Opinion
Civil Action Nos. 3117, 3118.
May 11, 1948.
Edward F. McClennen, Jacob J. Kaplan, Robert W. Meserve, and Nutter, McClennen Fish, all of Boston, Mass. (Edward A. Sargoy and Sargoy Stein, both of New York City, of counsel), for plaintiffs.
Joseph B. Abrams, of Boston, Mass., for defendants.
Actions by Loew's Incorporated against Fred E. Lieberman and others, and by the Paramount Film Distributing Corporation against Fred E. Lieberman and others, for damages from alleged breaches of moving picture rental contract.
Judgments for plaintiffs.
The following is the opinion of Philip A. Hendrick, Master:
The above-entitled case [Loew's Incorporated v. Lieberman], together with one other, was referred to me as Master by an order of reference dated October 29, 1946, directing me "to hear the parties and their evidence and find and report the facts to the Court, together with such questions of law as any party may request." The order of reference required a separate report in each case.
Pursuant to said order of the Court, I have heard the parties and their evidence and herewith report to the Court my findings in the above-entitled case, together with such questions of law as any party requested.
Commencement of Suit Suit was begun on November 8, 1944. Parties Plaintiff
The plaintiff is a corporation organized under the laws of the State of Delaware, having its principal place of business in New York City and also maintaining a branch office in Boston, Massachusetts. It is engaged in the business of supplying motion picture films to theatres for exhibition purposes.
In the motion picture industry, a supplier of motion picture films is known as a "distributor."
Defendants
Fred E. Lieberman is a resident of Brookline, in the County of Norfolk, Commonwealth of Massachusetts.
The defendant corporations against which evidence was offered are as follows:
Greater Boston Theatres, Inc.
Preferred Pictures, Inc.
Intown Theatre, Inc.
Newsreel, Inc., and Corner Theatre, Inc.
No evidence was introduced against Proven Pictures, Inc., or Holyoke Theatre, Inc., also named as defendants in the pleadings. In this report I have therefore, disregarded the naming of those two corporations as defendants.
Each of the corporate defendants against which evidence was offered was organized under the laws of the Commonwealth of Massachusetts and operated a theatre for the exhibition of motion pictures as follows:
Greater Boston Theatres, Inc. — Tremont Theatre — Boston Preferred Pictures, Inc. — Normandie Theatre — Boston Intown Theatre Inc. — Bijou Theatre — Boston Newsreel, Inc. — Square Theatre — Medford Corner Theatre, Inc. — Uphams Corner Theatre — Dorchester
A theatre showing motion pictures is known in the industry as an "exhibitor."
Fred E. Lieberman was the principal stockholder in each of the above-named corporations, holding 98% of the capital stock. He was president and treasurer of, a director in, and general manager of, each corporation.
The other stockholders and officers of the defendant corporations, none of whom was named as a defendant, are as follows:
Morton T. Lieberman, Fred E. Lieberman's brother was the holder of 1% of the stock in each corporation and was the vice-president of, and a director in, each corporation. He was an employee of the various corporations, receiving no compensation as an officer.
Naomie Lieberman, wife of Fred E. Lieberman, was the holder of 1% of the capital stock of Greater Boston Theatres, Inc. She was neither an officer nor an employee of the corporation.
William Alperin was an employee of the various corporate defendants. He held 1% of the capital stock of each of them, except Greater Boston Theatres, Inc., and was clerk of, and a director in, all the defendant corporations. He received no compensation as an officer of the various corporations.
At 176 Tremont Street, Boston, an office was maintained to which all theatres operated by the defendant corporations reported regularly, in which the master records of all the defendant corporations were kept, and through which was conducted the business of procuring pictures for exhibition in the various theatres operated by the defendant corporations. In this office Fred E. Lieberman had his headquarters and from it he directed the activities of the various corporations.
Pleadings Plaintiff's Bill of Complaint
The plaintiff's bill of complaint is lengthy and no useful purpose would be served by setting it out in full, as it is part of the record in the case. In substance, it alleges that the plaintiff furnished certain motion picture films to the defendants for exhibition purposes, some being furnished upon a percentage or participating basis and some on a flat rental basis; that the defendants made false returns to the plaintiff of the amounts realized from admissions received at various theatres when the percentage pictures were shown; that the price of flat rental pictures is based upon the amount received from the showing of certain key percentage pictures; that the false returns made by the defendants on percentage pictures resulted not only in the plaintiff's being deprived of the full amount of rentals due it on those pictures but also in the plaintiff's charging a lower price for flat rental pictures than it would have charged had true returns on percentage pictures been made.
The prayers of the bill are for an examination and discovery of the books and records of the defendant corporations, not pertinent in the matter before me, for the additional sums due to the plaintiff as rental for the exhibition of percentage pictures licensed to the defendants and to the other exhibiting corporations, and for damages.
The matter before me is the finding of facts as to whether or not (1) additional sums are due to the plaintiff as rental for percentage pictures, (2) the plaintiff has been damaged by the licensing of flat rental pictures, and (3) if so, the damages were substantial.
Defendants' Answers
The answer of Fred E. Lieberman is a general denial.
The answer of the defendant corporations is to all intents and purposes a general denial and, further raises the question of the court's jurisdiction, the amount involved being not in excess of $3000.
Findings
All the pictures referred to in this report were copyrighted by the plaintiff. No person or corporation other than the owner of the copyright may exhibit a copyrighted picture without first obtaining a license from the copyright owner. In the industry and in this report, reference to the "buying" or the "selling" of a picture means the licensing of a theatre to show the picture for a certain number of days for a certain price. The title to the film does not pass. The "playing" or the "showing" of a picture means the exhibition of the picture in a theatre.
In the industry the "season's product" means the pictures released by a distributor for exhibition during the period from September 1 in a given year through August 31 of the following year; for example, reference might be made to the 1939-1940 season's product. The pictures may be bought by the exhibitor long after their release, but the designation of the product remains the same.
The licensing of an exhibitor to use certain motion picture films for exhibition is by means of a contract between the distributor and the exhibitor. When executed, the written contract calls for the supplying by the distributor to the exhibitor of certain pictures, or the pictures of a certain season, to be shown for a specified number of days, for the use of each picture the exhibitor agreeing to pay to the distributor either a designated percentage of the gross receipts realized in the theatre during its exhibition or a certain designated sum. If the agreement calls for the payment of a percentage of the gross receipts, the picture is known as a "percentage" or "participating" picture; if a designated flat sum is specified, the picture is known as a "flat rental" picture.
The Boston office of the plaintiff is under the direction of a "district manager," under whom are a "branch manager" and salesman.
The first step in the usual procedure by which an exhibitor acquires a picture or pictures is for a salesman or the branch manager of a distributor to offer to the exhibitor certain pictures of a given season at a certain price. The matter of price may then become a subject for negotiation. It is safe to say in this case that price was always a vital factor and was always the subject of negotiations. If the negotiations reach a point where the salesman feels that there is a possibility of approval, the proposed arrangement is reduced to writing on forms provided by the distributor and known in the industry as "applications." These applications are usually in quadruplicate and are submitted by the salesman to the district manager of the distributor. If the applications are approved by the district manager, they are then forwarded to the New York office of the distributor for final approval by the Eastern sales manager. Until the application is approved in New York, however, there is no contract. Upon final approval, the exhibitor gets an approved copy and the other copies are retained by the distributor.
As indicated, a percentage or participating contract calls for a certain percentage of the gross receipts realized on the days a particular picture is shown, to be paid by the exhibitor to the distributor as rental; for example, 40% or 35% of the gross receipts of each day the picture is shown.
Under the terms of the contract, the exhibitor is required to notify the distributor on forms supplied by it: the amount of the total receipts of the theatre on each day the particular picture has been shown, the total number of paid admissions, and the prices of such admissions. This report is signed by the treasurer or cashier of the theatre and by its manager. In addition, the report is also signed by the distributor's representative, who is sent by the distributor to the theatre for the purpose of seeing that correct returns are made. Such distributors' representatives are known in the industry as "checkers".
When completed, the report is sent to the office of the distributor. The exhibitor is then billed for the amount represented by the contract percentage applied to the amount reported as having been realized; i.e., if the amount reported is $500 and the contract percentage 40, the exhibitor will be billed for $200 as the rental of that particular picture.
During the hearings before me the parties entered into a stipulation as follows:
"(1) With regard to the issue of any additional amounts which may be owing on percentage pictures so-called and pictures originally sold on flat rental terms, as to which the terms were later modified to percentage terms, the parties agree that this issue is to be determined by the Master on the depositions of Morton T. Lieberman and William Alperin and on the exhibits before the Master, including Exhibits 3, 182, 183 and 184 previously marked for identification, which may now be admitted in evidence as evidence of the facts therein stated.
"In the event that the Master finds upon the facts and the law that additional amounts should be paid on the percentage pictures so-called by the defendants, then the parties agree that the amounts to be found by the Master are as follows: To the plaintiff Loew's Incorporated the sum of $13,275; to the plaintiff Paramount Film Distributing Corporation the sum of $1,725. These amounts are not to carry interest until judgment is entered.
"(2) With regard to the issue as to whether or not the plaintiffs are entitled to damages in respect to pictures licensed on flat rental terms, other than those referred to in Issue No. 1, such damages, if any, being those to which the plaintiff might be entitled as a result of the claims alleged in the complaint in respect thereto, including, without restricting the preceding generality, the claim that the plaintiffs have been fraudulently induced to grant such licenses at license fees less than the fair and reasonable license fee therefor, the defendants have not conceded liability in respect to the foregoing claim of damages and the issues of fact and law in respect thereto are to be fully tried before the Master on all pertinent evidence, including the evidence submitted under the paragraph above. However, the parties have agreed that in the event that it is determined that the plaintiffs are to recover substantial as distinguished from merely nominal damages on account of the matters referred to in this paragraph, the amount of such damages shall be determined to be as to the plaintiff Loew's Incorporated the sum of $13,600 and as to the plaintiff Paramount Film Distributing Corporation the amount of $1400 and in each case these amounts shall be determined without interest prior to the date of the entry of judgment with respect thereto."
The stipulation automatically divides the case into two parts or issues:
1. As to the percentage pictures.
2. As to the flat rental pictures.
In this report I shall follow the plan of the stipulation and report on each issue separately.
First Issue
As seen by the terms of the stipulation, the Master is to determine the first issue upon designated evidence; to wit: the depositions of Morton T. Lieberman and William Alperin, and the exhibits before the Master, particularly Exhibits 3, 182, 183 and 184.
Upon the designated evidence, I find that there was an underreporting of receipts from the various theatres operated by the defendant corporations, intentionally made for the purpose of misleading the plaintiff as to the amounts realized from the exhibition of percentage pictures, and that the plaintiff relied upon those reports and billed the various theatres for the contract percentage of the reported receipts, resulting in the plaintiff's being deprived of money to which it was entitled and for which it would have billed the theatres had true returns of the gross receipts been made.
Exhibit 3, to which reference may be made, shows the extent of this underreporting. I find as a fact that Exhibit 3 sets forth the true situation so far as the under-reporting of gross receipts is concerned. That exhibit lists 55 percentage pictures which were supplied by the plaintiff and shown by the theatres of the corporate defendants between November 1, 1937, and December 31, 1943, the gross receipts of the theatres having been reported as lower than they actually were. The number of such pictures shown during that period by each of the said theatres was as follows:
Tremont Theatre (Greater Boston Theatres, Inc.) — 22 Normandie Theatre (Preferred Pictures, Inc.) — 16 Bijou Theatre (Intown Theatre Inc.) — 2 Square Theatre (Newsreel, Inc.) — 11 Uphams Corner Theatre (Corner Theatre, Inc.) — 4
The fact that the gross receipts from 55 pictures shown in five different theatres were all underreported leads to the conclusion that the defendant corporations wilfully and intentionally misrepresented gross receipts to the plaintiff. I so find.
I further find as a fact that the plaintiff relied on the figure submitted to it by the defendants and billed them for rentals based on the erroneous figures and, in some instances, also reduced the rental.
As to the knowledge and participation of Fred E. Lieberman the individual defendant who owned 98% of the stock of each corporation and was the president, treasurer, a director and the general manager of each of them, it is inconceivable that underreporting to the extent it was carried on by the corporate defendants could have been done without his knowledge and acquiescence. I find that he did know of and participate in the underreporting.
The defendant corporations, in addition to making false returns on box office statements to the plaintiff undertook by correspondence to obtain more favorable terms on some pictures, reiterating the statement of receipts as reason for a reduction in terms.
On July 11, 1939, the Greater Boston Theatres, Inc., wrote to the Boston office of the plaintiff relative to pictures which had been shown at the Tremont Theatre. The letter stated that "Idiot's Delight," shown at that theatre June 25, 26, 27, and 28, 1939, for which that defendant corporation had agreed to pay a flat rental of $230 as license fee, grossed only $606.75 and the defendant corporation asked for a reduction in price, on the ground that the gross receipts did not warrant the agreed film rental. As a result, the plaintiff reduced the film rental to 35% of the gross reported, or $212.36. The audit of the corporation's books disclosed that the gross income to the theatre from that picture was $1560.75, instead of the $606.75 reported.
In the same letter, the picture "Honolulu," played July 2, 3, 4, and 5, 1939, was mentioned as having grossed $568.30, although the audit disclosed that its true gross receipts were $1134.30. The defendant corporation had agreed to pay a flat rental for that picture. As a result of the letter, the license fee was reduced to 30% of the reported gross receipts of $568.30, or $170.49.
A third picture, "Pygmalion," played July 6, 7, 8, and 9, 1939, was also mentioned in this letter, its gross receipts being stated as $476. The audit disclosed that the gross receipts were actually $876. The contract price for the licensing of this picture was $230. As a result of the letter, the licensing fee was reduced to 25% of the gross reported receipts of $476, or $119, as against the contract price of $230.
Several other letters of similar kind were introduced in evidence. Two of them are of such significance in showing the extent of the misinformation supplied by the defendant to the plaintiff that I feel it important to bring them to the attention of the Court. Both letters were from Greater Boston Theatres, Inc., one dated August 6, 1943, referring to the picture "Somewhere I'll Find You," played July 28, 29, 30, and 31, 1943, and the other, dated August 31, 1943, referring to the picture "For Me and My Gal," played August 22, 23, and 24, 1943. In the letter of August 6, 1943, the gross receipts claimed to have been received from the showing of "Somewhere I'll Find You" were $825.26. The audit of the corporation's books shows the gross receipts to have been $1625.15. Variations of such size could not have resulted from inadvertence or mistake.
Upon all the evidence designated in the stipulation applicable to this first issue, I find that a plan to make false returns of gross receipts from the theatres operated by the corporate defendants was devised by and participated in by Fred E. Lieberman, the individual defendant, the purpose of which plan was to deceive the plaintiff as to the gross receipts from the showing of percentage pictures, in order that the rental cost to the corporate defendants would be reduced.
I find that the plaintiff accepted those false returns in good faith and relied upon them when billing the corporate defendants.
Claim is made on behalf of all the defendants that the practice of underreporting gross receipts from percentage pictures was widespread throughout the industry, was well known to all persons in the industry, and was winked at by the executives of the plaintiff; that in order to persuade them to buy percentage pictures these corporate defendants were told that they might "write their own ticket" in making returns of gross receipts on percentage pictures. I find that those claims have not been substantiated. On the contrary, I find that the various corporate defendants were bound by the terms of their written contracts and deliberately falsified the returns in order to save money in rental charges.
Reference has been made to the presence of a representative of the plaintiff in a theatre when percentage pictures were being played, his duty being to check the receipts of the theatre to see that true reports were made to the plaintiff. The reports from the various theatres to the plaintiff bear the signatures of the checkers to show that the figures are correct. It is manifest, therefore, that no false reports could be made if the checkers were honest and performed their duty. It appears that the checkers were paid by the corporate defendants, usually $10 a day. Such payment to the checkers, already on the payroll of the plaintiff, is capable of but one interpretation, to wit: that the checkers were bribed and accepted the bribes to certify as correct the false statements of the cashiers or treasurers and the managers of the theatres as to the gross receipts. I find that the various defendant corporations did from time to time bribe the checkers of the plaintiff and that the individual defendant knew of and countenanced the practice.
To summarize, on this phase of the case I find:
1. That a plan was devised by the individual defendant, Fred E. Lieberman, and carried out by the corporate defendants to make false returns to the plaintiff on percentage pictures.
2. That at least one of the purposes of making such false returns was to obtain a lower rental for the showing of percentage pictures.
3. That in setting the rental for percentage pictures the plaintiff relied upon the returns as made.
4. That there is due and payable to the plaintiff by the defendants the difference between the rentals actually charged and received by the plaintiff and the amount which should have been charged and paid had true returns been made.
5. That the amount due to the plaintiff from the various defendants is substantial.
6. That, in accordance with the stipulation, the additional amount which should be paid on percentage pictures by the defendants to the plaintiff is $13,275.
7. That, in accordance with the terms of the stipulation, said amount of $13,275 is not to carry interest until judgment has been entered.
Second Issue (Flat Rental Pictures)
On this issue it is the claim of the plaintiff that, because of the making of false returns by the corporate defendants of the receipts obtained from the exhibition of percentage pictures, the plaintiff was fraudulently induced to grant licenses for the exhibition of pictures at flat rentals which were less than fair and reasonable.
This issue presents a case of novel impression, no case involving such a claim having been adjudicated so far as the parties have been able to ascertain.
As hereinbefore stated, a contract for percentage pictures requires the exhibitor to report to the plaintiff the gross receipts derived from the exhibition of each such picture and to pay the plaintiff as a license fee the named percentage of the gross receipts. In the case of flat rental pictures, however, the contract requires the exhibitor to pay a designated sum for the right to exhibit certain pictures.
There is no set price, applying to all theatres, for a license to show a particular flat rental picture. The size and location of the theatre, the days of the week on which the picture is to be shown, the type and kind of picture, and the ability of the theatre to attract customers, are among the factors entering into the determination of the price. The price finally arrived at by the distributor and the exhibitor for the exhibition of a given picture is almost always the result of negotiations, each party seeking to set the price most advantageous to it. As has been stated, it is safe to say in this case that price was always a vital factor and always the subject of negotiations.
About 1938 or 1939 this plaintiff devised a formula for the pricing of flat rental pictures, based upon experience obtained in the showing of pictures under certain conditions. This experience was obtained in the following manner: When a picture was delivered by the producing department of the plaintiff to its sales department, a number of test showings were conducted throughout the country to determine that picture's revenue-producing value in relation to that of other pictures of the plaintiff played at the same theatre. From a cross section of the box office returns of the various theatres, the picture would be designated as first, second, third, fourth, or fifth "bracket" in box office value.
To determine the relative values of the various brackets, judged by the box office receipts, the plaintiff had examined the returns of approximately one thousand theatres which played only its percentage pictures. As a result of that survey, it was determined by the plaintiff that second bracket pictures grossed approximately 75% of the receipts of first bracket pictures; third bracket 55%; fourth bracket 35%; and fifth bracket 30%.
To establish the price for flat rental pictures to be shown in a given theatre, the formula was based on the average gross receipts of the percentage or first bracket pictures of this plaintiff shown in that theatre in a given year; for example, if the average gross receipts from the exhibition of percentage pictures of the 1941-1942 season resulted in a percentage rental price of $300, the price for flat rental pictures of the following season (1942-1943) was set at $225 for second bracket pictures, $150 for third bracket, and so on.
In order that its salesmen would have a definite asking price for flat rental pictures, the plaintiff prepared for each theatre in the country which used its pictures a price list for the various brackets, based upon the formula and upon the information which the plaintiff then had as to the return of that theatre on percentage pictures. That price list, called an "expectancy sheet," was made up in triplicate: one copy for the salesman, one for the branch manager, and one for the New York office. While the prices set down on the expectancy sheet were not mathematically accurate, they were approximately so; for example, if 75% of the average price for percentage pictures produced a figure of $193, the price would be set at $200. The prices specified on the expectancy sheets served as directives to the salesmen in offering pictures to the exhibitors. Whatever the result of the negotiations between the salesman and the exhibitor, the final approval of the contract prices had to come from the home office in New York before a contract resulted.
I find as a fact that Fred E. Lieberman and the executive officers of the corporate defendants had knowledge of this method of pricing pictures.
It seems plain that if the gross receipts of percentage pictures in a given year were so understated that the basic figures for the expectancy sheet were thereby reduced, the exhibitor would benefit in the ensuing negotiations on flat rental pictures. It is contended by the defendants that the exhibitor might not accept any pictures at the figures named on the expectancy sheet and might refuse to buy pictures at all. If, however, the plaintiff was misled as to the gross receipts from percentage pictures and put a price on flat rental pictures below what the formula would have called for had the true figures on percentage pictures been known, its bargaining base was thereby lowered and the exhibitor as a result obtained an advantage in the negotiations leading to the setting of the final price.
The defendants argue that there was no evidence that the defendant theatres would have paid any higher prices than they did pay for the pictures which they bought from the plaintiff and that, there being no affirmative evidence on that point, the plaintiff has failed to make out a case of damages, on the ground that the damages, if any, could be only conjectural.
Fred E. Lieberman testified that he always bought pictures as cheaply as he could; that from time to time he would refuse to buy when he thought the price too high and would not deal with a distributor for varying periods of time if he could not get its pictures at the prices he was willing to pay; and that he followed the foregoing practices in his negotiations with this plaintiff. Giving full effect to that testimony, the fact remains that he did buy pictures from this plaintiff for exhibition in the various theatres operated by the defendant corporations and that under the terms of any percentage contracts true returns on percentage pictures were to be made.
Under the first issue in this report I have found that a plan was devised by the individual defendant and carried out by the corporate defendants to make false returns on percentage pictures and that in setting the rental for those pictures the plaintiff relied upon the returns as made. I further find as a fact that to establish prices on flat rental pictures the plaintiff also relied upon false returns made to it by the defendants on percentage pictures shown.
The defendants contend that the practice of under-reporting percentage returns by exhibitors was a matter of common knowledge, known to the officials of the plaintiff, and was so widespread that the plaintiff knew, or should have known, that it was a common practice in the industry. I find that the making of false returns to the extent or of the nature of those in this case was not a common practice in the industry or a matter of common knowledge.
The defendants contend that, assuming there was such a price-setting formula as hereinbefore described, it was not followed by the plaintiff, as many of the contract prices deviated from those which would have resulted had the formula been applied literally. It is true that sometimes prices set by the plaintiff were lower than they would have been under a strict application of the formula; that the formula makes no provision for the pricing of return engagements of a given picture; and that in some instances, particularly in the Tremont Theatre, the same picture was shown many times at a reduced price for successive engagements.
The policy of exhibiting pictures at the Tremont Theatre was different from that of most theatres. If a picture had had a strong popular appeal when first released, it was brought back time and again to the Tremont. Contracts for pictures to be shown at that theatre set a flat rental price for the first engagement and then provided that the first four return engagements would be at a price considerably lower and that each return engagement after the first four would be at a price lower still. This practice of setting prices for return engagements had no connection with the formula, had been in effect some time prior to the time the formula was set up, and was continued thereafter.
It is the contention of the plaintiff that the defendants induced, and intended to induce, a state of mind on the part of the plaintiff which would result in its selling the defendants flat rental pictures at prices less than the fair value thereof and less than the amount the plaintiff would have insisted upon as a condition to parting with its property had it known the true receipts from percentage pictures. In other words, deceit on the part of the defendants induced the plaintiff to part with its property for less than the fair value of that property.
I find as a fact that the defendants made false returns to the plaintiff on percentage pictures with the intent, among other purposes, that the asking price of flat rental pictures would thereby be reduced. I find that the plaintiff, relying upon the defendants' misrepresentation as to the receipts obtained from the showing of percentage pictures, did set prices on flat rental pictures below those which it would have set had it known the true receipts from percentage pictures.
I find that the plaintiff is entitled to substantial damages in respect to pictures licensed to the defendants on flat rental terms. In accordance with the terms of the stipulation I find the damage to this plaintiff on this issue to be the sum of $13,600, without interest prior to the date of the entry of judgment with respect thereto.
To summarize, on this phase of the case I find:
1. That a plan was devised by the individual defendant, Fred E. Lieberman, and carried out by the corporate defendants to make false returns to the plaintiff on percentage pictures.
2. That at least one of the purposes in making such false returns was to obtain a lower rental for the showing of flat rental pictures.
3. That in setting the rental for flat rental pictures the plaintiff relied upon the returns made to it by the defendants of receipts from the showing of percentage pictures.
4. That the additional amount due to the plaintiff from the various defendants for flat rental pictures is substantial.
5. That in accordance with the stipulation the additional amount which should be paid to the plaintiff by the defendants for flat rental pictures is $13,600.
6. That in accordance with the terms of the stipulation the amount of $13,600 is not to carry interest until judgment has been entered.
Conclusion
I find that the plaintiff has been substantially damaged in the amount of $13,275 in the matter of the licensing of percentage pictures to the various defendants and in the amount of $13,600 in the matter of the licensing of flat rental pictures to the various defendants and that under the terms of the stipulation the said amounts are not to carry interest until judgment in the case has been entered.
The above-entitled case [Paramount Film Distributing Corporation v. Lieberman] together with one other, was referred to me as Master by an order of reference dated October 29, 1946, directing me "to hear the parties and their evidence and find and report the facts to the Court, together with such questions of law as any party may request." The order of reference required a separate report in each case.
Pursuant to said order of the Court, I have heard the parties and their evidence and herewith report to the Court my findings in the above-entitled case, together with such questions of law as any party requested.
Commencement of Suit Suit was begun on November 8, 1944. Parties Plaintiff
The plaintiff is a corporation organized under the laws of the State of Delaware, having its principal place of business in New York City and also maintaining a branch office in Boston, Massachusetts. It is engaged in the business of supplying motion picture films to theatres for exhibition purposes.In the motion picture industry, a supplier of motion picture films is known as a "distributor."
Defendants
Fred E. Lieberman is a resident of Brookline, in the County of Norfolk, Commonwealth of Massachusetts.
The defendant corporations are as follows:
Corner Theatre, Inc.
Newsreel, Inc.
Greater Boston Theatres, Inc.
Intown Theatre, Inc.
Preferred Pictures, Inc.
Each of the corporate defendants was organized under the laws of the Commonwealth of Massachusetts and operated a theatre for the exhibition of motion pictures, as follows:
Corner Theatre, Inc. — Uphams Corner Theatre — Dorchester Newsreel, Inc. — Square Theatre — Medford Greater Boston Theatres, Inc. — Tremont Theatre — Boston Intown Theatres Inc. — Bijou Theatre — Boston Preferred Pictures, Inc. — Normandie Theatre — Boston
A theatre showing motion pictures is known in the industry as an "exhibitor."
Fred E. Lieberman was the principal stockholder in each of the above-named corporations, holding 98% of the capital stock. He was president and treasurer of, a director in, and general manager of, each corporation.
The other stockholders and officers of the defendant corporations, none of whom was named as a defendant, are as follows:
Morton T. Lieberman, Fred E. Lieberman's brother, was the holder of 1% of the stock in each corporation and was the vice-president of, and a director in, each corporation. He was an employee of the various corporations, receiving no compensation as an officer.
Naomie Lieberman, wife of Fred E. Lieberman, was the holder of 1% of the capital stock of Greater Boston Theatres, Inc. She was neither an officer nor an employee of the corporation.
William Alperin was an employee of the various corporations. He held 1% of the capital stock of each of them, except Greater Boston Theatres, Inc., and was clerk of, and a director in, all the defendant corporations. He received no compensation as an officer of the various corporations.
At 176 Tremont Street, Boston, an office was maintained to which all theatres operated by the defendant corporations reported regularly, in which the master records of all the defendant corporations were kept, and through which was conducted the business of procuring pictures for exhibition in the various theatres operated by the defendant corporations. In this office Fred E. Lieberman had his headquarters, and from it he directed the activities of the various corporations.
Pleadings Plaintiff's Bill of Complaint
The plaintiff's bill of complaint is lengthy and no useful purpose would be served by setting it out in full, as it is part of the record is the case. In substance, it alleges that the plaintiff furnished certain motion picture films to the defendants for exhibition purposes, some being furnished upon a percentage of participating basis and some on a flat rental basis; that the defendants made false returns to the plaintiff of the amounts realized from admissions received at various theatres when the percentage pictures were shown; that the price of flat rental pictures is based upon the amount received from the showing of certain key percentage pictures; that the false returns made by the defendants on percentage pictures resulted not only in the plaintiff's being deprived of the full amount of rentals due it on those pictures but also in the plaintiff's charging a lower price for flat rental pictures than it would have charged had true returns on percentage pictures been made.
The prayers of the bill are for an examination and discovery of the books and records of the defendant corporations, not pertinent in the matter before me, for the additional sums due to the plaintiff as rental for the exhibition of percentage pictures licensed to the defendants and to the other exhibiting corporations, and for damages.
The matter before me is the finding of facts as to whether or not (1) additional sums are due to the plaintiff as rental for percentage pictures, (2) the plaintiff has been damaged and (3) if so, the damages were substantial.
Defendants' Answers
The answer of Fred E. Lieberman is a general denial.
The answer of the defendant corporations is to all intents and purposes a general denial and further, raises the question of the court's jurisdiction the amount involved being not in excess of $3000.
Findings
All the pictures referred to in this report were copyrighted by the plaintiff. No person or corporation other than the owner of the copyright may exhibit a copyrighted picture without first obtaining a license from the copyright owner. In the industry and in this report, reference to the "buying" or the "selling" of a picture means the licensing of a theatre to show the picture for a certain number of days for a certain price. The title to the film does not pass. The "playing" or the "showing" of a picture means the exhibition of the picture in a theatre.
In the industry the "season's product" means the pictures released by a distributor for exhibition during the period from September 1 in a given year through August 31 of the following year; for example reference might be made to the 1939-1940 season's product. The pictures may be bought by the exhibitor long after their release but the designation of the product remains the same.
The licensing of an exhibitor to use certain motion picture films for exhibition is by means of a contract between the distributor and the exhibitor. When executed the written contract calls for the supplying by the distributor to the exhibitor of certain pictures, or the pictures of a certain season to be shown for a specified number of days, for the use of each picture the exhibitor agreeing to pay to the distributor either a designated percentage of the gross receipts realized in the theatre during its exhibition or a certain designated sum. If the agreement calls for the payment of a percentage of the gross receipts the picture is known as a "percentage" or "participating" picture; if a designated flat sum is specified, the picture is known as a "flat rental" picture.
The Boston office of the plaintiff is under the direction of a "district manager" under whom are a "branch manager" and salesman.
The first step in the usual procedure by which an exhibitor acquires a picture or pictures is for a salesman or the branch manager of a distributor to offer to the exhibitor certain pictures of a given season at a certain price. The matter of price may then become a subject for negotiation. It is safe to say in this case that price was always a vital factor and always the subject of negotiations. If the negotiations reach a point where the salesman feels that there is a possibility of approval, the proposed arrangement is reduced to writing on forms provided by the distributor and known in the industry as "applications." These applications are usually in quadruplicate and are submitted by the salesman to the district manager of the distributor. If the applications are approved by the district manager, they are then forwarded to the New York office of the distributor for final approval by the Eastern sales manager. Until the application is approved in New York, however, there is no contract. Upon final approval, the exhibitor gets an approved copy and the other copies are retained by the distributor.
As indicated, a percentage or participating contract calls for a certain percentage of the gross receipts realized on the days a particular picture is shown to be paid by the exhibitor to the distributor as rental; for example, 40% or 35% of the gross receipts of each day the picture is shown.
Under the terms of the contract, the exhibitor is required to notify the distributor on forms supplied by it: the amount of the total receipts of the theatre on each day the particular picture has been shown, the total number of paid admissions, and the prices of such admissions. This report is signed by the treasurer or cashier of the theatre and by its manager. In addition, the report is also signed by the distributor's representative, who is sent by the distributor to the theatre for the purpose of seeing that correct returns are made. Such distributors' representatives are known in the industry as "checkers."
When completed, the report is sent to the office of the distributor. The exhibitor is then billed for the amount represented by the contract percentage applied to the amount reported as having been realized; i.e., if the amount reported is $500 and the contract percentage 40, the exhibitor will be billed for $200 as the rental of that particular picture.
During the hearings before me the parties entered into a stipulation, as follows:
"(1) With regard to the issue of any additional amounts which may be owing on percentage pictures so-called and pictures originally sold on flat rental terms, as to which the terms were later modified to percentage terms, the parties agree that this issue is to be determined by the Master on the depositions of Morton T. Lieberman and William Alperin and on the exhibits before the Master, including Exhibits 3, 182, 183 and 184 previously marked for identification, which may now be admitted in evidence as evidence of the facts therein stated.
"In the event that the Master finds upon the facts and the law that additional amounts should be paid on the percentage pictures so-called by the defendants, then the parties agree that the amounts to be found by the Master are as follows: To the plaintiff Loew's Incorporated the sum of $13,275; to the plaintiff Paramount Film Distributing Corporation the sum of $1,725. These amounts are not to carry interest until judgment is entered.
"(2) With regard to the issue as to whether or not the plaintiffs are entitled to damages in respect to pictures licensed on flat rental terms, other than those referred to in Issue No. 1, such damages, if any, being those to which the plaintiff might be entitled as a result of the claims alleged in the complaint in respect thereto, including, without restricting the preceding generality, the claim that the plaintiffs have been fraudulently induced to grant such licenses at license fees less than the fair and reasonable license fee therefor, the defendants have not conceded liability in respect to the foregoing claim of damages and the issues of fact and law in respect thereto are to be fully tried before the Master on all pertinent evidence, including the evidence submitted under the paragraph above. However, the parties have agreed that in the event that it is determined that the plaintiffs are to recover substantial as distinguished from merely nominal damages on account of the matters referred to in this paragraph, the amount of such damages shall be determined to be as to the plaintiff Loew's Incorporated the sum of $13,600 and as to the plaintiff Paramount Film Distributing Corporation the amount of $1400 and in each case these amounts shall be determined without interest prior to the date of the entry of judgment with respect thereto."
The stipulation automatically divides the case into two parts or issues:
1. As to the percentage pictures.
2. As to the flat rental pictures.
In this report I shall follow the plan of the stipulation and report on each issue separately.
First Issue
As seen by the terms of the stipulation the Master is to determine the first issue upon designated evidence; to wit: the depositions of Morton T. Lieberman and William Alperin, and the exhibits before the Master, particularly Exhibits 3, 182, 183 and 184.
Upon the designated evidence, I find that there was an underreporting of receipts from three theatres, intentionally made for the purpose of misleading the plaintiff as to the amounts realized from the exhibition of percentage pictures, and that the plaintiff relied upon those reports and billed the various theatres for the contract percentage of the reported receipts, resulting in the plaintiff's being deprived of money to which it was entitled and for which it would have billed the theatres had true returns of the gross receipts been made.
These three theatres were the Bijou Theatre, Boston (operated by the defendant Intown Theatre Inc.), the Square Theatre, Medford, Massachusetts (operated by the defendant Newsreel, Inc.), and the Normandie Theatre, Boston (operated by the defendant Preferred Pictures Inc.).
The Tremont Theatre (operated by the defendant Greater Boston Theatres, Inc.) did not show percentage pictures of this plaintiff within the period under discussion. In that period the Uphams Corner Theatre (operated by the defendant Corner Theatre, Inc.) did not underreport any percentage pictures of this plaintiff.
Exhibit 182, to which reference may be made, shows the extent of the underreporting at the Bijou, the Square, and the Normandie Theatres. I find as a fact that Exhibit 182 sets forth the true situation so far as the underreporting of gross receipts is concerned. That exhibit lists 15 percentage pictures which were supplied by the plaintiff and shown by the aforementioned theatres between November 1, 1937, and December 31, 1943, the gross receipts of the theatres having been reported as lower than they actually were. The number of such pictures shown during that period by each of the said theatres was as follows:
Normandie Theatre — (Preferred Pictures, Inc.) — 7 Bijou Theatre — (Intown Theatre Inc.) — 2 Square Theatre — (Newsreel, Inc.) — 6
The fact that the gross receipts from 15 pictures shown in three different theatres were all underreported leads to the conclusion that the defendant corporations which owned those theatres wilfully and intentionally misrepresented gross receipts to the plaintiff. I so find.
I further find as a fact that the plaintiff relied on the figures submitted to it by those defendants and billed them for rentals based on the erroneous figures and, in some instances, also reduced the rental.
As to the knowledge and participation of Fred E. Lieberman, the individual defendant who owned 98% of the stock of each defendant corporation and was the president, treasurer, a director and the general manager of each of them, it is inconceivable that underreporting to the extent it was carried on by those three corporate defendants could have been done without his knowledge and acquiescence. I find that he did know of and participate in the underreporting.
Upon all the evidence designated in the stipulation applicable to this first issue, I find that a plan to make false returns of gross receipts from the theatres operated by three of the corporate defendants, devised by and participated in by Fred E. Lieberman, the individual defendant, the purpose of which plan was to deceive the plaintiff as to the gross receipts from the showing of percentage pictures, in order that the rental cost to those corporate defendants would be reduced.
I find that the plaintiff accepted these false returns in good faith and relied upon them when billing those corporate defendants.
Claim is made on behalf of the defendants that the practice of underreporting gross receipts from percentage pictures was widespread throughout the industry, was well known to all persons in the industry, and was winked at by the executives of the plaintiff. I find that those claims have not been substantiated. On the contrary, I find that the various corporate defendants were bound by the terms of their written contracts and that three of them deliberately falcified returns in order to save money in rental charges.
To summarize, on this phase of the case I find:
1. That a plan was devised by the individual defendant, Fred E. Lieberman, and carried out by three of the corporate defendants to make false returns to the plaintiff on percentage pictures.
2. That at least one of the purposes of making such false returns was to obtain lower rentals for the showing of percentage pictures.
3. That in setting the rental for percentage pictures the plaintiff relied upon the returns as made.
4. That there is due and payable to the plaintiff by the defendants Preferred Pictures, Inc., Intown Theatre Inc. and Newsreel, Inc. the difference between the rentals actually charged and received by the plaintiff and the amount which should have been charged and paid had true returns been made.
5. That the amount due to the plaintiff from the said three defendants is substantial.
6. That, in accordance with the stipulation, the additional amount which should be paid on percentage pictures by the said three defendants, and by the individual defendant by reason of his participation, is $1725.
7. That, in accordance with the terms of the stipulation, the said amount of $1725 is not to carry interest until judgment has been entered.
Second Issue (Flat Rental Pictures)
On this issue it is the claim of the plaintiff that, because of the making of false returns by the corporate defendants of the receipts obtained from the exhibition of percentage pictures, the plaintiff was fraudulently induced to grant licenses for the exhibition of pictures at flat rentals which were less than fair and reasonable.
This issue presents a case of novel impression, no case involving such a claim having been adjudicated so far as the parties have been able to ascertain.
As hereinbefore stated, a contract for percentage pictures requires the exhibitor to report to the plaintiff the gross receipts derived from the exhibition of each such picture and to pay the plaintiff as a license fee the named percentage of the gross receipts. In the case of flat rental pictures, however, the contract requires the exhibitor to pay a designated sum for the right to exhibit certain pictures.
There is no set price, applying to all theatres, for a license to show a particular flat rental picture. The size and location of the theatre, the days of the week on which the picture is to be shown, the type and kind of picture, and the ability of the theatre to attract customers, are among the factors entering into the determination of the price. The price finally arrived at by the distributor and the exhibitor for the exhibition of a given picture is almost always the result of negotiations, each party seeking to set the price most advantageous to it. As has been stated, it is safe to say in this case that price was always a vital factor and always the subject of negotiations.
The evidence from the officials of the plaintiff as to the method of arriving at prices for flat rental pictures was that the company's policy was to ask for flat rental pictures a certain percentage of the earnings from percentage pictures, according to the drawing value placed upon the pictures by the home office, and, where no percentage pictures were sold to a theatre, to estimate what a given picture might gross or to obtain the best possible information as to the gross business of the theatre and its ability to pay and on that basis to price flat rental pictures. The plaintiff did not have a set formula reduced to writing for each theatre, based on known gross receipts from percentage pictures.
No percentage pictures were sold to the Tremont Theatre by this plaintiff during the period under discussion; therefore, the plaintiff could not have been misled by percentage returns in pricing flat rental pictures which it sold to that theatre.
There is no evidence that percentage pictures sold by the plaintiff to the Corner Theatre during said period were underreported; therefore, in establishing flat rentals for that theatre the plaintiff could not have been misled by returns on percentage pictures.
As to the other three theatres, the Bijou, the Square, and the Normandie, which did underreport to the plaintiff on percentage pictures, the evidence showed that at the Bijou there was an underreporting of gross receipts on one percentage picture in 1938 and on one percentage picture in September of 1943. I do not find that these two isolated cases were sufficient to mislead the plaintiff in the pricing of flat rental pictures to the Bijou Theatre.
At the Square Theatre there was an underreporting to the plaintiff of gross receipts on two percentage pictures sold in 1938, on three sold in 1939, and on one sold in 1940. I do not find that the underreporting of the gross receipts of those six pictures, the last one in 1940, established the percentage grosses in this theatre to the extent of misleading the plaintiff in the pricing of flat rental pictures.
All of the underreporting to the plaintiff of its percentage pictures at the Normandie Theatre occurred in 1939. What effect, if any, that underreporting of seven pictures in that year may have had on the plaintiff's pricing of flat rental pictures to that theatre in the subsequent season is entirely conjectural, the evidence not being clear that it had any effect.
Upon all the evidence produced by the plaintiff on this second issue, I find that underreporting of the receipts from percentage pictures had no effect on the prices asked by the plaintiff for flat rental pictures sold by it to these various defendants and that the plaintiff was not fraudulently induced to grant licenses for the exhibition of motion pictures by the defendants at flat rental fees less than the fair and reasonable fee therefor and that this plaintiff is not entitled to recover damages on this issue.
Conclusion
I find that the plaintiff has been damaged in the amount of $1725 in the matter of the licensing of percentage pictures to the defendants Preferred Pictures, Inc., Intown Theatre, Inc., and Newsreel, Inc., and is not entitled to damages in the matter of the licensing of flat rental pictures to the various defendants, and that under the terms of the stipulation the amount of $1725 is not to carry interest until judgment in the case has been entered.
When the above two cases were called for trial, they were referred to a Master because of the long and detailed accounting which was to be made. The Master was directed to make findings of fact, and to report such questions of law as any party might request.
Both actions involve claims for damages by reason of the failure of the defendants to live up to the licensing terms of moving picture rental contracts. Each case divided itself into two parts: first, claims arising out of percentage rentals and, second, claims arising out of flat rentals. The Master held extensive hearings and has now filed his reports. In Civil Action No. 3117, he finds that the plaintiff is entitled to recover $13,275 as damages in the matter of the licensing of percentage pictures, and $13,600 in the matter of the licensing of flat rental pictures. In Civil Action No. 3118, he finds that the plaintiff is entitled to recover the sum of $1,725 as damages in the matter of the licensing of percentage pictures to certain of the defendants, and that the plaintiff is not entitled to damages by reason of the licensing of flat rental pictures. Accompanying the Master's reports is a transcript of all of the testimony elicited at the hearing before him.
The plaintiffs have now moved the Court to adopt and confirm the Master's reports and to enter judgments thereon. The defendants have moved to have the actions recommitted with instructions to the Master to report the evidence and to make additional findings.
Rule 53(e)(2) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, requires the confirmation and adoption of the Master's report unless it is clearly erroneous. Having examined the transcript of evidence, I am of the opinion that the findings of the Master are amply supported by the evidence which was before him. The request of the defendants for the additional findings consists almost entirely of a demand for the specific evidence which the Master considered when making each finding of fact. To this the defendants are not entitled. The evidence before the Master amply supports the findings, and the Court therefore adopts them as its own findings of fact.
On the basis of the foregoing, I conclude and rule that the Master's reports are to be confirmed, and that the plaintiffs are entitled to judgments in each case in the amounts set forth in the Master's reports.