Appendix — Associated Film Distribution Corp. v. Casey
Supreme Court brief1987
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86 - 18510
No.
IN THE
SUPREME COURT OF THE UNITE
October Term, 1986
Supreme Court, U.S.
FILED
JAN 26 1987
YOSEPH F. SPANIOL, JR.
CLERK
ASSOCIATED FILM DISTRIBUTION CORPORATION,
AVCO EMBASSY PICTURES CORP.,
BUENA VISTA DISTRIBUTION Co.
, INC.,
COLUMBIA PICTURES INDUSTRIES, INC.,
FILMWAYS PICTURES, INC.,
METRO-GOLDWYN-MAYER, INC.,
PARAMOUNT PICTURES CORPORATION,
TWENTIETH CENTURY FOX FILM CORPORATION,
UNITED ARTISTS CORPORATION,
UNIVERSAL PICTURES DIVISION OF UNI
VERSAL CITY
STUDIOS, INC., UNIVERSAL FILM EXCHANGES,
WARNER BROS. INC., and
WARNER BROS. DISTRIBUTING CORPORATION,
VU.
BUDCO THEATRES, INC.,
and
APPENDIX TO
BARBARA KACIR CARL A. SOLANO
Of Counsel (215) 751-2162
*Counsel of Record
Petitioners
THE HONORABLE DICK THORNBURGH and
THE HONORABLE HARVEY BARTLE, III,
BUDCO QUALITY THEATRES, INC.,
FOX THEATRES MANAGEMENT CORP.,
Respondents
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF
APPEALS FOR THE THIRD CIRCUIT
ERWIN N. GRISWOLD JAMES D. CRAWFORD*
Jones, Day, Reavis & Pogue Schnader, Harrison, Segal & Lewis
655 Fifteenth Street, N.W. Suite 3600, 1600 Market Street
Washington, D.C. 20005 Philadelphia, PA 19103
Attorneys for Petitioners.
TABLE OF CONTENTS
Page
Court of Appeals Opinion of September 12,
AURIS, Sater apr say AE Ck et ean a a a Al
District Court Opinion of August 24, 1981...... A18
Court of Appeals Opinion of July 20, 1982...... A70
District Court Findings and Conclusions,
OE es cre oe eee A89
District Court Order Entering Judgment........ A142
Court of Appeals Order Denying Petition for
ge eae hs gue M5 6 vn er A143
Court of Appeals Judgment.................-.. A145
Constitutional and Statutory Provisions......... A147
A2
On Appeal from the United States
District Court for the
Eastern District of Pennsylvania
(D.C. Civil No. 80-1179)
Argued May 1, 1986
Before: SLOVITER and STAPLETON,
Circuit Judges, and
MENCER, District Judge*
(Opinion filed September 12, 1986)
OPINION OF THE COURT
SLOVITER, Circuit Judge.
This is the second time that this challenge to the
Pennsylvania Feature Motion Picture Fair Business
Practice Law, 73 P.S. §§ 203-1 to 203-11 (the Act), has
been before this court.
The Act has five substantive provisions. First, it pro-
hibits distributors from licensing films through “blind
bidding”, by requiring the distributors to hold a trade
screening of any film in Pennsylvania before entering
into a licensing agreement with an exhibitor. Id. § 203-4.
Second, the Act provides that a film licensing agree-
ment that bases payment to the distributor on atten-
dance or box office receipts may not also require a
minimum payment or guarantee. Id. § 203-5. The over-
whelming majority of licensing agreements are on such
a percentage basis.
Third, the Act prohibits a film licensing agreement
from requiring the exhibitor to advance any funds prior
to the exhibition of the film. Id. § 203-6.
*Hon. Glenn E. Mencer, United States District Court for the
Western District of Pennsylvania, sitting by designation.
cme lle ner a
A3
Next, the Act prohibits distributors from granting
exclusive licenses for any film for more than 42 days.
Id. § 203-7. As interpreted by the district court, this pro-
vision does not preclude negotiation of additional exclu-
sive licenses thereafter.
Finally, the Act regulates the bidding process be-
tween exhibitors and distributors by giving all exhibitors
who have submitted a bid a right to be present when bids
are opened; by giving exhibitors 60 days to examine all
bids if they have all been rejected; by requiring distrib-
utors to notify all bidding exhibitors of the terms of the
successful bids; and by requiring distributors who have
rejected all bids to inform all bidders and hold new bid-
ding. Id. § 203-8(a)-(e).
Earlier, a panel of this court reversed the district
court’s order granting summary judgment for plaintiffs.
We rejected the claim of plaintiffs, who are out-of-state
film distributors and producers who distribute most of
the films released in the United States (the distributors),
that the Act violated plaintiffs’ First Amendment free-
doms or was preempted by the Copyright Act on its face.
See Associated Film Distribution Corp. v. Thornburgh,
683 F.2d 808 (3d Cir. 1982). However, because we held
that on summary judgment, the trial court “could not
evaluate the actual impact of the Act (if any) on First
Amendment values; could not assess the nature and
weight of the state concerns which led to the Act’s en-
actment; and could not balance the state concerns
against the threat (if any) to the First Amendment,” id.
at 813-14 (footnotes omitted), we remanded the case to
the district court. We directed it to decide, with respect
to the First Amendment claim, “[w]hether the Act in fact
creates any material risk of delay in exhibition or in fact
threatens to inhibit the production of motion pictures by
changing the financial structure of the industry.” Id. at
812 (emphasis in original).
A4
With respect to the claim of federal preemption by
the Copyright Act, we held that, “[w]hether the prohibi-
tions contained in the Pennsylvania Act in fact ‘stand as
an obstacle to the accomplishment and execution of the
full purposes and objectives of Congress’ was in
dispute.” Jd. at 816 (emphasis in original). We ruled that
the trial court should decide “whether and to what extent
the Pennsylvania Act interferes with attaining the ‘pur-
poses and objectives of Congress.’ ” Id.
On remand, the district court conducted a six-week
bench trial to determine the effect of the provisions of the
Act that the distributors challenged. The district court
then issued an extensive opinion in which it upheld the
Act against each of the distributors’ challenges. 614
F.Supp. 1100 (E.D. Pa. 1985).
The distributors argue that the facts as found by the
district court support their argument, renewed in this
appeal, that the Pennsylvania Act unconstitutionally
burdens First Amendment rights and is preempted by
the Copyright Act. Much of their argument is foreclosed
by our earlier decision in this case, although we must
consider the effect on the First Amendment analysis of
the intervening decision in Minneapolis Star & Tribune
Co. v. Minnesota Commissioner of Revenue, 460 U.S.
575 (1983). In addition, we must consider the
distributors’ argument that the Act violates the Com-
merce Clause, which was not at issue in the prior panel
decision. We turn to that argument first.
I.
The Commerce Clause
The distributors argued to the district court that the
Act violated the Commerce Clause both because it dis-
criminated against interstate commerce in favor of in-
state commerce and because it unduly burdened
Se aed
AS
interstate commerce. See 614 F. Supp. at 1114. The dis-
trict court rejected both of these contentions. On appeal,
the distributors appear to be focusing primarily on the
latter argument, claiming tht the Act unconstitutionally
burdens interstate commerce because it seeks to pro-
mote an illegitimate objective, and because the means
chosen to remedy the problem are not those with the
least impact on interstate commerce.!
All parties agree that the applicable test is set forth in
the Supreme Court’s decision in Pike v. Bruce Church
Inc., 397 U.S. 137 (1970):
Where the statute regulates evenhandedly to effec-
tuate a legitimate local public interest, and its effects
on interstate commerce are only incidental, it will be
upheld unless the burden imposed on such com-
merce is clearly excessive in relation to the putative
local benefits. . . . If a legitimate local purpose is
found, then the question becomes one of degree.
And the extent of the burden that will be tolerated
will of course depend on the nature of the local in-
terest involved, and on whether it could be promoted
as well with a lesser impact on interstate activities.
Id. at 142 (citation omitted). The distributors claim that
the Act’s purpose is to redress a bargaining imbalance
between the largely out-of-state distributors and the in-
state exhibitors. Such a purpose, the distributors argue,
is impermissible under the Commerce Clause.
1. The distributors’ brief stresses that almost all of the distrib-
utors are located outside of Pennsylvania and that the exhibitors
who are benefited are in-state. The district court found that the Act
was facially neutral. We agree that under the decision in Exxon
Corp. v. Governor of Maryland, 437 U.S. 117, 125-26 (1978), there
is no impermissible discrimination between in-state and out-of-state
commerce. Exxon makes clear that the distinction made by the stat-
ute between distributors and exhibitors is not the type of discrimi-
nation that the Commerce Clause forbids.
A6
The distributors do not point to any evidence to sup-
port their assertion that the Pennsylvania legislature
intended to equalize the bargaining positions of distrib-
utors and exhibitors of films when it enacted the Act. In
fact, the district court found that each provision of the
Act served other, concededly legitimate, state interests.
For example, the court found that the trade screening
requirement reduced the risk of deceptive trade prac-
tices and “encourage[d] exhibitors to license films based
on the merits of the product,” thus providing the public
the films it wants to see. 614 F. Supp. at 1116. It found
that the provision of the Act prohibiting guarantees pro-
tected small theaters from going out of business and kept
a greater number of films before the public. Id. The court
found that the ban on exclusive runs of longer than 42
days promoted “the faster dissemination of new films in
rural and suburban areas.” Jd. at 1117. Finally, the reg-
ulations of bidding promoted “honest bidding practices.”
Id. The distributors have not argued that any of these
purposes are impermissible aims of legislation.
Even if the legislature had intended the Act to re-
dress an inequity in bargaining power between exhibi-
tors and distributors, the distributors have not shown
that it would be unconstitutional under the Commerce
Clause. The distributors rely on the Sixth Circuit’s de-
cision in Allied Artists Picture Corp. v. Rhodes, 679 F.2d
656 (6th Cir. 1982), in which the court considered an
Ohio statute similar to the Act. The court, in addressing
Ohio’s ban on advances and guarantees, held that “a
state’s interest in righting a bargaining imbalance,
standing alone, is not sufficient under the commerce
clause to permit direct interference with pricing where it
burdens interstate commerce.” Id. at 665 (emphasis
added). The court remanded the case to the district court
to determine whether other purposes supported the Ohio
statute’s contract restrictions.
ee ie eet
A7
Here, it is clear that other state interests support
each provision of the Act. For example, the “Legislative
Findings and Purposes”, which precede the Act, identify
ten interests the legislature sought to further, including
insuring “unabridged access for the public to artistic ex-
pression and opinion in feature motion pictures at rea-
sonable prices and at many different locations;”
preventing “unfair and deceptive acts or practices and
unreasonable restraints of trade in the business of dis-
tribution and exhibition of feature motion pictures;” and
preventing “theatres from unnecessarily going out of
business, thereby resulting in reducing the number of
small independent businesses and unemployment with
loss of tax revenues.” 73 P.S. § 203-2(1), (6) & (9). Thus,
even under the analysis urged on us by the distributors,
the Act would not violate the Commerce Clause.
The second prong of the distributors’ argument is
that the purposes of the Act could be served by means
with a lesser impact on interstate commerce. First, we
reiterate that the Pike v. Bruce Church test is whether
the “burden imposed . . . is clearly excessive in relation
to the putative local benefits.” 397 U.S. at 142. The avail-
ability of means of achieving the state interest that have
a lesser impact on interstate commerce is only one con-
sideration in the balancing process. The primary ques-
tion is whether the legislation imposes undue burdens
on interstate commerce.
Contrary to the distributors’ assertions, the district
court found that the burdens on interstate commerce
were minimal. It held that the trade screening require-
ment had no effect on the release date of films and that
costs incurred by the distributors in creating a trade
screening print were insignificant. 614 F. Supp. at 1108.
The prohibition on advances and guarantees was found
not to have a significant impact on film rental or on the
credit relationship between distributors and exhibitors.
Id. at 1110-11. The court found that the limitation on the
A8&
length of runs caused no delay in release dates and no
effect on rental terms. Id. at 1111-12. Finally, the district
court concluded that the bidding regulations had no ef-
fect on the terms accepted by the distributors to license
a film. Id. at 1112.
In light of the state interests that the district court
found advanced by the Act, these burdens are not
“clearly excessive.” Indeed, the burdens identified in the
district court’s unchallenged findings are practically
nonexistent. Thus, the distributors have not established
either that Pennsylvania’s purposes in enacting the Act
were illegitimate or that the Act’s burdens outweigh its
benefits. We hold, therefore, that the Act does not violate
the Commerce Clause.
Il.
The First Amendment
In our prior decision in this case, we held that the
Act was a content neutral “general regulatory statute.”
Associated Film Distribution Corp. v. Thornburgh, 683
F.2d at 812-13. As such, we held that its constitutionality
under the First Amendment was governed by the test
articulated in United States v. O’Brien, 391 U.S. 367,
376 (1968), for generally applicable regulations “when
‘speech’ and ‘nonspeech’ elements are combined in the
same course of conduct.” Under O’Brien,
[A] government regulation is sufficiently justified if
it is within the constitutional power of the Govern-
ment; if it furthers an important or substantial gov-
ernmental interest; if the governmental interest is
unrelated to the suppression of free expression; and
if the incidental restriction on alleged First Amend-
ment freedoms is no greater than is essential to the
furtherance of that interest.
391 U.S. at 377.
A9
We remanded the case so that the district court
could balance the burden the Act placed on First Amend-
ment values and “the nature and weight of the state con-
cerns which led to the Act’s enactment.” 683 F.2d at
813-14. On remand, the district court found that the Act
“had little or no impact on First Amendment values,” and
that the state interests at stake were “substantial”. 614 F.
Supp. at 1118. The court concluded that the Act did not
unconstitutionally burden First Amendment values,
and, in fact, that it furthered interests protected by the
First Amendment by requiring wider and more rapid dis-
tribution of films. Id. Thus, the court found the Act con-
stitutional under O’Brien.
On appeal, the distributors do not argue that the Act
is invalid under the O’Brien test. Rather, their argument
is that the Act discriminates against an industry that en-
gages in First Amendment activities, and, therefore, that
it must meet the considerably more rigorous test set forth
by the Supreme Court in Minneapolis Siar & Tribune
Co. v. Minnesota Commissioner of Revenue, 460 U.S.
575 (1983).
In Minneapolis Star, the Court held that a state tax
on the ink and paper consumed by periodicals, including
newspapers, violated the First Amendment. The Court
held that the tax discriminated against the press, and
that such discriminatory taxation could not stand “un-
less the burden [on rights protected by the First Amend-
ment] is necessary to achieve an_ overriding
governmental interest.” Id. at 582. According to the
Court, “differential treatment [of the press], unless jus-
tified by some special characteristic of the press, sug-
gests that the goal of the regulation is not unrelated to
suppression of expression, and such a goal is presump-
tively unconstitutional.” Id. at 585. As an alternative
ground for striking down the statute, the Court held that
Al10
its exemption of the first $100,000 for ink and paper used
unconstitutionally singled out large newspapers. Id. at
591-92.
The distributors contend that the Pennsylvania Act
singles out the motion picture industry, whose preducts
are accorded First Amendment protection, for the same
type of discriminatory treatment that the Court found
unconstitutional in Minneapolis Star. According to the
distributors, this discriminatory regulation is not justi-
fied by a “compelling” or “overriding” interest and is not
the least restrictive alternative to achieve the state inter-
ests asserted.
An essential factor in the Minneapolis Star analysis
is the inference of a goal to suppress expression. In our
prior opinion in this case, we found that the Pennsylva-
nia Act was not infected by such a goal. We stated that
the Act was “ ‘clearly content-neutral’ ”, “ ‘trade practice
legislation’ ”, and that it was directed at the motion pic-
ture industry “ ‘not because that industry communicates
ideas, but rather because. . . the market structure of that
industry is unique.’ ” 683 F.2d at 812 (quoting Allied
Artists Pictures Corp. v. Rhodes, 496 F. Supp. 408, 432
(S.D. Ohio 1980), aff’d in part, remanded in part, 679
F.2d 656 (6th Cir. 1982)). This conclusion that the Act
was prompted by trade practices associated with the dis-
tribution of motion pictures forecloses the argument that
the Act was designed to single out the motion picture
industry in order to suppress its expressive conduct. It is
only the latter type of differential treatment that triggers
the “compelling interest” analysis of Minneapolis Star.
Moreover, even if we were free to reconsider this
question, appellants have not persuaded us that the Act
is discriminatory in the same sense as was the differen-
tial taxation of the press that was ruled invalid in Min-
neapolis Star. The regulation of trade practices between
distributors and exhibitors does not directly impinge
SR SORIA DI Bt iS NN Stel 5 LR By Aa Pll
All
upon the expressive aspect of moviemaking activities, as
did the state taxation of ink and paper used by the press
in Minneapolis Star. Distribution of protected materials
also falls within the ambit of the First Amendment but
nothing in the language or structure of the Act suggests
that the Pennsylvania legislature intended to suppress or
regulate speech through regulation of certain trade prac-
tices.
The rationale of Minneapolis Star may require its
extension beyond taxation to regulations that impose dif-
ferential penalties directly on some First Amendment ac-
tivity, see, e.g., J-R Distributors, Inc. v. Eikenberry, 725
F.2d 482, 495 (9th Cir. 1984), rev’d. on otner grounds
sub nom. Brackett v. Spokane Arcades, Inc., 105 S. Ct.
2794 (1985). Certainly, some regulation may in effect
control the activity regulated as effectively as would tax-
ation. However, in this case the district court found, after
a full hearing, that the Act has had little, if any, impact
on the First Amendment activities of the distributors.
614 F. Supp. at 1118. These findings are not clearly er-
roneous. They confirm our prior opinion that the Act in
reality is not a discriminatory regulation of a First
Amendment activity, but is instead, a content-neutral,
regulatory statute that may have an incidental effect on
some of the distributors’ First Amendment activities.
Even after Minneapolis Star, such regulations are
subject to the O’Brien test. See Wayte v. United States,
105 S. Ct. 1524, 1533 (1985). See also Minneapolis Star,
460 U.S. at 585 n.7 (referring to O’Brien approvingly as
consistent with its analysis).
The district court held that the decision in Minne-
apolis Star would not, in any event, require striking this
statute because it found that “the differential treatment
of the movie industry in Pennsylvania’s laws is justified
by the special problems of that industry.” 614 F. Supp. at
Al2
1119 n.29. Minneapolis Star suggested that even differ-
ential taxation of the press might be permissible if “the
State asserts a counterbalancing interest of compelling
importance that it cannot achieve without differential
taxation.” 460 U.S. at 585. In view of our decision that
the regulation of trade practices singular to the distribu-
tion of motion pictures is not the type of differential treat-
ment that requires application of the Minneapolis Star
test, we need not reach the issue whether the counter-
balancing state interest is of “compelling importance.”
We thus affirm the decision of the district court that the
Act does not violate the First Amendment.
III.
The Copyright Act
The distributors also challenge the Act on the
ground that it limits rights specifically granted the copy-
right holder by the Copyright Act of 1976. 17 U.S.C.
§§101-914, and interferes with the Congressional pur-
pose underlying that statute. The distributors argue,
therefore, that the Act is preempted under the Suprem-
acy Clause. See U.S. Const. art. VI, cl. 2.7
In particular, the distributors argue that the Act ob-
structs the licensing of copyrighted films by requiring
trade screening, which imposes a direct control on the
timing of licensing by preconditioning it on the comple-
tion of the films; by prohibiting guarantees and ad-
vances, thereby impermissibly restricting the licensor’s
2. They do not suggest that the Act is preempted under the
specific provision of the Copyright Act preempting state laws that
purport to grant or destroy any rights “that are equivalent to any of
the exclusive rights within the general scope of copyright.” 17
U.S.C. § 301(a).
Pipe ee i ermine! hy ot
Al3
control and freedom to license; and by prohibiting ex-
clusive first runs of motion pictures for more than 42
days, thereby precluding copyright holders from licens-
ing exclusively for a term of their choice.
This argument by distributors is essentially a facial
challenge to the Act on the ground of preemption. Even
were the argument persuasive, this panel is not free to
examine the issue because it has already been decided
adversely to the distributors by the prior panel decision.
In that opinion, we held that the first district court de-
cision granting summary judgment for the distributors
erroneously ruled that the provisions of the Pennsylvania
Act challenged by the distributors here were preempted
by the Copyright Act. We stated:
The Act on its face contains no threat to the copy-
rights themselves: the Act does not take away from
plaintiffs and give to another the right to reproduce
the film, to prepare derivative works based on the
film, to distribute the film, or to license its perfor-
mance.
Associated Film Distribution Corp. v. Thornburgh, 683
F.2d at 816. In addition, we quoted the Allied Artists
district court opinion for the proposition that “(t]he au-
thority of the states to regulate market practices dealing
with copyrighted subject matter is well-established.” Id.
(quoting Allied Artists, 496 F. Supp. at 447).
Thus, the earlier decision of this court conclusively
established that the Pennsylvania Act was not facially
preempted by the Copyright Act. At the same time, we
recognized that in actual operation the Act might pre-
vent or interfere with the goals of the Copyright Act and
remanded for a factual determination by the district
court of the Act’s actual impact on federally created
rights. Id. at 816-17.
Al4
On remand, the district court found that the various
provisions of the Act have “had no effect on the incentive
to make and distribute motion pictures;” do “not dilute
the distributors’ ownership rights in their films;” set “no
limit on the financial terms at which films may be
licensed;” do “not restrict the distributors’ right to li-
cense its films;” and have “not impaired distributors’
ability to release their films on the dates they desire.” 614
F.Supp. at 1122-23. Thus, the district court found that
“{pllaintiffs have not fulfilled their burden of demon-
strating that the Pennsylvania Feature Motion Picture
Fair Business Practices Law has interfered with the Fed-
eral Copyright Act.” Id. at 1122.
The distributors do not contend that the findings of
the district court are clearly erroneous. Instead, they
make two arguments. The first is that when we re-
manded for a determination as to whether the prohibi-
tions contained in the Act in fact stand as an obstacle to
the accomplishment and execution of the purposes and
objectives of Congress, we did not discuss the direct con-
flicts between the rights granted a copyright holder un-
der 17 U.S.C. §106 and the restrictions imposed by the
Act. They argue that because these restrictions are im-
posed not by legislation of general application but by a
statute aimed solely at the copyright-protected motion
picture distributors, the Act must fall on that basis alone.
Brief for Appellants at page 32. We view this argument
as nothing more than a reassertion by the distributors of
their facial challenge which, as we have held, is not prop-
erly before us because of the prior panel decision.
The distributors’ second argument is that the district
court found that the Act created a sufficient burden on
the rights protected by the Copyright Act to require a
finding of preemption. The distributors point to the dis-
trict court’s findings that the prohibition on guarantees
eliminated a source of income for the distributors. 614 F.
Supp. at 1110; that the prohibition on advances deprives
LSAT AM URAL LOOT MIR LEER MANNER ae BIA Si ah Nae spe Die 2
Al5
the distributors of a means of protecting against credit
risks, id.; that the limitation on the length of exclusive
runs restricts the distributors’ ability to use certain mar-
keting strategies, id. at 1111; and that the trade screen-
ing requirement imposes some added costs on the
distributors. Id. at 1108.
Even if we disregard the district court’s conclusion
that these burdens were insignificant, these findings
show, at most, that the Act may affect, to some extent,
the copyright owner’s right to dispose of the film on the
optimum terms. However, in our prior opinion we re-
jected the distributors’ argument that a state trade reg-
ulation that affects the copyright owner’s monetary
return is thereby invalidated by the Copyright Act. In
that opinion we quoted approvingly from the district
court and court of appeals opinions in Allied Artists Pic-
tures Corp. v. Rhodes, 496 F. Supp. at 446-47 and 679
F.2d at 662-63, including the Sixth Circuit’s statement
that there is no “authority for the argument that state
trade regulation which affects distribution procedures
and, indirectly, monetary returns from copyrighted prop-
erty is invalidated implicitly or explicitly by the terms of
the Copyright Act.” 679 F.2d at 662-63 (approvingly
quoted in 683 F.2d at 816). Since the burdens to which
the distributors point relate only to the maximization of
income, we find that their argument in this respect is
also foreclosed by our earlier opinion.
We believe, however, that the distributors’ conten-
tion that the limitation on the length of exclusive runs to
42 days interferes with the copyright owner’s right to li-
cense exclusively for the life of the copyright merits par-
ticular comment. The district court found this
interference to be “minimal” because the court inter-
preted the 42-day provision of the Act as permitting a
distributor to enter into a series of exclusive contracts
with the same exhibitor as long as no contract lasted
longer than 42 days. 614 F.Supp. at 1123-24. Although
Al6
such an interpretation is advantageous to the
distributors’ desire to extend certain exclusive runs be-
yond 42 days, the distributors dispute the district court’s
interpretation of the Act.
The 42-day clause provides as follows:
No license agreement shall be entered into be-
tween distributor and exhibitor to grant an exclusive
first run or an exclusive multiple first run for more
than 42 days without provision to expand the run to
second run or subsequent run theatres within the
geographical area and license agreements and prints
of said feature motion picture shall be made available
by the distributor to those subsequent run theatres
that would normally be served on subsequent run
availability.
73 P.S. § 203-7.
We agree with the district court that “|t]his part of
the statute was inartfully drafted.” 614 F. Supp. at 1111
(footnote omitted). Nonetheless, we cannot construe this
provision as did the district court. Its plain language re-
quires a distributor to make provision “to expand the run
to second run or subsequent run theatres within the geo-
graphical area” and to make available prints of its feature
films “to... subsequent run theatres. . .” As the brief of
exhibitor appellee Fox Theatres concedes, the Act re-
quires that the exclusive first run must be expanded af-
ter 42 days “so that sub-run exhibitors will be able to
offer to license the film and bring the picture to their
communities sooner than they would have otherwise be-
fore the Act.” Brief of Fox Theatres at page 12. We con-
clude that the district court’s interpretation that “|t]he
statute also does not prevent a distributor from entering
into a series of exclusive licenses with one exhibitor as
long as each license does not exceed 42 days.” Associ-
ated Film v. Thornburgh, 614 F.Supp. at 1124, is erro-
neous as a matter of law.
Al7
There may be merit to the distributors’ argument
that the 42-day provision, when construed as limiting the
distributors’ right to license an exclusive run to 42 days,
is preempted by the Copyright Act. However, such pre-
emption would be apparent on the face of the statute and
cannot be reconciled with the court’s earlier decision
that the Act is not facially invalid under the Copyright
Act. As we have stated above, we are bound to that po-
sition.®
IV.
Conclusion
For the reasons set forth above, we will affirm the
judgment of the district court.
3. The writer of this opinion believes that the 42-day clause is
inconsistent with the Copyright Act. The Copyright Act gives the
owner of a copyright the exclusive right to distribute copies of the
copyrighted work by rental, lease, or lending. 17 U.S.C. § 106(3);
see also M. Nimmer, Nimmer on Copyright § 8.11 at 8-115 (1985).
That right encompasses the grant of an exclusive license for a period
as long as the copyright owner desires within the term of the copy-
right. Nonetheless, she feels compelled to join her colleages in af-
firming the district court decision because Internal Operating
Procedure 8C of this court binds subsequent panels to reported
panel opinions. Court in banc consideration is required to overrule
a published opinion.
Al8
DISTRICT COURT OPINION OF AUGUST 24, 1981
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF
PENNSYLVANIA
Civil Action No. 80-1179
ASSOCIATED FILM DISTRIBUTION
CORPORATION, et al.
V.
The Honorable Dick THORNBURGH,
et al.
Aug. 24, 1981.
MEMORANDUM AND ORDER
TROUTMAN, District Judge.
The Pennsylvania Feature Motion Picture Fair Busi-
ness Practices Law, Act No. 1980-14, 73 P.S. § 203-1 et
seq. (“the Act”), was approved by Governor Thornburgh
on February 29, 1980, and became effective on April 29,
1980. The Act comprehensively regulates the licensing
of motion pictures for exhibition within the Common-
wealth of Pennsylvania.
A number of other states have adopted legislation
regulating certain aspects of motion picture licensing. !
Most of the statutes that have been enacted in states
other than Pennsylvania go no further than prohibiting
the licensing of motion pictures without an advance
1. See Affidavit of Richard A. Fox, President, Fox Theatres
Management Corporation (“Fox Affidavit”) { 16; Exhibit “B” to An-
swer of Budco Quality Theatres, Inc.
Al9
trade screening (thereby prohibiting a practice referred
to in the Act as “blind bidding’’).2 A few, such as Sections
1333.05 through 1333.07 of the Revised Code of Ohio,
effective October 23, 1978 (“the Ohio statute”), regulate
other licensing practices such as “guarantees,”
“advances,” and bidding procedures.? The Pennsylvania
Act contains additional provisions, such as Section 7, 73
P.S. § 203-7, regulating “exclusive first runs,”* and is
more far-reaching than even the Ohio statute.
On March 24, 1980, plaintiffs, who include many of
the major distributors and producers of motion pictures,
initiated the present action. They ask that the Act be de-
clared unconstitutional and that its enforcement be per-
manently enjoined. In their complaint, plaintiffs assert
that the Act violates the Supremacy Clause, Article VI,
cl. 2, the Commerce Clause, Article I, § 8, cl. 3, and the
First, Fifth and Fourteenth Amendments to the United
States Constitution, as well as Article I, § 7 and Article
III, § 32 of the Constitution of the Commonwealth of
Pennsylvania. Named as defendants are the Governor
and Attorney General of the Commonwealth of Pennsy]l-
vania (who, by virtue of their offices, are charged with
the execution and the enforcement of the laws of the
Commonwealth), and two “exhibitors” as defined in § 3
2. See Allied Artists Pictures Corp. v. Rhodes, 496 F.Supp. 408,
437 (S.D.Ohio 1980), where District Judge Duncan observed that
the other state regulatory statutes enacted as of the time of trial
“ ‘hasically prohibit blind bidding.’ ” In Allied Artists, Judge Duncan
rejected an attack brought by many of the same plaintiffs upon the
constitutionality of the Ohio statute. That decision is presently on
appeal to the United States Court of Appeals for the Sixth Circuit
(No. 80-3566).
3. See Fox Affidavit, § 16.
4. Section 3 of the Pennsylvania Act defines a “run” as “[t]he
continuous exhibition of a feature motion picture for a specified pe-
riod of time.” A “first run” is the first exhibition of a feature motion
picture in the designated area and an “exclusive run” is “any run
limited to a single theatre in a defined geographical area.”
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of the Act, 73 P.S. § 203-3, Budco Quality Theatres, Inc.
(“Budco”) and Fox Theatres Management Corporation
(“Fox’”’).5 The exhibitor defendants operate two of the
major theatre circuits or chains in this region.® All de-
fendants filed answers to the complaint.’
5. The powers of the Governor and Attorney General are more
fully set forth in Article 4, § 2 of the Constitution of the Common-
wealth and 71 P.S. § 61 et seq. and 71 P.S. § 732-204.
Section 3 of the Act, 73 P.S. § 203-3, defines an “exhibitor” as
“{a]ny person engaged in the business of operating one or more the-
atres in this Commonwealth. . .” and a “distributor” as “[a]ny per-
son engaged in the business of renting, selling or licensing feature
motion pictures to exhibitors.”
6. Budco operates 55 theatres with 99 screens in Eastern
Pennsylvania, Maryland, Delaware, and Southern New Jersey, and
Fox operates 28 theatres with 48 screens in Pennsylvania, Mary-
land, and Delaware. Fox Affidavit, § 1; Affidavit of Claude J.
Schlanger (“Schlanger Affidavit”), § 1.
7. With its answer, defendant Budco counterclaimed against
plaintiffs, alleging violations of § 1 of the Sherman Act. By agree-
ment of the parties, plaintiffs have not answered the counterclaim.
Plaintiffs filed a motion for severance of the counterclaim or, in the
alternative, for a separate trial and a stay of all proceedings in con-
nection with it. Together with its answer, Budco also demanded a
trial of the entire case by jury, both the declaratory action and coun-
terclaim, and plaintiffs have moved to strike that demand.
The exhibitor defendants have served all plaintiffs with inter-
rogatories and requests for production of documents relating both to
the case-in-chief and to the counterclaim. The discovery sought by
Fox has been stayed by court-approved stipulation. A motion for pro-
tective order with regard to Budco’s discovery requests is presently
before this Court, as is an appeal from Magistrate Powers’ order of
September 22, 1980 denying plaintiffs’ earlier motion for a protec-
tive order limiting discovery to the issues raised by this motion.
aiteor
A21
On July 15, 1980 plaintiffs filed the present motion
for summary judgment, accompanied by affidavits, ask-
ing that the Act be declared unconstitutional on its face.®
Defendants’ responsive memoranda are also supported
by affidavits.? Oral argument was heard on March 27,
1981, and the motion is ripe for decision.
Stripped to the essentials, the issues before this
Court are, first, whether the Act’s regulation of the li-
censing process through which copyrighted motion pic-
tures are made available to the theatre-going public
violates the First Amendment and the Supremacy
Clause; and, second, whether any material fact issues
exist that would bar that determination on motion for
summary judgment.!° Careful review of the pleadings,
the affidavits, and the extensive and thorough briefs sub-
mitted by the parties demonstrates that plaintiffs’ First
Amendment and Supremacy Clause claims may be de-
cided on this motion and that the Act conflicts on its face
with rights protected by those constitutional provisions.
8. Plaintiffs’ motion for summary judgement was accompanied
by the affidavits of Leo Greenfield, Vice President for Marketing and
Distribution, Associated Film Distribution Corporation (“Greenfield
Affidavit”) and Norman Levy, President of 20th Century Fox En-
tertainment, a division of 20th Century Fox Film Corporation (“Levy
Affidavit”).
9. Defendants submitted the Fox and Schlanger affidavits.
10. Decision of the First Amendment issues disposes of this
motion. Defendants have basically and substantially conceded that
plaintiffs’ Supremacy Clause and copyright claim may be decided as
a matter of law. Because of the importance of the question whether
the Act’s regulation of licensing motion pictures for exhibition im-
permissibly interferes with federal copyright regulation, it is also
discussed in this opinion. Plaintiffs’ claims under the Due Process
clause and the Pennsylvania Constitution need not be decided be-
cause the foregoing is dispositive. As to the Commerce Clause is-
sues, additional facts are necessary for their determination under
the “balancing” test of Pike v. Bruce Church, Inc., 397 U.S. 137,
142, 90 S.Ct. 844, 847, 25 L.Ed.2d 174 (1970).
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3
THE PROVISIONS OF THE ACT.
The Act directly regulates the licensing process
through which copyrighted motion pictures, and the
ideas they express, are made available to theatre audi-
ences, prohibits certain terms in license agreements be-
tween distributors of motion pictures and exhibitors, and
requires that certain procedures be followed.!! There ex-
ist both obvious similarities to and differences from the
provisions of the Ohio statute.
Section 2 of the Act sets forth the sole legislative
finding, namely, that “the licensing and distribution of
feature motion pictures to theatres in this Common-
wealth, including the rights and obligations of distribu-
tors and exhibitors, vitally affects the general economy as
11. Motion pictures are copyrighted forms of creative expres-
sion. They are marketed by means of copyright licenses extended by
distributors of films, located in states other than Pennsylvania, to
local exhibitors. See Levy Affidavit, 4 2-3, 6; Greenfield Affidavit,
"" 2, 4-5. As a result of the landmark Supreme Court decision in
United States v. Paramount Pictures, Inc., 334 U.S. 131, 68 S.Ct.
915, 92 L.Ed. 1260 (1948), and the subsequent divestiture order in
United States v. Paramount Pictures, Inc., 85 F.Supp. 881
(S.D.N.Y.1949), aff'd sub nom. Loew’s Inc. v. United States, 339
U.S. 974, 70 S.Ct. 1032, 94 L.Ed. 1380 (1950), motion picture dis-
tributors own and operate no theatres at which motion pictures are
exhibited, in Pennsylvania or elsewhere. See Budco Answer, § 4.
They achieve access to their theatre audiences through theatres op-
erated by such exhibitors.
Both before the Pennsyivania Act was passed and at the present
time, distributors offer, and exhibitors bid or negotiate for, licenses
to exhibit motion pictures within regional or metropolitan marketing
areas. Levy and Greenfield Affidavits, {€ 9, 23. Revenues from the
licensing of copyrighted motion pictures constitute a significant por-
tion of the return received by the distributors. The terms of a copy-
right license are the means by which the distributor and exhibitor
apportion the risks and returns from exhibition of motion pictures.
See Levy and Greenfield Affidavits, §§ 5, 7, 8, 27; Fox Affidavit,
149 3,7.
—— ow
er fa ee ee
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well as the access of the public to works of artistic ex-
pression and opinion. . . .” and asserts that regulation of
licensing and relationships between motion picture dis-
tributors and exhibitors is a valid exercise of the police
power. Ten purposes purportedly served by the Act are
also listed in that section.!2 The Ohio statute contains no
statement of any finding or purposes.
12. These purposes, as stated, are:
“(1) [to] insure unabridged access for the public to artistic ex-
pression and opinion in feature motion pictures at reasonable prices
and at many different locations;
“(2) [to] avoid undue control of the exhibitors by the distribu-
tors;
“(3) [to] foster vigorous and healthy competition in offering
feature motion pictures for the benefit of the public by prohibiting
practices through which fair and honest competition is restrained,
destroyed or inhibited;
“(4) [to] promote the wide geographical dissemination at rea-
sonable prices to the public of ideas, opinions and artistic expression
in feature motion pictures;
“(5) [to] prevent delay in the exhibition of feature motion pic-
tures to the public in theatres playing subsequent to the first run
showing;
“(6) [to] prevent theatres from unnecessarily going out of busi-
ness, thereby resulting in reducing the number of small indepen-
dent businesses and unemployment with loss of tax revenues and
other undesirable consequences;
“(7) [to] prevent unfair deceptive acts or practices and unrea-
sonable restraints of trade in the business of distribution and exhi-
bition of feature motion pictures within the Commonwealth;
“(8) [to] promote fair and effective competition in that busi-
ness;
“(9) |to] benefit the movie going public by limiting the long and
extensive first runs so that additional theatres, in a given area, may
also exhibit the same feature motion picture and at possibly a lower
admission price; and
“(10) {to} prohibit blind bidding by insuring that exhibitors
have the opportunity to view a motion picture and know the contents
before committing themselves to exhibit it in their communities.”
A24
Section 3 defines the terms used in the Act. Its def-
initions closely resemble the definitions used in the Ohio
statute.
Section 4 absolutely prohibits negotiating for, bid-
ding for, or agreeing to a license for the exhibition of a
motion picture within Pennsylvania without a prior trade
screening within the Commonwealth (that is, it prohibits
“blind bidding”). The Ohio statute has the identical prac-
tical effect.!3 An important effect of this prohibition is
that no negotiation for a license agreement between a
distributor and an exhibitor may begin until the picture
is in fmal form for exhibition. Although Section 4 re-
quires a trade screening to take place, it does not require
exhibitors to attend a trade screening. Like other sec-
tions of the Act, Section 4 may not be waived. The Ohio
statute also prohibits any waiver of the cornparable sec-
tion.
Section 5 absolutely prohibits all guarantees of min-
imum film rental when a license agreement provides for
payment to the distributor based in whole or in part on a
percentage of attendance or box office receipts.!4 No
13. Sections 1333.06(A) and 1333.07(B), (C) of the Ohio stat-
ute say that distributors may not engage in “blind bidding,” and that
they must notify invited bidders of scheduled trade screenings. Ohio
includes “negotiation. . . prior toa trade screening. . .” in its def-
inition of “blind bidding.” § 1333.05(1).
14. The “percentage of gross receipts” represents the percent-
age figure of the box office receipts that the distributor would re-
ceive as rental. This was, and still is, the most common rental basis
and this means of obtaining rental is not affected by the Act. A cer-
tain figure is set aside for the exhibitor to cover “house expenses.”
The distributor receives a varying proportion of the net remainder,
such as 90%, with the exhibitor retaining the remaining 10%. As the
exhibition of a film continues, the exhibitor’s percentage normally
increases and the distributor’s declines. Levy and Greenfield Affi-
davits, { 14; Schlanger Affidavit, § 17. A “guarantee” would often be
coupled with a percentage rental. A guarantee established a mini-
mum rental that the distributor would receive and the exhibitor
would pay, whatever the receipts were at the box office. Levy and
Greenfield Affidavits, { 14; Fox Affidavit, { 7.
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A25
such license agreement may be conditioned upon or con-
tain any guarantee. By contrast, the Ohio statute, §
1333.06(B), only prohibits a distributor from demanding
that a license agreement contain a guarantee of a min-
imum payment. Although Section 5 prohibits a guaran-
tee in the case of a percentage rental, it does not prohibit
a flat rental, nor does it prohibit a guarantee with a flat
rental. Section 5 also provides that provisions for any
such guarantees are void and that any purported waiver
of the prohibition is void.
Section 6 of the Act prohibits any and all advance
payments of film rentals by an exhibitor to a distribu-
tor.!15 A license agreement may not provide for any ad-
vance payment prior to exhibition of a motion picture,
either as security for performance of the license agree-
ment or as an advance on rental payments due under the
agreement. The Ohio statute, § 1333.06(C) only prohib-
its a distributor from requiring a license that provides for
an exhibitor’s advancing any money for security or as an
advance payment on rental due more than 14 days prior
to exhibition of a motion picture. Like Section 5, Section
6 provides that any waiver is void and unenforceable (the
Ohio statute also prohibits waiver).
Section 7 prohibits “exclusive first runs” or “exclu-
sive multiple first runs” of motion pictures for more than
42 days “without provisions to expand the run to second
run or subsequent run theatres within the geographical
area.. . .”!6 A distributor may not agree to show a mo-
tion picture on an exclusive basis for more than 42 days.
An exhibitor with theatres in prime locations may show
15. Advance payments were partial rentals paid in advance be-
fore the initial exhibition of a motion picture. Levy and Greenfield
Affidavits, { 14; Schlanger Affidavit, { 9(G); Fox Affidavit, { 8.
16. 1616. Before the Pennsylvania Act was passed, the term or
time period of the license would be stipulated in the license agree-
ment and included in the negotiations between distributor and ex-
hibitor. Levy and Greenfield Affidavits, { 15; Fox Affidavit, { 5.
A26
the picture for more than 42 days, but may not longer
show it “exclusively” and the film must be “made
available,” or rebid.!” The Ohio statute imposes no such
limitation.
Section 8 establishes certain bidding procedures
that closely resemble those required in Ohio. It does not
make competitive bidding mandatory, but sets forth re-
quirements that must be followed if bidding is initi-
ated: 18
Section 8(a) requires that certain information be
provided to bidding exhibitors, including the identity of
all bidders.
17. Although the Schlanger Affidavit, § 15, speaks of “unduly
long guaranteed exhibition runs,” and 4 5 of the Fox Affidavit as-
serts that exhibitors are forced to play motion pictures for “long pe-
riods of time,” the Act does not bar long runs, only exclusivity.
18. Before the Act was passed, licensing of motion picture films
for exhibition was carried out in Pennsylvania in several ways, in-
cluding direct negotiation with individual exhibitors and the
distributor’s solicitation of bids from exhibitors in a particular mar-
ket area. Levy and Greenfield Affidavits, { 10; Exhibit “A” to Budco’s
Answer. On some occasions, the distributor would reject all bids and
would then undertake to negotiate with one or more exhibitors who
had bid or with entirely different exhibitors. Levy and Greenfield
Affidavits, § 10; Schlanger Affidavit, {| 9(D), 9(E). The information
normally provided on a bid solicitation included the title of the film,
identification of the talent involved (the actors, director, writer, pro-
ducer, etc.), the type of film, and a general plot summary. Exhibit
“A” to Budco’s Answer; Schlanger Affidavit, § 9(A). When the li-
cense agreement was negotiated or bid before the motion picture
was completed or available for viewing (or, on occasion, even when
the film was complete), the motion picture would be licensed with-
out an advance screening; that is to say, it would be “blind bid.”
_ Exhibit “A” to Budco Answers; Levy and Greenfield Affidavits, § 17;
Schlanger Affidavit, { 9(A). Fox Affidavit, {§ 4, 5; Section 3 of the
Act, 73 P.S. § 203-3. On other occasions, when a film was completed
in advance of licensing, exhibitors might be invited to attend a
“trade screening,” or a screening in advance of licensing. Levy and
Greenfield Affidavits, {4 17, 20; Fox Affidavit, 4 10, 20.
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A27
Section 8(b) requires that if the motion picture has
not been trade screened, the distributor shall establish a
date, time, and location of a trade screening in the bid
literature.
Section 8(c) requires that all bids are to be submitted
in writing and opened at the same time, in the presence
of those exhibitors or their agents who submitted bids
and who are present. Unlike Ohio’s §1333.07(D), it does
not require any exhibitor to be present.
Section 8(d) requires that a distributor make avail-
able to an exhibitor within 60 days after bids are opened
any bid made for the same run by any other exhibitor —
even if all bids submitted were rejected. The distributor
is also required to notify in writing each exhibitor who
submitted a bid for that run of the terms accepted and
the identity of the successful bidder.
Section 8(e) provides that, if all bids are rejected, a
distributor, once having issued invitations to bid, may
not enter into a license agreement except by means of
the bidding process specified in Section 8. In other
words, he may not reiect all bids and then enter into ne-
gotiations, nor may he withdraw the film from the mar-
ket, but instead, he must continue the bidding process.
Section 10 of the Act provides to exhibitors (but not
to distributors), a private right of action. No such right is
provided in Ohio. Any exhibitor may sue a distributor, or
an exhibitor, or both, for violations of the Act in a Court
of Common Pleas for damages or injunctive relief and is
entitled to recover costs, including reasonable attorney’s
fees. A distributor has no comparable right of action.
Because of the similarities and because of the many
significant differences between the Act and the Ohio
A28
statute, this Court will examine afresh the issues pre-
sented by plaintiff’s constitutional challenge. in light of
Judge Duncan’s thorough and thoughtful opinion up-
holding the constitutionality of that statute.
Il.
THE STANDARDS FOR SUMMARY JUDGMENT.
The principle that summary judgment may be en-
tered when “the pleadings, depositions, answers to in-
terrogatories and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as
to any material fact and that the moving party is entitled
to judgment as a matter of law” is well-established. Rule
56(c), Federal Rules of Civil Procedure. This Court re-
cently analyzed the principles that govern under Rule 56
in Hollinger v. Wagner Mining Equipment Corp., 505
F.Supp. 894, 896-898 (E.D.Pa.1981):
“Characterized as both a ‘drastic’ and ‘extreme’
remedy, summary judgment should be _ used
‘sparingly,’ for it is a ‘lethal weapon,’ eliminating the
opportunities to assess the demeanor and credibility
of witnesses as well as to examine and
cross-examine them in front of a jury. However,
where no genuine issues of material fact exist and as
a matter of law the moving party deserves entry of
judgment, the Court should render it in order to
eliminate sham issues of fact, to allow the Court to
pierce the pleadings and assess the proof to deter-
mine whether a genuine need for trial exists, and to
avoid waste of time and resources of both the liti-
gants and the Court where trial would be a useless
formality.”
xx * x x * x
A29
“Courts exercise discretion only in denying
summary judgment in a particular situation and use
fastidious caution in granting it. The responsibility
belongs to the Court to review all facts to determine
whether a genuine issue exists as to any material
fact, which may be defined as one which affects the
outcome of the litigation.” |Emphasis added: cita-
tions and footnotes omitted].
This Court is required to make the following three-
step analysis. First, in examining the record, it must re-
solve all doubts against the moving party, upon whom
the initial burden of justifying the motion falls, and con-
strue the motion in the light most favorable to its oppo-
nents, see Adickes v. S. H. Kress & Co., 398 U.S. 144, 90
S.Ct. 1598, 26 L.Ed.2d 142 (1970).
Second, it must ascertain whether disputes exist
with regard to any material fact, defined as a fact that
“affects the outcome of the litigation.” See Mutual Fund
Investors, Inc. v. Putnam Management Co., 553 F.2d
620, 624 (9th Cir. 1977), cert. denied 429 U.S. 1038, 97
S.Ct. 732, 50 L.Ed.2d 748; Goodman v. Mead, Johnson &
Co., 534 F.2d 566 (3d Cir. 1978). While summary judg-
ment may not be granted if there exist issues of material
fact relevant to the Court’s decision of the issues pre-
sented, the Court must not search for the existence of
such issues. Lockhart v. Hoenstine, 411 F.2d 455 (3d
Cir. 1969), cert. denied, 396 U.S. 941, 90 S.Ct. 378, 24
L.Ed.2d 244 (1969).
Third, the Court must determine whether “a genu-
ine need for trial” exists with regard to the decision of the
legal issues presented or whether any purported factual
questions are “largely illusory and a trial would be a ‘use-
less formality.’ ” See Cousins v. Yaeger, 394 F.Supp. 595
(E.D.Pa. 1975). It may not refuse to grant summary
judgment if the purported factual disputes alleged by a
party are not material to decision of the legal issues in the
A30
case. See British Airways Board v. Boeing Co., 585 F.2d
946, 952 (9th Cir. 1978), cert. denied 440 U.S. 981, 99
S.Ct. 1790, 60 L.Ed2d 241 (1979), reh. denied 441 U.S.
968, 99 S.Ct 2420, 60 L.Ed.2d 1074 (1979) (deposition
evidence that plaintiff tried to introduce was not proba-
tive with regard to the ultimate issue, the cause of an
airplane accident, and did not create any conflict con-
cerning a material fact despite the obvious presence of a
factual dispute). That an action involves constitutional
questions does not change the standard to be applied. See
Village of Schaumburg v. Citizens For A Better Environ-
ment, 444 U.S. 620, 100 S.Ct. 826, 63 L.Ed.2d 73
(1980), reh. denied 445 U.S. 972, 100 S.Ct. 1668, 64
L.Ed.2d 250 (1980) (Supreme Court affirmed the pro-
priety of granting summary judgment for plaintiffs in a
case involving interference with rights protected by the
First Amendment).
Applying those standards to this case, I conclude
that, with regard to plaintiffs’ First Amendment and Su-
premacy Clause claims, there are no material facts in
dispute and there exists no “genuine need for trial.”
Defendants urge this Court to deny plaintiffs’ motion
because of the existence of two categories of facts which,
they argue, are both disputed and material, namely (1)
the alleged relative disparity in economic power, size,
and concentration between distributors and exhibitors,
and the distributors’ purported abuse of that disparity,
which, defendants claim, provide justification for the
Act; and, (2) the need factually to ascertain the extent
and nature of the burdens that the Act may impose on
constitutionally protected activities. It is true that these
“facts,” particularly the economic “facts,” are vigorously
A31
disputed by the parties.!9 However, questions that per-
tain to them do not require resolution in order to decide
the legal issues presented in this motion. The real dis-
putes between the parties in this case are not factual but
legal and concern the standards of analysis to be applied
to the Act and to plaintiffs’ constitutional claims.
With regard to disparity in bargaining power and
size between distributors and exhibitors, concentration
in motion picture distribution and abuse of superior bar-
gaining power by distributors, even if each and every fact
put forward by defendants were assumed to be accurate
for purposes of the instant motion for summary judg-
ment, see Adickes v. Kress, supra, a contrary decision
concerning the constitutionality of this Act on First
Amendment and Supremacy Clause grounds would not
be compelled. The factual issues that defendants con-
tend exist might be material with regard to a more nar-
rowly drawn statute, like Ohio’s, whose purpose was
found by Judge Duncan to be to “effect a better balance
19. The Schlanger and Fox affidavits purport to describe
plaintiffs’ “economic concentration” and control of the distribution
of motion pictures and characterize plaintiffs’ practices before the
Act was passed as abuses of that superior bargaining power.
Schlanger Affidavit, 995, 6; Fox Affidavit, § 3. Plaintiffs, in their
reply memorandum, vigorously contest these assertions. Thus, the
“fact” of relative economic power and its implications is very much
at issue. However, it is not material to the issue of the facial un-
constitutionality of the Act under the First Amendment and the Su-
premacy Clause.
By contrast, although defendants have questioned the rele-
vance of many of plaintiffs’ factual assertions, they have not denied
them in their affidavits. Rule 56(e) of the Federal Rules of Civil
Procedure provides in pertinent part that “{w]hen a motion for sum-
mary judgment is made and supported as provided in this rule, an
adverse party may not rest upon the mere allegations or denials of
his pleading, but his response, by affidavits or as otherwise provided
by this rule, must set forth specific facts showing that there is a
genuine issue for trial.” Defendants’ efforts to create the appearance
of an issue of fact do not meet the criteria of Rule 56(e).
A32
of bargaining power between exhibitors and producer-
distributors. . . .” by correcting purported abuses of
that bargaining power, Allied Artists Pictures Corp. v.
Rhodes, supra, 496 F.Supp. at 429.20 However,
Pennsylvania’s more comprehensive Act must be judged
by more rigorous standards than Ohio’s comparatively
limited regulation and the economic facts at issue are not
material to the “compelling” or “significant” public pur-
poses required to justify it.
In its broad regulation of the copyright licensing pro-
cess under which motion pictures, which contain ex-
pression protected by the First Amendment, are made
available to theatre audiences, the Pennsylvania Act in-
disputably affects rights protected by the First Amend-
ment and granted under the federal Copyright Act, 17
U.S.C. §101 et seq. See Sections III and IV, infra. There-
fore, it must serve “compelling” or “significant” public
purposes. See, e. g., First National Bank of Boston v.
Bellotti, 435 U.S. 765, 786 98 S.Ct. 1407, 1421, 55
L.Ed.2d 707 (1978) reh. denied 438 U.S. 907, 98 S.Ct.
3126, 57 L.Ed.2d 150 (1978). The facts that defendants
assert are “material” are relevant to the purpose of
“weighting a balance. ... ,” 496 F.Supp. at 431, be-
tween private economic entities, but such equalizing of
bargaining relationships between business enterprises
has never been the kind of “compelling” purpose re-
quired to justify limitations upon rights protected by the
First Amendment or granted by federal legislation and
protected by the Supremacy Clause. Economic “facts”
20. In Allied Artists Pictures Corp. v. Rhodes, supra, 496
F.Supp. at 429, Judge Duncan applied the liberal “due process” tests
of such cases as United States v. Carolene Products Co., 304 U.S.
144, 152, 53 S.Ct. 778, 783, 82 L.Ed. 1234 (1938) and Nebbia v.
New York, 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940 (1934) to the
more limited Ohio statute, asking only if there existed “a rational
nexus between the legitimate object and the means chosen to
achieve it. . . .,” 496 F.Supp. at 431. More stringent examination
of Pennsylvania’s comprehensive enactment is required.
es Rn Sa es
A33
that might be relevant to that legitimate regulatory pur-
pose are not material to the more compelling purposes
required to sustain the constitutionality of the Pennsy]l-
vania Act.
Furthermore, assuming arguendo that the purpose
of correcting abuses due to “economic disparity” were
sufficiently compelling to justify some regulatory intru-
sion into rights protected by the First Amendment or
some limitation on a right granted by Federal copyright
legislation, the Pennsylvania Act’s comprehensive com-
bination of regulations is overbroad in its scope and goes
beyond serving any such assumed legitimate purpose.
The Act entirely and absolutely eliminates certain pro-
visions from license agreements — regardless of the ex-
istence of any abuses or the existence of economic
disparity between the parties or whether the practices
were coerced or mutually sought. It does so by prohib-
iting a broad spectrum of prior practices in combination,
although defendants themselves assert that practices
such as guarantees were injurious primarily because
combined with “blind bidding.”2! The Act does not nar-
rowly address itself to specific abuses, as is required
when expression is affected even indirectly, see Section
III, infra, but simply prohibits a number of licensing
terms outright, in combination. For this reason, as well,
although the economic facts defendants have set forth
might be relevant to a more limited statute like Ohio’s
that purports to correct specific abuses more precisely,
they are not material to the constitutional issues pre-
sented by the Pennsylvania Act, which imposes blanket
prohibitions.
Citizens For A Better Environment v. Village of
Schaumburg, 590 F.2d 220 (7th Cir. 1978), aff’d sub
nom. Village of Schaumburg v. Citzens For A Better En-
vironment, supra, is directly applicable to and disposes
21. See Fox Affidavit, 1% 4, 5, 7.
A34
of defendants’ argument that facts concerning plaintiffs’
practices before the Act was passed (about which there
is dispute) are material and must be developed through
discovery and a trial. In that case, plaintiff brought a de-
claratory attack under the First Amendment on a village
ordinance that imposed a blanket requirement that 75%
of the proceeds of charitable solicitation be used directly
for the charitable purposes of the soliciting organization
— regardless of the nature of the organization — regard-
less of the nature of the organization or plaintiff’s activ-
ities or the existence of any abusive practices by plaintiff.
The District Court held that the “75% requirement” was
an impermissible, although indirect, restraint upon
plaintiff’s exercise of its First Amendment freedoms. On
appeal, the village asserted that the entry of summary
judgment was improper because there existed issues of
material fact concerning plaintiff’s actual practices. The
Court of Appeals (and subsequently, the Supreme
Court) agreed with plaintiff that those fact issues, in-
cluding characterizations of plaintiff’s activities, were ir-
relevant to the question of the overbroad ordinance’s
constitutionality on First Amendment grounds.
As was true in Schaumburg, factual questions con-
cerning plaintiffs’ practices or the alleged economic dis-
parity between the parties are not material to decision of
the Act’s constitutionality. The Feature Motion Picture
Fair Business Practices Law, like the ordinance in
Schaumburg, imposes blanket (and nonwaivable) prohi-
bitions on certain business practices in combination —
all guarantees, all payment in advance of exhibition, all
advance negotiation prior to a trade screening, and var-
ious other practices are simply forbidden, even if such
practices have not been coerced, and regardless of any
abuse of any sort by a distributor, or of whether more
narrowly drawn or fewer prohibitions might correct the
abuse.
A35
As to facts concerning the Act’s burdens on consti-
tutional rights (see Section III(B), infra), the relevant
cases in the First Amendment and the Supremacy
Clause areas demonstrate that the question of the Act’s
constitutionality may be determined from the face of the
legislation without development of additional facts. The
legal standard in those contexts is whether a statute
presents the risk of infringing upon protected rights.
Proven interference with activities protected by the First
Amendment or that are the subject of comprehensive
federal regulation is not a necessary prerequisite to a de-
termination of facial unconstitutionality; the statute’s po-
tential for harm on its face is determinative. See Village
of Schaumburg v. Citizens For A Better Environment,
supra, 444 U.S. at 632, 100 S.Ct. at 833 (“75%
requirement” created the risk of limiting advocacy of par-
ticular views); Miami Herald Publishing Co. v. Tornillo,
418 U.S. 241, 257, 94 S.Ct. 2831, 2839, 41 L.Ed.2d 730
(1974) (risk that requirement that newspapers provide
access for views opposing editorials might cause news-
papers to limit their editorials to less controversial mat-
ters); Freedman v. Maryland, 380 U.S. 51, 85 S.Ct. 734,
13 L.Ed.2d 649 (1965) (striking a state censorship stat-
ute that created the risk of delay in exhibiting motion
pictures and thus, of suppressing protected expression);
Grosjean v. American Press Co., 297 U.S. 233, 250-51,
56 S.Ct. 444, 449, 80 L.Ed. 660 (1936) (state license tax
on advertising stricken because of the risk that it would
inhibit publication); Crane Co. v. Lam, 509 F.Supp. 782,
CCH Fed.Sec.L.Rep. § 97,896 (E.D.Pa.1981) (prelimi-
nary injunction granted against Pennsylvania Takeover
Disclosure Act because of its potential for substantial in-
terference with a federal statute).
Many facts concerning the relative economic status
of the parties, plaintiffs’ practices, or the effects of the
Act might be ascertained in discovery or through a
A36
lengthy trial. However, further discovery and factual de-
velopment of these myriad (but non-material) facts
would not affect decision of the First Amendment and
Supremacy Clause issues.
III.
THE ACT’S INTERFERENCE WITH RIGHTS
PROTECTED BY THE FIRST AMENDMENT.
Decision of plaintiffs’ First Amendment claims dis-
poses of this motion. Although the Act does not directly
command or prohibit any type of content, it comes within
the scope of the cases that have stricken indirect re-
straints upon content. It creates risks of restricting pro-
tected expression; its purposes do not meet the standard
that the cases require, namely, that they be “substantial”
or “compelling;” and its prohibitions are not drawn with
the precision that is required of a state legislative regu-
lation that affects dissemination of protected expression
even indirectly.
A. The Act imposes indirect restraints upon a pro-
tected activity
It is well-established that motion pictures are a form
of creative expression protected by the First Amend-
ment, although they are not “necessarily subject to the
precise rules governing any other particular method of
expression. . . .” Joseph Burstyn, Inc. v. Wilson, 343
U.S. 495, 503, 72 S.Ct. 777, 781, 96 L.Ed. 1098 (1952),
and although this protection is not absolute. Times Film
Corp. v. Chicago, 365 U.S. 43, 81 S.Ct. 391, 5 L.Ed.2d
403 (1961), reh. denied 365 U.S. 856, 81 S.Ct. 798, 5
L.Ed.2d 820. With the exception of obscenity, which is
not involved in this case, this protection applies regard-
less of the film’s content. See e. g., Erzoznik v. City of
Jacksonville, 422 U.S. 205, 95 S.Ct. 2268, 45 L.Ed.2d
Se ee ee ee
A37
125 (1975); Interstate Circuit v. Dallas, 390 U.S. 676,
88 S.Ct. 1298, 20 L.Ed.2d 225 (1968).
The fact that motion pictures are commercial en-
deavors does not alter their protected status. See Joseph
Burstyn, Inc. v. Wilson, supra, 343 U.S. at 501-502, 72
S.Ct. at 780. In fact, recent cases have made it quite clear
that so-called “commercial” speech engaged in by cor-
porate entities is entitled to First Amendment safe-
guards. See Metromedia Inc. v. City of San Diego,
___U.S.___., 101 S.Ct. 2882, 69 L.Ed.2d 800 (1981);
Consolidated Edison Co. of New York v. Public Service
Comm’n., 447 U.S. 530, 100 S.Ct. 2326, 65 L.Ed.2d 319
(1980); First National Bank of Boston v. Bellotti, 435
U.S. 765, 783, 98 S.Ct. 1407, 1419, 55 L.Ed.2d 707
(1978). See also Buckley v. Valeo, 424 U.S. 1, 16, 96 S.Ct.
612, 633, 46 L.Ed.2d 659 (1976) (“this Court has never
suggested that the dependence of a communication on
the expenditure of money operates itself. . . . to reduce
the exacting scrutiny required by the _ First
Amendment.”). Motion pictures, of course, cannot be
equated with mere “commercial speech” such as adver-
tisements, commercial billboards, billing inserts, or the
like, See Central Hudson Gas & Electric Corp. v. Public
Service Comm’n., 447 U.S. 557, 100 S.Ct. 2343, 65
L.Ed.2d 341 (1980), on remand 51 N.Y.2d 817, 433
N.Y.S.2d 426, 413 N.E.2d 365, because, as creative ex-
pressions of ideas, they come directly within the ambit of
the First Amendment. Erzoznik v. City of Jacksonville,
supra; Joseph Burstyn, Inc. v. Wilson, supra.
The Act whose constitutionality is at issue in the
present case obviously does not censor the content of
motion pictures or require producers or distributors to
adhere to one idea at the expense of others, or forbid
them to make or to distribute any particular type of mo-
tion picture. In that sense, defendants are correct when
A38
they describe the Act as “content-neutral” and distin-
guish it from censorship regulations designed to sup-
press speech because of its content. See Allied Artists
Pictures Corp. v. Rhodes, supra, 496 F.Supp. at 432. Ob-
viously, the Act is not identical to an ordinance prohib-
iting live entertainment (see Schad v. Borough of Mt.
Ephraim, U.S.___, 101 S.Ct. 2176, 68 L.Ed.2d 671
(1981)), or to a regulation forbidding the sale of a par-
ticular type of book to young people (see Bantam Books
v. Sullivan, 372 U.S. 58, 83 S.Ct. 631, 9 L.Ed.2d 584
(1963)), or to a content-based restriction on what may be
shown in a particular forum. See, e. g., Southeastern Pro-
motions, Ltd. v. Conrad, 420 U.S. 546, 95 S.Ct. 1239, 43
L.Ed.2d 488 (1975) (striking down prohibition against
use of municipal theatre for a performance of the musi-
cal “Hair’”).
However, the conclusion that the Act does not reg-
ulate content, but, instead, affects the distribution and
exhibition of all motion pictures in Pennsylvania, regard-
less of content, does not dispose of plaintiffs’ claims. The
Act comprehensively and directly regulates the licensing
process — the means by which all motion pictures, and
the ideas they contain, are made available to the theatre-
going public in the Commonwealth — and, on its face,
creates risks of limiting expression. The cases hold with
unanimity that, even if a statute or ordinance indirectly
restrains speech, it is unconstitutional if it has that effect
and does not further “an important or substantial gov-
ernmental interest . . . unrelated to the suppression of
free expression . . .” and “the incidental restriction on
alleged First Amendment freedoms is ‘no greater than is
essential to the furtherance of that interest.’ ” United
States v. O’Brien, 391 U.S. 367, 377, 88 S.Ct. 1673,
1679, 20 L.Ed.2d 672 (1968), reh. denied sub nom.
O’Brien v. United States, 393 U.S. 900, 89 S.Ct. 63, 21
L.Ed.2d 188. The “exacting scrutiny” required by the
A39
First Amendment cases “is necessary even if any deter-
rent effect on the exercise of First Amendment rights
arises, not through direct governmental action, but in-
directly as an unintended but inevitable result of the
government’s conduct. . . .” Buckley v. Valeo, supra,
424 U.S. at 64-65, 96 S.Ct. at 656 (holding unconstitu-
tional a “content-neutral” statute that impinged upon
freedom of speech by imposing expenditure limitations
upon candidates for public office).
Quite recently, the Supreme Court demonstrated
the continuing validity of this principle in Village of
Schaumburg v. Citizens For A Better Environment,
supra, 444, U.S. at 632, 100 S.Ct. at 833. It held there
that an ordinance’s imposition of a flat percentage re-
quirement on the use of proceeds from door-to-door so-
licitation, although it was not enacted to limit the pro-
tected solicitation and was therefore “content-neutral”,
was unconstitutional because it might limit “informative
and perhaps persuasive speech seeking support for par-
ticular causes or for particular views. . . .” and pre-
sented the risk that “without solicitation the flow of such
information and advocacy would likely cease.” Ibid.
The courts have made it clear that the First
Amendment’s protection extends to the means of distri-
bution of protected expression as well as to protection of
content itself. See, e. g., Philadelphia Newspapers, Inc. v.
Borough Council of Swarthmore, 381 F.Supp. 228, 240
(E.D.Pa.1974) (holding that newspaper boxes along
public streets are constitutionally protected); Lovell v.
Griffin, 303 U.S. 444, 452, 58 S.Ct. 666, 669, 82 L.Ed.
949 (1938); Grosjean v. American Press Co., supra, 297
U.S. at 251, 56 S.Ct. at 449. The Pennsylvania Act reg-
ulates the licensing process by which protected expres-
sion is made available to the public, just as the ordinance
at issue in Philadelphia Newspapers, Inc. v. Borough
Council of Swarthmore, supra, regulated the means of
distribution of newspapers.
A40
Defendants’ argument that, because the Act only
regulates the licensing process, not the content of films
themselves, it does not violate the First Amendment,
must therefore be rejected. Their formulation ignores
the meaning of the cases discussed above — namely,
that non-traditional or indirect regulation of the means of
communicating protected speech may affect the ability
to communicate those ideas. See, e. g., Grosjean v. Amer-
ican Press Co., 297 U.S. at 244-45, 56 S.Ct. at 446-47
(state license tax directed at newspapers violated the
First Amendment because it might have limited circu-
lation). Recognizing that courts must be alert to unusual
restrictions upon First Amendment rights that appear in-
nocently clothed as “indirect” restraints, the Supreme
Court, in Miami Herald Publishing Co. v. Tornillo, 418
U.S. 241, 256, 94 S.Ct. 2831, 2838, 41 L.Ed.2d 730
(1974), rejected a statutory requirement that newspa-
pers make available space for reply to controversial edi-
torials and wrote:
“The Florida statute operates as a command in
the same sense as a Statute or regulation forbidding
appellant to publish specified matter. Governmental
restraint on publishing need not fall into familiar or
traditional patterns to be subject to constitutional
limitations on governmental powers.” {Footnotes
and citations omitted]. L
Even if defendants’ characterization of the Act’s ef-
fects on protected speech as not only “indirect” but
merely “peripheral” and “incidental” were correct, that
would not end the inguiry, for “|e]ven where a chal-
lenged regulation restricts freedom of expression only in-
cidentally or only in a small number of cases, we have
scrutinized the governmental interest furthered by the
regulation and have stated that the regulation must be
narrowly drawn to avoid unnecessary intrusion on free-
dom of expression.” Schad v. Borough of Mt. Ephraim,
supra, U.S. at n.7, 101 S.Ct. at 2183 n.7
ee
A41
(1981) [citing United States v. O’Brien, supra, 391 U.S.
at 376-377, 88 S.Ct. at 1678-1679.]. When the standards
for analyzing indirect restraints upon communication
are applied to the risks that the Act’s provisions create on
their face — risks of delays in licensing and of financial
uncertainty as well as other burdens — it must be con-
cluded that its restraints, although indirect, affect the
dissemination of protected expression in motion pictures
in a manner that violates the First Amendment.
B. The Act creates the risk of inhibiting protected
expression
On its face, the Act creates the risk of delay in li-
censing and of shifting financial burdens and uncertain-
ties — indeed, defendants argue in their affidavits that
the latter is one of the Act’s purposes.22 These risks,
which threaten expression itself and its dissemination in
motion pictures, are inherent and unavoidable in the
statutory scheme and are clear on the face of the Act.
Defendants correctly assert that actual proof of the
Act’s impact upon the financing, booking, or release of
motion pictures can only be ascertained after discovery
and possibly, after a trial. However, in making this as-
sertion, they ignore the well-established principle that
the risk of infringement of First Amendment rights is
sufficient to establish a statute’s burdens, whether the
regulation in question affects expression directly or in-
directly. Proof of impact is not essential to decision of this
motion on First Amendment grounds. See, e.g., Village of
Schaumburg v. Citizens For A Better Environment,
supra, 444 U.S. at 632, 100 S.Ct. at 833 (“75%
requirement” created the risk of limiting the seeking of
support for particular causes). To declare a statute or or-
dinance unconstitutional on First Amendment grounds.
22. See, e.g., Schlanger Affidavit © 10.
A42
actual proof of infringement of expression is not neces-
sary. For example, in Murdock v. Pennsylvania, 319
U.S. 105, 114, 63 S.Ct. 870, 875, 87 L.Ed. 1292 (1943),
the Supreme Court observed that a license tax on dis-
tribution of religious literature was “likely to restrict
petitioners’ religious activities. On their face, they are a
restriction of the free exercise of those freedoms which
are protected by the First Amendment.” See also
Schneider v. State, 308 U.S. 147, 163, 60 S.Ct. 146, 151,
84 L.Ed. 155 (1939) (involving “indirect” time and place
restrictions on leafletting which did not impose a total
ban on the protected activity).
Some examples will illustrate the way these consid-
erations apply to the risks created by the instant Act. As
to delay, Sections 4, 7, and 8, as well as others, create on
their face the risk of delay in licensing. Under Section 4,
there may be absolutely no negotiation or solicitation of
bids in Pennsylvania before a picture has_ been
trade-screened — and, obviously, the film cannot be
trade-screened before it is completed. The effect of Sec-
tion 4 inevitably must be to delay licensing until after
completion of the film — no matter how much informa-
tion is available to an exhibitor, or regardless of the
exhibitor’s size, or how intensely it wants to exhibit a
given picture based on its knowledge of the talent or sub-
ject matter.23 These requirements, on their face, create
the risk of delay in licensing and potentially affect ex-
23. Despite its prohibitions, the Act does not require an exhib-
itor actually to attend a trade screening and see the motion picture
in advance. It merely requires that all motion pictures offered for
licensing in Pennsylvania be trade screened. See Section C, infra,
for discussion of the way the Act goes beyond prohibiting any abuses
such as coercion of an exhibitor to accept an unknown product, or
deceptive practices or fraud.
A43
pression and its dissemination in copyrighted motion
pictures. 74
Section 8 compounds that risk. Requirements such
as that a trade screening be held before bids are invited
or negotiations take place, or that, in the event that all
bids are rejected, there may be no private post-bidding
negotiation, but instead, the picture must be re-bid, cre-
ate an additional (and undesirable) risk of delay in the
licensing of motion pictures that is substantial and not
merely “theoretical.” Buckley v. Valeo, supra, 424 U.S. at
19, 96 S.Ct. at 634. Before the Act was passed, if the
bidding process failed to produce a satisfactory result,
negotiations between a distributor and an exhibitor were
permitted. The Act prohibits this.
Furthermore, the requirement of Section 7, that a
motion picture be “made available” after 42 days to sub-
sequent run theatres, opens the door to additional delays
if the film is to be “made available” by bidding. The risks
of delays in licensing which potentially affect expression
that are created by Sections 7 and 8 aic obvious from the
face of the Act.
Freedman v. Maryland, 380 U.S. 51, 85 S.Ct. 734,
13 L.Ed.2d 649 (1965), is perhaps the Court’s definitive
statement of the unconstitutionality of the risk of delay in
the licensing of motion pictures for exhibition in the-
atres. There, a statute requiring motion pictures to be
submitted to a State Board of Censors for the purpose of
sorting out obscene from constitutionally protected films
was held unconstitutional. The Court struck down the
statute because its burdensome and time-consuming
24. See Allied Artists Pictures Corp. v. Rhodes, 496 F.Supp. at
423, 435, where Judge Duncan found as a fact that the Ohio statute
posed a risk of some delay in the release of films. He also recognized
that because the Ohio statute “prohibits bidding until after trade
screening, it necessarily entails that release of a completed motion
picture is suspended during the time it takes to complete the bidding
procedure.” Id. at 421.
A44
procedures created both the “risk of delay” and the “dan-
ger of unduly suppressing protected expression ... .”,
380 U.S. at 54, 85 S.Ct. at 736 [emphasis added]. The
Court (Justice Brerinan) observed that “in the case of
motion pictures, it may take very little to deter exhibition
in a given locality.” [bid.2> Whether factual bases existed
for the expectation of delay or suppression was not at
issue; the standard of constitutionality was the presence
of the risk.26 See also Southeastern Promotions Ltd. v.
Conrad, supra, 420 U.S. at 560-62, 95 S.Ct. 1239,
1247-48, 43 L.Ed.2d 448 (risk of discouraging use of a
public forum and of delaying unconstitutionally affected
First Amendment liberties); Allied Artists Pictures Cor-
poration v. Rhodes, supra, 496 F.Supp. at 433 (“a delay
of expression is an abridgement of it; where the delay is
not justified by a substantial governmental interest it
cannot be condoned.”); Goldman Theatres, Inc. v. Dana,
405 Pa. 83, 173 A.2d 59 (1960), cert. denied 368 U.S.
897, 82 S.Ct. 174, 7 L.Ed.2d 93 (1961).27
\
25. Justice Brennan, in discussing the risk of delay created by
the statute, also noted that “[i]t is common knowledge that films are
scheduled well before actual exhibition. . . .,” a point made as well
by Judge Duncan in Ohio. See Allied Artists Pictures Corp. v.
Rhodes, supra, 496 F.Supp. at 422.
26. Maryland subsequently enacted a more limited statute that
met Freedman’s requirements and that was upheld by the Supreme
Court. See Star v. Preller, 375 F.Supp. 1093 (D.Md. 1974), aff’d
without opinion 419 U.S. 956, 93 S.Ct. 3054, 37 L.Ed.2d 1016
(1974).
27. See Nebraska Press Association v. Stuart, 423 U.S. 1327,
1329, 96 S.Ct. 251, 253, 46 L.Ed.2d 237 (1975), in which Justice
Blackmun wrote in another context:
“Each passing day may constitute a separate arid cogniza-
ble infringement of the First Amendment. The suppressed in-
formation grows older. Other events crowd upon it. To this
extent, any First Amendment infringement that occurs with
each passing day is irreparable.”
A45
As to financial uncertainties which might affect ex-
pression, defendants themselves assert that the licens-
ing and exhibition of motion pictures involve “significant
economic risks” (Fox Affidavit, § 4), and that there exist
certain “risks as to the economic viability of the pictures”
(Schlanger Affidavit, § 10). See also Allied Artists Pic-
tures Corp. v. Rhodes, supra, 496 F.Supp. at 415, ob-
serving that the motion picture industry is a “high risk,
high profit business.” It is clear that the Act, on its face,
by prohibiting guarantees, advances, and exclusive first
runs limited only by market demand, enhances the fi-
nancial risks that the distributor of motion pictures must
bear. This was recognized in Allied Artists, where Judge
Duncan observed that even the less stringent Ohio stat-
ute “has a potential for increasing the plaintiffs’ produc-
tion and marketing costs... ., ” 496 F.Supp. at 423, that
“lalbolition of guarantees means the production occurs
without prompt reimbursement; costs are not recovered,
if at all, until after the film is completed ....” 496
F.Supp. at 434, and that the Ohio statute prohibited
“risk-shifting devices.” Id. at 423. Furthermore, defen-
dants here have complained that before the Act was
passed, exhibitors were forced to bear some risks of lack
of commercial success. Schlanger Affidavit, § 11. The
implication is that the Act has increased the risk to the
producer/distributor.
In Pennsylvania, if a percentage of gross receipts li-
cense term is utilized, any guarantee of return is forbid-
den. This prohibition, on its face, increases the
acknowledged risk of the enterprise that must be borne
by the makers and distributors of motion pictures. The
42-day provision (Section 7) creates the risk that exhi-
bition of a given motion picture might not take place for
a period of time sufficient to make it economically worth-
while.‘ The prohibition against advances prevents a dis-
tributor from obtaining security from exhibitors for any
reason whatsoever. These limitations on prior practices
A46
plainly have a potential impact, even though indirect,
upon the production, distribution and exhibition of mo-
tion pictures, recognized as a risky undertaking.
Statutes that create the presence of financial or other
risks that might inhibit expression have been held to be
unconstitutional as a matter of law. Thus, in Miami Her-
ald Publishing Co. v. Tornillo, supra, 418 U.S. 241, 257,
94 S.Ct. 2831, 2839, 41 L.Ed.2d 730 (1974), the Court
found impermissible under the First Amendment the
risk that newspaper editors, required to provide free
space for response to controversial editorials, might feel
compelled by the economics of this government-imposed
access requirement to stop printing the controversial ed-
itorials. In Buckley v. Valeo, 424 U.S. 1, 19, 96 S.Ct. 612,
634, 46 L.Ed.2d 659 (1976) the Court observed that fi-
nancial limitation “necessarily reduces the quantity of
expression by restricting the number of issues dis-
cussed, the depth of their exploration, and the size of the
audience reached.” Most recently, in Village of
Schaumburg, supra, 444 U.S. at 632, 100 S.Ct. at 833,
the Court recognized that “without solicitation [for
funds] the flow of such information and advocacy would
likely cease.” Many years earlier, in Grosjean v. Ameri-
can Press Co., supra, 297 U.S. at 245, 56 S.Ct. at 447,
the Court held that a state license tax, directed at news-
papers and magazines, and imposed on gross receipts
upon advertising in well-circulated newspapers, violated
the First Amendment because its “tendency is to restrict
circulation ... destroying both advertising and circula-
tion ....” And in Murdock v. Pennsylvania, 319 U.S.
105, 114, 63 S.Ct. 870, 875, 87 L.Ed.2d 1292 (1943), it
held that the costs of a commercial solicitation tax, ap-
plied to religious groups, “restrains in advance those con-
stitutional liberties of préss and religion and inevitably
tends to suppress their exercise.”
Significantly, most of the above restraints were not
directly or explicitly content-related. In all of the cases in
A47
which they were involved, the Court recognized the dan-
gers of such indirect restraints to the ability to express
ideas and to their free dissemination — the very risks
that the Act’s restrictions pose.
On their face, the Act’s prohibitions against guaran-
tees, long exclusive first runs, and advances throw the
undisputed financial risks of motion picture production,
distribution, and exhibition more heavily on the
producer/distributor and create the danger of affecting
the financial investment processes through which mo-
tion pictures and the ideas they express, are created and
communicated.28 The cases demonstrate that extensive
factual analysis of the actual burdens that might be im-
posed by the Act is not necessary; a genuine risk of af-
fecting activities protected by the First Amendment, if
not counterbalanced by significant public governmental
purposes, served by a precisely tailored enactment, is it-
self unconstitutional.
C. When standards for evaluating indirect re-
straints upon expression are applied to the Act,
it is clear that its purposes are not compelling
and that its restraints are overbroad.
In United States v. O’Brien, supra, 391 U.S. at
376-77, 88 S.Ct. at 1678-79, the Supreme Court set forth
the still-accepted four-pronged test for evaluating the
impacting of indirect statutory regulation of expression.
“To characterize the quality of the governmental
interest whichsmust appear, the Court has employed
a variety of descriptive terms: compelling; substan-
tial; subordinating; paramount; cogent; strong.
Whatever imprecision inheres in these terms, we
think it clear that a government regulation is suffi-
ciently justified if it is within the constitutional
28. Allied Artists Pictures Corp. v. Rhodes, supra, 496 F.Supp.
at 415.
A48
power of the Government; if it furthers an important
or substantial governmental interest; if the govern-
mental interest is unrelated to the suppression of
free expression; and if the incidental restriction on
alleged First Amendment freedoms is no greater
than is essential to the furtherance of that
interest. "29
When the standards of analysis that are set forth in
O’Brien and the subsequent cases that have followed its
principles are applied to the Act, it is clear that the Penn-
sylvania Act’s explicit and implicit purposes do not meet
its criteria and that the Act’s non-waivable and compre-
hensive prohibitions are not drawn with the narrow pre-
cision that the cases require.°°
29. See also First National Bank of Boston v. Bellotti, supra,
435 U.S. at 786, 98 S.Ct. at 1421. There, a state law prohibited cer-
tain businesses, such as banks, from making contributions to pub-
licize their views on political issues, other than on questions that
materially affected their property. The Supreme Court viewed this
“indirect” restriction as directly limiting the subjects of corporate
speech. In striking down the restraint, it forcefully stated the gov-
erning requirements:
““!T}he State may prevail only upon showing a subordinating
interest which is compelling’. . . ‘and the burden is on the govern-
ment to show the existence of such an interest. . . .. Even then, the
state must employ means ‘closely drawn to avoid unnecessary
abridgement. .. .’” [citations omitted].
Under Belotti, the state, as the proponent of legislation must
meet the burden of demonstrating the existence of a compelling
interest, and must “closely draw” the legislative means to achieve
that purpose while avoiding unnecessary abridgement of free ex-
pression.
30. When First Amendment interests are involved, a court may
not apply the liberal “rational basis” due process test of United
States v. Carolene Products Co., supra, 304 U.S. 144, 152, 58 S.Ct.
778, 782, 82 L.Ed. 1234 (1939), and Nebbia v. New York, 291 U.S.
502, 537, 54 S.Ct. 505, 516, 78 L.Ed. 940 (1934), in which the “laws
passed” must only have a “reasonable relation to a proper legislative
purpose and |be} neither arbitrary nor discriminatory... .” Id. at
537, 54 S.Ct. at 516. Compare Allied Artists Pictures Corp. v.
A49
With regard to purposes, the legislature’s list in Sec-
tion 2 of the Act (see note 12, supra) cannot be deemed
to contain purposes that are sufficiently “substantial,”
“significant,” or “compelling” public or governmental in-
terests to justify the Act.! Asserted purposes 1, 4, 5, and
9 (see note 12, supra), speak generally of broadening
public access to motion pictures, particularly with regard
to subsequent “runs,” but, like the govern-
mentally-coerced access found constitutionally unac-
ceptable in Miami Herald Publishing Co. v. Tornillo,
supra, 418 U.S. at 255, 94 S.Ct. at 2838, such objectives
create the risk of indirect burdens that inhibit expres-
sion, and under the cases, are insufficiently compelling
to justify the Act’s potential restraints upon expression.
Section 2, which speaks of the “access of the public” and
“insuring unabridged access” to motion pictures, when
read together with the requirement of Section 7, that a
Footnote 30 (Continued )
Rhodes, supra, applying that “rational basis” test to the more limited
Ohio enactment and finding that “the Act rationally relates to a
number legitimate and important state interests.” 496 F.Supp. at
432. A more demanding standard is required when a state’s laws
“run afoul of some specific constitutional provision or other federal
law.” City of New Orleans v. Dukes, 427 U.S. 297, 304, n.5, 96 S.Ct.
2513, 2517, n.5, 49 L.Ed.2d 511 (1976), on remand 537 F.2d 856
(Sth Cir. ).
31. Furthermore, a Court must look behind a recitation of pur-
pose, for“. . . the mere recitation of a benign, compensatory purpose
is not an automatic shield which protects against any inquiry into
the actual purposes underlying a statutory scheme.” Weinberger v.
Wiesenfeld, 420 U.S. 636, 648, 95 S.Ct. 1225, 1233, 43 L.Ed.2d 514
(1975). See also Great Western United Corp. v. Kidwell, 577 F.2d
1256, 1279 (5th Cir. 1978), rev'd on other grounds sub nom. Leroy
v. Great Western United Corp., 443 U.S. 173, 99 S.Ct. 2710, 61
L.Ed.2d 464 (1979) (rejecting stated state legislative purposes in a
takeover statute as irrelevant); Kassel v. Consolidated Freightways
Corp., 450 U.S. 662, 670, 101 S.Ct. 1309, 1316, 67 L.Ed.2d 580
(1981), holding (in the context of a Commerce Clause challenge to
a State statute) that:
“(T]he incantation of a purpose to promote the public
health or safety does not insulate a state law from .. . attack.”
ASO
film be reoffered after 42 days for exhibition at subse-
quent run theatres, or of Section 8(e) that, once invita-
tions for bids are issued, a motion picture may not be
withdrawn, appears to run afoul of the Supreme Court’s
opinion in Miami Herald, supra, which rejected such
requirements.
Asserted purposes 2, 3, 6 and 8 (see note 12, supra),
refer generally to protection of the private business in-
terests of the exhibitors in relation to distributors or to
enhancing competition.*2 However, the cases demon-
strate that protection of the commercial interests of a pri-
vate group, here, motion picture exhibitors, is. not
sufficiently “compelling” to justify intrusion into areas
protected by the First Amendment.
Asserted purpose 10 simply speaks of the need to
prohibit “blind bidding.”
When these purposes are examined in the light of
the purposes found insufficient to support regulation in
such cases as Buckley v. Valeo, supra, invalidating a lim-
itation on campaign expenditures as an indirect restraint
on speech, or Village of Schaumburg, supra, invalidating
the “75% requirement,” or the many other cases that
could be cited, it is clear that they cannot sustain this
Act’s restraints. An illustrative case is Home Box Office v.
Federal Communications Comm’n., 567 F.2d 9, 49-50
(D.C. Cir. 1977), cert. denied sub nom. Federal Commu-
nications Comm'n. v. Home Box Office, 434 U.S. 829, 98
S.Ct. 111, 54 L.Ed.2d 89 (1977), reh. denied 434 U.S.
988, 98 S.Ct. 621, 54 L.Ed.2d 484 (1977), later app. 587
F.2d 1248 (1978). There the Court applied the O’Brien
ms
32. As to enhancing competition, or asserted purpose 7, pre-
vention of deception, even if these purposes were legitimate and/or
substantial, and not mere “incantations,” see Kassel, supra, 450
U.S. at 670, 101 S.Ct. at 1316, Village of Schaumburg, supra, 444
U.S. at 636, 637, 100 S.Ct. at 836, the cases demonstrate that they
must be served by more narrowly drawn means.
ASI
criteria and struck down administrative regulations with
a strong presumption of validity promulgated by the FCC
and with the ostensible valid purpose of avoiding
“siphoning.” The Court found that, while those regula-
tions, prohibiting all advertising during programs and
limiting the number of feature films and sportcasis com-
bined, did not regulate content directly, they violated the
First Amendment as indirect restraints. Applying the
O’Brien standard, it held (id. at 49-50):
“The no-advertising and 90-percent rules clearly vi-
olate O’Brien’s first criterion. Not only do they serve
no ‘important or substantial. . . interest,’ 391 U.S. at
377... they serve no purpose which will withstand
scrutiny on this record .... Instead, the Commis-
sion has indulged in speculation and innuendo
O’Brien requires that ‘an important or substantial
government interest’ be demonstrated... .” ( Foot-
notes omitted).
The purposes cited by defendants in their briefs
(such as correcting the effects of economic disparity ) do
not advance their argument. Indeed, they weaken
defendants’ argument by emphasizing the absence of
any compelling public purposes that serve as a founda-
tion for the Act’s broadly conceived restraints.
Defendants have argued that the Act is no different
from the laws of general application designed to imple-
ment policies such as equal employment, antitrust, zon-
ing, product safety, fraud prevention, or consumer
protection and the like, and that its effects are
peripheral” restrictions on expression with which the
First Amendment, whose purpose is to protect funda-
mental freedoms, is not concerned. It is true that cases
like Pittsburgh Press Co. v. Pittsburgh Comm'n. on Hu-
man Relations, 413 U.S. 376, 93 S.Ct. 2553, 37 L.Ed.2d
669 (1973), reh. denied 414 U.S. 881, 94 S.Ct. 30, 38
L.Ed.2d 128, where the Court held that the newspaper
A52
industry whose “product” is protected speech must fol-
low the laws governing equal employment, and others
cited by defendants that uphold statutes of general ap-
plication regulating antitrust violations or labor relations,
demonstrate that businesses whose product is expres-
sion are as subject as are any other enterprises to laws of
general application carrying out valid public policies.
However, the Pennsylvania Act is not a statute of general
application but a comprehensive regulatory enactment
directly regulating motion picture licensing and its pur-
poses are not comparable to those in the regulation up-
held in Pittsburgh Press; nor are the Act’s effects
“peripheral.”33 The cases on which defendants rely do
not support this Act’s comprehensive regulation of the
means of distribution and exhibition of motion pictures
in Pennsylvania—regulation that is addressed solely to
one aspect of one business. See, e.g., Metromedia, Inc. v.
City of San Diego, supra,____. U.S. at____, 101 S.Ct. at
2896.
Nor is the Act like a consumer protection statute.
Despite the general language in Section 2, the Act limits
transactions between business entities, not between the
33. Thus, this case is very different from those cited by defen-
dants. Compare Lorain Journal Company v. United States, 342 U.S.
143, 72 S.Ct. 181, 96 L.Ed. 162 (1951) (newspapers are subject to
the antitrust laws); Oklahoma Press Publishing v. Walling, 327 U.S.
186, 66 S.Ct. 494, 90 L.Ed. 614 (1946) (the Fair Labor Standards
Act applies to newspapers); United States v. Hunter, 459 F.2d 205
(4th Cir. ), cert. denied sub nom. Hunter v. United States, 409 U.S.
934, 93 S.Ct. 235, 34 L.Ed.2d 189 (1972), reh. denied 413 U.S. 923,
93 S.Ct. 3046, 37 L.Ed.2d 1045 (1973) (prohibition against publi-
cation of discriminatory housing advertisements in newspapers is
not a First Amendment violation). Each of these cases involved sig-
nificant federal policies exemplified in federal enactments of general
application as applied to industries otherwise protected by the First
Amendment, in contrast to this case. Nor is this case like United
States v. Paramount Pictures Corp., 334 U.S. 131, 68 S.Ct. 915, 92 :
L.Ed. 1260 (1948) in which the court applied the federal antitrust :
laws to the motion picture industry.
AS3
ultimate consumer and an entity engaged in deceptive
practices. Compare Donaldson v. Reed Magazine, Inc.,
333 U.S. 178, 68 S.Ct. 591, 92 L.Ed. 628 (1948)
(postmaster-general determined that a contest was
fraudulent and refused to allow use of the mails for cir-
culation of books and magazines offering prizes); Savage
v. Commodity Futures Trading Comm'n. 548 F.2d 192
(7th Cir. 1977) (regulation of fraud in commodity trad-
ing).
The purposes of Section 2, and those which defen-
dants propose, might well be valid and support another,
more limited regulation, possibly one more closely re-
sembling the Ohio statute. Judge Duncan’s observation,
that “delay is a direct result of trade screening, the im-
portance of which to the state’s regulatory purposes has
been earlier emphasized. . . .,” 496 F.Supp. at 435, is
applicable to a statute, that, unlike Pennsylvania’s, does
not prohibit all guarantees and advances, and that does
not require that films be “made available” after 42 days
to subsequent run theatres, but which, instead, prima-
rily eliminates blind bidding. This comprehensive regu-
lation sweeps too broadly and requires more substantial
purposes to justify it.
Even if the purposes asserted in Section 2 of the Act
were sufficiently “substantial” or “compelling” to justify
some regulation, the Act is not the precisely drawn en-
actment that the Court requires. In Village of
Schaumburg v. Citizens For A Better Environment,
supra, 444 U.S. at 636-637, 100 S.Ct. at 836, the Su-
preme Court held that the village’s “75% requirement”
could not be sustained unless (1) it served a sufficiently
strong interest that the village was entitled to protect and
(2) did not unnecessarily (and overbroadly) restrict ex-
pression. The village alleged that prevention of fraud was
its principal justification (like asserted purpose 7 here,
73 P.S. § 203-2(7)). The Court (Justice White) not only
A54
found no substantial relationship between the 75% re-
quirement and any valid goals of fraud prevention, public
safety, or residential privacy; it wrote:
“The Village may serve its legitimate interests,
but it must do so by narrowly drawn regulations de-
signed to serve those interests without unnecessarily
interfering with First Amendment freedoms.”
Id. at 637, 100 S.Ct. at 836.
See also Schad v. Borough of Mt. Ephraim, supra,
nts en , 101 S.Ct. at 2184-87, where the Su-
preme Court reversed convictions for violating that por-
tion of a village zoning ordinance that barred “live
entertainment” from the uses permitted in the borough’s
commercial zones. The borough argued that the pur-
poses of the prohibition were to serve the immediate
needs of borough residents and to avoid parking and po-
_ lice problems—normally, valid zoning goals. Id. at
- , 101 S.Ct. at 2184-87. The Court found that
the ordinance’s purposes were not sufficiently substan-
tial to justify the overly restrictive means used:
“{W]hen a zoning law infringes upon a protected
liberty, it must be narrowly drawn and must further
a sufficiently substantial government interest... .
Similarly, in Village of Schaumburg v. Citizens for a
Better Environment, 444 U.S. 620, 637, 100 S.Ct.
826, 836, 63 L.Ed.2d 73 (1980), it was emphasized
that the Court must not only assess the substantial-
ity of the governmental interests asserted but also
determine whether those interests could be served
by means that would be less intrusive on activity pro-
tected by the First Amendment. ...” Id. at
- , 101 S.Ct. at 2182-2184.
If a zoning ordinance that would traditionally sur-
vive judicial scrutiny, see Village of Belle Terre v. Boraas,
416 U.S. 1, 94 S.Ct. 1536, 39 L.Ed.2d 797 (1974), must
A55
meet such strict criteria, logically, regulation of bargain-
ing relationships in motion picture licensing, a far less
compelling or public state activity, must meet them—
even when that regulation is “content-neutral” is con-
trast to an ordinance prohibiting live entertainment. Ac-
cord: Schneider v. State, 308 U.S. 147, 162,60 S.Ct. 146,
151, 84 L.Ed. 155 (1939) (invalidating restrictions on
door-to-door and street distribution of circulars when
government’s purpose could be achieved less restric-
tively); Space Age Products, Inc. v. Gilliam, 488 F.Supp.
775 (D.Del. 1980) (even so valid an objective as elimina-
tion of fraud did not justify an overbroad “prior restraint”
on plaintiff’s First Amendment rights, although the
“speech” in question, unlike motion pictures, was mere
advertising for a “pyramid” scheme).
The Act’s provisions strike too broadly and affect pro-
tected rights more substantially than the cases permit.
Several examples of its overbreadth are apparent on its
face. For example, assuming arguendo that asserted
purpose 7 (prevention of “deceptive practices”) were
deemed both to be “substantial” and a purpose intended
by the legislature, a more specific bill mandating ad-
vance disclosure or permitting cancellation of a license
agreement after screening, or even simply requiring an
advance trade screening, would address that issue more
directly and with less impact upon protected rights.
However, the Act couples prohibitions against guaran-
tees and advances with those against blind bidding, al-
though the affidavits of defendants Budco and Fox
argued forcefully that guarantees were undesirable pri-
marily because, if a film were not trade-screened, an ex-
hibitor would not have seen a film before entering into a
license agreement in which he guaranteed a return to
the distributor.34 According to defendants’ own rationale,
34. Fox Affidavit at §{ 4, 5, 7. Thus, Fox speaks of the evils of
“the combination of guarantees and not being able to see a film be-
—
fore bidding on or negotiating forit. . . .” © 5.
AS6
the Act is overbroad on its face (and violates the O’Brien
criteria) when it prevents an exhibitor from offering a
guarantee (or an advance) to compete to obtain a picture
once advance trade screenings have been required.
Defendants also argue that the Act’s restrictions are
mere “time,” “place,” and “manner” regulation, see
Grayned v. City of Rockford, 408 U.S. 104, 116-117, 92
S.Ct. 2294, 2303, 33 L.Ed.2d 222 (1972) and rely on
Young v. American Mini Theatres, Inc., 427 U.S. 50, 96
S.Ct. 2440, 49 L.Ed.2d 310 (1976), reh. denied 429 U.S.
873, 97 S.Ct. 191, 50 L.Ed.2d 155 (1976), for the prop-
osition that mere indirect regulation of the time and
place of speech offends no constitutional provision. In
their view, requiring advance trade screenings, manda-
tory rebidding, and reoffers of films after 42 days are rea-
sonable regulations that leave open sufficient alternative
channels for communication to avoid unconstitutional
restriction. Young, however, is not dispositive of this
case, nor has it been accorded much weight in subse-
quent Supreme Court decisions (see, e. g., Schad v. Bor-
ough of Mt. Ephraim, supra,___. U.S. at_____, 101 S.Ct.
at 2184).
First, in contrast to the instant case, which involves
the direct regulation of all aspects of the motion picture
licensing process, Young only restricted the location of
certain specific theatres showing sexually explicit
“adult” films. Thus, it regulated one narrow aspect of
motion picture exhibition that is not involved in this
case. By contrast to the regulation in Young, the instant
Act directly regulates the entire process of licensing of
motion pictures for exhibition in theatres in Pennsylva-
nia (and is not concerned with such peripheral First
Amendment matters as obscenity).
AS7
Second, in upholding the ordinance in Young (by a
5-4 vote), the Court emphasized the existence of evi-
dence presented to the lawmakers of neighborhood de-
terioration due to concentration of the regulated
theatres. 427 U.S. at 62, 96 S.Ct. at 2448. There have
been no comparable findings here.
Finally, in Young, the challenged ordinance merely
dispersed the theatres being regulated and had no im-
pact upon the availability of the sexually explicit films.
See 427 U.S. at 71, n.35, 96 S.Ct. at 2453, n.35. It is
questionable whether such provisions as the Act’s time
limitation on exclusive first runs is comparable to that
“dispersal;” it creates the risk of potential economic im-
pact and limiting availability of all types of films.
In Schad v. Borough of Mt. Ephraim, supra, the bor-
ough, relying on Young, argued that its zoning ban on
live entertainment was mere “time,” “place,” and
“manner” regulation. It claimed, inter alia, that because
live entertainment was amply available outside the bor-
ough, opportunities for this form of expression had not
been restricted (this is comparable to an argument that
Section 7, which sets a time limit on exclusive first runs,
is constitutional “time,” “place,” and “manner” regula-
tion because the films will be available in locations other
than prime theatres). The Supreme Court rejected that
view and, qucting from Schneider v. State, 308 U.S. 147,
163, 60 S.Cc. 146, 151, 84 L.Ed. 155 (1939) observed
that “one is not to have the exercise of his liberty of ex-
pression in appropriate places abridged on the plea that
it may be exercised in some other place.” Id. _____ U.S. at
many 404 SCL ot ZEB.
The Act’s provisions directly regulate and affect the
licensing process which permits dissemination of ex-
pression contained in motion pictures to theatre audi-
ences in Pennsylvania. The Act is not the narrowly
drawn regulation that the cases require when First
A58
Amendment rights are affected. The Act is not a law of
general application. The risks to expression that it cre-
ates, although indirect, are apparent on its face. In the
absence of compelling governmental interests, directly
and precisely served by legislation with a substantial re-
lationship to them, Village of Schaumburg, supra, 444
U.S. at 638, 100 S.Ct. 837, its indirect restraints on ex-
pression cannot stand, even though they are not phrased
as direct regulation of content.
IV. THE ACT’S INTERFERENCE
WITH FEDERAL COPYRIGHT
LAW.
The foregoing analysis is, of course, dispositive of
this motion. However, because of the importance of this
constitutional challenge to a significant state legislative
enactment, in which it is clairned that the state enact-
ment interferes with federal law, this opinion will also
discuss plaintiffs’ Supremacy Clause claim.
Initially, it is important to observe that the case law
provides little guidance with regard to the constitution-
ality of such comprehensive regulation of copyright li-
censing by a state.35 However, such analogies as exist in
35. This Court has carefully examined the cases cited in the
parties’ briefs and has independently sought for additional authority
in this area. There is very little direct case authority on the issue
before the court. Those cases in which state action in the copyright
area has been stricken deal primarily with conflicting grants of copy-
right. See e. g., Mills Music, Inc. v. Arizona, 591 F.2d 1278 (9th Cir.
1979). Compare Remick Music Corp. v. Interstate Hotel Co., 58
F.Supp. 523 (D.Neb.1944), aff’d sub nom. Interstate Hotel Co. v.
Remick Music Corp., 157 F.2d 744 (8th Cir. 1946), cert. denied 329
U.S. 809, 67 S.Ct. 622, 91 L.Ed. 691 (1947), reh. denied 330 U.S.
854, 67 S.Ct. 770, 91 L.Ed. 1296 (1947), holding that a state law was
unconstitutional because it required a copyright holder to offer his
property for sale in a certain way and limited his right to fix the
terms and the price of a license. Id. 58 F.Supp. at 543-4. In Remick,
failure to comply with the state law resulted in virtual forfeiture of
the copyright.
A59
the cases and analysis and comparison of the two stat-
utory schemes convince this Court that a conflict imper-
missible under the Supremacy Clause exists between
the Act and federal copyright law.
The issue of whether the Pennsylvania Act must be
deemed preempted under the Supremacy Clause, U.S.
Const., Art. VI, cl. 2, raises “sensitive issues of
state/federal relations. .. .,” Allied Artists Pictures
Corp. v. Rhodes, supra, 496 F.Supp. at 442, and this
Court has approached that determination with caution.
The often-stated and well-established criteria that gov-
ern preemption were summarized in Jones v. Rath Pack-
ing Co., 430 U.S. 519, 525-26, 97 S.Ct. 1305, 1309-10,
51 L.Ed.2d 604 (1977), reh. denied 431 U.S. 925, 97
S.Ct. 2201, 53 L.Ed.2d 240:
“The first inquiry is whether Congress, pursuant to
its power to regulate commerce, U.S. Const., Art. 1,
§ 8, has prohibited state regulation of the particular
aspects of commerce involved in this case. Where
. . the field which Congress is said to have pre-
empted has been traditionally occupied by the
States, ‘we start with the assumption that the his-
toric police powers of the States were not to be su-
perseded by the Federal Act unless that was the
clear and manifest purpose of Congress.’. . . But
when Congress has ‘unmistakably . . . ordained’,
that its enactments alone are to regulate a part of
commerce, state laws regulating that aspect of com-
merce must fall. This result is compelled whether
Congress’ command is explicitly stated in the
statute’s language or implicitly contained in its
structure and purpose.
Footnote 35 (Continued )
The cases cited by defendants for the proposition that there is
no conflict between the state and federal schemes are inapposite in
that they deal with application of the antitrust laws or other laws of
general application to copyrighted property or to trademarks or with
taxes of general application.
A60
“Congressional enactments that do not exclude
all state legislation in the same field nevertheless
override state laws with which they conflict.
U.S.Const., Art. VI. The criterion for determining
whether state and federal law are so inconsistent
that the state law must give way is firmly established
in our decisions. Our task is ‘to determine whether,
under the circumstances of this particular case, [the
State’s] law stands as an obstacle to the accomplish-
ment and execution of the full purposes and objec-
tives of Congress.’ ” [citations omitted]
See also Maryland v. Louisiana, ____ U.S. ___.,
, 101 S.Ct. 2114,.2128, 69 L.Ed.2d ____ (1981);
Hines v. Davidowitz, 312 U.S. 52,61 S.Ct. 399, 85 L.Ed.
581 (1941).
The history, purposes and provisions of the 1976
Copyright Act demonstrate that, in this area, Congress
has “unmistakably ordained” that federal enactments
are to govern.36 See the Notes of the Committee on the
36. See Morseburg v. Balyon, 621 F.2d 972 (9th Cir.) cert. de-
nied, 449 U.S. 983, 101 S.Ct. 399, 66 L.Ed.2d 245 (1980) in which
this principle — that whether a particular conflict between state and
federal laws will be found tolerable or unconstitutional normally de-
pends upon the relative strength and nature of the federal and state
interests involved — recently was discussed. The Court of Appeals
rejected the argument that a state transfer tax on royalties should be
preempted under the former Copyright Act. The Court observed that
when the “area of occupation” is peculiarly federal, or nationwide in
its concern, the Supreme Court has emphasized the national inter-
est and has found preemption:
“{Cjertain basic doctrinal notions repeatedly are used in apply-
ing preemption. Thus, the extent to which the federal law has ‘oc-
cupied the field’ and the presence of ‘conflict’ between the federal
and state law have always been focuses of analytic attention. The
nature of the Court’s emphasis at a particular time is revealed by
whether ‘occupation of the field’ and ‘conflict’ are easily found to
exist or not. ‘Occupation’ can require no more than the existence of
a federal law generally applicable to a significant portion of the area
in question to no less than an express statement demonstrating an
A61
Judiciary, House Report No. 94-1476, 94th Cong., 2d
Session, 1976, reprinted at pp. 271-72 of 17 U.S.C.A.
(1977), U.S. Code Cong. & Admin. News 1976, 5659. To
make these intentions enforceabie, Congress enacted an
explicit statutory preemption section in the 1976 Copy-
right Act, Section 301(a), 17 U.S.C. § 301(a). That sec-
tion provides, in pertinent part, that:
“(a) On and after January 1, 1978, all legal or
equitable rights that are equivalent to any of the ex-
clusive rights within the general scope of copyright
as specified by section 106 in works of authorship
that are fixed in a tangible medium of expression
and come within the subject matter of copyright as
specified by sections 102 and 103, whether created
before or after that date and whether published or
unpublished, are governed exclusively by this title.
Thereafter, no person is entitled to any such right or
equivalent right in any such work under the com-
mon law or statutes of any state.”
Section 301(b) establishes certain exemptions. Sig-
nificantly, Congress broadened the scope of Section
301(a) from an earlier version (H.R. 4347, 89th Con-
gress, 2d Sess. (1966)) which had provided only that “all
rights in the nature of copyright” were preempted and, at
the same time, eliminated from the same earlier version
of Section 301(b) specific examples of exemptions to the
Footnote 36 (Continued )
intention to occupy the field duly enacted by Congress. ‘Conflict’
likewise, can require no more than a mechanical demonstration of
potential conflict between federal and state law to no less than a
showing of substantial frustration of an important purpose of the
federal law by the challenged state law.” 621 F.2d at 976.
Recently, in McCarty v. McCarty, . U.S. , 101 S.Ct.
2728, 69 L.Ed.2d 589 (1981), the Court held that even in the area
of domestic relations, which “belongs to the laws of the States and
not to the laws of the United States. . . .,” In re Burrus, 136 U.S.
586, 593-94, 10 S.Ct. 850, 852-53, 34 L.Ed. 500 (1890), a state’s
community property laws must give way to federal law as enacted in
military retirement statutes.
A62
preemption provision, such as breaches of contract or de-
ceptive practices. See generally discussion in Nimmer on
Copyright, § 1.01(b) at pp. 1-10 through 1-19 (1978).
As defendants correctly point out, the Act does not
make recompense to the copyright holder impossible,
nor does it establish a conflicting system of state copy-
right which would obviously be preempted under Sec-
tion 301. However, as Judge Duncan stated in Allied
Artists, the standard is whether state legislation “grants,
creates, or destroys” rights equivalent to those of a copy-
right. Allied Artists Pictures Corp. v. Rhodes, supra, 496
F.Supp. at 443 (emphasis added), and, in certain ways,
the Act has that effect. See discussion at pp. 993-995,
infra. Compare Remick Music Corp. v. Interstate Hotel
Co., supra, 58 F.Supp. at 543-4.
However, the Court need not find statutory preemp-
tion; the more general question of conflict of the two stat-
utory schemes under the Supremacy Clause is decisive.
Plaintiffs contend that the Act limits the exercise of fed-
erally created rights and, therefore “stands as an obstacle
to the accomplishment and execution of the full pur-
poses and objectives of Congress.” Hines v. Davidowitz,
supra, 312 U.S. at 67, 61 S.Ct. at 404. Analysis of the
purposes and objectives of the Copyright Act and the
Pennsylvania Act’s impact upon them convinces me that
plaintiff’s arguments have merit.
To ascertain those purposes, it is necessary, first, to
look at the constitutional provision governing copyrights
and second, at the Copyright Act itself. Article 1, Section
8, Cl. 8 provides that Congress has the power “[t]o pro-
mote the Progress of Science and useful Arts, by secur-
ing, for limited Times to Authors and Inventors the
exclusive Right to their respective Writings and
Discoveries.” This provision makes clear that the public
goal—promoting “Science and useful Arts’—is to be
A63
served by the means of rewarding the “Author.” Further-
more, the legislative history of both the 1976 Copyright
Act and its predecessor, as well as the relevant cases de-
cided under both federal Acts, demonstrate that, while
the public interest in the dissemination of copyrighted
material is, of course, paramount, Fox Film Corp. v.
Doyal, 286 U.S. 123, 52 S.Ct. 546, 76 L.Ed. 1010 (1932),
Congress believed that “encouragement of individual ef-
fort by personal gain is the best way to advance public
welfare through the talents of authors. . . .” Mazer v.
Stein, 347 U.S. 201, 74 S.Ct. 460, 98 L.Ed. 630 (1954),
reh. denied, 347 U.S. 949, 74 S.Ct. 637, 98 L.Ed. 1096
(1954). Thus, in Goldstein v. California, 412 U.S. 546,
555, 93 S.Ct. 2303, 2309, 37 L.Ed.2d 163 (1973), reh.
denied 414 U.S. 883, 94 S.Ct. 27, 38 L.Ed.2d 131 (1973),
interpreting the former Copyright Act, the Court ex-
plained that “to encourage people to devote themselves
to intellectual and artistic creation, Congress may guar-
antee to authors and inventors a reward in the form of
control over the sale or commercial use of copies of their
works” [emphasis added].
Section 106 of the 1976 Copyright Act, 17 U.S.C.
§ 106, protects the right of the copyright holder to profit
from its creative efforts and governs the way in which a
copyright holder may distribute its work to the public
and realize the economic benefits of that work. It pro-
vides that a holder of a copyright has, among others, the
“exclusive rights to do and to authorize any of the
following:”
x * x cy a a
“(3) to distribute copies or phono-records of the
copyrighted work to the public by sale or other trans-
fer of ownership, or by rental, lease, or lending;
A64
‘“(4) in the case of literary, musical, dramatic
and choreographic works, pantomimes, and motion
pictures and other audiovisual works, to perform the
copyrighted work publicly. .. .”
The legislative history of Section 106 indicates the
importance accorded by the draftsmen of the Copyright
Act to the right of the copyright holder to “distribute [his
works]... by rental, lease, or lending. . . .” The notes of
the Committee on the Judiciary, House Report No.
94-1476, show that “[t]he five fundamental rights that
the bill gives to copyright owners—the exclusive rights
of reproduction, adaptation, publication, performance,
and display—are stated generally in section 106. These
exclusive rights, which comprise the so-called ‘bundle of
rights’ that is a copyright, are cumulative and may over-
lap in some cases [emphasis added].” 17 U.S.C.A. at 100.
Clearly, the Committee viewed the right to license as an
essential element of the copyright itself. State regulation
that interferes with that right interferes with the essence
of the copyright grant and with the achievement of the
Congressional objectives.
Furthermore, the same Committee notes make clear
the Congressional intent that “the copyright owner
would have the right to control the first public distribu-
tion of an authorized copy of his work whether by sale,
gift, loan, or some rental or lease arrangement. . . . |em-
phasis added],” id. at 101, the choice clearly being the
copyright holder’s.
Although the Pennsylvania Act does not prohibit the
grant of a copyright under federal law or establish a com-
peting copyright system or equivalent right under state
law, its provisions substantially restrict the conditions
under which a copyright holder may distribute and li-
cense its work. Its regulation of the conditions under
which “rental, lease, or lending” may take place inter-
feres with the federally created rights granted by § 106
A65
and with the copyright holder’s “control over the sale or
the commercial use. . . .” of its work, Goldstein, supra,
412 U.S. at 555, 93 S.Ct. at 2309, in ways that the Ohio
statute upheld in Allied Artists does not.
For example, Section 6 of the Pennsylvania Act
makes unlawful the inclusion of any advances in li-
censes. By contrast, an exhibitor who wishes to do so
may offer an “advance” in Ohio, where a short (14 day)
advance is permitted in a license agreement. Thus, while
the Ohio statute upheld in Judge Duncan’s opinion in
Allied Artists may not have unconstitutionally limited a
copyright holder’s control over the commercial use of its
work, the Pennsylvania Act goes further.
A second example is the Pennsylvania Act’s absolute
prohibition of all guarantees in combination with per-
centage payments. In Allied Artists, Judge Duncan rec-
ognized that the Ohio statute merely prohibited the
conditioning of a license agreement upon a demand of a
guarantee when a percentage rental was sought, unlike
Pennsylvania’s Act, which prohibits all guarantees out-
right, and implied that otherwise, he might have come to
a contrary decision about the Ohio statute’s constitution-
ality:
“First, plaintiffs assert that the Ohio Act’s prohibi-
tion of licenses conditioned on guarantees conflicts
with the right afforded by copyright owner ‘to dis-
tribute copies .. . by rental, lease, or lending.’ Plain-
tiffs contend that as a result of this prohibition, the
owner of a copyright in a motion picture is faced with
the mutually exclusive choices of licensing his film
for a fixed price (guarantee) and licensing his film
only for a participation in its profits (film rental).
Plaintiffs contend that the Ohio Act operates to deny
to an artist one of the most basic rights inhering in
private property—the right to sell or lease the prop-
erty for a fixed price reflecting its value to the lessee.
A66
“As a factual matter, the Act does not present the
plaintiffs with the Hobson’s Choice indicated. By its
terms, it does not prohibit guarantees; it merely pro-
hibits conditioning the granting of a license agree-
ment on the payment of a guarantee when a film
rental is also sought. The Act merely limits the cir-
cumstances under which guarantees may be ob-
tained to situations in which the licensor does not
compel the licensee to promise a guarantee as a con-
dition to receiving the license. Yet in so doing, the
Act does restrict the formerly unfettered discretion
in producer-distributors to demand payment by
guarantees.” {Emphasis added]
496 F.Supp. at 445.
In Pennsylvania, the Act poses exactly this
‘“Hobson’s Choice.”
A third example of interference with § 106 is Section
7 of the Act, which regulates the term of the license—a
provision which is not included in the Ohio statute at all.
After 42 days, the film must be reoffered for licensing,
and the run must be “expanded.” The copyright holder’s
freedom to license or not to license is directly affected by
this section of the Act.
The bidding requirements (also present in Ohio) re-
strict the licensor’s control and freedom to license even
further. Once bids are sought, a motion picture license
may not thereafter be negotiated privately. Section 8 also
requires that bidders be informed of the terms of
competitors’ bids. Since negotiation may not take place if
all bids are rejected, return to the copyright holder is nec-
essarily affected, for on rebidding, competing exhibitors
know the terms that were previously rejected. Further-
more, Section 8 prohibits the licensor from withdrawing
the film from the market once bidding is initiated and all
bids are rejected, further restricting his freedom not to
license under the Copyright Act.
A67
In addition, the requirement of Section 4, that an
advance screening be held, requires the copyright holder
to delay licensing to a time subsequent to the time at
which he is permitted to license under the Copyright
Act. This requirement, also present in Ohio, conflicts
with § 106. See Kennecott Corp. v. Smith, 637 F.2d 181,
188 (3d Cir. 1980) (New Jersey Takeover Bid Disclosure
Law, delaying “commencement” of a tender offer, con-
flicted with 5-day waiting period in SEC Rule 14(d)-2, 17
C.F.R. § 240.14(d)2(b) (1980); Crane Co. v. Lam, 509
F.Supp. 782, CCH Fed.Sec.L.Rep., § 97,896 (E.D.Pa.
1980) (Pennsylvania Takeover Disclosure Act imposed a
time period that conflicted with that in the Williams Act).
These conflicts with the constitutional goals and
Congressional intent as it appears in the history of the
1976 Copyright Act are apparent on the face of the Penn-
sylvania Act. Given the importance of the exclusive right
to license, of the right of control and choice of the means
of distribution, and the significance of return to the copy-
right holder, the conclusion that the Act’s restrictions
“stand as an obstacle” to accomplishment of the Con-
gressional objectives is compelled.
Defendants cite Fox Film Corp. v. Doyal, 286 U.S.
123, 52 S.Ct. 546, 76 L.Ed. 1010 (1932) for the propo-
sition that reduction of licensing revenues is not uncon-
stitutional in and of itself, and, of course, that general
proposition is correct in the abstract. See also United
States v. Paramount Pictures Corp., supra, 334 U.S. at
158, 68 S.Ct. at 929; Allied Artists, supra, 496 F.Supp.
at 446-47. But Fox Film only holds that a
non-discriminatory state gross receipts tax of general ap-
plication (which this Act is not) may be applied to rev-
enues received from copyright licensing. Its circum-
stances are not analogous to the Act’s direct regulation of
licensing terms and its interference with the licensor’s
control of the commercial use of its work.
A68
Defendants also rely on cases in which state laws of
general application regulating conduct found to be
against public policy, only peripherally related to copy-
right licensing or to trademarks, were upheld. See
Watson v. Buck, 313 U.S. 387, 404, 61 S.Ct. 962, 968, 85
L.Ed. 1416 (1941) (regulating restraint of trade);
Mariniello v. Shell Oil Co., 511 F.2d 853 (3d Cir. 1975)
(regulating franchise terminations). However, by con-
trast to the statutes in those cases, the Act directly and
exclusively regulates the process of licensing copy-
righted property and directly restricts licensing terms in
the agreements themselves, such as guarantees, ad-
vances, or the period of the license, rather than con-
demning behavior that contravenes public policy.
The Act’s limit upon the duration of the license,
upon when a distributor may license, its prohibition of
guarantees and advances, and its bar against licensing or
negotiations prior to screening, as well as against con-
summating a license without complying with rebidding
requirements, all directly—and severely—restrict the
rights of the licensor. If the question before this Court
were merely whether “the mere existence of the [Copy-
right Act] [prohibits] all lawmaking relating to [copy-
right]... .” Mariniello, 511 F.2d at 857, another answer
would be required. Here, however, the issue is whether
the Pennsylvania Act’s broad and comprehensive regu-
lation of the process of licensing copyrighted motion pic-
tures conflicts with the objectives of Congress in its
enactment of the Copyright Act. For the reasons stated
above, I find that the Act conflicts with Congress’ grant
of rights under the Copyright Act and “. . . stands as an
obstacle to the accomplishment and execution of the full
purposes and objectives of Congress. . . ., ” Jones v. Rath
Packing Co., supra, 430 U.S. at 526, 97 S.Ct. at 1310.
en Te Pe ee ee ee
A69
V.
THE COMMERCE CLAUSE, DUE PROCESS AND
STATE LAW CLAIMS
Because the foregoing analysis is dispositive of
plaintiffs’ motion, this Court need not decide the remain-
ing constitutional arguments.
CONCLUSION.
For these reasons, plaintiffs’ motion for summary
judgment will be granted. An appropriate order will be
entered.
This entry of judgment also disposes of plaintiffs’ ap-
peal from the Magistrate’s Order of September 22, 1980
in plaintiffs’ favor. Plaintiffs’ motions concerning the
counterclaim of Budco Quality Theatres, Inc. will be
ruled upon in due course.
A70
COURT OF AFP¥* ALS OPINION OF JULY 20, 1982
UNITED STATES COURT OF APPEALS FOR THE
THIRD CIRCUIT
Nos. 81-2706 to 81-2708
ASSOCIATED FILM DISTRIBUTION CORPORATION,
AVCO EMBASSY PICTURES CORP.,
BUENA VISTA DISTRIBUTION CO., INC.,
COLUMBIA PICTURES INDUSTRIES, INC.,
FILMWAYS PICTURES, INC.,
METRO GOLDWYN-MAYER, INC.,
PARAMOUNT PICTURES CORPORATION,
TWENTIETH CENTURY-FOX FILM CORPORATION,
UNITED ARTISTS CORPORATION,
UNIVERSAL PICTURES DIVISION OF
UNIVERSAL CITY STUDIOS, INC.,
UNIVERSAL FILM EXCHANGES,
WARNER BROS., INC., AND WARNER
BROS. DISTRIBUTING CORPORATION,
8 Appellees
THE HONORABLE DICK THORNBURGH,
Governor of the Commonwealth of Pennsyivania,
Individually and in his official capacity, 4
HARVEY BARTLE, III, Attorney General for the
Commonwealth of Pennsylvania, individually and
in his official capacity,
BUDCO THEATRES, INC., :
BUDCO QUALITY THEATRES, INC.,
its subsidiary corporation, and
FOX THEATRES MANAGEMENT CORPORATION,
THE GOVERNOR AND THE ATTORNEY GENERAL
OF THE COMMONWEALTH OF PENNSYLVANIA,
Appellants in No. 81-2706.
Appeal of BUDCO QUALITY THEATRES, INC.,
in No. 81-2707.
Appeal of FOX THEATRES MANAGEMENT
CORPORATION, in No. 81-2708.
A71
Argued May 14, 1982.
Before: GIBBONS, and HUNTER, Circuit Judges,
and GERRY,* District Judge.
(Opinion filed July 20, 1982)
OPINION OF THE COURT
JAMES HUNTER, III, Circuit Judge.
Plaintiff in this case are movie distributors and pro-
ducers. They filed suit against Pennsylvania’s governor
and several movie exhibitors seeking a declaratory judg-
ment that the Pennsylvania Feature Motion Picture Fair
Business Practices Law, 73 P.S. §§ 203-1 through
203-11, was unconstitutional. The trial court granted
summary judgment for plaintiffs, striking down the en-
tire statute as violative of the First and Fourteenth
Amendments and the preemption provision of the Copy-
right Act, 17 U.S.C. § 301, 520 F.Supp. 971.' For the
reasons which follow, we will reverse the grant of sum-
mary judgment and remand this case to the district
court.
Background
In 1980 Pennsylvania enacted the Feature Motion
Picture Fair Business Practices Law (“Pennsylvania
Act”).? The Act forbids all blind bidding, some guaran-
“ Honorable John F. Gerry, United States District Court for the
District of New Jersey, sitting by design: on.
1. The trial court entered a final judgment under Federal Rule
of Civil Procedure 54(b) on the constitutionality of the statute, leav-
ing all other issues, including Budco’s antitrust counterclaims, un-
resolved.
2. The Pennsylvania Act includes the following provisions:
§ 203-2. Legislative findings and purposes
The General Assembly of the Commonwealth of Pennsyl-
vania finds and declares that the licensing and distribution of
A72
Footnote 2 (Continued)
feature motion pictures to theatres in this Commonwealth, in-
cluding the rights and obligations of distributors and exhibitors,
vitally affects the general economy as well as the access of the
public to works of artistic expression and opinion. In order to
promote the public interest and public welfare of this Common-
wealth to:
(1) insure unabridged access for the public to artistic expres-
sion and opinion in feature motion pictures at reasonable prices
and at many different locations;
(2) avoid undue control of the exhibitors by the distributors;
(3) foster vigorous and healthy competition in offering feature
motion pictures for the benefit of the public by prohibiting prac-
tices through which fair and honest competition is restrained,
destroyed or inhibited;
(4) promote the wide geographical dissemination at reasonable
prices to the public of ideas, opinions and artistic expression in
feature motion pictures;
(5) prevent delay in the exhibition of feature motion pictures to
the public in theatres playing subsequent to the first run show-
ing;
(6) prevent theatres from unnecessarily going out of business,
thereby resulting in reducing the number of small independent
businesses and unemployment with loss of tax revenues and
other undesirable consequences;
(7) prevent unfair and deceptive acts or practices and unrea-
sonable restraints of trade in the business of distribution and
exhibition of feature motion pictures within the Common-
wealth;
(8) promote fair and effective competition in that business;
(9) benefit the movie going public by limiting the long and ex-
tensive first runs so that additional theatres, in a given area, may
also exhibit the same feature motion picture and at possibly a
lower admission price; and
(10) prohibit blind bidding by insuring that exhibitors have the
opportunity to view a motion picture and know its contents be-
fore committing themselves to exhibit it in their communities;
it is necessary to legislate regulations and standards pursuant to
the exercise of the police power of this Commonwealth govern-
ing the relationship between feature motion picture distributors
or licensors and exhibitors serving the public by establishing fair
business practice procedures for the licensing and distribution
of feature motion pictures within the Commonwealth and to
provide remedies for the violation of this act, including damages
and attorneys’ fees.
i Nia ek
A73
Footnote 2 (Continued )
§ 203-3. Definitions
The following words and phrases when used in this act
shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
“Bid.” A written or oral proposal by an exhibitor to a dis-
tributor, which proposal is in response to an invitation to bid or
negotiate and states the terms under which the exhibitor will
agree to exhibit a feature motion picture.
“Blind bidding.” Bidding, negotiating, offering terms, ac-
cepting a bid or agreeing to terms for the purpose of entering
into a license agreement prior to a trade screening of the feature
motion picture that is the subject to the agreement.
“Distributor.”’ Any person engaged in the business of rent-
ing, selling or licensing feature motion pictures to exhibitors.
“Exhibit or exhibition.”’ Showing feature motion pictures
to the public for a charge.
“Exhibitor.”” Any person engaged in the business of oper-
ating one or more theatres in this Commonwealth.
“Invitation to bid.” A written or oral solicitation or invita-
tion by a distributor to one or more exhibitors to bid or negotiate
for the right to exhibit a feature motion picture.
“License agreement.” Any contract, agreement, under-
standing or condition between a distributor and an exhibitor for
the exhibition of a feature motion picture by the exhibitor.
“Person.” One or more individuals, partnerships, associa-
tions, societies, trusts or corporations.
“Run.” The continuous exhibition of a feature motion pic-
ture in a defined geographical area for a specified period of time.
A “first run” is the first exhibition of a feature motion picture in
the designated area; a “second run” is the second exhibition and
“subsequent runs” are subsequent exhibitions after the second
run. “Exclusive run” is any run limited to a single theatre in a
defined geographical area and a “nonexclusive” or “multiple
run” is any run in more than one theatre in a detined geograph-
ical area.
“Theatre.”’ Any establishment in which feature motion pic-
tures are exhibited regularly to the public for a charge.
“Trade screening.” The showing of a feature motion pic-
ture by a distributor in recognized exchange cities within the
Commonwealth which is open to any exhibitor.
§ 203-4. Blind Bidding
Blind bidding is hereby prohibited within the Common-
wealth. No negotiations between exhibitors and distributors for
the licensing or exhibition of a feature motion picture shall take
A74
Footnote 2 (Continued )
place and no license agreement or any of its terms shall be
agreed to for the exhibition of any feature motion picture within
the Commonwealth before the feature motion picture has been
trade screened within the Commonwealth.
§ 203-5. Guarantees
(a) Minimum payment to distributor. — It shall be un-
lawful for any license agreement which provides for a fee or
other payment to the distributor based in whole or in part on the
attendance or the box office receipts at a theatre within the
Commonwealth to contain or be conditioned upon a guarantee
of a minimum payment to the distributor.
(b) Prohibited guarantees void.—Any provision, agree-
ment or understanding which provides for such a guarantee
shali be void and purported waiver of the prohibition in subsec-
tion (a) shall be void and unenforceable.
§ 203-6. Advances
(a) Advances prohibited.—It shall be unlawful for any li-
cense agreement for the exhibition of a feature motion picture
at a theatre within the Commonwealth to contain or be condi-
tioned upon a provision, agreement or understanding that the
exhibitor shall advance any funds prior to the exhibition of the
picture as security for the performance of the license agreement
or to be appiied to payments under such an agreement.
(b) Prohibited advances void.—Any provision, agreement
or understanding which provides for such an advance shal! be
void and any purported waiver of the prohibition in subsection
(a) shall be void and unenforceable.
§ 203-7. Length of run
No license agreement shall be entered into between dis-
tributor and exhibitor to grant an exclusive first run or an ex-
clusive multiple first run for more than 42 days without
provision to expand the run to second run or subsequent run
theatres within the geographical area and license agreements
and prints of said feature motion picture shall be made availabie
by the distributor to those subsequent run theatres that would
normally be served on subsequent run availability.
§ 203-8. Bidding procedures
(a) Invitation to bid contents.—If bids are solicited from
exhibitors for the licensing of a feature motion picture within
the Commonwealth, then the invitation to bid shall specify the
following:
(1) Whether the run for which the bid is being solicited is
a first, second or subsequent run; whether the run is an exclu-
sive or non-exclusive run; and the geographical area for the run.
A75
tees, all advances, all “five o’clock looks,”* and exclusive
first runs which last longer than 42 days. Motion pic-
tures contain protected speech. However, the Pennsyl-
vania Act daes not directly affect speech or content; ulate
motion pictures as commodities.
Footnote 2 (Continued )
(2) The names of all exhibitors who are being solicited.
(3) The date and hour the invitation to bid expires.
(4) The time, date, name and address of the location where
the bids will be opened, which location shall be in the exchange
centers of this Commonwealth.
(b) Trading screening.—If the motion picture that is the
subject of a bid has not already been trade screened within the
exchange centers in this Commonwealth, the distributor solic-
i iting the bid shall include in the invitation to bid, the date, time
and location of the trade screening for such picture.
(c) Bid submission and opening.—All bids shall be sub-
mitted in writing and shall be opened at the same time and in
the presence of those exhibitors, or their agents, who submitted
bids and are present at such time.
(d) Examination of bids.—Any exhibitor, or the agent of
an exhibitor, who submits a bid for a particular run of a feature
motion picture may, at reasonable times within 60 days after a
bid is opened, examine any bid that is made for the same run of
the motion picture by another exhibitor. The exhibitor may ex-
amine the bids even if the distributor rejects all bids that are
submitted. Within seven business days after a bid for a partic-
ular run of a feature motion picture is accepted, the distributor
shall notify in writing each exhibitor who submitted a bid for
that run, the terms of the accepted bid and the identity of the
successful bidder.
(e) Rejection of all bids.—If a distributor issues invita-
4 tions to bid for a feature motion picture and rejects all bids re-
| ceived, he shall not enter into a license agreement for the
exhibition of the picture except by means of the bidding process
Z| specified in this section. If the distributor rejects all bids sub-
‘ mitted pursuant to the invitation to bid, he shall notify all ex-
% hibitors who submitted bids that he rejected all bids and shall
: issue a new invitation to bid.
i a cael asl
es
Set aldara isonet
3. A “five o’clock look” occurs when a distributor allows a fa-
vored exhibitor to see other bids, so that the exhibitor may re-bid.
496 F.Supp. at 430.
A76
Ohio has enacted a similar statutory scheme, R.C. §§
1333.05 through .07, the constitutionality of which was
rather, the Act is an economic statute designed to
regupheld after eight weeks of discovery and a four week
trial. Allied Artists Pictures Corp. v. Rhodes, 496 F.Supp.
408 (S.D.Ohio, 1980), aff'd in reievant part and re-
manded on commerce clause issue, 679 F.2d 656 (6th
Cir. June 4, 1982).4 The Ohio statutory scheme, unlike
the Pennsylvania scheme, allows advances within four-
teen days of the first exhibition of a movie, forbids con-
ditioning a license on guarantees, and contains no
provision regulating the length of first runs.°
Discussion
The First and Fourteenth Amendments
The trial court ruled that the Pennsylvania Act was
unconstitutional as violative of the First and Fourteenth
Amendment because the Act, on its face, “creates the
risk of a delay in licensing and of shifting financial bur-
dens and uncertainties [from the exhibitors to the
distributors].” 520 F.Supp. at 983.° We disagree. On its
face, the Act does nothing but forbid certain trade prac-
tices. Whether the Act in fact creates any material risk of
delay in exhibition or in fact threatens to inhibit the pro-
duction of motion pictures by changing the financial
structure of the industry was a hotly contested question
4. The Ohio statute is quoted in 496 F.Supp. at 419-420.
Several other states have similar statutes. It appears that
Pennsylvania’s is the only such statute which has not survived con-
stitutional challenge. See Allied Artists, 679 F.2d at 659 n. 2.
5. If the assertion of the exhibitor defendants that advances are
often required “against license fees to become due far in the future,”
appendix at 333, is true, then the fact that the Ohio statute allows
advances two weeks before the first showing would not be a material
difference between the two statutory schemes.
6. The trial court reached only the First Amendment and Copy-
right Act issues.
ee ee ee ee ee ae ee ee ee Ree! os
A77
of fact: defendants argued that, in fact, the statute has no
impact on any First Amendment freedoms at all, or, in
the alternative, that any impact is minimal and more
than justified by the need to restore some economic
power balance between the exhibitors and_ the
distributors/producers. ’
The Ohio district court established the following
framework for its First Amendment analysis of the Ohio
statute:
There is no question that motion pictures are a
form of expression falling within First Amendment
protection. Interstate Cireuit v. Dallas, 390 U.S.
676, 682, 88 S.Ct. 1298, 1302, 20 L.Ed.2d 225
(1968); United States v. Paramount Pictures, Inc.,
334 U.S. 131, 166, 68 S.Ct. 915, 933, 92 L.Ed. 1260
(1948). Even assuming that the Ohio statutes en-
croach upon that expression, however, that fact does
not end the inquiry.
... [In] Konigsberg v. State Bar of California,
366 U.S. 36, 49, 81 S.Ct. 997, 1006, 6 L.Ed.2d 105
(1961), ... the Supreme Court [stated] . . .:
|Gleneral regulatory statutes, not intended to
control the content of speech but incidentally
limiting its unfettered exercise, have not been
regarded as the type of law the First or Four-
teenth Amendment forbade Congress or the
States to pass, when they have been found jus-
tified by subordinating valid governmental in-
terests, a prerequisite to constitutionality which
has necessarily involved a weighing of the gov-
ernmental interest involved.
Id. at 50-51, 81 S.Ct. at 1006....
7. The Ohio district court described the nature of the motion
picture industry in some detail. 496 F.Supp. at 414-415.
A78
The Act [is not directed at the content of expres-
sion]. It is trade practice legislation, directed at the
motion picture industry as opposed to other indus-
tries, not because that industry communicates ideas,
but rather because, as plaintiffs readily acknowl-
edge, the market structure of that industry is
unique.
The Ohio Act is clearly content-neutral. It is an
economic regulation operating on all distributors
and exhibitors acting within Ohio regardless of the
content or subject matter of the films involved. To
the extent that it affects expression, it does so only
incidentally.
As such the Act falls within that category of
“general regulatory statutes, not intended to control
the content of speech but incidentally limiting its
unfettered exercise,” which should be upheld when
“justified by subordinating valid governmental
interests.” Konigsberg, supra, 366 U.S. at 50-51, 81
S.Ct. at 1006-07. ...
Determination of the constitutionality of such
legislation necessarily entails a balancing of the le-
gitimate governmental interests it serves against its
impact on the protected expression.
In United States v. O’Brien, 391 U.S. 367, 377,
88 S.Ct. 1673, 1679, 20 L.Ed.2d 672 (1968), rehear-
ing denied, 393 U.S. 900, 89 S.Ct. 63, 21 L.Ed.2d
188, the court elaborated on the balancing test:
[A] government regulation is sufficiently justi-
fied if it is within the constitutional power of the
Government; if it furthers an important or sub-
stantial governmental interest; if the govern-
mental interest is unrelated to the suppression
of free expression; and if the incidental restric-
tion on alleged First Amendment freedoms is
A79
no greater than is essential to the furtherance of
that interest.
496 F.Supp. at 432-33 (footnotes omitted).* We agree
8. Schaumburg v. Citizens for a Better Environment, 444 U.S.
620, 100 S.Ct. 826, 63 L.Ed.2d 73 (1980), relied on below, 520
F.Supp. at 980, 982, 985, is distinguishable from this case. In
Schaumburg, a statute forbade door to door solicitation by groups
which used less than 75% of the proceeds for the group’s charitable
purposes. Id. at 634, 100 S.Ct. at 834-35. Unlike the statute at issue
in this case, the statute in Schaumburg was on its face a “direct and
substantial limitation on protected activity.” Id. at 636, 100 S.Ct. at
836. Here, the statute has no facial impact upon speech and does not
directly regulate speech or content at all.
Schad v. Mount Ephraim, 452 U.S. 61, 101 S.Ct. 2176, 68
L.Ed.2d 671 (1981), also cited by the trial court, involved an ordi-
nance which forbade all live entertainment and thus constituted a
“substantial restriction of protected activity.” 452 U.S. at 72, 101
S.Ct. at 2184. Its adverse impact on “communicative activity” was
direct and unjustifiable. Id. at 71-72, 101 S.Ct. at 2184-85.
The state actions challenged in Consolidated Edison Co. v. Pub-
lic Service Commission, 447 U.S. 530, 100 S.Ct. 2326, 65 L.Ed.2d
319 (1980), and in In re RM], U.S. , 102 S.Ct. 929, 71
L.Ed.2d 64 (1982) involved direct regulation of content. In Consol-
idated Edison, defendant had forbade “the inclusion in monthly
electric bills of inserts discussing controversial issues of public
policy.” 447 U.S. at 532, 100 S.Ct. at 2330. The Supreme Court
construed this as a “content-based regulation,” id. at 537, 100 S.Ct.
at 2333, and as a regulation of “speech on the basis of its subject
matter.” Id. at 536, 100 S.Ct. at 2332. Thus, the Court noted, “the
state action may be sustained only if the government can show that
the regulation is a precisely drawn means of serving a compelling
state interest.” Id. at 540, 100 S.Ct. at 2334. In RMJ, the state had
restricted lawyer advertising “to certain categories of information,”
thereby prohibiting certain speech altogether. U.S. at ;
, 102 S.Ct. at 932, 939. See also Metromedia, Inc. v. San Diego,
453 U.S. 490, 516, 101 S.Ct. 2882, 2897, 69 L.Ed.2d 800 (1981)
(content-based restriction on billboards invalid under First Amend-
ment) (plurality); Linmark Associates, Inc. v. Willingboro, 431 U.S.
85, 94,97 S.Ct. 1614, 1619, 52 L.Ed.2d 155 (1977) (law restricting
signs “based on their content” ruled invalid under First Amend-
ment).
In Heffron v. International Society for Krishna Consciousness,
452 U.S. 640, 101 S.Ct. 2559, 69 L.Ed.2d 298 (1981), the Court
A80
with the Ohio district court and with the Sixth Circuit,
see 679 F.2d at 661, 663, that this framework embodies
the correct approach to statutes like the Pennsylvania
Act. However, the grant of summary judgment in this
case precluded the application of this framework. The
trial court could not evaluate the actual impact of the Act
(if any) on First Amendment values;? could not assess
the nature and weight of the state concerns which led to
the Act’s enactment; and could not balance the state
Footnote 8 (Continued )
upheld a state rule which required that exhibitors at the Minnesota
State Fair conduct sales, distribution and fund solicitation opera-
tions from a booth. Id. at 644, 101 S.Ct. at 2562. The Court decided
that the state rule, which it construed to be a non-content-based
time, place and manner restriction on speech, was not based on con-
tent and was valid under the facts before it.
Unlike the state rules challenged in Schaumburg, Schad, Con-
solidated Edison, RMJ, and Heffron, the statute at issue here is not
a direct regulation of speech, but is rather a restriction on certain
trade practices which may (or may not) have an indirect impact on
speech. Whether the statute has any impact on speech and the ex-
tent (if any) of that impact are questions of fact. Whether the impact
requires invalidation of the statute or parts thereof is a question of
law.
9. The Ohio district court found, after trial and an exhaustive
analysis of the facts, that the actual threat to First Amendment val-
ues was minimal, and consisted solely of the “risk of an occasional
and minor delay in the release of a new film.” 496 F.Supp. at 435.
See 496 F.Supp. at 433-35 for the court’s summary of the evidence
relating to the First Amendment claims. Inter alia, plaintiffs’ own
witnesses “made it clear that the decision to finance and produce a
particular film is not primarily motivated by considerations regard-
ing its marketing.” 496 F.Supp. at 434. Indeed, the court noted that
the “evidence supports the inference that [plaintiffs’ former prac-
tices| may discourage production and distribution of controversial
films or of low-budget films with unknown artists.”” 496 F.Supp. at
434 n. 14.
We note that 10 of the 12 plaintiffs in this suit were 10 of the
11 plaintiffs in the Ohio suit.
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A81
concerns against the threat (if any) to the First Amend-
ment. !?
The Copyright Act
In addition to striking the Pennsylvania Act as un-
constitutional under the First Amendment, the trial
court ruled that the Act was preempted by the federal
Copyright Act and therefore unconstitutional under the
Supremacy Clause:
The Act’s limit upon the duration of the license,
upon when a distributor may license, its prohibition
of guarantees and advances, and its bar against li-
censing or negotiations prior to screening, as well as
consummating a license without complying with
rebidding requirements, all directly—and severely—
restrict the rights of the licensor.
520 F.Supp. at 995. We disagree with the trial court’s
analysis.
Title 17 U.S.C. § 301(a) provides:
10. Any argument that the Ohio statute accomplished the
state’s goals at too high a cost to the First Amendment faded in the
face of the Ohio district court’s factfinding that the only risk to the
First Amendment created by the Ohio statute was a minimal risk of
delay in exhibition. The Ohio district court balanced this minimal
risk against the “substantial legitimate governmental interests
served by the Act”:
the State’s interest in readjusting the relative market strengths
of exhibitors and distributors; in establishing fair and open bid-
ding practices; protecting consumers from a rise in ticket prices;
removing the opportunities for unfair dealing and as a result,
inhibiting suspicion within the industry; and permitting Ohio
exhibitors to exercise their independent business judgments in
licensing films.
496 F.Supp. at 435. The list of reasons for the Pennsylvania Act set
forth in § 203-2 of that Act includes these concerns in addition to
others.
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On and after Jan
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