U.S. Supreme Court INTERSTATE CIRCUIT v. U.S., 306 U.S. 208 (1939)

[Page 306 U.S. 208, 215]

Interstate operates forty-three first-run and second-run motion picture theatres, located in six Texas cities. [Footnote 1] It has a complete monopoly of first-run theatres in these cities, except for one in Houston operated by one distributor's Texas agent. In most of these theatres the admission price for adults for the better seats at night is 40 cents or more. Interstate also operates several subsequent-run theatres in each of these cities, twenty-two in all, but in all but Galveston there are other subsequent-run theatres which compete with both its first- and subsequent- run theatres in those cities.

Texas Consolidated operates sixty-six theatres, some first- and some subsequent-run houses, in various cities and towns in the Rio Grande Valley and elsewhere in Texas and in New Mexico. In some of these cities there are no competing theatres, and in six leading cities there are no competing first-run theatres. It has no theatres in the six Texas cities in which Interstate operates. That Interstate and Texas Consolidated dominate the motion picture business in the cities where their theatres are located is indicated by the fact that at the time of the contracts in question Interstate and Consolidated each contributed more than 74 per cent. of all the license fees paid by the motion picture theatres in their respective territories to the distributor appellants. [Footnote 2]

[Page 306 U.S. 208, 217]

atres at a night admission of 40 cents or more. [Footnote 4] One demand was that the distributors 'agree that in selling their product to subsequent runs, that this 'A' product will never be exhibited at any time or in any theatre at a smaller admission price than 25› for adults in the evening'. The other was that 'on 'A' pictures which are exhibited at a night admission of 40› or more-they shall never be exhibited in conjunction with another feature picture under the so-called policy of double features'. The letter added that with respect to the 'Rio Grande Valley situation', with which Consolidated alone was concerned, 'We must insist that all pictures exhibited in our 'A' theatres at a maximum night admission price of 35› must also be restricted to subsequent runs in the Valley at 25›'.

[Page 306 U.S. 208, 223]

One distributor, it is true, did not agree to impose the restrictions in Houston, but this was evidently because it did not grant licenses to any subsequent-run exhibitor in that city, where its own affiliate operated a first-run theatre. [Footnote 7] The proposal was unanimously rejected as to Galveston and Austin, as was the request that the restrictions should be extended to the cities of the Rio Grande Valley served by Consolidated. We may infer that Galveston was omitted because in that city there were no subsequent-run theatres in competition with Interstate. But we are unable to find in the record any persuasive explanation, other than agreed concert of action, of the singular unanimity of action on the part of the distributors by which the proposals were carried into effect as written in four Texas cities but not in a fifth or in the Rio Grande Valley. Numerous variations in the form of the provisions in the distributors' license agreements and the fact that in later years two of them extended the restrictions into all six cities, do not weaken the significance or force of the nature of the response to the proposals made by all the distributor appellants. It taxes credulity to believe that the several distributors would, in the circumstances, have accepted and put into operation with substantial unanimity such far-reaching changes in their business methods without some understanding that all were to join, and we reject as beyond the range of probability that it was the result of mere chance.

[Page 306 U.S. 208, 237]

tive prices to his bailees' competitors in the same city. I think it has never been suggested that an agreement of the sort mentioned, restricted in time and place, amounts to a conspiracy in unreasonable restraint of trade or commerce. The right to make such agreements is essential to the realization of the full value of the property. It is conceded that the distributor defendants might grant exclusive licenses to Interstate, and that an exclusive license to Interstate would not constitute a conspiracy under the Sherman Act, or confer any cause of action on others who desired licenses in the same city; and this remains true however much such action by the licensor might injure the business of others seeking licenses.

I am of opinion that the restrictions in the licenses of second run exhibitors were not unreasonable restraints of commerce under the Sherman Act. There is no contention that the action of the distributor defendants discouraged competition between them either for the business of Interstate or for that of subsequent run licensees. The restrictions upon the latter were not intended to increase license fees paid by them or those paid by Interstate; they were imposed to prevent destruction of the good will which made possible the continued exhibition of first run feature pictures and to avoid decrease of the revenue from those pictures then and theretofore enjoyed under licenses to Interstate and other first run feature exhibitors. The reasonableness of the restrictions must be judged by the situation of the industry and the propriety of its protection from practices which would seriously injure it. [Footnote 3] The question always is whether an agreement unduly restrains competition and, in applying

[Page 306 U.S. 208, 240]

The Government stresses the fact that each of the distributors must have acted with knowledge that some or all of the others would grant or had granted Interstate's demand. But such knowledge was merely notice to each of them that if it was successfully to compete for the first run business in important Texas cities it must meet the terms of competing distributors or lose the business of Interstate. It could compete successfully only by granting exclusive licenses to Interstate and injuring subsequent run houses by refusing them licenses,-a course clearly lawful,-or by doing the less drastic thing of agreeing to protect the good will of its pictures by putting necessary and not severely burdensome restrictions upon subsequent run exhibitors, which I think equally lawful.

Mr. Justice McREYNOLDS and Mr. Justice BUTLER join in this opinion. Footnotes

Footnote 1 A first-run theatre is one in which a picture is first exhibited in any given locality. A subsequent-run theatre is one in which there is a subsequent exhibition of the same picture in the same locality.

Footnote 2 Payments of license fees by Interstate to distributor appellants in the 1934-35 season aggregated $1,077,819.58. Payments by all other exhibitors operating theatres in the same cities aggregated $369,594.72. Texas Consolidated payments for the same period aggregated $594,863.68. All other exhibitors operating in the same cities paid $47,928.22.

Footnote 3 'Interstate Circuit, Inc.,

Majestic Theatre Building,

Dallas, Texas.

July 11, 1934.

Messrs.: J. B. Dugger, Herbert MacIntyre, Sol Sachs, C. E. Hilgers, Leroy Bickel, J. B. Underwood, E. S. Olsmyth, Doak Roberts.'Gentlemen: On April 25th, the writer notified you that in purchasing product for the coming season 34-35, it would be necessary for all distributors to take into consideration in the sale of subsequent runs that Interstate Circuit, Inc., will not agree to purchase produce to be exhibited in its 'A' theatres at a price of 40› or more for night admission, unless distributors agree that in selling their product to subsequent runs, that this 'A' product will never be exhibited at any time or in any theatre at a smaller admission price than 25› for adults in the evening.

In addition to this price restriction, we also request that on 'A' pictures which are exhibited at a night admission price of 40› or more- they shall never be exhibited in conjunction with another feature picture under the so-called policy of double-features.

At this time the writer desires to again remind you of these restrictions due to the fact that there may be some delay in consummating all our feature film deals for the coming season, and it is imperative that in your negotiations that you afford us this clearance.

In the event that a distributor sees fit to sell his product to subsequent runs in violation of this request, it definitely means that we cannot negotiate for his product to be exhibited in our 'A' theatres at top admission prices.

We naturally, in purchasing subsequent runs from the distributors in certain of our cities, must necessarily eliminate double featuring and maintain the maximum 25› admission price, which we are willing to do.

Right at this time the writer wishes to call your attention to the Rio Grande Valley situation. We must insist that all pictures exhibited in our 'A' theatres at a maximum night admission price of 35› must also be restricted to subsequent runs in the Valley at 25›. Regardless of the number of days which may intervene, we feel that in exploiting and selling the distributors' product, that subsequent runs should be restricted to at least a 25› admission scale.

The writer will appreciate your acknowledging your complete understanding of this letter.

Sincerely,

(Signed) R. J. O'Donnell.'

Footnote 4 A Class 'A' picture is a 'feature picture' having five reels or more of film each approximately 1,000 feet in length, shown in theatres of the specified Texas cities charging 40 cents or more for adult admission at night. Approximately fifty per cent. of the pictures released by the distributor defendants in the Texas cities in 1934-1935 were Class 'A' pictures.

Footnote 5 The Metro-Goldwyn-Mayer Distributing Corporation agreement with Interstate did not include Houston, where it operated through a subsidiary a first run theatre, and where it did not until the 1936-1937 season license any subsequent run pictures. It agreed with Interstate to impose the restrictions in Houston for the 1936-1937 season.

Footnote 6 The injunction against the double feature restriction excepted from its operation two distributors, and the agent of one of them, which had previously made a practice of including such a restriction in their license agreements.

Footnote 7 See footnote 5.

[Footnote 1] Straus v. American Publishers' Ass'n, 231 U.S. 222, 34 S.Ct. 84, L.R.A.1915A, 1099, Ann.Cas.1915A, 369; Paramount Famous Lasky Corporation v. United States, 282 U.S. 30, 51 S.Ct. 42.

[Footnote 2] See United States v. Dubilier Condenser Corp., 289 U.S. 178, 186, 53 S.Ct. 554, 557, 85 A.L.R. 1488.

[Footnote 3] Appalachian Coals, Inc., v. United States, 288 U.S. 344, 358, 359 S., 360, 362, 53 S.Ct. 471, 473, 474. Compare Chicago Board of Trade v. United States, 246 U.S. 231, 238, 38 S.Ct. 242, 243, Ann.Cas.1918D, 1207.

[Footnote 4] Manners v. Morosco, , 40 S.Ct. 335; E. Bement & Sons v. National Harrow Co., 186 U.S. 70, 22 S.Ct. 747.

[Footnote 5] United States v. General Electric Co., 272 U.S. 476, 488-490, 47 S. Ct. 192, 196, 197; Standard Oil Co. v. United States, 283 U.S. 163, 179, 51 S.Ct. 421, 427.

[Footnote 6] Cincinnati, P.B.S. & P. Packet Co. v. Bay, , 26 S.Ct. 208; Oregon Steam Navigation Co. v. Winsor, 20 Wall. 64, 67.

[Footnote 7] Fowle v. Park, 131 U.S. 88, 9 S.Ct. 658; Board of Trade v. Christie Grain & Stock Co., 198 U.S. 236, 250, 252 S., 25 S.Ct. 637, 639, 640; Moore v. New York Cotton Exchange, , 46 S.Ct. 367, 45 A.L.R. 1370; United States v. General Electric Co., 272 U.S. 476, 47 S.Ct. 192; United States v. Addyston Pipe & Steel Co., 6 Cir., 85 F. 271, 46 L.R.A. 122.