It seems the Department of Justice has opted for “the director’s cut” of its now two-year-old investigation of alleged antitrust violations by the nation’s largest movie theater chains.
The probe, focused on claims that AMC Entertainment, Regal Entertainment and Cinemark used their market power to demand exclusive access to popular films, became public in May 2015. The Justice Department declined to comment this week on the status of its investigation, but in a recent filing with the U.S. Securities and Exchange Commission, AMC addressed the matter as an ongoing risk for the company’s business.
President Donald Trump’s nominee to head the DOJ Antitrust Division, Makan Delrahim, is a Los Angeles lawyer with ties to the film industry, stirring talk in Hollywood that the investigation may be all but dead. Those hoping for its quiet demise can argue the probe has already had its desired impact by changing industry practices and leading several major movie studios to swear off sweetheart screening deals.
Donald Pepperman, managing partner and antitrust specialist at Blecher Collins & Pepperman in Los Angeles, said not to “read too much into the duration of the probe.”
Asked to predict how Delrahim, a former lawyer to AMC, might approach the investigation, Pepperman demurred: “We’ll have to wait and see,” he said.
The antitrust inquiry into the exclusivity deals began with demands for pertinent documents and emails, and interviews with Hollywood studio execs and theater owners. Today it remains on a parallel track with similar antitrust investigations in Texas, Florida, New York and four other states, and a handful of lawsuits across the country.
The common thread is an allegation that the three major chains have tried to muscle out smaller rivals by convincing studios to deny them access to first-run films. Known as “clearances” or “circuit dealing,” the practice prevents geographic competitors of the major movie chains from opening films until after a period of exclusivity has run.
The stakes are high and come at a critical time for movie theaters fighting what appears to be a losing battle to retain their share of consumers’ entertainment dollars. The domestic box office has set records with more than $11 billion in each of the last two years, but higher ticket prices have driven the gains and attendance is flat. The growth of cable TV and the explosion of online streaming video have moviegoers, especially young ones, looking elsewhere.
Those are challenges for the major chains and the independent theaters, but their will to fight for a common goal has frayed at times. Some independents and boutique chains have gone upscale, offering reserved seating, plush recliners, waiters, alcohol and fine dining to provide moviegoers with a better-than-home experience. And some have been successful enough to be perceived as a threat to the large chains’ revenues.
There have been more than a few court clashes:
In 2006, Flagship’s Cinemas Palme d’Or, an upscale 10-screen theater in Palm Desert, Calif., sued Plano, Texas-based Cinemark over alleged circuit-dealing. The case was dismissed in 2014 and Cinemark issued a statement saying it “simply does not engage in ‘circuit dealing’.”
The Palme d’Or shut down last June. “Cinemark finally succeeded in driving the last nail in our coffin,” said “Breaking Bad” star Bryan Cranston, one of the theater’s owners, at the time. “We just couldn’t continue the struggle in this unfair business climate.”
But the independent theaters and smaller chains have held their own in other circuit-dealing battles.
On March 31, AMC settled a 2014 antitrust suit brought by Cobb Theaters in Georgia, which operates 19 theaters in the Southeast, after the Atlanta-based independent chain sought more than $100 million in damages.
Cobb was represented by Thomas Boeder of Seattle-based Perkins Coie. AMC, which insisted its film licensing practices were lawful and consistent with standard industry practice, was defended by a team of lawyers from Alston & Bird in Atlanta and Norton Rose Fullbright in Texas.
Boeder also represented Mark Cuban’s L.A.-based Landmark Theatres in a 2015 antitrust suit filed against Regal in Washington D.C., alleging that the giant chain coerced the studios to keep first-run films out of its new theater in Washington, D.C. Landmark, the nation’s largest independent chain with 54 locations, reached a settlement that included a commitment by Regal to end clearances.
The current fight traces back to United States vs. Paramount Pictures, a 1948 U.S. Supreme Court case that was the beginning of the end for Hollywood’s studio system. The justices held 7-1 that the studios’ ownership of theaters, in which they showed only their movies, created an unfair monopoly.
Last year, under the glare of federal and state scrutiny, Fox and Universal Pictures said that they would no longer adhere to any clearance agreements, joining Paramount Pictures which has traditionally avoided them. Pressed on the issue when the Fox and Universal shifted, Sony Pictures, Warner Bros. and Disney said they would continue to base distribution strategies on maximizing returns, implying that if clearances were the best route to profitability they’d take it.
Those public commitments leave plenty of semantic wiggle room, said Pepperman.
“The fact is that they agreed to not agree to exhibitors’ demands for exclusivity,” said Pepperman, “but if they go to the exhibitors with a comparable plan, is there really a difference?”
That’s in line with the thinking of defenders of the practice, who say selectively favoring your best partners is simply competitive business, and only a problem when someone gets angry with their deal.
Delrahim, who’s awaiting Senate confirmation, has pledged to recuse himself for one year from any matters involving clients of his former law firm, Brownstein Hyatt Farber Schreck.
It’s not clear how that will play out in the movie theater probe. A decade ago Delrahim worked for AMC and helped win approval of its 2005 merger with Loews Cineplex Entertainment.
There’s no record, however, that AMC is an active client. AMC is not listed among his top clients in the nominee’s financial disclosure report, though the filing does note he’s an investor in the 2016 film “Trash Fire” starring Entourage’s Adrian Grenier and a Pilgrim Studios television concept called “Ultimate Justice.” A spokeswoman for Brownstein Hyatt said Thursday, the law firm is not currently registered to do federal lobbying for AMC.
Whatever the resolution of the Justice Department’s inquiry, entertainment and antitrust lawyers including Houston-based attorney Bryce Callahan are watching closely.
Callahan represents iPic-Gold Class Entertainment, along with R. Paul Yetter and Marc Tabolsky of Yetter Coleman LLP, in an antitrust suit that alleged Regal and AMC in 2014 conspired to keep a new Houston theater from succeeding and a planned Dallas location from opening.
Regal and AMC warned the studios that any films licensed to iPic would not play at nearby theaters run by the two larger chains, iPic claimed in the suit, filed in May 2015 in District Court in Harris County, Texas
Regal, represented Samuel W. Cooper of Paul Hastings and Leon Greenfield, Perry Lange and Chris Casamassima of Wilmer Cutler Pickering Hale and Dorr, settled early in 2016. Soon after, iPic was granted an injunction forbidding AMC to utilize clearance agreements against iPic, which was upheld on appeal. The case is set for trial on Aug. 15.
“I certainly have no information or insight into what’s going on at the Justice Department,” said Callahan, acknowledging that the settlements might have sapped some steam from the probe.
“But you would have to think that the investigators would push through to the end … ,” he said. “This is a pernicious practice. You wouldn’t want people thinking they could get away with it.”