Orson, Inc. v. Miramax Film Corp. 79 F.3d 1358 (3d Cir. 1996)

Orson, Inc., owned and operated the Roxy, a movie theater located in downtown Center City, Philadelphia, from January 1992 until the permanent closing of the theater in October 1994. The Roxy exhibited art films—as opposed to movies that may be characterized as mainstream—on two screens. The total seating capacity at the Roxy was 260. The Ritz theaters, which competed with the Roxy in the showing of art films in the Center City area, consisted of two five-screen facilities with a total seating capacity of approximately 1,800. The ticket prices at the Roxy and at the Ritz theaters (referred to collectively as "the Ritz") were essentially the same. In addition to the Roxy and the Ritz, there were six other Center City area theaters that showed art films at least part of the time.

Miramax Film Corp., a nationwide distributor of feature-length motion pictures (including art films), distributed movies to all of the theaters in Center City and elsewhere in the greater metropolitan Philadelphia area. Miramax licensed films for exhibition for a limited period of time. Consistent with the usual practice in the motion picture industry, these licenses normally were exclusive—meaning that during the time period established in the license, the film would not be licensed to other theaters located in a specified area. Such licenses, called clearances, contained compensation terms entitling Miramax to a portion of the exhibiting theater's box office gross.

In the motion picture industry, a first run is the initial exhibition of a film in a given geographic area. A subsequent run is an exhibition of that film in the same geographic area after the first run has expired. Between January 1992 and February 1994 (when discovery ended in the lawsuit described below), Miramax licensed 28 films on a first-run basis, as well as one on a subsequent-run basis, to the Ritz. During the same time period, Miramax granted the Roxy one first-run license and 14 subsequent-run licenses, and issued various first-run licenses to Center City area theaters other than the Roxy and the Ritz. In addition, during the same time period, 59 distributors other than Miramax granted a total of 73 first-run licenses to the Roxy.

All of the first-run licenses Miramax granted to the Ritz were exclusive in nature. On occasion, Orson sought a first-run, nonexclusive license on a Miramax film and indicated that Orson would offer Miramax a higher percentage of the Roxy's box office receipts than the percentage the Ritz would pay. Nevertheless, Miramax did not grant Orson the licenses it had requested for the Roxy.

Orson sued Miramax in August 1993, alleging that it had violated section 1 of the Sherman Act by conspiring with the Ritz to exclude the Roxy from the art film market. According to Orson's complaint, this conspiracy involved an agreement to (1) make the Ritz Miramax's exclusive Philadelphia exhibitor for first-run art film features, and (2) grant the Ritz exclusive first-run rights to any Miramax film the Ritz wished to exhibit. The district court concluded that rule of reason analysis was appropriate because the supposed agreement between Miramax and the Ritz was "clearly a vertical agreement" between a distributor and an exhibitor. After undertaking such an analysis, the district court granted summary judgment in favor of Miramax. Orson appealed to the U.S. Court of Appeals for the Third Circuit.

Mansmann, Circuit Judge   In rule of reason cases, the plaintiff bears the initial burden of showing that the alleged combination or agreement produced adverse, anticompetitive effects within the relevant product and geographic markets. The plaintiff may satisfy this burden by proving the existence of actual anticompetitive effects, such as reduction of output, increase in price, or deterioration in quality of goods and services. Due to the difficulty of isolating the market effects of the challenged conduct, however, such proof is often impossible to make. Accordingly, the courts allow proof of the defendant's "market power" instead. Market power [is] the ability to raise prices above those that would prevail in a competitive market. If a plaintiff meets his initial burden of adducing adequate evidence of market power or actual anticompetitive effects, the burden shifts to the defendant to show that the challenged conduct promotes a sufficiently pro-competitive objective.

Agreements between entities at different market levels are termed "vertical restraints." The Supreme Court has instructed that vertical restraints of trade, which do not present an express or implied agreement to set resale prices, are evaluated under the rule of reason. The Supreme Court has also repeatedly confirmed in vertical restraint cases that interbrand competition, as opposed to intrabrand competition, is the primary goal of the antitrust laws.

Miramax conceded for purposes of summary judgment that the relevant product market was art films and that the relevant geographic market was Center City, Philadelphia. The first issue we consider is the precise nature of the agreement between Miramax and the Ritz. Orson alleges that Miramax committed to make the Ritz its exclusive Philadelphia exhibitor for first-run art film features. [W]e disagree. The record is devoid of any proof of a promise [by Miramax] to grant first-run licenses . . . in Center City to the Ritz only. Moreover, the evidence is to the contrary; the Roxy received a first-run license from Miramax, as did [other Center City area theaters]. The record shows, instead, a series of clearances granted by Miramax to the Ritz, based on an understanding between the parties' respective principals that any time the Ritz was showing a first-run Miramax film, its license would be exclusive.

Before we consider the antitrust significance of the clearances, however, we will address the alleged conspiracy that we believe lies at the heart of Orson's . . . complaint. As we understand it, Orson's antitrust theory does not primarily challenge the clearances themselves; [instead, Orson] claims that the clearances were mere vehicles that Miramax and the Ritz used to further a secret conspiracy to drive the Roxy out of business by denying that theater first-run Miramax films.

[In a previous case in which a theater owner alleged the existence of a similar conspiracy between another theater owner and a motion picture distributor, the Third Circuit required the plaintiff to prove the defendants' conscious commitment to a scheme to achieve an unlawful objective. According to the Third Circuit's decision in that precedent case, such proof must include a showing that the defendants (1) acted in a manner contrary to their economic interests, and (2) had a motive to enter into the allegedly unlawful scheme.] Orson . . . contends that given its willingness to pay a higher percentage of the Roxy's gross for first-run Miramax films than paid by the Ritz, Miramax acted contrary to its economic well-being by choosing to grant clearances to the Ritz; [Orson] further maintains that Miramax was coerced into favoring the Ritz because the Ritz had made it clear that unless it was granted an exclusive arrangement it would use its clout and refuse to play Miramax films.

We do not find sufficient evidence in the record for either assertion. To the contrary, the evidence established that the clearances were consistent with Miramax's business interests, granted by the distributor to, as between the Roxy and the Ritz, the theater it reasonably predicted would generate greater income. The record demonstrated that the Ritz had [five times as many screens as the Roxy and nearly nine times the seating capacity of the Roxy, as well as] a solid history of box office receipts; by comparison, the Roxy was not nearly as profitable. The theaters which comprised the Ritz had been in continuous operation since their inception; the Roxy, on the other hand, had ceased operation from time to time over the years. Simply put, . . . Orson's position, premised solely on the financial terms of its offer, is insufficient to call into question the wisdom of Miramax's decision. [T]he evidence in the record is insufficient to permit the factfinder to conclude that Miramax acted contrary to its self-interest by choosing to license exclusively to the Ritz rather than the Roxy. Moreover, the deposition testimony that Orson offered to support its assertion that the Ritz had unduly pressured Miramax in its licensing decisions, even when viewed in Orson's favor, shows nothing of the kind. Orson failed to show that Miramax had a motive to conspire with the Ritz to drive the Roxy out of business. Therefore, we conclude that Orson failed to sustain its burden on summary judgment regarding the essential elements of its antitrust conspiracy claim.

Our inquiry does not end here. The fact remains that clearances existed between Miramax and the Ritz, and that Orson contends that [the clearances themselves] violated section 1 of the Sherman Act. [C]learances, which involve entities at different levels of the film distribution industry, are vertical nonprice restraints of trade. As such, they are subject under section 1 to a rule of reason analysis.

Guided by applicable rules of federal antitrust law and [previous cases in which courts have considered the potential antitrust implications of clearances], we conclude that the reasonableness of a clearance under section 1 of the Sherman Act depends on the competitive stance of the theaters involved and the clearance's effect on competition. [Special attention must be paid to the effect on] interbrand competition, which, as the Supreme Court has instructed, is our primary concern in an antitrust action.

[W]e begin with the fact that the parties agreed that the Roxy and the Ritz were in competition. Thus, the clearances served their accepted purpose of assuring both Miramax and the Ritz that the return from one run of a particular Miramax film would not be diminished. Turning to the touchstone of the rule of reason, the clearances' competitive effects, the uncontroverted facts . . . reveal a market in which competition thrived at both the distributor and exhibitor levels. In Center City, the Roxy, the Ritz, and [various other theaters] vied for the films of at least 59 distributors. Indeed, it is the indisputable existence of alternative sources of supply for the Roxy which negates the existence of anticompetitive effects in this case. Although the Miramax-Ritz clearances most certainly reduced intrabrand competition to some degree by disallowing the Roxy from showing on a first-run basis any Miramax film that the Ritz had selected, they undeniably promoted interbrand competition by requiring the Roxy to seek out and exhibit the films of other distributors, which it consistently accomplished. [T]he record conclusively establishes that the clearances did not produce the anticompetitive effects the Sherman Act was designed to prevent. On the contrary, competition in the relevant market was enhanced; art film consumers in Center City had more movies from which to choose. We thus conclude that Orson failed to present sufficient evidence to support its claim that the Miramax-Ritz clearances were unreasonable restraints of trade.

District court's grant of summary judgment for Miramax affirmed.