U.S. Film Studios Agree to Modify "Most Favored Nations" Clause in EU Contracts to Encourage Financing and Installation of Digital Equipment


On March 4, 2011, the European Commission (“EC”) announced that it had closed an investigation into whether the contracts of several major U.S. film studios for the financing and installation of digital projection equipment in European cinemas infringed the EU's competition law banning anticompetitive agreements and practices (Article 101 of the Treaty of the Function of the European Union). The EC was concerned that the contractual arrangements - which required each studio to be offered the most favorable terms agreed with any film distributor - could have the effect of restricting the access of smaller independent film distributors to cinemas with new digital equipment. The major U.S. film studios agreed to amend their contracts to address the EC's preliminary concerns and to avoid a more lengthy and detailed formal antitrust investigation.

To encourage European cinemas to install high-cost digital equipment, the major U.S. film studios exported a virtual print fee (“VPF”) model under which both film distributors (which include the major U.S. film studios) and European cinemas contribute towards the costs of investing in digital projection systems. Under the VPF model, an “integrator”, a third party intermediary, obtains financing, pays upfront for the digital equipment and installs it in cinemas. The film distributor then pays the integrator, who remains the owner of the equipment until its repaid over time. Every time a digital film is shown in a cinema, the film distributor pays a VPF towards the recoupment of the equipment cost. VPF payments cover the majority of the costs, with the remainder paid for by the cinema exhibitors, which make an upfront payment to the integrator. Most VPF payments are made by the major U.S. film studios.

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