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Cine 42ND Street Theater Corp. v. Nederlander Organization Inc.

May 14, 1986

CINE 42ND STREET THEATER CORPORATION, LEONARD CLARK AND THE BRANDT ORGANIZATION, INC., PLAINTIFFS-APPELLANTS,
v.
THE NEDERLANDER ORGANIZATION, INC.; HARRIS NEDERLANDER, INC.; JUJAMCYN COMPANY, INC.; CAMBRIDGE INVESTMENT GROUP, LTD.; PARK TOWER REALTY CORP.; THE NEW YOUR STATE URBAN DEVELOPMENT CORPORATION; TIMES SQUARE REDEVELOPMENT CORPORATION AND THE CITY OF NEW YORK, DEFENDANTS-APPELLEES



Appellants, Cine 42nd Street Theater Corporation, et al., appeal from a judgment dated April 18, 1985 in the United States District Court for the Southern District of New York (Conner, J.) that dismissed their complaint against the New York State Urban Development Corporation (UDC), et al., challenging the UDC's designation of the Nederlander Organization, Inc., et al., as successful bidders for the theater development rights in the Broadway Theater market. The challenge was based on claimed violations of § 7 of the Clayton Act, 15 U.S.C. § 15 et seq. The district court held that appellees were entitled to claim the state action defense. See Parker v. Brown, 317 U.S. 341, 87 L. Ed. 315, 63 S. Ct. 307 (1943). Judge Newman concurs in a separate opinion. Affirmed.

Author: Cardamone

Before: NEWMAN, CARDAMONE and MINER, Circuit Judges.

CARDAMONE, Circuit Judge:

New York's Urban Development Corporation (UDC) and New York City, together with private parties, are engaged in a development project designed to revitalize the Times Square area. Under the plan, five moviehouses in the Broadway Theater district are being acquired by the UDC and leased to private parties to renovate and operate them as Broadway Theaters. This appeal presents the novel question of whether the developers of this project are immune from the provisions of the federal antitrust laws.

A state's attempt to regulate its own domestic economy that results in anticompetitive consequences brings two divergent beliefs into sharp conflict. The first, embedded in our federalist system, holds that states are sovereign powers and -- absent constitutional constraints -- entitled to act independently, even when such leads to anticompetitive economic activity. The second tenet is that our economy is grounded on the free enterprise system and that anticompetitive economic activity is prohibited by antitrust law. Resolving the conflict between these concepts is our task.

Beyond doubt free competition undergirds our economy. But the State urges that private enterprise cannot effectively deal with the problems of urban decay, and contends that exclusive reliance on free enterprise may leave its cities as desolate as the nothingness Shelley described beside Ozymandias. "Round the decay Of that colossal wreck, boundless and bare, The lone and level sands stretch far away."*fn1 Concerned that unchecked urban blight could produce a similar wasteland, and persuaded that free enterprise alone could not reverse its spread, the state crafted a vehicle to solve this persistent problem, even though that redevelopment effort might involve anticompetitive activity.

Appellants Cine 42nd Street Theater Corporation, Leonard Clark and the Brandt Organization, Inc. presently have contractual interests in the five moviehouses to be leased and were unsuccessful bidders for the theater development rights. As plaintiffs below they challenged the designation of those rights to the private appellees -- the Nederlander Organization, Inc., Jujamcyn Company, Inc. and Cambridge Investment Group, Ltd. -- made by the public appellees, the New York State Urban Development Corporation and the City of New York. The complaint alleged awarding interests in the development project to the private appellees would substantially lessen competition in the Broadway Theater market and thus violate the Clayton Act, 15 U.S.C. § 15 et seq. (1982) and New York's Donnelly Act, N.Y. Gen. Bus. Law §§ 340-349-a (McKinney's 1968 & Supp. 1986). Appellees' motion to dismiss the complaint was granted by judgment dated April 18, 1985 in the United States District Court for the Southern District of New York (Conner, J.). Appellants challenge the district court's holding that appellees were entitled to a state action defense under the Clayton Act. We agree with the district court's conclusion, but take a somewhat different path to reach it.

I BACKGROUND

A. Formation, Purpose and Powers of the New York State Urban Development Corporation

In 1968, the New York State Legislature confronted the persistent problem of urban blight. Recognizing that many localities were in decay and unsanitary, thereby depriving citizens of educational, cultural, and residential opportunities, the legislature enacted the New York State Urban Development Corporation Act. 65 N.Y. Uncon. L. § 6251 et seq. (McKinney 1980 & Supp. 1986) (Act or UDC Act). The Act created the UDC as the vehicle to reverse urban decay.

The UDC is "a corporate governmental agency of the state, constituting a political subdivision and public benefit corporation." UDC Act § 6254(1) (McKinney Supp. 1984). Two of its nine member governing board are public officials -- the superintendent of banking and the chairman of the State Science and Technology Foundation. Subject to the advice and consent of the state senate, the remaining seven directors are selected by the governor who also designates one of the seven as chairperson. Currently, the directors serve four year terms.

The agency is designed to make the State an active participant in the financing and construction of urban renewal projects. See Governor's Memorandum on Approval of Urban Development Program, reprinted in 1968 N.Y. Sess. Laws 2359 (February 27, 1968). As such, the UDC represents legislative recognition that private enterprise cannot by itself rebuild the State's cities, and that other methods of obtaining funds, such as state-wide voting referendums, are ineffectual. See Osborn, New York's Urban Development Corporation: A Study on the Unchecked Power of a Public Authority, 43 Brooklyn L. Rev. 237, 237-41 (1977) (New York's UDC).

From its inception the UDC was structured to operate independently, free from the political and bureaucratic inertia that had delayed other projects and made them unattractive investments to the private sector. Although a creature of statute, the UDC derives its powers directly from the State Constitution. Floyd v. N.Y.S. Urban Development Corp., 33 N.Y.2d 1, 7, 347 N.Y.S.2d 161, 300 N.E.2d 704 (1973). As a public benefit corporation it exercises governmental authority, although it does so independently of the State. Smith v. Levitt, 37 A.D.2d 418, 421, 326 N.Y.S.2d 335 (3d Dep't 1971), aff'd mem., 30 N.Y.2d 934, 335 N.Y.S.2d 687, 287 N.E.2d 380 (1972); see Osborn, New York's UDC at 237-38 & n.4.

Its powers are as broad and diverse as the problems it is designed to address. While the UDC was given generalized powers to improve the urban environment, it was also granted specific authority to enter into lease arrangements, to acquire property through purchase or condemnation, and to hold, sell or otherwise transfer this property either to public or private third parties. UDC Act § 6255.

Because this case involves the leasing of land for land use improvement projects, we examine that aspect of the UDC's powers with greater particularity. Pursuant to § 6256(1) the UDC may enter into 99-year leases with any third party, whether public or private, when the land is to be used for a land use development project. Although leases may be auctioned through competitive bidding, such bidding is not mandatory. Further, public notice is only necessary if the lease is awarded to a "person, firm, partnership, or corporation," rather than a housing company or local development corporation. Id. at (a), (b), (c).

The sole limitation placed on the UDC's leasing power -- within the context of land use improvement projects -- is that it must first find that the proposed project will actually improve a previously decayed area. See Id. This limitation as further defined in § 6260 requires the agency to make three findings prior to awarding a lease and undertaking such an improvement project: first, the target area must qualify as a "substandard or unsanitary area, or [be] in danger of becoming: such an area, UDC Act § 6260 (c)(1); second, the designated project must actually improve the target area in a manner consistent with the underlying legislative purpose, see id. at (c)(2); third, the project must solicit and incorporate, to the greatest extent possible, the active participation of private business interests, id. at (c)(3).

The UDC is encouraged to work actively with municipalities. UDC Act § 6266. To permit municipalities to enter freely into coordinated projects with the UDC, the Act specifically authorizes municipalities to contract with the agency notwithstanding prohibitions to the contrary. Id. at 6266(6). The specific grants and powers conferred upon the UDC make it a powerful engine for social change. Its powers include: developing projects without regard to local zoning, building, or other local laws, UDC Act § 6266, and funding, building, leasing, selling or managing facilities, free from " any taxes, other than assessments for local improvements, upon or in respect of a project or of any property . . . of the corporation" otherwise assessable by the State or its political subdivisions, id. § 6272. To accomplish its large scale goals, the UDC was empowered to issue bonds and notes for a principal amount well over $1 billion, UDC § 6268; in UDC Act § 6270 the State takes upon itself the "moral obligation" to stand behind the UDC's indebtedness, so as to attract private investment in its debt obligations. It was further armed with an entitlement that its provisions control over inconsistent provisions "of any other law, general, special or local. . . ." Id. § 6283. The legislature finally declared that the Act "Being necessary for the welfare of the state and its inhabitants, shall be liberally construed so as to effectuate its purposes." Id. § 6284.

B. The Forty-Second Street Redevelopment Project

We turn now to the UDC's use of its leasing power in the instant case, that is, in connection with the Forth-Second Street Redevelopment Project (the Project).*fn2 Because this appeal is from a judgment that granted summary judgment dismissing the complaint pursuant to Fed. R. Civ. P. 12(b)(6), we accept as true the facts alleged in appellants' antitrust complaint.

Those facts reveal the following. The Times Square area has been a frequent source of pride and also of embarrassment to the City of New York. As the home of the Broadway theater industry, it is a world-wide cultural attraction. But as an area of high crime, pornography, and dilapidated housing, it projects a sorry image of urban blight. The Project, created to redevelop this culturally and economically important area of the City, was initiated on June 27, 1980 when the City and the UDC entered into an agreement for a joint redevelopment of the area surrounding West Forty-Second Street. The renovation of existing moviehouses into live theaters suitable for Broadway productions was among the Project's goals.

The overall plan envisioned the UDC acquiring certain targeted theaters -- through condemnation or purchase -- and then leasing them together with the accompanying real estate, through competitive bidding, to private parties who would renovate and use them as Broadway theaters. Tax abatements and other forms of public assistance were to be provided to ease the private developers' financial burden. To this end, the Project area was divided into a number of "Development Sites." On Site 5 three theaters -- the Apollo, Selwyn and Lyric -- were designated to become new Broadway theaters. The New Amsterdam and Harris theaters located on Site 6 were similarly designated. Appellant Brandt Organization through its controlling interest in The Forty-Second Street Company presently operates the three theaters located on Site 5. Appellant Cine 42nd now operates the Harris theater pursuant to a long-term lease with an option to buy. The New Amsterdam theater was purchased by appellee The Nederlander Organization prior to the bidding here at issue.

Having selected the theaters to be available for private purchase and renovation, the City and UDC issued, in June 1981, the 42ND STREET DEVELOPMENT PROJECT REQUEST FOR DEVELOPMENT PROPOSALS (Request for Proposals). Accompanying the Request for Proposals were the Design Guidelines and Special Features Supplement. These documents set forth the Project's purpose and the criteria by which winning bidders would be selected. Appellants submitted timely bids for those theaters in which they already had a contractual interest.

On April 6, 1982 appellee, The Nederlander Organization, was "conditionally designated" to become the lessee for the Harris and New Amsterdam theaters. The Selwyn, Apollo, and Lyric theaters were "conditionally designated" to be leased to appellees Jujamcyn Company and the Cambridge Investment Group as joint developers. These designations were made in accordance with the criteria announced for selection. Funding for the Harris Theater lease as well as for the costs of the leases for the Selwyn, Apollo and Lyric, was provided by appellee Park Tower Realty Corp. Memoranda of Terms were signed for each of the theaters and on October 4, 1984 the UDC Board of Directors approved the Project and the conditional designations.

C. Appellants' Antitrust Allegations

Appellants' complaint alleges that these leases are acquisitions that violate § 7 of the Clayton Act. Section 7 violations result, they assert, because awarding the leases to appellees will lessen competition within the Broadway theater industry; erect barriers preventing new competitors from entering the relevant market; and increase the opportunity for, and likelihood of, collusive behavior among the remaining theater owners.

Appellants sue in their capacity as former motive theater operators who are losing their rights in these theaters and as private attorneys-general. The antitrust injury allegedly suffered results directly from the loss of their leases, the increased difficulty they will face in gaining entry into the Broadway theater market, and the arm they will suffer as private parties forced to pay higher prices because of the collusive and monopolistic pricing policies they allege will result from these acquisitions. In their prayer for relief, appellants requested an order enjoining the UDC, the City of New York and the private appellees from proceeding with the Project. In addition, they sought a declaratory judgment that the conditional designations of appellees as lessees violated the antitrust laws.

In count two of their complaint appellants urge that these same events also violated New York State's Donnelly Act. They contend that the state claim was properly before the district court under the doctrine of pendent jurisdiction, because the alleged state violation arose from ...


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