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UNITED STATES v. KERASOTES ILLINOIS THEATRES INC.

January 9, 1987

UNITED STATES OF AMERICA, PLAINTIFF,
v.
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:

JUDGMENT ORDER

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 choosing first.

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 before.

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 background:

    I. For forty years prior to 1977, the Justice
  Department took the position that split agreements
  among film

  exhibitors were "legal if the film allocation was
  accomplished with distributor participation or
  consent." (Justice Dept. announcement of April 1,
  1977).
    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 ...

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