon the ground that said amended complaint fails to state a claim upon which relief can be granted.'

 In the event that any part of the foregoing relief prayed for is denied, defendants move to stay 'further prosecution of so much of this action as is referable to arbitration pursuant to a certain agreement between Paramount Pictures Inc. and Paramount Hollywood Theatre Corporation, dated September 5, 1944, effective as of March 19, 1942'.

 Both sides have submitted affidavits and briefs on this motion. I shall now discuss the respective contentions of counsel.

 On the argument of the motion and in their briefs the plaintiffs have urged that Paramount Hollywood Theatre Corporation was properly authorized to bring this action and that its president had the authority to direct that it be brought. The corporation was formed under the laws of the State of Delaware on February 4, 1942. Plaintiff, Fanchon & Marco, Inc., and defendant, Paramount Pictures, Inc., were, and still are the only stockholders. Each contributed one-half of the money capital of the corporation, for which each received one-half of the capital stock. Fanchon & Marco, Inc., received the stock designated as 'Class A', and Paramount Pictures, Inc., received the 'Class B' stock. The alphabetical designations have no significance; both had the same rights under the charter.

 The articles of incorporation provided, inter alia, that the holders of the shares of each class shall be entitled to elect one-half of the total number of directors fixed by the by-laws. Article Ninth provides in part that 'the number of directors shall not be less than four (4) and shall always be fixed at an even number'. This resulted in equal representation on the board for the two stockholders. The holder of the Class A stock was granted the right to elect the President, Treasurer and one or more Assistant Treasurers of the corporation. The holder ...


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