United States District Court, Central District of Illinois, Springfield Division
January 9, 1987
UNITED STATES OF AMERICA, PLAINTIFF,
KERASOTES ILLINOIS THEATRES, INC., KERASOTES ENTERPRISES, D/B/A KERASOTES ADMINISTRATION COMPANY, AND DAN L. OWEN, DEFENDANTS.
The opinion of the court was delivered by: Mills, District Judge:
A criminal antitrust prosecution.
The jury returned a verdict of not guilty as to each Defendant.
The Court agrees — in aces, spades, and trumps!
Judgment is hereby entered in favor of the Defendants and against the
Government on that verdict.
On May 8, 1985, a federal grand jury sitting in Springfield, Illinois,
returned a one-count indictment charging Kerasotes-Illinois Theatres,
Inc., Kerasotes Enterprises (collectively called "Kerasotes"), and Dan
Owen with having engaged in a conspiracy in restraint of trade in
violation of section 1 of the Sherman Act, 15 U.S.C. § 1. The
specific business practices that allegedly violated the Sherman Act in
this case are called "split agreements" which, until recently, were a
common phenomena in the motion picture industry.
As defined by the Justice Department, a split agreement, also known as
a "split-of-product," is an arrangement by which motion picture
exhibitors in a particular market allocate among themselves the right to
negotiate or bid for films offered by distributors for exhibition in that
locale. Exhibitors also agree that they will refrain, either completely
or for a stated period, from negotiating or bidding against each other
for the right to exhibit films so allocated. Occasionally, film
distributors are parties to the split agreements, but in many instances
they involve only exhibitors.
This case involved motion picture splitting in Quincy, a small city in
West Central Illinois on the Mississippi River with a population of
approximately 42,000. There are two theatre chains in Quincy: Kerasotes,
the larger of the two, operates three theatres with a total of 7
screens. The other, Dickenson, operates one theatre with 3 screens.
As was their practice for numerous years, every few months employees of
Kerasotes and Dickenson talked on the phone to allocate which films each
of them would purchase from the film distributors. In the telephone
conferences, Kerasotes and Dickenson would take turns choosing a
first-run film, with the exhibitor that chose second the previous time
The distributors were well aware of — and even encouraged
— this practice. For instance, when a movie was about to be
released, distributors would often call and ask one of these Quincy
exhibitors if it had split yet. In addition, both Kerasotes and Dickenson
attempted to accommodate the distributors in their selection of movies by
playing first run movies as they were scheduled for release by the
producers and distributors. These arrangements worked well, as is
demonstrated by their prevalance across the nation. There was ample
testimony in this case that everyone — film producers,
distributors, exhibitors and viewing public — benefited by the
split agreements. In fact, when splits between exhibitors ceased, the
distributors merely took over the job of allocating the films to the
exhibitors, receiving whatever prices they charged or negotiated, as
At trial, Defendants contended that during the time periods covered
by the indictment (December 1983 — July 1985), the legality of
splits was unsettled. Here is the unchallenged chronology of the pertinent
I. For forty years prior to 1977, the Justice
Department took the position that split agreements
exhibitors were "legal if the film allocation was
accomplished with distributor participation or
consent." (Justice Dept. announcement of April 1,
II. Prior to 1977, federal courts held that splits
were to be judged under the "rule of reason" analysis
and found them lawful when the distributor consented.
See, e.g., United States v. Lowe's, Inc., 1962 CCH
Trade Cases ¶ 70, 347 at p. 76,374 (S.D.N.Y.
1962); Dahl, Inc. v. Roy Cooper Co., 448 F.2d 17, 19
(9th Cir. 1971). Under these guidelines, motion
picture splitting flourished and remained a widespread
practice among exhibitors.
III. Then, in April of 1977, the Justice Department
issued a press release*fn1 stating that it regarded
any form of split agreement to be unlawful under
IV. However, in response to protest by the motion
picture industry, the Antitrust Division agreed that
the courts should decide the legality of splits and
stated that its enforcement actions would be civil
until the legality of splits was decided by the
V. Shortly after the press release, several
exhibitors in Virginia brought an action against the
Attorney General for a declaratory judgment that
splits were not per se offenses under section 1. That
suit resulted in a decision in the exhibitors' favor.
There, the district court held that splits were not
per se offenses under section 1. Greenbriar Cinemas,
Inc. v. Attorney General, 511 F. Supp. 1046 (W.D.Va.
1981). The Government took no appeal from this
decision in order to obtain a ruling by a
higher court, and the results of this litigation were
published in the motion picture trade press.
VI. In 1980, the Government instituted a civil
action of its own against exhibitors in Milwaukee,
Wisconsin, alleging that a split agreement among
exhibitors in that city violated section 1. The case
was tried as both a rule of reason case and a per se
case and in June 1983, the district court held the
Milwaukee split per se unlawful. United States v.
Capitol Services, Inc., 568 F. Supp. 134 (E.D. Wis.
VII. While the Capitol Service case was pending in
the district court or on appeal to the Seventh
Circuit, two district courts in California and the
Court of Appeals for the Fifth Circuit rendered
conflicting decisions on split agreements. In
September 1983, Judge Rafeedie held in a civil case
that the split agreements there involved were not per
se offenses and were to be judged by the rule of
reason. Exhibitor's Service, Inc. v. American
Multi-Cinema, Inc. (unpublished opinion). See
788 F.2d 574, 578 n. 5, 1986-1 CCH Trade Cases, p.
62,497 n. 5 (9th Cir. 1986). On the other hand, Judge
Kenyon of the same district, also in a civil case,
held in 1982 that the split agreements there involved
were per se unlawful because, in that judge's
opinion, they were equivalent to price fixing. General
Cinema Corp. v. Buena Vista Dist. Co., 532 F. Supp. 1244,
1279 (C.D. Cal. 1982). Further, the Fifth Circuit, in
Southway Theatres, Inc. v. Georgia Theatre Co.,
672 F.2d 485, 492 (5th Cir. 1982) noted in dicta that
"split agreement[s] among the circuit theatres do not
constitute an independent violation of the antitrust
laws" and would be improper only if some exhibitors
combined with distributors to foreclose other
exhibitors from the market.
VIII. Finally, on February 28, 1985, the Seventh
Circuit in United States v. Capitol Services, Inc.,
756 F.2d 502 (7th Cir. 1985), affirmed the scope of
injunctive relief granted by the Milwaukee district
court, holding that the nationwide scope of injunctive
relief was proper in that case. Since the defendants
challenged only the nation-wide scope of the district
court's injunction, the legality of split agreements
in general was not strictly at issue on appeal.
Nevertheless, the court of appeals' opinion contained
a statement that splits were a form of agreement not
to bid and therefore subject to the per se rule of
National Society of Professional Engineers v. United
States, 435 U.S. 679, 98 S.Ct. 1355, 55 L.Ed.2d 637
(1978). The Seventh Circuit denied rehearing in
Capitol Services on April 22, 1985, and the Supreme
Court denied certiorari on November 4, 1985. ___ U.S. ___,
106 S.Ct. 311, 88 L.Ed.2d 288 (1985).
The foregoing sequence of events demonstrates that the legality of
splits was completely unsettled during a substantial portion of the
period covered by the instant indictment — December 1983 to April
1985, all but 3 months out of the 20 months charged — and the issue
as yet remains unresolved by the Supreme Court. Further, all the recent
decisions were in civil cases. During this period, no criminal
indictment had been returned involving splits. The indictment in this
case is the first in the country ever to charge that split agreements
are a violation of the criminal law under the federal antitrust
It is a fundamental tenent of our criminal jurisprudence that
conviction of a crime requires proof of intent beyond a reasonable
doubt. But in a criminal antitrust case, two different types of intent
are generally required: "the basic intent to agree, which is necessary
to establish the existence of the conspiracy, and the more traditional
intent to effectuate the object of the conspiracy." United States v.
U.S. Gypsum Co., 438 U.S. 422, 443 n. 20, 98 S.Ct. 2864, 2877
n. 20, 57 L.Ed.2d 854 (1978). With respect to the second type — the
intent to effectuate the object of the conspiracy — the Supreme Court
has held that this element is satisfied by proof that either: (1) the
Defendant's conduct was "undertaken with knowledge of its probable
and [actually had] the requisite anticompetitive effects"; or (2)
Defendant's conduct was undertaken "with the purpose of producing
anticompetitive effects . . . even if such effects did not come to pass."
Id. at 444 and n. 21, 98 S.Ct. at 2877 and n. 21.
As already noted, during the time periods alleged in this indictment
the courts were uncertain as to whether the probable consequence of
motion picture splitting was an anticompetitive effect. Clearly,
therefore, the jury's finding that these Defendants lacked the intent
to produce anticompetitive effects is supported by the evidence. We
note that our circuit "does not read Gypsum as indicating that
once Defendants are proved to have intentionally made an agreement which
is unlawful per se, there must be an instruction that the
Defendants cannot be convicted unless they are found to have intended
to restrain trade or commerce." United States v. Brighton Bldg. &
Maintenance Co., 598 F.2d 1101, 1106 (7th Cir. 1979).
However, as explained above, these Defendants were not even aware that
their conduct could be labeled unlawful per se in a civil
case. Thus, it is incredible to believe that they could have been charged
with knowledge that their actions would have an anticompetitive effect,
and that they would be subject to criminal liability.
It should be flagged that the sole effect of this prosecution has been
to change who does the splitting. Instead of the exhibitors, distributors
now dictate which film shall be offered for exhibition. Because the
process for allocating movies remains intact, it is doubtful at best
that the exhibitor splitting in fact had any anticompetitive effect.
It is against this backdrop that the jury returned its verdict of
not guilty. The verdict is overwhelmingly supported by the evidence,
and is a just finish to this prosecution.
The Court therefore enters judgment upon the jury verdict of not
guilty. Defendants are released from their respective bonds.