Back during Hollywood’s golden age, everything was controlled by the movie studios. They made the movies, they owned and controlled the stars, and they ran most of the theaters. Inevitably, a business of this magnitude will run afoul of United States trade regulations, and the movie studios did just that with their strong-arming of independent theater operators and the use of block booking. In 1927, the Federal Trade Commission concluded that block booking, the studio practice of forcing independent theaters to buy movies in large multi-film blocks, and the studio’s use of violence and intimidation against independent theater owners was an illegal monopolistic practice.

The Famous Players Lasky Case

The government initiated an antitrust case against one studio known as Federal Trade Commission v. Famous Players Lasky Corporation, et al (a few years later, the Famous Players Lasky Corporation would change its name to Paramount Pictures). A cease and desist order against the practice of block booking was issued on July 9, 1927, along with a demand that the studio reform its theater purchasing practices. After stalling for almost a year, Famous Players-Lasky denied all of the charges and continued on with their illegal deeds. In response to this, the federal government filed an antitrust case against 10 major film studios, (all of them members of the Motion Picture Producers and Distributors of America, or MPPDA) charging them with monopolizing 98% of domestic film distribution.

The case was tried in Federal District Court in New York City, and the court agreed that the studios had violated federal law, but it refused to sanction the anti-block booking reforms proposed by the government. As a result, both parties appealed the case to the United States Supreme Court. Not only did the Supreme Court also find the studios to be in violation of the Sherman Antitrust Act, but it was also willing to declare that block booking was one of the main problems that needed to be fixed.

As the case was winding its way through the courts, the United States had begun falling deeper and deeper into the Great Depression. By the time the case had reached the sentencing phase, the studios were suffering deep fiscal losses due to the economic downturn. President Roosevelt, feeling that it wasn’t in the best interests of the economy or pubic morale to have such a high profile industry go down the tubes, gave the studios protection under the National Industrial Recovery Act. The government agreed to nullify the Court decision and call off the antitrust case in exchange for the studios’ promise that they would be more open to the unionization of their workers.

Not only did the NIRA provisions allow the studios to escape the antitrust verdict, but it also gave the MPPDA the power to draft it’s own written code, putting into writing monopolistic practices that had up until then been only unofficially sanctioned. The studios were protected until the NIRA was declared unconstitutional in 1935.

Make Bad Movies = You Get Sued Again

The studios had a terrible year in 1938 and people across the country were complaining about the low-quality films that were being churned out. The only big hit of 1938, and at that point the highest grossing film of all-time, was an animated feature called Snow White and the Seven Dwarfs, put out by a small independent outfit known as Walt Disney Pictures. Even the big studio heads were admitting that they were in a “slump” but claimed that many great films were just around the corner (they were right, 1939 saw the release of The Wizard of Oz, Gone With The Wind, Stagecoach, and Mr. Smith Goes to Washington, among many others.) The detractors of the studio system had always claimed that it stifled creativity, and the poor showing of 1938 led many Americans to agree with them. There was even an unsigned editorial in Variety that placed the blame squarely on block booking: "The wonder is not the scarcity of outstanding, smashing film hits, but that under the present system of industry operation there are any hits at all." The United States Justice Department, seeing an opening to take down the studios and look like the good guy, swooped in and announced their case United States v. Paramount Pictures, Inc., et al. on July 20, 1938.

The case finally went to trial in Federal District Court on June 3, 1940, but was suspended 17 days later, as the two sides agreed to sit down and negotiate. The negotiations ran through the summer, and a compromise was announced in October. The studios agreed to limit block booking to packages of five feature films each, and the block booking of short films was eliminated entirely. In exchange, the studios got to keep their theaters. But there was an out clause in this agreement: all of the studios named in the suit had to comply by June 1, 1942 or the agreement would be null. Universal and Columbia, two studios that didn’t own theaters and needed block booking to survive, refused to agree with the deal. United Artists, which neither owned theaters nor block booked, joined the other two in dissention.

The three dissenters refused to agree to the deal, and on October 8, 1945, everyone was back in court to continue the case. The government again argued that the studios acted together to keep a stranglehold on the first-run theater markets, while the studios claimed that they needed to continue their current business practices to financially survive. The case carried on for several months until June 1946 when the Federal Court found the studios guilty of conspiracy in restraint of trade, focusing specifically on block booking. The court interpreted that the copyright ownership of any film was a limited monopoly protected by the U.S. Constitution. Based on the precedent, the court declared that the combination of two separate copyrights threatened free trade and was considered illegal. But the Federal Court also allowed the studios to keep their theater chains, declaring that vertical integration was not illegal per se.

Both sides were unhappy with the decision, and just like the previous case 18 years earlier, both sides appealed to the Supreme Court. Arguments began on February 9, 1948 with Attorney General Tom C. Clark using statistics to back up his case: Of the 92 U.S. cities with a population of 100,000 or greater, the studio-owned theater chains held domination over all but four. Over one-third of the cities had no independent theaters at all. The studio legal team was headed by former Secretary of State James F. Byrnes and 1924 Democratic Presidential candidate John W. Davis, but they still stuck with same argument that the studios needed to do what they did in order to survive.

On May 4, 1948, twenty-one years after the first injunction against the studios, the Supreme Court ruled in favor of the government in a 7-1 decision written by Justice William O. Douglas.

Where a high quality film greatly desired is licensed only if an inferior one is taken, the latter borrows quality from the former and strengthens its monopoly by drawing on the other. The practice tends to equalize rather than differentiate the reward for the individual copyrights. Even where all the films included in the package are of equal quality, the requirements that all be taken if one is desired increases the market for some. Each stands not on its own footing but in whole or in part on the appeal which another film may have. As the District Court said, the result is to add to the monopoly of the copyright in violation of the principle of the patent cases involving tying clauses….Columbia Pictures makes an earnest argument that enforcement of the restriction as to block-booking will be very disadvantageous to it and will greatly impair its ability to operate profitably. But the policy of the anti-trust laws is not qualified or conditioned by the convenience of those whose conduct is regulated. (emphasis added, because I love the quote)

Block booking was abolished and the Court recommended that the best solution to the whole problem was to have the studios divest themselves of their theater chains. The case was remanded back to Federal Court to determine the final outcome of the theaters

Last Gasp of the Giants

The studios were still going to fight it out and keep their theaters, when suddenly RKO studio head (and later, certified nutjob) Howard Hughes announced that his studio would immediately comply with the Court recommendation. Hughes had much to gain by doing this, his studio was the weakest of the theater owners and if the government won their case he would be on equal ground with his competitors. A little while later, Paramount also decided to accede to the demands of the government, citing mounting legal fees and the possible negative financial impact of a court-forced liquidation. The real reason Paramount gave in was because of television. The studio owned several television stations, and had heavily invested in the DuMont Network. The Communications Act of 1934 stated that any company convicted of monopolistic practices could be refused a broadcast license. Paramount euthanized their theater ownership in order to protect their expansion into television.

The remaining three studios fought it out with the government in public, while also doing everything they could in private to come to some sort of last minute compromise that would allow them to keep control of their theatres. The government refused to deal, and July 25, 1949 the Federal Court ordered the studios to divest themselves of all theater ownership.

The loss of their stranglehold on distribution spelled doom for the power of the studios. They now had to compete fairly with the independent producers, and many of their formulaic offerings simply paled in comparison. The explosion in popularity of the new medium of television also took eyes away from the nation’s movie screens. Never again would the studios achieve the dominance over their industry that they once held.

Paramount Famous Lasky Corporation v. United States 282 U.S. 30 -
United States v. Paramount Pictures Inc. 334 U.S. 131
Hollywood in slump 1938: Variety, December 14, 1938
Aberdeen, J.A. Hollywood Renegades. Palos Verdes: Cobblestone, 2000

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