Reading Intern. v. Oaktree Capital Management LLC

Page 301

317 F.Supp.2d 301

READING INTERNATIONAL, INC.; Citadel Cinemas, Inc.; and Sutton Hill Capital, LLC, Plaintiffs, v. OAKTREE CAPITAL MANAGEMENT LLC; Onex Corporation; Regal Entertainment Group; United Artists Theatre Company; United Artists Theatre Circuit, Inc.; Loews Cineplex Entertainment Corporation; Columbia Pictures Industries, Inc.; The Walt Disney Company; Universal Studios, Inc.; Paramount Pictures Corporation; Metro-Goldwyn-Mayer Distribution Company; Fox Entertainment Group, Inc.; Dreamworks LLC; Stephen Kaplan; and Bruce Karsh, Defendants.

No. 03 CV. 1895(GEL).

United States District Court, S.D. New York.

December 10, 2003.

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Stephen M. Axinn, Axinn, Veltrop & Harkrider LLP, New York, New York (Lauren S. Albert, Michael L. Keeley, on the brief) for the plaintiffs.

Glenn D. Pomerantz, Andrew C. Finch, Munger, Tolles & Olson LLP, Los Angeles, CA; Cyrus Amir-Mokri, Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, for defendants Oaktree Capital Management, Stephen Kaplan and Bruce Karsh.

David S. Copeland, Kaye Scholer LLP, New York, New York (Fredric W. Yerman, Karin E. Garvey, Mark S. Popofsky, on the brief); Matthew P. Previn, Wilmer, Cutler & Pickering, New York, New York (A. Douglas Melamed, IJay Palansky, Jeffrey D. Ayer, Yaa A. Apori, Washington, DC, on the brief) for defendants Onex Corporation, Regal Entertainment Group, United Artists Theatre Circuit, Inc., and Loews Cineplex Entertainment Corp.

Kenneth R. Logan, Olivier N. Farache, Simpson, Thacher & Bartlett New York, New York (Sanford Litvack, Joanna Swomley, Quinn Emanuel Urquhart Oliver & Hedges, LLP, New York, New York; William E. McDaniels, John E. Schmidtlein, Williams & Connolly LLP, Washington, DC, on the brief) for distributor defendants.¹

R. Hewitt Pate, Assistant Attorney General, Deborah P Majoras, Deputy Assistant Attorney General, (Catherine G. O'Sullivan, Steven J. Mintz, Ralph T. Giordano, on the brief), U.S. Department of Justice, Antitrust Division for the United States as amicus curiae.

OPINION AND ORDER

LYNCH, District Judge.

Plaintiff Reading International, Inc. ("Reading"), its subsidiary, Citadel Cinemas, Inc. ("Citadel"), and Sutton Hill Capital, LLC ("Sutton Hill") (collectively, "plaintiffs" or "the Village East"), respectively the owner, operator, and landlord of the Village East Cinema in Manhattan, bring this complaint under federal and New York State antitrust laws against the operators and principal investors of the Loews and Regal theater chains, as well as most of the major film distributors. Plaintiffs allege that these parties conspired through various illegal means to restrain trade in the market for top commercial films in lower Manhattan. Plaintiffs seek relief under sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1 and 2, and under sections 7 and 8 of the Clayton Act, 15 U.S.C. §§ 17 and 18. They also assert ancillary claims under New York statutory law for conspiracy in restraint of trade and under common law for unjust enrichment and tortious interference with prospective contractual relations. Defendants now move pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss plaintiffs' complaint for failure to state a claim. For the reasons discussed below, defendants' motion will be granted in part and denied in part.

BACKGROUND

The following facts are taken from the complaint, except where noted. All factual allegations in the complaint are assumed to be true for purposes of this motion.

Plaintiff Village East owns and operates the Village East Cinema, an independent seven-screen movie theater located in lower Manhattan. Plaintiff Sutton Hill is the landlord of this property. Defendants Loews Cineplex Entertainment Group ("Loews") and Regal Entertainment Group ("Regal") respectively own the Loews Village Sevenplex and the United Artists Union Square Stadium 14 ("Union Square 14"), which are the nearest local theaters in competition with plaintiffs. Defendants Oaktree Capital Management and Onex Corporation ("Oaktree" and "Onex") are investors in Loews and Regal.

During the 1990s, the movie exhibition industry underwent a period of expansion, followed by financial hardship, reorganization, and consolidation. The entities that are now known as Loews and Regal, in prior incarnations, exemplified this trend, each making numerous acquisitions before going bankrupt in 2000 and 2001. (Compl.¶ 72.) At this time, defendants Oaktree and Onex, two asset management companies that specialize in obtaining the assets of bankrupt corporations, acquired the claims of Loews' creditors, with Onex acquiring 60% and Oaktree acquiring 40%. (Compl.¶ 73.) Oaktree and Anschutz Investment Company ("Anschutz"), a similar investment firm which is not a party to this action, similarly bought the entire equity of what was then known as Regal along with two other failing exhibitors (United Artists and Edwards Theaters), and reorganized these three theaters as wholly-owned subsidiaries of the new Regal Entertainment Group (defendant Regal). (Compl.¶ 70.) Oaktree currently owns approximately 17% of Regal, with Anschutz owning 77%. (Compl.¶ 75.) At the time the Complaint was filed, Loews owned approximately 1,534 screens in the United States and Regal and its subsidiaries owned 5,711 screens. (Compl.¶¶ 63, 70.)

Plaintiffs claim that Loews and Regal have monopolized the market for what plaintiffs call "top commercial films" ("TCFs").² Specifically, they allege that past acquisitions of other theater chains on a national scale by Regal and Loews, and later, by Oaktree and Onex, have injured competition in lower Manhattan. They assert that past mergers have resulted in a monopsony in the "Lower Manhattan Zone" that has allowed Regal and Loews to pressure distributors, also defendants in this action,³ to enter exclusive and unreasonable licensing agreements for the distribution of TCFs, and ultimately, to close plaintiffs out of the market.

Plaintiffs further allege that Oaktree has attempted to control both Regal and Loews, competitors in the market. This has been accomplished, according to plaintiffs, not only through the acquisition of shares, but also through an illegal "interlock" whereby Oaktree "serves on the board of Directors of both Regal and Loews," that is, Oaktree's President Bruce Karsh serves on the board of Loews and Oaktree's principal Stephen Kaplan serves on the board of Regal.⁴ (Compl.¶¶ 78, 119.) Since Oaktree and Onex together are sole shareholders of Loews, this interlocking directorate has enabled Onex and Oaktree jointly to control both companies, and to orchestrate the illegal agreements with distributors.

Plaintiffs assert that distributor defendants "refuse[ ] even to receive or consider offers from Reading to license Top Commercial Films to the Village East, which raises an inference of conspiratorial anticompetitive conduct" (Compl. ¶ 82A (emphasis in original)) and that they consistently grant Regal or Loews "clearances," which are exclusive rights to run films, that are unreasonable in length and serve no pro-competitive purpose. (Compl.¶ 82B.) They further complain that "move over" arrangements allowing Regal and Loews to move a film from a large screen to a smaller screen in a multiplex after the initial run grants defendants "exclusive rights to films until their value as first-run features is fully exhausted." (Compl.¶ 82C.)

The result of these actions has been to squeeze the independent Village East out of competition for the TCFs it needs to keep its box-office sales up and its customers coming back. According to the complaint, in the year 2002, Regal and Loews exhibited 29 of the 30 TCFs shown in the Lower Manhattan Zone, while the Village East did not show a single one. (Compl.¶ 3.) Although it has 25% of the screens and 22% of the total seats in the Lower Manhattan Zone, Village East only grossed 11% of the total revenue from films shown in 2002. (Compl.¶ 52-54.) Since 1999, the Village East has experienced a steady decline in attendance, box office receipts, and net income. Attendance in 2002 declined 59% below 1998 levels, and total revenues fell by 60% over the same period. (Compl.¶ 81.) In addition, plaintiffs allege that defendants' actions have resulted in consumer injury, including loss of competition, decrease in the number and variety of films exhibited, higher box-office prices, elimination of discounts, higher concession prices, and insufficient seats to meet consumer demand. (Compl.¶ 91.) Plaintiffs contend that these conditions, if allowed to continue, will soon drive the Village East out of business, "giving Loews, Regal, Onex and Oaktree complete control of the Lower Manhattan Zone." (Compl. ¶¶ 81, 91.)

Defendants characterize plaintiffs' injuries as the result of "an aging seven-screen theater's inability to compete with a newer, larger, state-of-the-art megaplex, whose opening ... had the exact effect that the antitrust laws are designed to encourage." (Distr.Br. 2.) Defendants' theory is that plaintiffs have simply failed to remain competitive in a changing marketplace, in which Regal and Loews provide a more attractive venue for both consumers and distributors in the exhibition of TCFs. They now move to dismiss, raising numerous defenses, discussed in turn below.

DISCUSSION

On a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the Court must accept "as true the facts alleged in the complaint," Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., Inc., 32 F.3d 697, 699-700 (2d Cir.1994), and may grant the motion only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Thomas v. City of New York, 143 F.3d 31, 36-37 (2d Cir.1998) (citations omitted); see also Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir.1996) (stating that when...