Last October, we discussed the Department of Justice’s announcement that it would be revisiting the 1948 Paramount Consent Decrees, a series of movie-studio concessions and divestments resulting from a landmark antitrust prosecution, United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948). Among other things, those decrees held unlawful the then-existing vertical integration of production studios, distributors, and exhibitors (i.e., theaters) and held various prevailing practices—“block booking” (bundling movie licenses and strong-arming theaters into accepting all of a studio’s movies); “circuit dealing” ( obtaining mass licenses for entire theater chains, instead of for individual theaters and films); overbroad “clearances” (selling exclusive exhibition licenses for certain geographical areas); and setting minimum movie-ticket prices—to be impermissibly anticompetitive. Yesterday, Assistant Attorney General Makan Delrahim announced the results of that review at the American Bar Association’s 2019 Antitrust Fall Forum. He confirmed that the DOJ would, indeed, be seeking to dissolve the 70-year-old Decrees.
After summarizing the purposes and effects of the Decrees, Delrahim noted that the movie industry and the habits of the theatergoing public had both undergone “significant change” since the prosecution of the studios and demise of the studio system. He observed that most cities now have “many multiplex cinemas showing films from different distributors,” and that “most of our movie-watching is not in theaters at all.” Moreover, ongoing technological and business innovations have created “competitive pressures” from “unexpected sources,” such as MoviePass—which, while ultimately a “flawed” business model, led major theater chains to explore and implement their own flat-fee services. These changes, he said, showed that the market had “evolved” and that “[o]nce innovation has occurred . . . it would be a mistake for antitrust enforcers to limit the potential for consumer-enhancing innovation.”
In light of the transformed industry landscape, Delrahim explained that the Decrees “no longer serve the public interest” for several reasons. First, the horizontal conspiracy among the studios—“the original violation animating the decrees” —had been halted and disbanded by them. Second, in the decades since then, the Decrees have “remedied the effects of the violation, ridding the industry of ‘all taint’” of the conspiracy and reversing its effects. Third, the effects of the Decrees made it unlikely that the defendants could reinstate their cartel. Finally, “evolution” in antitrust law itself has “made blanket prohibitions of certain vertical restraints inappropriate.” Because they fail to “meet consumer interests,” he concluded, the DOJ will promptly seek termination of the Decrees.
Delrahim had two important caveats. Although the bulk of the Decrees will be dissolved at once, there will be a “two-year sunset period on the bans on block booking and circuit dealing” to allow the defendants and theater chains a transition period to negotiate licensing arrangements replacing the “theater-by-theater and film-by-film” licensing required by the Decrees. More generally, he made clear that “the practices addressed in them are [not] now considered per se lawful” or “insulated from antitrust scrutiny.” Instead, “consistent with modern antitrust law,” each vertical restraint will be reviewed under the rule of reason—and if “credible evidence shows a practice harms consumer welfare,” DOJ will step in.
The DOJ’s decision is not surprising. Modern antitrust case law and agency guidelines espouse a deferential approach to vertical restraints in intellectual property licensing and generally allow proprietors a fair degree of discretion to adopt profit-maximizing practices in the distribution of their works. Motion pictures, of course, are a quintessential form of intellectual property. Dissolving the decrees thus can be seen as bringing the law in the movie industry into line with this broader trend. While rule-of-reason evaluations remain a backstop against consumer harm, Delrahim’s speech suggests that the Antitrust Division is setting the stage for movie studios to experiment with alternative distribution practices without the specter of imminent prosecutorial intervention.