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Flagship Theatres of Palm Desert, LLC v. Century Theatres

August 31, 2011

FLAGSHIP THEATRES OF PALM DESERT, LLC, PLAINTIFF AND APPELLANT,
v.
CENTURY THEATRES, INC. ET AL., DEFENDANTS AND RESPONDENTS.



(Los Angeles County Super. Ct. No. SC090481) APPEAL from a judgment of the Superior Court of Los Angeles County. Linda K. Lefkowitz, Judge.

The opinion of the court was delivered by: Rothschild, J.

CERTIFIED FOR PUBLICATION

Reversed with directions.

This is an antitrust action concerning the distribution and exhibition of motion pictures. Flagship Theatres of Palm Desert, LLC (Flagship) owns a movie theater called the "Cinemas Palme d'Or" (the Palme) with 10 screens. Flagship owns no other theaters. Century Theatres, Inc. (Century) owns a nearby movie theater called the "Century 15 at the River" (the River) with 15 screens. Century owns a large theater circuit of over 1,000 screens, and in 2006 Century was acquired by Cinemark USA, Inc. (Cinemark), resulting in a combined circuit of several thousand screens. Many of Century's theaters are in noncompetitive markets.

Flagship filed this antitrust action against Century and two film distributors, alleging that Century has used the power deriving from both the size of its theater circuit and its many theaters in noncompetitive markets to undermine the competitive process through which theaters bid for and obtain licenses to exhibit first-run films. According to Flagship, under previous ownership the River and the Palme obtained roughly equal numbers of first-run films, but under Century the River now obtains licenses for far more first-run films than the Palme, the few that are left to the Palme are commercially inferior, and the imbalance is not based on the relative merits of the Palme's and the River's bids. On the contrary, according to Flagship, superior bids by the Palme are often rejected in favor of inferior bids by the River as a result of Century's abuse of the power of its circuit.

After Flagship voluntarily dismissed the distributors and amended its pleadings to add Cinemark as a defendant, Century and Cinemark (collectively "defendants") moved for summary judgment. They argued inter alia that Flagship could not show antitrust injury and could not show that Century had market power in the market in which the Palme and the River compete. The trial court agreed and entered judgment against Flagship. We reverse.

BACKGROUND

Flagship operates the Palme, a 10-screen movie theater in Palm Desert, California. Century operates the River, a 15-screen movie theater in the neighboring community of Rancho Mirage, California. The Palme and the River are located less than two miles apart on Highway 111, a major thoroughfare running through the Coachella Valley. Previously, when the Palme and the River were being operated by Flagship's and Century's predecessors, film distributors granted "clearances" to the River and the Palme with respect to each other, meaning that a distributor licensing a film to the River would agree not to license the same film to play at the Palme at the same time, and vice versa.

Century began operating the River in approximately July 2002 and continued its predecessor's practice of requesting clearances for the River with respect to the Palme. Before being acquired by Cinemark in 2006, Century operated movie theaters at 80 locations across 12 states featuring a total of more than 1,000 screens.*fn1 Flagship introduced evidence that as of 2006, only approximately 12 to 14 of Century's 80 theaters were in competitive markets.

Flagship's only theater is the Palme, which Flagship acquired in 2003. Two of Flagship's founders previously formed another business entity, Flagship Theatre Corporation, which operates only one theater, located in a noncompetitive market.

In July 2006, Flagship filed the instant lawsuit against Century and two film distributors. The complaint alleged claims for restraint of trade in violation of the Cartwright Act (Bus. & Prof. Code, § 16700 et seq.),*fn2 unfair competition in violation of the unfair competition law (id., § 17200 et seq. (hereafter UCL)), and intentional interference with prospective economic advantage. Flagship later filed a first amended complaint and a second amended complaint, alleging similar claims and adding Cinemark as a defendant. Flagship also eventually dismissed the distributor defendants.

Flagship alleged that before Century began to operate the River, film distributors licensed roughly equal numbers of first-run films to the River and the Palme, with the Palme "generally receiving the larger share." After Century began operating the River, however, distributors licensed roughly three times as many first-run films to the River as to the Palme, and the films licensed to the Palme were generally "inferior films" that were expected to "generate far lower box office revenue than those licensed to Century." Flagship alleged that Century obtained such favorable treatment for the River, to the detriment of the Palme, by using the bargaining power deriving from both the size of Century's circuit and its operation of numerous theaters in noncompetitive markets. Flagship alleged that Century's conduct constituted unlawful "circuit dealing," which violates the longstanding antitrust law requirement that "films be licensed on a theater by theater, film by film basis."

In 2008, defendants moved for summary judgment. Defendants argued that Flagship's antitrust claim under the Cartwright Act failed because (1) the clearances Century obtained for the River against the Palme were lawful, (2) Century did not have sufficient market power in the geographic market in which the Palme and the River compete--which defendants contended was the entire Coachella Valley--to cause competitive harm in that market, and (3) Flagship could not demonstrate antitrust injury. Defendants further argued that because the Cartwright Act claim failed, Flagship's UCL and intentional interference with prospective economic advantage claims failed as well.

Flagship filed opposition and, in the alternative, requested a continuance in order to complete outstanding discovery. Flagship argued that defendants' motion was based on "the false assumption that this is just a case about clearances" and contended to the contrary that the case is based on Century's methods of negotiating with and licensing films from distributors, which deprived the Palme "of the opportunity to fairly compete to license any but a handful of first-run films."

The trial court granted defendants' motion and entered judgment against Flagship. The court agreed with defendants that Flagship failed to create a disputed issue of material fact regarding (1) antitrust injury, (2) the contention that the geographic market in which the Palme and the River compete is the entire Coachella Valley, and (3) the contention that Century lacks market power in that market. Flagship timely appealed.

STANDARD OF REVIEW

We review the trial court's ruling on a motion for summary judgment de novo. (Buss v. Superior Court (1997) 16 Cal.4th 35, 60.)

DISCUSSION

I. Summary of Principles of Antitrust Law and Overview of Claims

The Cartwright Act states that "[e]xcept as provided in this chapter, every trust is unlawful, against public policy and void." (§ 16726.) Section 16720 defines the term "trust" as "a combination of capital, skill or acts by two or more persons" for certain enumerated anticompetitive purposes, including "[t]o create or carry out restrictions in trade or commerce." (§ 16720, subd. (a).) That prohibition is analogous to the catchall language of section 1 of the Sherman Act (15 U.S.C. § 1), which prohibits "[e]very contract, combination . . . , or conspiracy, in restraint of trade or commerce." (See Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 838 (hereafter Aguilar).) Thus, although the Cartwright Act was not patterned after the Sherman Act (State of California ex rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147, 1164, superseded by statute on other grounds as stated in Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 570), federal case law interpreting the Sherman Act is often a useful aid in interpreting the Cartwright Act (SC Manufactured Homes, Inc. v. Liebert (2008) 162 Cal.App.4th 68, 84).

Under both Cartwright Act and Sherman Act case law, some restraints of trade are treated as per se unlawful, while others are analyzed under the "rule of reason." "In general, only unreasonable restraints of trade are prohibited. [Citation.] However, 'there are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.' [Citation.] Among these per se violations is the concerted refusal to deal with other traders, or, as it is often called, the group boycott. [Citations.]" (Marin County Bd. of Realtors, Inc. v. Palsson (1976) 16 Cal.3d 920, 930-931 [hereafter Marin County].) Under the rule of reason, the challenged conduct is unlawful only if its anticompetitive effects outweigh its procompetitive effects. (See, e.g., Exxon Corp. v. Superior Court (1997) 51 Cal.App.4th 1672, 1680-1681 [hereafter Exxon].)*fn3

Because the parties' characterizations of Flagship's claims differ considerably, we briefly summarize them here before turning to analysis of the parties' arguments on the merits. According to defendants, Flagship's claims are essentially challenges to Century's practice of obtaining clearances from film distributors. ("[Flagship] is really complaining about Century's clearance requests.") A clearance is an exclusive right that a film distributor grants to a theater in connection with the licensing of a film. It prohibits the distributor from licensing the film for exhibition at certain other theaters, either identified by name or located within a specified geographic region, while the film is being shown at the theater that obtained the clearance. (See, e.g., Soffer v. National Amusements Inc. (D.Conn. Jan. 10, 1996, Civ. No. 3:91CV472 (AVC)) 1996 U.S.Dist. Lexis 19751, at p. *6; Orson, Inc. v. Miramax Film Corp. (E.D. Pa. 1994) 862 F.Supp. 1378, 1386, fn. 10.) Federal case law applying the Sherman Act has treated clearances as vertical non-price restraints ...


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