License of Motion Pictures Preempted

November 25, 1999


Michael I. Rudell

State Law Regulating Exclusive License of Motion Pictures Preempted by Copyright Act

(Originally published in the Entertainment Law column in the New York Law Journal, November 25, 1999.)

In what has been termed a landmark decision, the U.S. Court of Appeals for the Third Circuit has held that the Copyright Act preempts a Pennsylvania state law which it describes as an obstacle to the exclusive rights given to a copyright holder to distribute the copyrighted work. That law would prohibit a motion picture distributor from granting an exhibitor an exclusive first-run license for more than 42 days without provision for the expansion of the run to other theaters in the area.

From January 1992 through October 1994 Orson Inc. exhibited primarily second-run art films through the Roxy Screening Rooms, a Philadelphia movie theater with two screens. Miramax Film Corp. exhibited the first runs of its art films in Philadelphia at The Ritz Theaters, a pair of theaters with five screens each. During the approximately 2-1/2 year period when Orson operated the Roxy Screening Rooms, it received for exhibition in that theater only one first-run movie from Miramax, and rarely received second-run movies after the expiration of the 42nd day of exhibition at The Ritz, despite its repeated requests.

In its complaint, Orson charged that the distribution of films by Miramax, and specifically its dealings with The Ritz, violated the Sherman Act, the Pennsylvania common law tort of unreasonable restraint of trade, and section 203-7 of the Pennsylvania Feature Motion Picture Fair Business Practices Law (the “Pennsylvania Act”).

Orson’s claims relating to the Sherman Act and unreasonable restraint of trade were dismissed early in the proceedings. Its claims respecting the Pennsylvania Act also were dismissed by the district court, but were reinstated by the Court of Appeals on the grounds that the district court did not properly interpret the language of the Pennsylvania Act. A jury trial resulted in an award to Orson of approximately $160,000 and attorneys fees in the same amount. After motions, the case again reached the Court of Appeals, which considered the preemption issue as a matter of law.

Section 203-7 of the Pennsylvania Act provides that: “No license agreement shall be entered into between 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 theaters 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 theaters that would normally be served on subsequent run availability.”

Section 106 of the Copyright Act provides that, subject to certain exceptions, the owner of a copyright has the exclusive right to distribute copies of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease or lending; and in the case of motion pictures and other audiovisual works, to perform the copyrighted work publicly.

Prior to considering the effect of the Copyright Act on the validity of section 203-7, the decision first notes that courts have had differing views of a distributor’s responsibility under the state law. It concludes that the correct construction of the language of section 203-7 prohibits a motion picture distributor from entering into an exclusive first-run arrangement for more than 42 days. This being the case, the Court cannot avoid deciding whether the imposition of such a requirement on the copyright holder is preempted by the Copyright Act.

The Supreme Court has recognized three ways in which federal law may preempt, and thereby displace, state law: (1) by express preemption, (2) by field (or implied) preemption, or (3) by conflict preemption. Express preemption arises when there is an explicit statutory command that state law be displaced. Under field or implied preemption principles, state law may be displaced if federal law so thoroughly occupies a legislative field as to make reasonable the inference that Congress left no room for the states to supplement it.

State law may be displaced under conflict preemption principles if the law in question presents a conflict with federal law either because it is impossible to comply with both the state and the federal law or because the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. The decision notes that these three categories are not rigidly distinct.

The Copyright Act contains an express preemption provision in section 301 which provides, in relevant part:

On and after January 1, 1978, all legal or equitable rights that are equivalent to any of the exclusive 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 common law or statutes of any State.

Whether under statutory or common law, state laws are subject to express preemption under section 301 only if they create rights that are the equivalent of the exclusive rights within the general scope of copyright. As noted above, such exclusive rights in a copyrighted work are set forth in section 106 of the Copyright Act.

Conflict preemption may arise either because compliance with both regulations is a physical impossibility or because the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Those purposes and objectives, as they appear in the Copyright Act, are to implement a nationally uniform system for the creation and protection of rights in a copyrighted work. Here, Miramax argues that both express preemption and conflict preemption are present. The Court notes that although both may be applicable, its analysis more closely parallels that used in prior decisions applying conflict principles, and it proceeds on that ground.

Before continuing further with its discussion, the Court turns to an analysis of the forces behind the passage of the Pennsylvania Act. It observes that the distribution of motion pictures has been the subject of attention since at least the 1940’s when the Department of Justice filed antitrust suits attacking certain business practices prevailing with the industry. It notes that the legislative findings and purposes included in the Pennsylvania Act set forth a litany of the unfair market practices the state sought to prevent or ameliorate. One of the most egregious was that of blind bidding – the marketing and licensing of a film prior to its completion and without offering exhibitors a chance to trade screen the final product. As a result, distributors could make deceptive claims regarding films offered for bidding. The Court cites cases which discuss the distributors’ practice of promoting films based on multiple screen stars who only had cameo roles or who were never seen together in a single scene and distributors which would promulgate scant and sometimes misleading information.

Closely tied to the blind bidding problem was the unfairness in the bidding process itself which occurred when distributors would unseal closed bids in collusion with a favored exhibitor (so-called “5 o’clock looks”) in order to enable that exhibitor to offer a sufficiently high bid to obtain the film.

A further industry practice which the Pennsylvania Act attempted to address was the use of minimum guarantees and advances, which shifted the risk of unsuccessful exhibitions from distributors to exhibitors who were required to pay fixed sums in advance of showing.

Regulations concerning such market conditions do not create a preemption issue because they only touch copyright works indirectly, if at all. However, a state regulatory scheme that is “copyright-based in essence” presents a different matter. The 42-day exclusive first-run license limitation in section 203-7 is a distinctly different regulation from those within the state’s power over improper market practices. If the state’s ban on exclusivity after 42 days directly regulates a right that is protected by federal copyright law, it must of necessity be preempted under conflict preemption principles.

Among the exclusive rights granted under section 106 of the Copyright Act are the rights to distribute and perform the copyrighted work publicly. However, section 203-7 of the Pennsylvania Act requires the distributor to expand its distribution after forty-two days by licensing another exhibitor in the same geographic area, even if such expansion is involuntary and uneconomic. A distributor who exercises its right under the Copyright Act to grant an exclusive license to an exhibitor of choice will be subject to liability under the Pennsylvania Act for refusing to grant licenses to other exhibitors in the same geographic area after the forty-second day. In the present case, the potential liability under the state law for a copyright holder’s exercise of its federal rights became a reality and illustrates the conflict created by the Pennsylvania Act. The Court states that “it is evident that the Pennsylvania Act regulates the essence of the federally protected copyright.”

In rejecting Plaintiff’s argument that once a copyright holder makes an initial distribution, a state is free to regulate the manner in which the work is thereafter distributed, the Court notes that there is not here present a claim that the state regulation falls within one of the federally established exceptions to the exclusive rights of a copyright holder, such as fair use.

The Pennsylvania Act would impose upon copyright holders an obligation to distribute and make available other copies of the work following their initial decision to publish and distribute copies of the copyrighted item. This is contrary to the exclusive rights of a copyright holder under section 106.

In conclusion, the Court holds that because section 203-7 stands as an obstacle to the federally created exclusive rights given to a copyright holder, namely the exclusive right to distribute the copyrighted work, it is pre-empted by the Copyright Act.