Business

U.S. steps up scrutiny of movie distribution

The federal government is investigating movie distribution practices involving Hollywood studios and major theater owners, including Leawood-based AMC Entertainment. This photo shows Chris Evans as Captain America/Steve Rogers in the new film “Avengers: Age of Ultron.”
The federal government is investigating movie distribution practices involving Hollywood studios and major theater owners, including Leawood-based AMC Entertainment. This photo shows Chris Evans as Captain America/Steve Rogers in the new film “Avengers: Age of Ultron.” The Associated Press

At a time when the box office is booming, the business practices of the nation’s largest theater chains are coming under growing scrutiny by the federal government.

The Department of Justice recently ordered Regal Entertainment Group, Leawood-based AMC Entertainment Holdings and Cinemark Holdings to supply documents as part of a widening investigation into whether the largest theater chains violated federal antitrust laws, three people familiar with the investigation said.

The government is examining allegations from independent theater owners across the country that the big chains are using their market clout to block smaller rivals from getting first-run movies.

The issuance of civil investigative demands, or administrative subpoenas, signals a significant escalation in the Justice Department inquiry, which launched several months ago but has accelerated in recent weeks.

The department also has assembled a task force of attorneys and economists to examine a business practice known as clearances — license agreements in which theaters obtain permission from studios to exclusively show first-run movies in their theaters within certain zones, thereby blocking nearby rivals from playing the same movie at the same time.

Task force members already interviewed executives from at least three independent theaters in Florida, Texas and Kansas, people with knowledge of the inquiry said. This week they are expected to meet with executives with Cobb Theatres, a 20-theater chain based in Birmingham, Ala.

The investigation is being closely watched in the exhibition industry and in Hollywood because it could force changes in how major motion pictures are distributed and lead to costly fines for the big chains.

“This is the sort of thing that antitrust is particularly worried about,” said Mark Lemley, a professor at Stanford Law School and an expert on antitrust law. “Do we have a few dominant players entering into deals that make it harder for independent companies to establish themselves and gain ground?”

Industry insiders expect that the government’s investigation will last six months to a year.

Although violations of the Sherman Antitrust Act are subject to criminal penalties, the Justice Department would more likely file a civil lawsuit against theaters that could be resolved through a consent decree. Such a decree could include fines and possibly an injunction that would bar use of blanket clearances.

The government investigation could also open the door to more antitrust lawsuits, in which plaintiffs can receive treble damages.

AMC, Regal and Cinemark declined to comment on the latest government review of their business practices. However, theater and some studio executives have previously defended the use of clearances, contending they provide an efficient way for studios to allocate movies and protect competing theaters from diluting their grosses by having too many film runs in a given area.

AMC chief executive Gerry Lopez defended his company’s use of clearances.

“The fact of the matter is we are playing by rules that have been long established,” Lopez told the Los Angeles Times last month. “There are 600-plus exhibitors in this country. There are three or four exhibitors who are irritated by it. My guess is they have made some bad business calls.”

Regal Entertainment chief executive Amy Miles said in a recent conference call with analysts that “one has to remember that film clearances … existed for many years and we believe they have because they are beneficial to the studios, they are beneficial to exhibition and they are beneficial to consumers.”

The use of clearances developed after a landmark Supreme Court decision in 1948 that required studios to divest their ownership in movie theaters. Clearances were initially seen as a way to guarantee that small, independent theaters would gain access to first-run films, allowing the industry to grow rapidly.

But as the industry has increasingly consolidated — about half of all theater screens are owned by three companies — tensions between large chains and independent theater chains have heightened. Because they control so many screens, big chains have more leverage with studios in terms of where and when movies play across their circuits.

One legal dispute erupted last year when Cobb Theatres sued AMC in U.S. District Court in Georgia. Cobb, which operates 20 theaters, accused AMC of using its “monopoly power” to block some first-run movies from being screened at an upscale cinema and dining complex in Brookhaven, a suburb of Atlanta. The suit alleges that AMC convinced studios to give two nearby AMC theaters in the city’s Buckhead neighborhood preferential treatment.

AMC denied the allegations and moved to dismiss the case. A federal judge in March allowed it to proceed.

The chain has been especially aggressive in enforcing clearances in the three years since China’s Dalian Wanda Group acquired AMC for $2.6 billion.

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