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United States v. Loew's Inc.

decided: August 3, 1989.

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE, CROSS-APPELLANT,
v.
LOEW'S INCORPORATED, WARNER COMMUNICATIONS, INC. AND WARNER BROS., INC., DEFENDANTS, WARNER COMMUNICATIONS, INC. AND WARNER BROS., INC., APPELLANT AND DEFENDANT-APPELLANT, CROSS-APPELLEES



Warner Communications, Inc. and Warner Bros., Inc., (collectively Warner) appeal from an order of the District Court for the Southern District of New York, Palmieri, J., granting Warner's motion for permission to own and operate motion picture theatres subject to certain restrictions. Warner argues that changed conditions in the industry have rendered unnecessary the strictures of the consent judgment into which it and the government entered after United States v. Paramount Pictures, Inc., 334 U.S. 131, 92 L. Ed. 1260, 68 S. Ct. 915 (1948), and that it should be free to retain and manage, free of any restrictions, its fifty percent stake in Cinamerica Theatres, L.P., a joint venture between Warner and Gulf Western Corp. The government did not oppose Warner's motion in the district court and joins Warner in seeking modification of the order to remove the restriction. Remanded, with directions to delete certain restrictions from the order of the district court.

Lumbard, Pratt, and Altimari, Circuit Judges.

Author: Lumbard

LUMBARD, Circuit Judge:

Warner Communications, Inc. and its subsidiary Warner Bros., Inc. (collectively Warner) appeal from an order of the District Court for the Southern District of New York, Palmieri, J., granting, subject to certain conditions, Warner's motion for an order, pursuant to Part VI(B) of the antitrust consent judgment into which Warner and the government entered in 1951, for permission to engage in the business of exhibiting motion pictures. The district court's order permits Warner to retain its fifty percent interest in Cinamerica Theatres, L.P., a motion picture exhibitor which is a joint venture of Warner and Paramount Pictures, Inc., a subsidiary of Gulf Western Corp., subject to certain restrictions: Warner is required (1) to hold the ownership of the theatres separate from Warner; (2) to keep the management of Cinamerica wholly separate; (3) to have no involvement in Cinamerica's internal affairs; and (4) to deal with Cinamerica at arm's length. Warner's holding is to continue to be subject to court supervision.

The United States, which did not oppose Warner's motion in the district court, now joins Warner in seeking the modification of Judge Palmieri's order and the entry of an order permitting Warner to own and conduct the operations of Cinamerica, without restrictions, as one-half owner of that partnership.

We find that Warner's ownership of a one-half share in a motion picture exhibition company will not unreasonably restrain competition in the motion picture distribution and exhibition businesses and therefore remand for the entry of an order unconditionally granting Warner's motion.

I

This litigation arises out of the continuing supervision of a consent Judgment entered into by Warner and the government almost forty years ago in the wake of United States v. Paramount Pictures, Inc., 334 U.S. 131, 92 L. Ed. 1260, 68 S. Ct. 915 (1948). This consent judgment, the original form of which is reported at 95 F. Supp. 83, 1950-51 Trade Cas. (CCH) para. 62,765 (S.D.N.Y. January 4, 1951), subjects Warner, in a manner similar to that of the consent judgments affecting the seven other Paramount Pictures defendants, to injunctive restrictions that hinder the vertical integration of the production, distribution and exhibition of motion pictures.

Warner and its codefendants were required to divest themselves of all theatres they then owned. Additionally, in order to terminate the anticompetitive practice of the distribution by producers of groups of their films exclusively to circuits of theatres, each of the consent judgments contains a licensing injunction prohibiting the "licensing [of] any feature for exhibition . . . in any other manner than that each license shall be offered and taken theatre by theatre, solely upon the merits and without discrimination in favor of affiliated theatres, circuit theatres or others." Warner Consent Judgment, Section III(8), 95 F. Supp. 83, 1950-51 Trade Cas. (CCH) para. 62,765, at 64,266. The consent judgments also prohibit the acquisition of theatres in the future, and provide, as in Warner's case, that Warner may not engage in the exhibition business, except upon application to the Attorney General and upon a showing to the court "that any such engagement shall not unreasonably restrain competition in the distribution or exhibition of motion pictures." Warner Consent Judgment, Part VI(B); 95 F. Supp. 83, 1950-51 Trade Cas. (CCH) para. 62,765, at 64,272.

In August 1986, Warner, wanting to buy theatres from several chains, perceived itself to be disadvantaged in the marketplace because most of its competitors are not prohibited from engaging in the exhibition business. Warner therefore moved the court, pursuant to Part VI(B) of the consent judgment, for permission to purchase theatres without prior judicial consent, and Warner proposed to hold separate any interests it might acquire pending approval by the court as specified by the consent judgment. Warner proposed that its management would play no role in the management of such interests during what it hoped would be only brief periods between purchase and judicial review of such transactions.

Judge Palmieri granted Warner's motion on August 27, 1986, specifying that Warner could acquire motion picture theatres and related assets without prior judicial consent, provided that it kept title to the exhibition assets in a separate subsidiary, managed and operated those assets separately and moved, pursuant to Part VI(B) of the Warner Consent Judgment, for court approval within thirty days of the acquisition.

In February 1987, Warner agreed to buy a fifty percent interest in three theatre chains (the Mann and Festival chains in the West, and the Trans Lux chain in Connecticut and Manhattan), comprising 119 theatres with 469 screens, from Paramount. The theatres were acquired by Cinamerica Theatres, L.P., a newly created limited partnership in which Warner and Gulf Western, Paramount's parent, are co-equal partners.

Cinamerica's screens, located in 43 operating areas, constitute about two percent of the total number of screens in the country, approximately 22,000 in 1987. While Cinamerica owns more than half of the screens in nine cities and at least one-third in twelve additional markets, most of these markets are relatively small, except for the Westwood, California market, in which Cinamerica owns nine of the seventeen screens. This is noteworthy because Westwood and Manhattan's Upper East Side are considered in cinematic circles to be the two most important markets in the country due to the high concentrations of movie interests and personalities, as well as critics, in those areas; a successful first run in those two markets is generally believed to be a harbinger of nationwide success.*fn1 Warner, however, points out that the appearance of a high degree of market power in Westwood, as well as in Fairfield County, Connecticut, where Cinamerica also has a large number of screens, is deceptive because of the large numbers of competing screens located close to these areas, in Century City, California and Eastern Westchester County, New York, respectively.

Warner, pursuant to Part VI(B) of the Consent Decree, notified the Department of Justice of its proposed purchases in early 1987. The government conducted an investigation during 1987, concluding in December 1987 that it would not oppose Warner's acquisition of Cinamerica. In January 1988 Warner finalized the purchase and moved in ...


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