California State Court of Appeals Reverses Award For Antitrust “Circuit Dealing” Allegations
On September 2, 2020, a three-judge panel on the California State Court of Appeals Second Appellate District reversed a jury’s award in favor of Flagship Theatres of Palm Desert, LLC (“Plaintiff”) under California’s Cartwright Act. Flagship Theatres of Palm Desert, LLC v. Century Theatres, Inc., No. B292609, 2020 WL 5229369, at *1 (Cal. Ct. App. Sept. 2, 2020). Plaintiff sued rival theaters Century Theatres, Inc. and Cinemark USA, Inc. (“Defendants”) in Coachella Valley, California in connection with their “circuit dealing” agreements with movie distributors. The court found that the elimination of a single competitor is not sufficient evidence of harm to competition to sustain a verdict under the Cartwright Act.
“Circuit dealing” refers to the practice of entering into a single license that covers all theaters in a theater circuit. Plaintiff’s circuit dealing allegations centered around defendants’ licensing agreements with distributors that allowed defendants to show new movies at the immediate time of their release (“first-run films”). In a typical agreement like this, distributors agree to license first-run films to theaters that may have multiple locations, irrespective of the proximity of those locations. Distributors also agree to limit the number of theaters to which they grant these licenses within a particular geographic region. Here, plaintiff’s theater was in the same location as one of defendants’ theaters resulting in plaintiff being unable to obtain choice first-run films.
Plaintiff alleged that the licenses were anticompetitive circuit dealings because defendants leveraged their power as owners of about 300 theaters across the country to pressure distributors into denying licenses to plaintiff. The jury agreed, finding that defendants had caused harm to competition in the form of decreased output of film and that the anticompetitive effects resulting from being able to enter into multiple licensing agreements outweighed any procompetitive benefits.
Defendants successfully appealed the jury’s $1.25 million (automatically trebled to $3.75 million) damages award for several reasons including that (1) plaintiff’s relevant geographic market definition was flawed, and (2) plaintiff lacked sufficient evidence to show that the alleged circuit dealing harmed competition in any market.
As an initial matter, the court held that a rule of reason, and not a per se rule, applied to plaintiff’s allegations because plaintiff presented no evidence of horizontal competitor agreements or related conduct. In that context, the court distinguished the key U.S. Supreme Court case on circuit dealing (United States v. Paramount Pictures, 334 U.S. 131 (1948)), finding that unlike that case, plaintiff did not allege any broad network restrictions or horizontal coordination.
The court then found that there was insufficient evidence of anticompetitive effects in a properly defined antitrust market to support the jury’s verdict. The court found that plaintiff did not provide sufficient evidence in support of the alleged relevant geographic market (the Rancho Mirage clearance zone) because there were multiple theaters outside of that area and no evidence that customers within that zone would not drive to see movies at the other theaters.
The court concluded that the consumers’ ability to see movies at those theaters demonstrated a lack of the sort of injury to competition required under the rule of reason and that injury to a single competitor, as reflected in plaintiff’s exit from the market, was insufficient to sustain an antitrust claim because “it does not satisfy a plaintiff’s burden under the antitrust rule of reason to show an ‘actual adverse effect on competition as a whole in the relevant market.’”
Finally, the court found that the jury’s verdict could not be sustained in any event—applying plaintiff’s or defendants’ geographic market—in light of insufficient evidence to prove any of the types of harm plaintiff alleged, namely, reduction in output of film licenses, reduction of consumer choice of theatres, barriers to entry, and loss of a unique theatre in the Coachella Valley.