Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Reading International, Inc. v. Oaktree Capital Management LLC

January 8, 2007

READING INTERNATIONAL, INC.; CITADEL CINEMAS, INC.; AND VILLAGE EAST LIMITED PARTNERSHIP, PLAINTIFFS,
v.
OAKTREE CAPITAL MANAGEMENT LLC; ONEX CORPORATION; REGAL ENTERTAINMENT GROUP; UNITED ARTISTS THEATRE COMPANY; UNITED ARTISTS THEATRE CIRCUIT, INC.; LOEWS CINEPLEX ENTERTAINMENT CORPORATION; COLUMBIA PICTURES INDUSTRIES, INC.; THE WALT DISNEY COMPANY; UNIVERSAL STUDIOS, INC.; PARAMOUNT PICTURES CORPORATION; METRO-GOLDWYN-MAYER DISTRIBUTION COMPANY; FOX ENTERTAINMENT GROUP, INC.; DREAMWORKS LLC; STEPHEN KAPLAN; AND BRUCE KARSH, DEFENDANTS.



The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge

MEMORANDUM OPINION & ORDER

Plaintiffs Reading International, Inc., Citadel Cinemas, Inc. and Village East Limited Partnership (collectively, "Village East" or "Plaintiffs"), the owners and operators of the Village East movie theatre in Manhattan, located at the intersection of 2nd Avenue and East 12th Street, bring this action under federal and New York State antitrust laws alleging illegal licensing agreements between the large theatre chains and movie distributors. Plaintiffs originally sued fifteen major film exhibitors and distributors, as well as the asset management companies that controlled two exhibitors, Regal and Loews. After a motion to dismiss, see Reading Int'l, Inc. v. Oaktree Capital Mgmt. LLC, 317 F. Supp.2d 301 (S.D.N.Y. Dec. 10, 2003), and a series of settlements, however, the action now proceeds only against Regal Entertainment Group, and its subsidiaries, United Artists Theatre Company and United Artists Theatre Circuit, Inc. (collectively, "Regal"),*fn1 which own and operate the Union Square 14 movie theatre at Broadway and East 13th Street, one block north and two and one-half blocks west of Plaintiff's Village East. Plaintiffs seek relief under Section 1 of the Sherman Act, 15 U.S.C. § 1, and Section 8 of the Clayton Act, 15 U.S.C. § 19. They also assert ancillary claims under the Donnelly Act (New York's antitrust law), N.Y. Gen. Bus L. § 340(1), and New York common law for tortious interference with prospective contractual relations. Regal, as the last remaining defendant, now moves for summary judgment pursuant to Rule 56(c) of the Federal Rules of Civil Procedure. For the reasons discussed below, the Court grants Regal's motion in its entirety.

BACKGROUND

A. The Parties

Plaintiffs own and operate a number of independent movie theatres in Manhattan, including the Village East Cinema located at Second Avenue and 12th Street in the East Village. (Am. Comp. && 1-2.) In 1991, the Village East was transformed into a seven-screen, 1,272-seat multiplex, on the site of what used to be a live, Yiddish-language theatre. (Id.) The original character and landmarked interior architecture of the old theatre were preserved in the conversion. (Id.)

Defendant Regal owns and operates the largest circuit of movie theatres in the United States, with a total of approximately 542 theatres containing 6,383 screens as of June 29, 2006. See http://investor.regalcinemas.com. As of July 2005, this constituted 17% of the motion picture screens in the United States. (Regal's Local Rule 56.1 Statement ("56.1 Statement") & 4.) Approximately 485 of Regal's theatres---with a total of 5,457 screens---are located in what are known as "sole exhibitor zones," meaning that Regal is the only exhibitor in the zone, with no competition from other theatres. See http://investor.regalcinemas.com/annuals (providing financial & SEC reports). If distributors wish to play their films in these sole exhibitor zones (which they may or may not), they must deal with Regal. One of Regal's many theatres is the Union Square 14 Theatre ("Union Square 14").*fn2 (Regal's 56.1 Statement & 3.)

Oaktree Capital Management, LLC ("Oaktree") and The Anschutz Corp., asset management companies that specialize in obtaining the assets of bankrupt corporations, acquired control over Regal and United Artists when they emerged from bankruptcy in 2002. (Am. Compl. && 74-75.) At the same time, Oaktree and Onex Corporation ("Onex"), also an asset management company specializing in obtaining the assets of bankrupt corporations, acquired control over Regal's competitor, Loews Cineplex Entertainment Corporation ("Loews") when it exited bankruptcy around the same time. (Id. & 73.) Thus, Oaktree participated in the management of both Regal and Loews and placed its executives on the boards of directors of both companies. (Id. && 4, 72, 76-78; Polansky Aff., Exs. 46 & 48.) Oaktree ended the interlocking representation in June 2003, however, when its executive, Bruce Karsh, resigned from the Loews Board of Directors. (Karsh Dep. 264, Aug. 12, 2004; Keeley Aff., Ex. 92.) Oaktree sold its interest in Loews completely in July 2004. (Polansky Aff., Ex. 58.)

B. Movie Licensing Practices

Movies are distributed by companies known as "distributors," which license films to theatres for exhibition. In licensing a film to theatres, a distributor's primary goal is to maximize the net licensing fees or "film rent" it receives. The most common method of calculating film rents in Manhattan is through a "90/10" deal. (Cotter Dep. 321-22; Cooper Dep. 224-25, Nov. 30, 2004.) The arrangement requires a determination of the theatre's box office ticket revenues for the film, and then subtracting the "house allowance"*fn3 for each auditorium in which the film played. (Cooper Dep. 196-97, 224-25.) The remainder is then split, with ninety percent going to the distributor and ten percent to the theatre. (Id.) The distributor also incurs the costs of producing and shipping prints of the film, which can range from approximately $1,200 to $3,000. (Regal's 56.1 Statement ¶ 11; Pls.' 56.1 Statement Resp. No. 11) To maximize net film rent for a particular film, therefore, a distributor seeks to maximize ticket revenue relative to costs.

Not all distributors and exhibitors utilize the 90/10 arrangement. According to Plaintiffs, some use aggregates or settlement*fn4 instead. Further, some 90/10 deals contain "floors," which are minimum percentages of the total weekly gross (notwithstanding any house allowance) that the exhibitor will pay if the 90/10 calculation results in a rental amount lower than the percentage floor. (See Pls.' 56.1 Statement, Resp. No. 10.)

Distributors engage in a complicated, multi-step process to determine the optimal release pattern in order to meet their objectives for each film. (See Araujo Dep. 52-72, Apr. 27, 2005.) First, the distributor determines when to release the film, taking into account when other distributors will be releasing their films. (Id.) Next, a distributor determines how "wide" to release the film; that is, on how many screens to open the film, both nationally and regionally. (Id.) This number may range anywhere from just a few screens to over three thousand screens nationwide. Finally, if an area has more than one theatre, the distributor must select the specific theatre or theatres in which to open the film. (Id.)

Distributors and exhibitors have divided Manhattan into several "film zones" for purposes of licensing movies. (See Keeley Aff., Exs. 40 & 107.) The theatres in a particular film zone are those thought to be "in substantial competition with one another," so that distributors would prefer not "to play them day and date," meaning that the film will not play simultaneously at that theatre and another theatre in the same zone. (Araujo Dep. 108.) Because of the perception that theatres in a particular zone compete with one another, exhibitors within the film zones may request exclusive rights to a film. These arrangements are commonly known within the industry as "clearance agreements."

C. Lower Manhattan Zone

One of the film zones recognized by industry professionals is the "Village zone" or "Lower Manhattan Zone," ("LMZ") which Plaintiffs assert is "the area from the Hudson to East Rivers below 19th Street (excluding Battery Park City)."*fn5 (Pls.' Mem. Law Opp'n Summ. J. 6.) Plaintiffs exclude Battery Park City, in which Regal operates another movie theatre, because industry professionals consider Battery Park a separate film zone. (See Keeley Aff., Ex. 40.)

According to Plaintiffs' count, approximately 350,000 people live in the LMZ, making it one of the most densely-populated film zones in the United States. (Cotter Dep. 207.) In addition, thousands of people who live elsewhere in Manhattan or New York City visit the LMZ because of its broad entertainment options and convenient transportation and subway options. (Id. 202:20-22.) The LMZ contains only three first-run theatres for top commercial films: the Union Square 14, the Loews Village VII, and the Village East. (See Araujo Dep. 16-17, 102-103; Smerling Dep. 82.) While numerous other movie theatres exist in the LMZ, such as The Angelika---also owned by Citadel Cinemas---and the Landmark Sunshine Theatre, also exhibit first run movies, they are "art" or specialized films, i.e., independent and foreign-language films.*fn6 Plaintiffs conceded that a number of first-run theatres for top commercial films are located immediately outside the LMZ, however, including Loews 19th Street, the Clearview Chelsea, located at 23rd Street between Seventh and Eighth Avenues, Loews Kips Bay, located at Second Avenue and 32nd Street, Loews 34th Street and AMC Empire and Loews 42nd Street E-Walk Theatre, as well as the Regal Battery Park Stadium, located in Battery Park City. (Def.'s Mem. Law Supp. Summ. J. 15 & 20; Def.'s 56.1 Statement ¶ 46; Pls.' 56.1 Statement Resp. No. 46.)

D. The Product Market for "Top Commercial Films"

According to Plaintiffs, not all motion pictures are alike, and not all motion pictures compete with one another. "Art" films and foreign films, for example, are asserted not to be interchangeable with top-grossing commercial films. (See Guadagno Dep. 35; Lewellen Dep. 143-45; Polon Dep. 109-10.) In order to determine the proper release strategy, distributors attempt to predict, through screenings, industry publications and tracking services, which films will generate the highest box-office returns. (See Engel Dep. 22; Campbell Dep. 90; Pade Dep. 59-60; Smerling Dep. 147-48.) A number of factors affect the expected gross of a movie, including the reputation of the director, the number of well-known actors in the film, the size of the production and advertising budgets, and whether the movie is a sequel to a previous movie.*fn7

(See Engel Dep. 21.) Plaintiffs assert that films expected to gross more than $75 million in domestic box-office receipts, which Plaintiffs term "Top Commercial Films" or "TCFs", are a separate product market for which no other films are an adequate substitute. (Pls.' Mem. Law Opp'n Summ. J. 8.) Regal submits that the predictions of a $75 million gross, are more frequently wrong than correct, as few films achieve the $75 million target. (Def. Mem. In Supp. 43.)

E. Film Exhibition in the Lower Manhattan Zone

Since the late 1990s Prior to November 1998, the Loews Village VII and the Village East were the two

largest theatres in the LMZ, and TCF's were distributed relatively evenly between the two theatres.*fn8 (Keeley Aff., Ex. 10 (Tollison Report & 118).) In November 1998, however, the Union Square 14 opened its doors. (Smerling Dep. 17.) The new theatre had fourteen screens (more than any theatre in Manhattan at the time), had stadium seating in all its auditoriums, and had 3134 seats.*fn9 As a result of its size and amenities, the Union Square 14 quickly became one of the largest grossing theatres in Manhattan. (See Palansky Aff., Ex. 1 (Rubinfeld Report & 23); Keeley Aff., Ex. 52.) One movie distributor executive described the opening of the Union Square 14 as a "sea change," because for the first time there was "a theatre in that area that on a picture that normally would not do great business in Manhattan, did unprecedented business---two, three four times anything [the distributors] ever would have gotten . . . out of this area before." (Blake Dep. 64.) Another distributor described the Union Square 14 as "one of those rare theatres that makes [films] look important." (Bruer Dep. 59-60.) In fact, even one of Plaintiffs' own executives admitted that the Union Square 14 was "probably the best theatre in Manhattan."*fn10 (Palansky Aff., Ex. 43.) By contrast, the Vice Chairman of Sony Pictures described the Village East as an older, less desirable theatre:

[The Village East has] four really horrible theatres in the basement . . . Very old fashioned design of a theatre that you don't even see much anymore, where--you know, dividing up a larger screen to the point where what used to be the back of the theatre is now the front of the theatre. And you open the door, and here's the audience looking at you because the door is right next to the screen and they're very small auditoriums. . . . And, you know, it's really cramped seating, cramped conditions, frankly something that, if we played a film in, and one of the people connected with the film were to attend or a friend of someone connected with a film would attend, my phone would ring, and it would not be complimentary.*fn11

(Blake Dep. 107-08.) As a result, the Union Square 14 quickly became the theatre of choice for film distributors.

Prior to the opening of the Union Square 14, the Village East made clear that it did not want to play day and date with the new theatre. (See Smerling Dep. 83.) As a result, distributors licensed films to the Union Square 14. When the Village East realized that its was no longer getting the movies it desired, it approached distributors and expressed a willingness to play day and date with the Union Square 14, but distributors continued to play a number of top-grossing films only at the Union Square 14. (See Pls.' Mem. Law Opp'n 14.)

In addition, at least five other theatres, all with stadium seating, opened in Manhattan since 1998. The Loews Kips Bay, for example, is within easy walking distance and Regal Battery Park is located in lower Manhattan. (See Regal.'s Local Rule 56.1 Statement & 42.) As a result of this new competition, the Village East's revenues steadily declined after 1998. Much of this business was lost to the Union Square 14. In 2002, the Union Square 14 got approximately seventy-one percent of all film revenue generated in the LMZ; the Village East got less than eleven percent. (Am. Compl. & 54.) This new competition has not ruined the Plaintiffs completely,*fn12 however, and the Village East remains in operation as a first-run theatre.

F. Regal's Behavior in the Marketplace

Plaintiffs contend that Regal uses its success in the Manhattan market---and nationwide, more generally---as leverage, often bullying distributors into less than desirable film rent deals. (See Keeley Aff., Exs. 46-47, 109-12, 129.) In fact, Kurt Hall, co-CEO of Regal admits that Regal "fights" with distributors "every single day." (Hall Dep. 217.) Regal's disputes with DreamWorks got so bad that DreamWorks threatened not to license films to Regal in the future. (See Keeley Aff., Exs. 46, 129.) In that letter, Disney refers to an inappropriate "all or nothing" licensing deal that Regal has proposed during licensing negotiations. (See id., Ex. 46.) On another occasion, Michael Pade, a United Artists Executive, launched a tirade of offensive comments at a Twentieth Century Fox ("Fox") representative after Fox licensed a high-grossing film to the Village East instead of the Union Square 14. In his letter, Mr. Pade made his distaste for the Village East clear: "Don't you think it's time to divest yourself of your Village East stock? This is getting embarrassing. . . . [M]aybe we can work something out." (Keeley Aff., Ex. 49.) In another letter to Fox, Mr. Pade likened the Village East to "a cave in Tora Bora." (Id., Ex. 51.)

Plaintiffs now sue Regal under Section 1 of the Sherman Act, alleging that the Village East's steadily declining profits is the result of a series of illegal licensing agreements between Regal and its distributors. Defendants contend that Plaintiffs' declining profits are the result of the Village East's inability to compete in the changing movie theatre marketplace. On ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.