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The Society of Independent Motion Picture Producers

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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





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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