Price-Fixing in the Motion Picture Industry

Northwestern University Law Review, January 1, 2020 | Go to article overview

Price-Fixing in the Motion Picture Industry


IN 1938 the Justice Department brought an action against the major distributors of motion pictures,1 alleging that their system of distributing films to exhibitors violated Sections 1 and 2 of the Sherman Act.2 When the case came on for trial in 1940, the parties negotiated a consent decree which provided for an arbitration system to settle charges of discrimination against independent theaters, prohibited the booking of more than five films in any one block, and required films to be trade shown before being licensed.3 After the three year period for which the decree was binding, the government reopened the litigation, primarily because it felt that the only effective way to prevent monopolization of the motion picture industry was by requiring the five theater-owning defendants to dispose of their financial interests in theaters, and secondarily to require all eight defendants to discontinue certain unreasonable practices.4 The three-judge court refused to divest the defendants of their theaters, but enjoined them from entering into agreements with exhibitors fixing minimum theater admission prices and ordered the defendants to institute a new system of marketing films.0

The price fixing agreements were declared illegal on alternative grounds: first, that each distributor was conspiring with exhibitors;6 second, that even if it was lawful for a distributor and an exhibitor to make such agreements, that they were unlawful because they were the result of a conspiracy among the distributors. The first ground will be referred to as the "vertical" conspiracy; the second as the "horizontal" conspiracy. It is the purpose of this comment to discuss first, the vertical conspiracy, second, the evidence upon which the finding of a horizontal conspiracy is based, and third, the remedy adopted by the court.

Vertical Price-fixing

IN Dr. Miles Medical Co. v. Park & Sons7 a divided Supreme Court held that contracts fixing resale prices violate the Sherman Act. As a result of the confusion8 and controversy9 which grew out of this and subsequent decisions, Congress passed the Miller-Tydings Amendment to the Sherman Act to legalize resale price maintenance of trade-marked articles.10 Literally this amendment does not apply to the motion picture industry because the relationship between a distributor and an exhibitor is not that of vendor and vendee; instead it is partly a lessor-lessee, and partly a licensor-licensee relationship. The physical property, consisting of several reels of film is leased to the theater owner, who is also granted a license to exhibit the copyrighted performance to the public for profit. Moreover the ultimate consumer who buys a ticket to see the performance is not a vendee.11 In the Paramount case the defendants contended that since this amendment permits vertical price fixing when actual sales are involved, and in this respect overrules the Miles case, it would be anomalous to apply the doctrine of that case to mere licenses.12 The only answer the court gave to this argument was that the Act does not apply because there is no sale here.13 Although the court's statement is correct, it is an unsatisfactory answer to the argument. It would have been preferable to ask whether the policy which prompted the legislature to permit vertical price fixing for trade-marked articles applies to the motion picture industry.

The proponents of the Miller-Tydings Amendment did not contend that vertical price-fixing was not a restraint of trade, but instead argued that the restraint was necessary to prevent the unfair practice of using widely advertised articles as price "leaders."14 The large chain retail organizations were able to market certain trade-marked articles at a low price, possibly even at a loss, to increase their general volume of business. This practice lessened the value of the trade-marked article in the eyes of the public, thus harming the manufacturer's good will, and hurting the independent retailer who could not afford to compete on this basis. …

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