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The Antitrust Campaign and the Paramount Decree

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Like so many of the problems dogging the movie industry during the 1940s, the government’s antitrust campaign took on a new intensity after the war. The Justice Department had eased its trust-busting efforts during the war, and in fact the only significant antitrust decision against the film industry had involved not the studios but the large unaffiliated theater circuits. In March 1943, the Crescent circuit was found guilty in federal court of restraint of trade in a five-state region in the Southeast. The Crescent decision was important to the government’s case against the studios as well, however, since it successfully challenged key aspects of vertical integration, particularly the trade policies which enabled the studios and large unaffiliated circuits to control specific regions and markets and to restrain independent exhibitors.

The Crescent decision was upheld by the Supreme Court in late 1944, bolstering the Justice Department’s view that the major studios as well as the big circuits were vulnerable to antitrust litigation. 121 In the wake of that court decision, and with the war finally coming to an end, the newly appointed attorney general, Tom Clark, decided to reactivate the Paramount case against the major studios. Once again, theater-chain divorcement was the major objective in an overall effort to dismantle the vertically integrated studio system. In October 1945, the Justice Department and the eight studio-distributors returned to New York federal district court, resuming the antitrust battle that had been dormant since 1940.

The government completed its case by late November 1945, and a ruling was handed down by the three-judge panel in June 1946. That ruling was essentially a split decision favoring the studios, and thus it appeared that Hollywood’s good fortunes at the box office in 1946 might be matched in the courts. The court found that the eight majors indeed had conspired in what amounted to a nationwide restraint of trade, but it was their sales policies, ruled the court, not the Big Five’s theater ownership, that was the primary factor in this restraint. “It would seem unlikely,” said the court, “that theater owners having aggregate interests of little more than one-sixth of all the theaters in the United States are exercising such a monopoly of the motion picture business that they should be subjected to the drastic remedy of complete divestiture in order to effect a proper degree of free competition.”

“Film Biz Beats Divorcement,” blared a page-one banner headline in Variety, and indeed this was a tremendous victory for the studios. 124 But the court did rule against the studios on several other major points: it outlawed price fixing, block booking, and all “sweetheart” arrangements between the studios and unaffiliated circuits; it severely curtailed run-zone-clearance policies; it ordered the Big Five either to assume full ownership or to sell off any theaters in which their holdings were between 5 and 95 percent. And in what soon proved to be the most troublesome and controversial outcome of the case, the court demanded that a system of competitive bidding be established to ensure that films were sold on a strict film-by-film, theater-by-theater basis.

Attorney General Clark still was not satisfied. He publicly criticized the court for falling short of theater divorcement, and he vowed to appeal the decision. 126 Nonetheless, in late 1946 a U.S. statutory court upheld the June 1946 decision and issued a new consent decree in line with that ruling. 127 At that point, the Justice Department began a series of formal appeals to the Supreme Court, which agreed to hear the case.

Meanwhile, Justice’s pursuit of the large unaffiliated theater circuits also yielded mixed results. After the war, the government’s chief targets were the Schine and Griffith circuits in the Northeast and Southwest, respectively. In June 1946, only weeks after the Paramount ruling, a federal judge in Buffalo, New York, found Schine guilty of antitrust violations and ordered the circuit to divest seventy-five of its theaters (the total was later reduced). 129 Then in October, a federal judge in Oklahoma found the Griffith circuit not guilty of virtually identical charges. Predictably, appeals were filed in both cases, and they would work their way to the Supreme Court.

While the government battled the studios and unaffiliated circuits on behalf of the nation’s independent exhibitors, several independents won significant antitrust victories on their own. In February 1946, the Supreme Court upheld a lower court ruling that the studios and large circuits had conspired to prevent the Jackson Park Theater in Chicago from securing first-run bookings. Then in July, in another federal lawsuit, the Jackson Park was awarded “treble damages” for unreasonable clearance: the competing circuits and studio chains had to pay Jackson Park three times the estimated profits that were lost owing to a mandatory seven-day clearance behind a nearby Balaban & Katz theater—with the latter’s gross receipts used as one measure to determine the award. 131 A similar federal court ruling later in the year on behalf of William Goldman Theaters in Philadelphia against the Warner-Stanley chain dealt yet another blow to the industry’s entrenched run-zone-clearance system. It also encouraged other exhibitors to sue, and by late 1946 similar cases were filed in Detroit, Baltimore, Memphis, St. Louis, and several other major first-run markets. Both the studios and the unaffiliated circuits appealed the rulings, adding to the tangle of antitrust litigation working its way through the higher courts.

Thus, while 1946 saw an unprecedented number of major court cases involving antitrust suits against the movie industry, the issues were far from resolved. The studios clearly remained at the center of virtually all the antitrust action—even cases involving the unaffiliated theater circuits, since the circuits’ power was essentially a function of favorable treatment by the studios. The majors were encouraged by the favorable rulings on divorcement to keep battling the Justice Department; their resolve only intensified, no doubt, with the deteriorating economic conditions after 1946. Quite obviously, the loss of the studios’ theater revenues, coming in the midst of economic crises both at home and abroad, would mean financial disaster.

The year 1947 was relatively quiet on the antitrust front, although the din of complaints about the court-mandated auction-bidding system grew louder with each passing week. The auction system was hardest on independent exhibitors, precisely those whom it was intended to help. The independents simply could not compete with the larger and better-financed theater circuits, and yet they still had to live with the rising cost of film rentals that inevitably accompanied an auction system. With their interests in both production and exhibition, the majors had a more ambivalent reaction to the new system. While auctioning drove up rental fees and thus benefited production and sales operations, the majors’ theater affiliates were livid that their once-guaranteed product flow was now subject to the whims of a more competitive marketplace.

While the antitrust action against the movie industry may have slowed somewhat in 1947, the government’s overall trust-busting crusade heated up considerably. A key factor was Truman’s campaign strategy, which brought the administration and the Justice   Department into an alignment that would have been unthinkable in the Roosevelt years. As the Wall Street Journal noted in August 1947, “The Truman administration has big new plans for hewing a trust-busting program as the capstone of its 1948 presidential campaign.” 134 The Federal Trade Commission was on the antitrust warpath as well, and by late 1947 antitrust suits had been filed against many major industries, from cement and sugar to steel and auto tires.

Many of these cases wound up being argued before the Supreme Court in 1948, including various appeals involving the movie industry. By early 1948, the Court had agreed to hear appeals by all of the principals in the recent antitrust cases—the studios, the circuits, and the independent exhibitors as well as the Justice Department. At that point, three distinct types of antitrust cases had emerged: the government’s suit against the studios demanding an end to unfair trade practices and theater-chain divorcement (i.e., the Paramount case); the governments suits against the large unaffiliated circuits for conspiring with the studios to monopolize certain regions of the country (the Griffith and Schine cases); and the independent exhibitors’ suit against the studios and circuits for withholding product and unreasonable clearance (the Goldman case). These three types of antitrust litigation clearly were interrelated, and thus the Supreme Court decided to consider the Schine, Griffith, and Goldman cases along with the Paramount case, and to rule on all of these cases together.

The Supreme Court handed down its momentous Paramount decree on 3 May 1948, with Justice William O. Douglas writing a single opinion on the Paramount, Griffith, and Schine cases and making a separate ruling on the Goldman case. The gist of the Court’s unanimous Paramount decision can be summarized in four points: first, the mere existence of monopoly power, whether lawfully or unlawfully gained, is basis enough for an antitrust judgment; second, it is not necessary to find specific intent to restrain trade, simply that such restraint results from the defendants’ business conduct; third, the Sherman Act can be violated by prevention of competition as much as by destruction of competition; and finally, any theater under any ownership is subject to an antitrust judgment if the theater was acquired or maintained as a result of unreasonable restraint of trade.

The Court ruled against the defendants—the eight majors and the two theater circuits—in all three cases. In the Paramount, Schine, and Griffith cases, the Court sent the suits back to the lower courts for review and for new judgments in line with its findings. In the Paramount case, the Supreme Court asked the New York district court to reconsider theater divorcement, noting that the majors’ cooperative control of the first-run market clearly amounted to monopoly practice. The Court upheld the ruling against Schine and reversed the not-guilty ruling in the Griffith case; in both cases, the lower court was instructed to reconsider the extent of the circuit’s monopoly and to write a new decree accordingly. And the Court simply refused to review (thus upholding) a lower court judgment in the Goldman case, which awarded the independent exhibitor treble damages of $375,000.

Not surprisingly, given the convoluted history of the decade-old antitrust suit, no one in the industry could quite believe that it was over. And for a while it seemed that perhaps it was not. Among the Big Five, only RKO was willing and ready to comply with the ruling. By November 1948, RKO had worked out a consent decree with the government whereby the studio would divest its theaters by creating a separate exhibition company. 139 Paramount began discussions with the Justice Department in late 1948, but the other majors refused to abide by the Paramount decree, hoping to forestall divestiture through interminable legal actions or, failing that, to work out some form of partial divestiture. Thus, in its year-end review, the 1949 Film Daily Year Book stated: “New and most important chapters in the lengthy serial, the so-called New York equity suit, were written in 1948, but not finis.”

Not “finis” perhaps, but close to it. Paramount in early 1949 grudgingly signed a consent decree, agreeing to create a separate exhibition company by year’s end and to initiate a three-year divestiture process. 141 Once Paramount yielded to divestiture, the handwriting was on the wall, and in fact the Paramount agreement provided a veritable blueprint for the other studios’ inevitable divorcement. As the Motion Picture Herald stated, the February 1949 consent decree between Paramount and the government represented “a foundation on which the entire future production-distribution-exhibition organization of the industry may be built.” 142 Still, Warners, Fox, and Loew’s/MGM—now referred to in the industry as the “Big Three”—fought on. Injunctions were filed and arguments heard in New York federal district court, and in July Variety ran a headline predicting “No Divorcement Until ’55,” based on the assumption that “legislation will stall it for years.”

Only days later, however, the federal court ordered the Big Three to divest, virtually mandating a divorce procedure like that conducted by RKO and Paramount. 144 Loew’s filed yet another appeal to the Supreme Court (which would be refused), but the federal court ruling effectively ended any efforts to sustain the crumbling oligopoly. Aptly enough, the first company to divest was Paramount, and in a corporate reorganization Page 328  that officially took effect at what was quite literally the end of the decade. At the stroke of midnight, 31 December 1949, Paramount Pictures Incorporated effectively ceased to exist and was replaced by two new entities: Paramount Pictures Corporation, a production-distribution company under Barney Balaban, and United Paramount Theaters, a chain of 1,115 theaters under Leonard Goldenson.

The Paramount divestiture clearly marked not only the end of the decade but the end of an era for the American motion picture industry. Earlier that year, in fact, Fortune magazine ran one of its occasional in-depth pieces on the industry under the title “Movies: End of an Era?” The question mark in that title might well have been an exclamation point, as the ensuing cutline well indicated: “With box office down, foreign revenues cut, critics pained, older fans dwindling, reorganization at hand and television looming, the motion-picture industry may be turning a historic corner.”

Fortune also noted “a panicky feeling in the air” in 1949 Hollywood, since “the brunt of the recent decline fell…on independent producers and on the production end of the integrated companies.” 147 Indeed, although the entire American movie industry was pulled into the postwar maelstrom, at the very center of that vortex were the Hollywood studios. And what was at stake was far more than the financial well-being of the major companies, but the very structure of the industry and the nature of the Hollywood studio system itself.

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almost 7 years ago

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