The opinion of the court was delivered by: HERLANDS
General Nature of the Action
This is a civil antitrust action instituted by a complaint filed by the United States on April 10, 1958, under Section 4 of the Sherman Act (15 U.S.C.A. § 4) and Section 15 of the Clayton Act (15 U.S.C.A. § 25). It alleges violations of Section 1 of the Sherman Act (15 U.S.C.A. § 1) and Section 7 of the Clayton Act (15 U.S.C.A. § 18). The three defendants are Columbia Pictures Corporation ('Columbia'), Screen Gems, Inc. ('Screen Gems'), and Universal Pictures Company, Inc. ('Universal').
The complaint alleges that the violations arise from the execution and subsequent performance of two interrelated agreements: an agreement entered into August 2, 1957, under which Screen Gems, a wholly-owned subsidiary of Columbia, was granted for approximately fourteen years by Universal the exclusive license to distribute for television exhibition approximately six hundred Universal feature films originally produced prior to August 1, 1948 for theatrical, exhibition; and an agreement, executed concurrently by the three defendants, under which Columbia guaranteed performance by Screen Gems of all its obligations under the distribution agreement, and that Screen Gems would continue to be the exclusive licensee for television exhibition of substantially all Columbia pre-August 1, 1948 feature films.
Under the distribution agreement, Screen Gems undertook television distribution of the Universal feature films. Screen Gems was to receive certain specified percentages of the total income from such distribution, and guaranteed payment to Universal of annual minimums totaling $ 20,000,000 during the first seven years.
The Government alleges that the agreements themselves are agreements to fix prices, illegal per se under Section 1 of the Sherman Act. It also alleges that, in the distribution since August 2, 1957 of the Universal and Columbia feature films by Screen Gems, prices were fixed and competition eliminated between Universal and Columbia per se in violation of Section 1 of the Sherman Act.
The Government further alleges that the exclusive distribution rights received by Screen Gems constituted the acquisition of an asset within the meaning of Section 7 of the Clayton Act, the effect of which may be substantially to lessen competition in the distribution of feature films for television exhibition in New York City and the contiguous area known as Metropolitan New York.
The Parties -- Defendant and Jurisdiction
Defendant Columbia is a corporation organized and existing under the laws of the State of New York, and transacts business and is found within the Southern District of New York. Columbia is in the business of producing motion pictures for theatrical exhibition which are distributed for such exhibition throughout the United States by subsidiaries and licensees.
Defendant Screen Gems is a corporation organized and existing under the laws of the State of California, and transacts business and is found within the Southern District of New York. Screen Gems is a wholly-owned subsidiary of Columbia, and is in the business of producing and distributing films for television exhibition. Many of the films which it distributes for television exhibition were produced by other companies; and some of these films produced by other firms were produced originally for exhibition in motion pictures theatres.
Defendant Universal is a corporation organized and existing under the laws of the State of Delaware, and transacts business and is found within the Southern District of New York. Universal has, since 1912, been a producer and distributor of motion pictures for theatrical exhibition throughout the United States and the world. During those forty-eight years it has produced and distributed several thousand feature films by subsidiaries and licensees. The principal business of Universal has, for more than forty years, been the production and distribution of motion pictures for theatrical exhibition.
Each defendant is engaged in interstate commerce. There is no issue as to jurisdiction and venue.
The following definitions are based on the record:
(a) 'Columbia': Columbia Pictures Corporation.
(b) 'Screen Gems': Screen Gems, Inc.
(c) 'Universal': Universal Pictures Company, Inc.
(d) 'Distribution': Offering to grant and sublicense, and entering into contracts granting and sublicensing, the right to televise any filmed, videotaped or live programming to (1) any person operating any television station or group of television stations, for televising over such station or group, (2) any sponsor sponsoring any telecast over any television station or (3) any advertising agency, for exercise on behalf of any client sponsoring telecast over any television station.
(e) 'Release': Advising or making known to prospective sublicensees that filmed, taped or live programming is in distribution.
(f) 'Feature Film': A full length, copyrighted motion picture having a running time usually in excess of 60 minutes, originally produced for exhibition in motion picture theatres, including Westerns.
(g) 'Package': Two or more feature films offered by a distributor for sublicensing to a sublicensee.
(h) 'The Agreement': The Television License and Distribution Agreement executed by Columbia, Screen Gems and Universal on August 2, 1957, as of July 1, 1957.
(i) 'Sale', 'License' or 'Sublicense': The transaction by which a distributor transmits to a television station the right to exhibit television programming.
(j) 'D -- -- -- ': Exhibit -- -- -- submitted by defendants Columbia and Screen Gems.
(k) 'G -- -- -- ': Exhibit -- -- -- submitted by plaintiff.
(l) 'U -- -- -- ': Exhibit -- -- -- submitted by defendant Universal.
The complaint was filed April 10, 1958, more than eight months after the Distribution Agreement was executed. Six months later, in October 1958, the Government moved to enjoin the continued performance by the defendants of the August 2, 1957 Agreements, and for summary judgment as to the Section 1 charge.
On November 3, 1958, defendants amended certain language of the Distribution Agreement which the Government had cited in its moving papers as proof of the per se illegality of the agreement.
On January 22, 1959, the motion for summary judgment was denied. The motion for preliminary injunction was partially granted, the defendants being enjoined from releasing more than fifty Universal feature films in any six-month period during the pendency of the litigation. United States v. Columbia Pictures Corporation, D.C.S.D.N.Y.1959, 169 F.Supp. 888.
Following these motions comprehensive pretrial proceedings took place. The parties propounded interrogatories upon each other and served answers thereto. Plaintiff took the deposition of one of the officers of Screen Gems.
Formal and informal pretrial hearings were held before the Court, during which proposed exhibits and the issues and contentions of the parties were thoroughly explored among counsel and the Court. This resulted in the entry of a Pretrial Order on March 14, 1960, consented to by all parties, which embodied a number of stipulations of fact, cleared many objections to exhibits, and resulted in expediting the trial considerably.
Some Aspects of the Trial Proceedings
The trial, which commenced March 14, 1960, lasted 17 court days and covered more than 2,600 pages of transcript. Upwards of 250 exhibits were admitted into evidence. The Government called three witnesses in its case in chief and one rebuttal witness. Defendants Columbia and Screen Gems called eight witnesses. Defendant Universal called five witnesses. Of the foregoing thirteen defense witnesses, the testimony of five (Schneider, president of Columbia and Screen Gems; Rackmil, president of Universal, and Miles, Theuteberg and O'Neill of Universal) were stipulated to by the Government.
Several motions were made during the course of trial. Defendants' motion to dismiss at the end of plaintiff's case was denied.
Plaintiff's motion at the end of its case for an order extending the partial preliminary injunction against Screen Gems releasing further Universal films was also denied, as was plaintiff's renewed motion for the same relief made later during the course of trial.
The Court reserved decision on all motions at the conclusion of the evidence, and directed that the parties exchange and file proposed findings of fact and conclusions of law, and main and reply briefs.
The statutes involved herein are, in relevant part, as follows:
Section 1 of the Sherman Act: 'Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal * * *.' 15 U.S.C.A. § 1.
Section 7 of the Clayton Act: 'No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, * * *' 15 U.S.C.A. § 18.
The Distribution Agreement
The Distribution Agreement was admitted into evidence as Government's Exhibit G1. It was, as stated, executed by defendants August 2, 1957. Its essential terms are substantially as follows: Universal granted to Screen Gems exclusive television distributorship of the approximately 600 feature films produced and released for theatrical exhibition by Universal prior to August 1, 1948 (with limited exceptions not material). The distributorship is for a period of up to 14 years and is not assignable. Universal granted only the right to distribute the films for television exhibition; Universal reserved all other rights in the films and continues to own them (Sections III, VII of Distribution Agreement).
In addition, the Distribution Agreement required Screen Gems to distribute the features diligently in order that the greatest possible revenues may be realized for itself and Universal (Section V). Screen Gems was required to release not less than 78 Universal features in each of the six annual periods (Section V.6) and to negotiate to sublicensees concerning the Universal features on a non-discriminatory basis (Section V). After Screen Gems recoups certain distribution expenses, it is to be paid a percentage of the net proceeds as its distribution fee; Universal is entitled to the balance (Sections X.7, X.8). Screen Gems is required to make annual minimum payments to Universal which total $ 20,000,000 over seven years (Section X).
The Agreement provided that all sales and other policies relating to Universal pictures and their distribution should be formulated jointly by Screen Gems and Universal (Section V.3); that Screen Gems would not grant any sublicense for Universal's pictures on terms less favorable than for Columbia's (Section V.7); and that Screen Gems would submit to Universal, in advance of the release of any Universal features, a schedule of minimum prices below which Screen Gems was not to sublicense the Universal features without Universal's approval (Section V.7).
The Agreement permits Universal to conduct an audit of Screen Gems' sales records (Section XI) and requires Screen Gems to render reports to Universal showing the sublicensing of each Universal film and the sublicensing of other films included in transactions involving Universal films (Section XII).
The Agreement also provided that the revenues resulting from a sublicense which includes both Universal features and Columbia features shall be allocated to Universal and to Screen Gems on the basis of the value assigned by those defendants to each of the features included in the sublicense (Sections V, X). To effectuate this purpose, in those cases where a package of feature films is composed of Columbia features and Universal features, Universal and Screen Gems agree on the proportion of revenues attributable to each company on the basis of the relative value of the features each has contributed to the package. The allocation proportion is achieved by assigning to each feature in the package a classification, either 'A', 'B', 'C' or 'D', according to its relative value (Section V.14).
The Distribution Agreement was amended by the parties on November 3, 1958 in certain respects directly pertinent to the issues raised under the Sherman Act. The amendments will be discussed below in that connection.
The Sherman Act Section 1 Charge The Issues Stated
Both sides see eye to eye on the propositions that an agreement to fix prices is illegal per se; and that, where the attacked arrangement is one to fix prices, the trial court must reject as immaterial and irrelevant defendants' proffered evidence of their intent, motive and good faith in entering into the agreement or of the beneficial economic effect of the agreement.
The parties are, however, in fundamental disagreement as to whether the contract herein is an agreement to fix prices, either by its terms or by its operation. In essence, the plaintiff's position is that the agreement on its face is one to fix prices; that extrinsic evidence of the genesis and economic motivation of the agreement is therefore immaterial; and that the actual operation of the contract is corroborative of its price-fixing character. Consequently, the plaintiff's strategy has been to present and rely on an almost exclusively documentary case; and its tactic has been to emphasize the wording of certain clauses in the agreement and the plaintiff's conception of how these clauses operated in practice.
Taking sharp issue with each of plaintiff's contentions, defendants have argued that a mere reading of the agreement would not enable the court to reach a definitive conclusion, either in point of fact or as a matter of law, as to whether the contract is one to fix prices. On the contrary, defendants assert, a finding and conclusion as to whether or not this agreement is a price-fixing device can be formulated only on the basis of a realistic view in depth of the agreement -- its origin, motivation, objectives, wording (as the various clauses were negotiated, drafted and finalized), and its actual operation and effect. Such evidence, the defendants say, is offered -- not to legitimatize an agreement to fix prices -- but to demonstrate that, viewed in the totality of the facts, the agreement has none of the characteristics of an agreement to fix prices, as that term is conventionally used.
These rival contentions were put forward and argued at length during the extensive informal and formal pre-trial conferences and hearings, as well as in pre-trial legal memoranda submitted by both sides. The court, having considered the legal arguments and having read the proposed exhibits and heard summaries of the proffered proof, decided that the defendants should be permitted to present a full case in accordance with the rationale of their analysis. In the course of the trial, the defendants did make a comprehensive presentation through live witnesses, stipulated testimony, and extensive documentary proof.
A restatement of the Sherman Act, 1 issues and a brief outline of the Clayton Act, § 7 issues will facilitate a consideration of the trial record.
Sherman Act, § 1. The Government alleges that defendants entered into an unlawful combination and conspiracy consisting of a 'continuing agreement, understanding and concert of action by the defendants' (par. 19). It is alleged that the 'defendants have effectuated the aforesaid combination and conspiracy in part by means of' the Distribution Agreement (par. 20). Plaintiff charges that the 'effects' of the classification provisions of the Distribution Agreement and of the 'less favorable' treatment clause 'have been and unless restrained will be to fix and maintain uniform and identical minimum prices and to eliminate price and other competition between Columbia, Screen Gems and Universal, in the distribution and licensing of feature film for television exhibition throughout the United States' (par. 24).
The Government has urged from the outset that the foregoing alleged conspiracy and combination is illegal per se under Sherman Act, § 1. The Government has, with deliberation and persistence, set forth its contention that it need prove its case solely by reference to the four corners of the Distribution Agreement, without reference to the extrinsic facts.
Consistent with this claim, the Government stipulated in Pretrial Order Par. 13(n) that 'In connection with the Sherman Act Section 1 cause of action and the allegations in the complaint relating thereto, the Government is not relying upon any oral understanding or parol agreement between Columbia, Screen Gems or Universal extrinsic to the written agreement of August 2, 1957.' And further, the Government stipulated in Par. 13(o) of the Pretrial Order that 'The agreement of August 2, 1957 was the result of arm's length bargaining between the parties, and the parties in entering into said agreement did not have the motive to fix prices within the meaning of Section 1 of the Sherman Act.'
It is thus clear that the broad issue in the Sherman Act charge in this case is whether, in the face of the fact that the parties did not have the motive, purpose or intent to fix prices, and without proof by plaintiff of any effect of the Distribution Agreement in the market place, the Court can hold the Distribution Agreement to be illegal on its face as a price-fixing arrangement such as is condemned per se by the Sherman Act.
To bring this issue into sharper focus, defendants have not asserted that 'price-fixing' arrangements, once found, are not illegal per se. In defendants' submission, the issue before this Court was to determine what constitutes price fixing under the decisional authorities.
The Government is not claiming that the fact that Columbia and Universal are distributing through the agency of Screen Gems in mixed packages constitutes by itself an illegal per se arrangement.
As was stated in the record (2605-06):
'The Court: Now let me see in the interest of saving time whether I cannot formulate the second issue.
'The government claims that by virtue of the fact that Columbia and Universal got together through the medium of Screen Gems, and sold through Screen Gems feature films of each, either alone or in mixed packages, that the effect of that was necessarily to eliminate competition between Universal and Columbia in regard to feature films to be used as programming material on TV stations.
'Mr. Harrison: No, your honor.
'The Court: All right, you tell me what you claim.
'Mr. Harrison: We claim that no merely the fact that they got together -- that per se we do not claim is illegal, but we say that the arrangement by which they got together, that is, the specific provisions of the agreement whereby they determined in advance a formula -- they determined in advance how much would be received for each Universal and each Columbia feature film in relation to each other, and they entered into the proviso of Section V.7 where no Universal feature film shall be sold for less than a Columbia feature film, that that was the per se illegality.' (Emphasis added.)
The Sherman Act issues thus resolve themselves into two contentions, as articulated by Government counsel (2610-14):
1. Does the proviso of Section V.7 of the Distribution Agreement, relating to the 'less favorable' treatment of Universal features, and the implementing sections, relating to minimum rate schedules, constitute price fixing illegal per se? As to this issue, the Government contends that it is immaterial and irrelevant as to how the contract was carried out and performed, that the issue must be decided by looking only to the language of the contract and nothing else, and that the contract provisions are self-explanatory, self-illuminating and self-defining, requiring no explanation as to what was intended, how the parties operated and the practical purposes sought to be served.
2. Do the classification provisions of the Distribution Agreement constitute price fixing illegal per se? In this connection, the Government asserts that the Court must go beyond the four corners of the Agreement and 'must analyze their operations'.
As to (1), it is defendants' position that the provisions of Section V.7 of the Distribution Agreement, and related provisions, do not call for price fixing on their face and have not operated as such. Moreover, this very section of the contract was completely eliminated by the amendment of November 3, 1958, as was the provision for the submission to Universal of minimum rate schedules. Defendants have made it manifestly clear that they do not intend to revert in any way to these provisions. Thus, the very provisions upon which the Government rests its contention of illegality have already been carved out of the Agreement. Despite the amendment, the Court will adjudicate the legality of the agreement both prior and subsequent to November, 1958.
As to (2), defendants submit that classification did not operate to fix prices at which Columbia and Universal feature films were licensed or sublicensed to television stations, and that these provisions were inserted in the Agreement solely as an internal procedure to facilitate allocation of the proceeds of licenses and sublicenses between Columbia and Universal on the basis of the relative value each contributed to the package of films sold.
Defendants pose a third issue: Whether the clauses objected to by the Government, even assuming arguendo that they are anticompetitive in effect, are ancillary to the main, concededly legitimate, transaction of Screen Gems distributing Universal features and, as such, whether their validity under the cases must be determined by their reasonableness under all the circumstances.
Clayton Act, § 7. The issues under the Clayton Act may be defined as follows:
(1) Whether Screen Gems acquired an asset within the meaning of Sec. 7 when it obtained an exclusive limited license under a copyright to distribute Universal feature films for television exhibition.
(2) What is the appropriate 'line of commerce.' The Government contends that feature films for television exhibition have sufficiently peculiar characteristics and uses to constitute them an appropriate line of commerce within which the probable future effects of the acquisition may be evaluated.
Defendants submit that feature films do not have such sufficiently peculiar characteristics and uses, and that the appropriate line of commerce is broader than feature films and includes other films and television programs.
(3) Whether, as the Government claims, the New York metropolitan area is an appropriate 'section of the country' within the meaning of Sec. 7 of the Clayton Act. Defendants submit that plaintiff has failed in its burden of proof in establishing that the New York metropolitan area is an area of effective competition, by itself significant and distinguishable from other parts of the country.
(4) The fourth and final issue under the Clayton Act charge is reached only if the Government prevails on each and every one of the foregoing three issues. If the issue is reached, the question is whether the effect of the acquisition by Screen Gems of the license for television distribution of the Universal feature films may be substantially to lessen competition in the distribution of feature films for television exhibition in the New York television market.
The Government acknowledges that it has the burden of proof on all issues in the case, Clayton Act as well as Sherman Act. This means, under the Clayton Act, that if the Government has failed to sustain its burden of proving by a fair preponderance of the credible evidence any one of the four contentions enumerated above, defendants are entitled to judgment dismissing that charge.
Description of the Television Industry
The television industry in the United States is relatively new. Illustrative statistics show the tremendous expansion and growth within the ten-year period 1949 to 1958: in 1949 there were but 98 commercial television stations in the United States, whereas ten years later there were 514.
The number of total TV sets in the country grew in the ten-year period from 1,000,000 to 47,000,000, while at the same time the number of television homes expanded from 940,000 to 41,924,000.
Concurrently, television broadcasting revenues and expenses and volume of television advertising grew with dynamic leaps and strides.
In New York City there are seven commercial television stations: Channel 2 (WCBS-TV), Channel 4 (WRCA-TV), Channel 5 (WNEW-TV), Channel 7 (WABC-TV), Channel 9 (WOR-TV), Channel 11 (WPIX) and Channel 13 (WNTA-TV). WCBS-TV is affiliated with the CBS network, WRCA-TV is affiliated with the NBC network and WABC-TV is affiliated with the ABC network. The other four stations presently have no network affiliation.
The physical picture projected by the seven New York stations on television sets in the homes in the New York area extends beyond the confines of the city itself. Each of the seven stations has its transmitter site on the Empire State Building in New York City, and the power to transmit an image extends to a radius of approximately 75-90 miles from the Empire State Building.
Television stations throughout the country are on the air for a major portion of the day, every day of the week. While the sign-on and sign-off times vary from station to station, and even for the same station from month to month and year to year, it can be said generally that stations are exhibiting programming material from early morning to late evening. This is particularly so in New York, although there is no substantial difference in the programming technique and practice by television stations located outside of New York from those located in New York.
Television programming consists of programs produced on motion picture film, programs presented live on stage and, of more recent development, programs recorded on Videotape, a new development in the industry which permits instantaneous reproduction of sight and sound on magnetic tape, which can be played over and over again as in the case of programs produced on film.
Film programs consist of those motion picture films produced specifically for television and those produced originally for theatres but which have been made available for television exhibition. Feature films fall within the latter category.
The following basic fact must be emphasized at the outset. Only pre-August 1, 1948 feature films are involved in the Government's charges. For purposes of this case, pre-August 1, 1948 feature films are generally referred to as 'feature films' (without a date) or, sometimes, as 'pre-1948 feature films.'
The dividing date-line between 'pre' and 'post' August 1, 1948, comes about as a result of a labor union controversy in the movie and TV industries. Script writers, performers, and others (directors, cameramen, stagehands) want a 'cut' of the revenues from the TV exhibition of feature films produced after August 1, 1948. No similar claim has interfered with the TV licensing of pre-August 1, 1948 feature films.
Consequently, pre-August 1, 1948 feature films have thus far been available for TV exhibition, while post-August 1, 1948 feature films have not been released for that use. When the labor controversy is settled (and this is imminent) post-August 1, 1948 feature films will be sold or licensed for TV exhibition, and thus compete with pre-August 1, 1948 feature films.
'Pre-1948 feature films' are a product of finite quantity. There is a fixed inventory of that product. it cannot be replenished. Moreover, it is a continuously depleting property in the sense that, with each repeat or rerun, its economic value approaches zero.
In sharp contrast, the quantity of post-August 1, 1948 feature films has an 'open end;' there is no limit on their number. The significance of post-1948 feature films is coaxial -- quantity plus quality. Qualitatively, post-August 1, 1948 feature films have much greater value than pre-August 1, 1948 feature films, because the established stars are better known to present-day audiences, and the technological production is improved. Moreover, in theme, character portrayal, and costuming, post-1948 feature filmes are closer to current taste and contemporary trends, and thus have enhanced audience identification and audience appeal.
The same qualitative and quantitative comparison is to be made between pre-1948 feature films and current live TV shows, taped recordings of such live shows (i.e. videotapes) and syndicated films (i.e. films that are made specially for TV exhibition). Live shows, taped live shows, and syndicated films -- like post-August 1, 1948 feature films -- are types of TV programming material that do not have a fixed inventory limitation. They, too, are keyed to current tastes, thereby facilitating commercial exploitation of the vogue.
Economic realities thus compel an appraisal of pre-1948 feature films in a market context that includes domestic and foreign post-1948 feature films, live shows, video-taped live shows, and syndicated films.
For all practical purposes, TV programming is an adjunct of the advertising business. The end: maximum viewing audience and, consequently, maximum purchasers. The means: TV programs.
TV programming is a mixture of show business and advertising. It is a form of economic symbiosis.
The TV stations are interested in advertising revenue. The TV industry is subject to the pressure for higher ratings and higher profits.
TV programming is dynamic, experimental, free from fixed patterns, subject to the requirements of advertisers and sponsors, and catering to the advertising experts' image of the largest common denominator of public taste. Variety is the spice and therefore the necessity of TV programming. A partial cataloguing of the varieties of TV programming demonstrates that it covers a broad spectrum, the elements of which include such items (to use the cant of the trade) as 'Westerns,' 'adventure tales,' 'suspense drama series,' 'private eyes,' 'Civil War action series and Civil War specials,' 'hilarious comedy,' 'humor,' 'song, dance and comedy specials,' 'Shakespeare,' 'television biography' (intimate closeups of famous personalities), 'news specials,' 'opera,' 'contest,' 'quiz shows,' 'sports events,' 'wisdom,' and 'religion.'
TV is prime advertising medium because the audience for programs can be turned into a market for advertised wares. The sponsor pays for a program, not primarily to entertain viewers, but to get them to listen to his advertising messages, the commercials, which persuade them to buy his product. The commercial may be one or more long or short announcements in the course of an extended network program or a ten-second plug on a local station.
A sponsor has a good deal to say about the quality, the content and the general character of a program he pays for. To get a program, he turns to his advertising agency.
The advertising agency is a considerable power in TV. The money that pays for programs funnels through the advertising agency, which picks a program for a sponsor, fits it with commercials to sell the sponsor's products, and buys broadcasting tiem from a TV network or station.
Sometimes agencies actually produce a show for a sponsor. But more and more the advertising agencies turn for programming material to the TV distributors.
The distributor or packager may be an independent producer who puts a complete show together, sometimes from opening music to closing commercial. Packagers or distributors will either produce a complete live show or, more usually, a film series which will run a number of episodes or license feature films.
The networks are largely middlemen, taking programs from sponsors and transmitting them over cable lines to local stations, which pass them on to the viewers. The cable wire and related facilities, loosely hold together the network's wholly-owned stations, plus independently-owned affiliates, with which the network contracts to furnish a certain number of programs.
The reality of TV is an ever-fluctuating relationship between three economic powers:
(1) representatives of the networks and independent stations,
(2) sponsors and their advertising agencies, and
(3) packagers and distributors of TV programming materials.
As broadcasting hours stretched out from pre-dawn to past midnight, the TV stations turned to outside program packagers and distributors for programming material to fill up the schedule.
The content of TV programs is influenced by the real or suspected views of the TV audience. The TV industry tries to give the viewers what they want. It tries to find out what they want through the rating systems. The ratings are meant to establish how many people actually see TV shows. There are three major rating services, and they use different ways to poll viewers. Trendex bases its results on 1,000 telephone calls made at random to possible TV viewers in 25 cities. Nielsen attaches meters to 1,200 TV sets; and these keep a record of how much and when the sets are used. Arbitron, using another set attachment, keeps a continuous electronic check on the set and beams its findings to a computer.
The main task of a TV program is to get the highest possible number of viewers for the sponsor, thereby achieving the highest possible profits. At present, television does not sell its product, i.e., entertainment. It exists only to sell other wares.
To recapitulate, programming viewed on American television results from the intermeshing of a number of entities, the chief of which are advertisers and advertising agencies, television networks, commercial television stations, producers and distributors of programming, station representatives, and the common carrier providing interconnection.
There are three television networks in the United States: Columbia Broadcasting System (CBS), National Broadcasting Company (NBC) and American Broadcasting Company (ABC). Each of the networks owns and operates television stations in cities throughout the country, including New York, as follows:
Network Stations Cover ed
/////-- //////-- ///////--
ABC WABC-TV New York
KABC-TV Los Angeles
KGO-TV San Francisco
CBS WCBS-TV New York
KNXT Los Angeles
WHCT Ha rtford
KMOX-TV St. Louis
NBC WRCA-TV New York
KRCA Los Angeles
Many of the more than 500 commercial television stations throughout the United States are affiliated by contract with one or more of the three television networks.
Programs created originally for television viewing are produced by networks, stations, advertising agencies and independent producers.
Television programming is supplied to stations by networks, independent distributors, advertisers and the stations themselves. Distributors of filmed programming (made originally for television or for motion picture theatres) and videotaped programming sublicense their programming to stations, advertisers and networks.
While programming may be paid for or produced in the first instance by stations, it is advertisers who in the final analysis bear its cost. Networks act as selling agents for the stations which they own and operate and with which they are affiliated in selling advertising time on the stations. Stations also employ other sales agents, called station representatives, to sell their commercial time to advertisers.
Networks arrange with American Telephone & Telegraph Company, the common carrier for interconnection, to deliver network programming to their owned and operated stations and to the affiliated stations.
The Distribution Agreement Is Not an Arrangement to Fix Prices
An agreement to fix prices is illegal per se, without regard to motive, market control, or the amount of commerce affected. United States v. McKesson & Robbins, Inc., 1956, 351 U.S. 305, 76 S. Ct. 937, 100 L. Ed. 1209; United States v. Line Material Co., 1948, 333 U.S. 287, 68 S. Ct. 550, 92 L. Ed. 701; United States v. Paramount Pictures Corp., 1948, 334 U.S. 131, 68 S. Ct. 915, 92 L. Ed. 1260; United States v. Masonite Corp., 1942, 316 U.S. 265, 62 S. Ct. 1070, 86 L. Ed. 1461; United States v. Socony Vacuum Oil Co., 1940, 310 U.S. 150, 60 S. Ct. 811, 84 L. Ed. 1129; United States v. Trenton Potteries Co., 1927, 273 U.S. 392, 47 S. Ct. 377, 71 L. Ed. 700; Virginia Excelsior Mills Inc. v. Federal Trade Commission, 4 Cir., 1958, 256 F.2d 538.
But the facts adduced at the trial do not bear out the plaintiff's allegation that the distribution agreement is an arrangement to fix prices. Appalachian Coals v. United States, 1933, 288 U.S. 344, 53 S. Ct. 471, 77 L. Ed. 825; Standard Oil Co. (Indiana) v. United States, 1931, 283 U.S. 163, 51 S. Ct. 421, 75 L. Ed. 926, ('Cracking' case); Chicago Board of Trade v. United States, 1918, 246 U.S. 231, 38 S. Ct. 242, 62 L. Ed. 683; United States v. Morgan, D.C.S.D.N.Y. 1953, 118 F.Supp. 621, 689, 691 ('Investment bankers' case).
The evidence has been tested and measured against the criteria established by the foregoing authorities.
The evidence establishes the total lack of purpose, intent or motive to fix prices.
Concededly defendants did not have the motive to fix prices. As the Government stipulated in Pretrial Order 13(o):
'The agreement of August 2, 1957 was the result of arm's length bargaining between the parties, and the parties in entering into said agreement did not have the motive to fix prices within the meaning of Section I of the Sherman Act.'
The record is equally conclusive that the parties entered into the arrangement for legitimate business purposes without intent to fix prices. During the course of trial the Government stipulated that, if called as witnesses, Abe Schneider, the president of Columbia and Screen Gems, and Milton Rackmil, the president of Universal, would testify to certain facts embodied in the stipulation. These were read into the record and stand uncontradicted and unimpeached in any way. Schneider testified (1371-2):
'In entering into the agreement of August 2, 1957, Government Exhibit G-1, neither Columbia Pictures nor Screen Gems intended to fix prices or to eliminate competition and the agreement of August 2, 1957 was not entered into that purpose.'
Similarly, Rackmil testified that Universal did not enter into 'any agreement for an illegal purpose', and that the distribution agreement was executed 'in the exercise of our best business judgment, for reasonable business requirements and for a lawful purpose' (1903).
The testimony of Schneider and Rackmil, and the corroborative testimony of other executives of the defendants, Hanft, Hyams and Gluck, establish the business reasons for the parties' entering into the distribution agreement.
From Universal's standpoint, it had prior to August 2, 1957, a library of pre-August 1, 1948 feature films which was considered by it to be of real value for television exhibition. As Rackmil and Gluck emphasized, although Universal was in the business of distributing feature films to motion picture theatres, it had never been in the business of distributing feature films or any other form of programming to television stations, and it is not possible to utilize theatrical distribution facilities in the television field.
As Rackmil testified (1892-3):
'The distribution of motion pictures for television exhibition is a separate and distinct business from that of distributing motion pictures for theatrical purposes. * * * Distribution of motion pictures for television requires a separate and distinct sales and promotional organization. * * * The techniques of promotion, advertising, purchase and sale are entirely different. The same personnel has not been and cannot be employed interchangeably.'
For that reason Universal was faced with the choice of establishing a new distribution organization for itself or licensing its library or feature films to an existing independent organization. Prior to any negotiations with Screen Gems, the Universal management made the decision not to enter the television distribution business; and from that point sought a responsible and competent firm through which it could realize the potential income from television exhibition of its feature films.
The evidence adduced at the trial establishes further that Universal received offers from and negotiated with a number of organizations which sought the distribution rights to the feature films. The choice finally narrowed down to Screen Gems.
Screen Gems had an experienced distribution organization in all forms of filmed television programming. It was set up to distribute nationally. It had the financial responsibility and backing, not only of its own resources, but also of its parent Columbia. Finally, Screen Gems was engaged in the so-called retail method of distributing films.
Universal had made the business determination prior to August 2, 1957 that because the quality of its feature film library was not as good as those of the rest of the motion picture industry, the most profitable method of distributing the films would be to release them to television stations around the country in small packages, rather than licensing the entire library at once. This required the facilities of a national organization experienced in the syndication of television material. Screen Gems not only fit the bill in this regard but had specific experience in the retailing of the feature film library of Columbia.
On its part Screen Gems sought the distribution rights to the Universal library in order to replace its dwindling supply of programming material.
Screen Gems had obtained the distribution rights to the Columbia library in February 1956. By mid-summer 1957, half of the Columbia films had already been released by Screen Gems; only about 190 salable Columbia features remained. Replenishment was necessary in order to maintain the overhead required to support a national distribution organization.
Hanft, vice president and treasurer of Screen Gems described the problem graphically (411-13):
'Basically, we need to acquire programs to keep our sales staff busy, and then after we acquire programs we need to get more sales. It is an interrelated process. The success of our company depends upon the acquisition of programs for distribution. Involved in that is a study of the marketplace and the needs that the television industry have for programming, so that acquisitions of programming would become intelligent acquisitions.
'We tried to obtain the information concerning the marketplace by a constant flow of reports from our sales staff, from trade journals, from personal knowledge gathered through meeting with various people in the industry.
'Based upon that information concerning the needs of the marketplace, we will then make efforts to acquire programming, such as the Burns and Allen films, some 239-odd programs, he Universal features, the Fireside programs.
'We do this because we have a fixed nut. We have an overhead. We have an operation to run, and the more film we can run through that operation the lower will be the cost of distribution on a percentage basis. That means that our profits will increase if we can reduce our cost of distribution.
'At the same time that means that we can support and maintain the relatively large independent organization that we have, and hopefully throw off some profits for the stockholders.
'In order to do this, again, after we have acquired programming, we now have to merchandise it, that is, show it. This means we have to package it. We have to offer it attractively. We have to advertise it. We have to put it into the marketplace so that people will spark to it and take an interest in it and want to buy it.'
These were the motivating factors that brought the parties together in the summer of 1957.
The resulting distribution agreement, consisting of 57 carefully drawn pages, was entered into after hard bargaining on both sides and long and arduous negotiations over all of the details of the arrangements.
In the interest of a clear and complete record, the Court will now set forth a number of detailed findings and conclusions concerning the economic background of the parties, their business activities leading to the agreement, and the provisions and operation of the agreement:
1. Milton R. Rackmil assumed the presidency of Universal in 1952; has been its president since that date, and has been responsible for its business plans and policies.
2. United World Films, Inc. (hereinafter referred to as 'United World') is a Delaware corporation, and all its stock is owned by Universal.
3. United World was organized in 1946. Since that time its principal business has been the distribution of 16 mm. films for non-theatrical purposes.
4. United World's activities in television consisted chiefly in supplying stock footage from its newsreel library to networks, advertisers and television producers which were assembling shows for television exhibition.
5. An insubstantial and minor portion of United World's business consisted of the offering of a small group of non-theatrical short subjects to existing television stations for exhibition thereon. These consisted of several series of 12 1/2-minute subjects assembled from discontinued theatrical shorts, newsreel footage and library footage. They were ...