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The Independent Producers and the Paramount Case, 1938-1949
Part 4: The Studios in Federal Court, 1945
The New York Equity Suit
The antitrust campaign of the independent producers helped take the Hollywood
studios back to court. With the expiration of the Consent
Decree of 1940, and closing of World War II, the Justice Department began
the second phase of U.S. v. Paramount, et al, commonly known as "The
New York Equity Suit." On October 8, 1945 the Big Eight studios and the
Justice Department were in Federal Court, and the prognosis did not look
favorable for the integrated studios.
CLICK HERE to read the Department of
Justice Statement by Attorney General Biddle, August 1944
The Government Opposes Theatre Monopoly
One of the events that brought a dismal outlook to the studios was the Crescent
theater case. The Crescent trial (also
known as the Sudekum case named after the large Tennessee defendant) was
the first of the three great exhibitor suits filed in 1939 to make it to the
Supreme Court. Even though the Consent Decree of 1940 had exempted the studios
from the Crescent case in 1940, the theater chain trial was widely viewed
as a measure of government predisposition to legal intervention in the film
business. In fact, the SIMPP executive committee hastily involved the Society in
the case by attempting to file an amicus curiae brief with the Supreme
Court in 1944. Spending over $10,000 to unsuccessfully file the brief, SIMPP
leaders later admitted that they did not give the Society enough time to
complete the approval process. Nevertheless the incident helped enhance the
reputation of SIMPP as a trustbusting organization, and the expensive misstep
helped bring about the financial restructuring of the Society the following
year. More significantly, “while the Supreme Court did not permit the filing
of a brief,” the SIMPP leaders reported to their members, “it is felt that
the government's position was strengthened by our request to file and the
publicity resulting therefrom.”
The industry carefully took note as the Supreme Court decided against the
Crescent theater monopoly, and condemned its anti-competitive practices. With a
hint of the problems in store for the major Hollywood studios, the language of
the Crescent decision seemed ominous for the Big Eight as the Supreme
Court claimed that “somewhere in the background a greater conspiracy from
which flow consequences more serious than we have here. . . .”
The Paramount Trial in New York
In the New York Equity Suit, the Paramount case defendants used many
of the same arguments as before the war, pitching block booking and vertical
integration as an economic necessity. Following the incredible war-time box
office windfall, the Big Eight could no longer shelter their businesses
practices behind the guise of industry hardship that had postponed previous
government interaction during the Great Depression and early in World War II.
The entire industry, lead by Paramount Pictures, was riding an unprecedented
profit growth as theater attendance peaked to its all time record in 1946. The
massive Paramount theater holdings, which had nearly brought the studio to ruin
in the Depression, now allowed the company revenue to skyrocket. Paramount
reported an unheard-of $39 million profit for the year 1945-46, more than twice
that of the second place studio Twentieth Century-Fox.
Even with the booming conditions, the studios complained about the
instability of the current foreign situation, and argued that the Hollywood
majors could not afford to be toppled from their position of strength at home
just at the time when more leverage was needed to overcome international quotas
and restrictions.
Interestingly Hollywood faced an even larger threat, one which was not yet
identified as a significant enough menace to provide for convincing argument in
the Paramount case but, nevertheless, a challenge that brought widespread
changes that would help undermine the studio power-base. This, of course, was
the rise of television as a popular medium. As discussed more in chapter 14,
this new influence from television coincided with-and helped fuel-the
independent film movement that was changing the way Hollywood made movies.
For the opening arguments in the Paramount trial in New York, the
Justice Department began by presenting charts (“scrap paper” its was
referred to on several occasions by the studio attorneys) to demonstrate the Big
Five stranglehold on the first-run theater markets with additional evidence that
claimed that the Little Three acted in collusion with the theater-owning majors.
Legal counsel for Warner Bros. said, “These theatres provide a sure outlet
and make it possible to spend these millions on pictures. Strike down that
quality and this industry is sunk.” RKO, the smallest of the Big Five,
defended itself by deflecting the accusations. “To say it has created a
monopoly is incredible,” the RKO attorney declared. United Artists still
innocently claimed that its did not know why UA was part of the antitrust suit.
Two weeks into the trial, Adolph Zukor testified, retelling the history of
the Paramount studio to show that he was literally forced into vertical
integration by the predatory exhibitor organizations like First National. He
denied all conspiracy charges, including the allegation that his studio used
block booking in order to eliminate competition and maintain their dominant
position in the first-run theater market.
The Court Declares the Studios Guilty
The trial wrapped in January 1946, and the industry awaited the decision to
be handed down by the three New York City judges Henry W. Goddard, Augustus N.
Hand, and John Bright. The New York Equity ruling came in June 1946 as something
of a surprise to both sides.
The Hollywood studios, including the Little Three, were found guilty of
conspiracy in restraint of trade with charges that focused on block booking. The
court put an interesting interpretation on block booking, indicating that the
copyright ownership of any film was, in actuality, a limited monopoly protected
by the U.S. Constitution. Based on the precedent from other recent patent
antitrust cases, the court declared that the combination of two separate
copyrights threatened free trade and was considered illegal. Also theater
pooling, where two competing theater chains combine for mutual advantage, was
also outlawed.
However the court permitted the Big Five studios to retain their own theater
chains. Vertical integration was not declared illegal per se; pooling was
considered the culprit. So instead, the court ordered the major studios to
eliminate all theater pools, and allowed the Big Five keep their large circuits.
“We cannot concede to the prayer of the plaintiff,” the ruling indicated,
“that the major defendants should be divested of their theatres in order that
no distributor of motion pictures shall be an exhibitor.” The court claimed
that to divorce the theaters from the studios would not solve the monopoly
problem, but supplant the experienced Hollywood owners with new owners who may
render worse public service and perpetuate territorial monopolies. The court's
solution was competitive bidding, a controversial concept of sorts, where
studios would be forced to accept the auction price of “the highest
responsible bidder.” The distributors were forbidden to discriminate against
any theater, and had to sell each film without the semblance of block booking.
To aid in this, the court also protected the studio practice of
run-zone-clearance (if executed in a “reasonable” manner), and also upheld
the film arbitration system.
At the end of 1946, an appeal was heard by the Statutory Court, and a new
ruling was issued which upheld most of the provisions of the District Court
ruling. However, the new decision placed additional restrictions on
run-zone-clearance, and called arbitration into question.
CLICK HERE to read the full text of the
New York Equity decision - December 31, 1946
The Paramount Case Appeal to a Higher Court
None of the participants were satisfied with the result of the New York
Equity Suit. The Department of Justice, which considered theater divestiture the
only proper remedy, refuted the mandatory court-directed competitive bidding as
unexpected and unwanted. The Big Five were disappointed with the Statutory Court
departure from the long-dead Consent Decree of
1940. While the Big Five agreed
to comply with the ban on theater pooling (which they in fact did by July 1,
1947), they protested the elimination of block booking. Universal and Columbia,
who felt like they were dragged into the suit, were devastated by the block
booking ban.
Though SIMPP was not entirely pleased with the outcome, the independents had
many things to celebrate. The SIMPP public relations department said that
“there can be no question that the verdict is not entirely satisfactory
because it did not result in complete divorcement of theater ownership.”
However, for the first time since the FTC investigations in the 1920s, “the
majors have been publicly pronounced guilty of monopolistic practices which the
American people regard as abhorrent and inimical to their best interests, while
the independents have aligned themselves on the traditional American side of
fair play and freedom of the individual to do business on a basis of merit
instead of power.”
The Society's public relations director congratulated the independent members
for helping to spur the government into action: “It can safely be said that
without the intervention of the Society the motion picture industry might be
forced to operate to this day and in the foreseeable future under another
consent decree.” Furthermore, the trial generated more exposure for
SIMPP-“publicity space worth thousands upon thousands of dollars, and
good-will and prestige for which there is no material yardstick.”
Both the government and the major studios submitted appeals that would send
the Paramount case to the Supreme Court. The independent producers
welcomed the Statutory decision as an appropriate preamble to the real fight
ahead.
CLICK HERE to read SIMPP reaction
to the New York Equity decision - January 1947
MORE:
SOURCES:
The Crescent case -
“while the Supreme Court”: Loyd Wright and John C. Flinn to SIMPP, January
8, 1945, WWP; “somewhere in the background”: United States v. Crescent
Amusement Co., et al, 323 U.S. 173 (1944); also John C. Flinn to Loyd
Wright, November 4, 1943, p. 3, John C. Flinn to Eric Cleugh, December 28, 1944,
and John C. Flinn to Walter Wanger, June 7, 1945, WWP.
New York Equity Suit: “Film Quality Tied To Theatre
Chains,” NYT, October 10, 1945; “Zukor Denies Film Pact,” NYT,
October 24, 1945, p. 23; HR, October 24, 1945, pp. 1, 10; “5 Movie
Producers To Retain Theatres,” NYT, June 12, 1946, p. 29; results of
the trail recounted in Film Daily Yearbook 1947, p. 41 and briefly in
Mast, The Movies in Our Midst, pp. 596-598.
SIMPP reaction: Joe Alvin, Public Relations, letter to
SIMPP, January 9, 1947, pp. 1-5, “Film Market Hampered By U.S. Edict, Nelson
Says,” Hollywood-Citizen News, January 10, 1947.
See Bibliography.
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