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United States v. Capitol Service Inc.

February 28, 1985

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
CAPITOL SERVICE, INC., KOHLBERG THEATRES SERVICE CORPORATION, MARCUS THEATRES CORPORATION AND UNITED ARTISTS THEATRE CIRCUIT, INC., DEFENDANTS-APPELLANTS



Appeal from the United States District Court for the Eastern District of Wisconsin. No. 80 C 407-Robert W. Warren, Judge.

Bauer and Eschbach, Circuit Judges; and Edwards, Senior Circuit Judge.*fn*

Author: Edwards

EDWARDS, Senior Circuit Judge.

This is a civil antitrust action brought by the United States Government under Section 1 of the Sherman Act, 15 U.S.C. ยง 1, against four motion picture exhibitors who operate theaters in the Milwaukee, Wisconsin area. This action was tried to the court in a 4 1/2 week trial. The United States District Court for the Eastern District of Wisconsin, Judge Robert W. Warren presiding, found defendants guilty of Section 1 violations in that the defendants' practice of "splitting," or allocating among themselves, the rights to negotiate for films released by motion picture distribution companies constituted both illegal price fixing and an illegal "scheme to divide products among themselves with the purpose of eliminating competition with respect to those products." United States v. Capitol Service, Inc., 568 F. Supp. 134, 155 (E.D. Wis. 1983). Judge Warren issued the following injunction:

The defendants are hereby enjoined from further engaging in any motion

picture split agreements, in any form and with any person, in any motion

picture exhibition market throughout the United States.

Id. Defendants appeal only the breadth of the injunction.

The District Court's opinion includes 13 pages of factual findings. Its findings of fact are not challenged on appeal. Only those facts necessary to an understanding and resolution of the issues raised by appellants will be repeated here.

The defendants-appellants, Capitol Service, Inc. ("Capitol Service"), Kohlberg Theatres Service Corporation ("Kohlberg"), Marcus Theatres Corporation ("Marcus"), and United Artists Theatre Circuit, Inc. ("UATC"), cumulatively operate approximately 90% of the first-run motion picture theaters in the Milwaukee metropolitan area. On November 30, 1977, representatives of each appellant met and formed a "split agreement." The District Court described the agreement as follows:

Under the agreement, the defendants have grouped their theaters that primarily exhibit first-run motion pictures into three units of eleven screens each. On occasion, some of the defendants' theaters that are not included in the three units have been split pictures under the split agreement. Under the agreement, Marcus and UATC each constitute one unit since each has eleven primarily first-run screens in Milwaukee. Capitol Service, which has eight primarily first-run screens, and Kohlberg, which has three primarily first-run screens, together form the third unit. The defendants meet periodically or converse by telephone to split pictures. The split is a "picture-by-picture" split, meaning particular films are allocated to specific theaters. The exhibitors take turns selecting films for their respective theaters, making sure that no two theaters in the same geographic zone play the same film. Because General Cinema, which is not involved in the split, has two first-run theaters in Milwaukee, the defendants will sometimes "split around" the General Cinema theaters, meaning that they leave a run of the picture open in the event one of General Cinema's theatres obtains a license for the picture.

Id. at 140-141.

The District Court specifically found that appellants formed the split "for the purpose of eliminating competition among themselves." Id. at 142. The split was formed in response to what appellants viewed as the "excessive terms" which resulted from the distribution system previously used in the Milwaukee area--the competitive bid system. Id. at 143. Under the competitive bid system, motion picture distributors inform exhibitors of the release of new films by exhibitor solicitation letters. The letters provide a minimum of information about the film and include suggested minimum terms for the licensing of the film. See Allied Artists Picture Corp. v. Rhodes, 679 F.2d 656, 660 (6th Cir. 1982). The exhibitors then respond with competitive bids for the right to play the film at a particular theater. The bidding process often results in terms greater than that suggested in the solicitation letters. United States v. Capitol Service, Inc., 568 F. Supp. at 138.

Licensing also occurs by competitive and noncompetitive negotiations. The latter occurring in "close" or one exhibitor markets. Films are also distributed under the "track" system--a system of distribution to theaters on the basis of an established relationship between the distributor and exhibitor. Id. With the exception of the noncompetitive negotiations, all licenses are firm and not subject to downward adjustment following the playing of a ...


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