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California Resale Royalties Act

By Stacy Lefkowitz Brown

On October 18th artists Chuck Close, Laddie John Dill and the estate of Sculptor Robert Graham sued Sotheby's, Christies and Ebay seeking damages for the nonpayment of royalties under the California Resale Royalties Act (CRRA). The complaint also seeks punitive damages and appropriate injunctive and declaratory relief to ensure compliance with the CRRA in the future.

The California Resale Royalties Act and Caselaw

The CRRA effectively codifies the French concept of droit de suite, in which an artist retains the right to an economic interest in the sale proceeds of an artwork for transactions after the initial sale. It requires that a seller pay a 5% royalty to an artist for the resale of a work of fine art defined as a painting, drawing, sculpture or an original work of art in glass, where the seller resides in California or the sale takes place in California, and the artist is a U.S. citizen, or has been a California resident for at least 2 years at the time of the sale. (Ca. Civil Code § 986.) The royalty is to be paid within 90 days of the sale if the sale occurs during the artist's lifetime, or to an artist's legal heirs up to 20 years after the artist's death. (Id.) If the seller cannot locate the artist, the royalty fee goes to the California Arts Council. (Id.)

The CRRA does not apply to the initial sale of the work of art by the artist where the artist holds the legal title to the work at the time of the sale. (Id.) It also does not require a royalty where the initial purchaser is an art dealer who then resells the work of art to another art dealer within 10 years of the initial purchase. (Id.) Finally, the CRRA does not apply to stained glass attached to real property upon the sale or transfer of the property to which it is attached. (Id.)

The CRRA has been the focus of legal controversy in the past, withstanding Constitutional challenges on the grounds of Preemption and violations of Due Process and the Contracts Clause. The preemption issue was addressed most recently in Baby Moose Drawings v. Dean Valentine. There, the assignees of artist Mark Grothjahn's royalty rights sued a dealer to collect the 5% royalty due under the CRRA. (Baby Moose Drawings, Inc. v. Dean Valentine et al., 2011 U.S. Dist. LEXIS 72583.) The California District Court addressed the issue of preemption when the plaintiff moved to remand the case to the California State Court in response to the defendant's removal of the case to federal court. (Id.) The District Court held that the California state court was the appropriate venue as the federal court did not have original jurisdiction. (Id at 12.) A federal court has original jurisdiction over ". . .any civil action arising under any Act of Congress related to . . . copyrights." (Id at 1.) The defendant claimed that removal to federal court was justified because the Copyright Act preempted the CRRA. (Id at 6.) The court disagreed, stating that the Copyright Act did not preempt the CRRA, because the 5% royalty added an extra element of protection to artists. (Id at 8.) This extra element did not "infringe upon the exclusive rights provided by the Copy right Act." (Id.) Similarly, the "royalty right on resale amounts to artists is qualitatively different from the rights granted to copyright holders under the Copyright Act." (Id at 9.) Further, the court looked to Congressional intent to determine that the CRRA did not interfere with the federal law. Specifically, the court noted a Judiciary Committee report on Amendments to the Copyright Act in 1990, which stated:

[s]tate artists' rights laws that grant rights not equivalent to those accorded under the proposed law are not preempted, even when they relate to works covered by [the Copyright Act]. For example, the law will not preempt a cause of action for . . . a violation of a right to a resale royalty." (Id at 10. Emphasis added.)

Preemption was also at issue in Morseburg v. Babylon, which was brought as a test case for the CRRA. (Morseburg v. Babylon, 621 F.2d 972 (1980).) There, an art dealer sued the California Council for the Arts claiming that the 1909 Copyright Act preempted the CRRA. (Id at 975.) He argued that the CRRA interfered with federal law because it "impaired" his ability to "vend" a work of art and restricted the transfer of a work of art under the 1909 Act. (Id.) Morseburg relied on Sections 1 and 27 of the 1909 Act, which provided in Section 1 that "Any person entitled thereto . . . shall have the exclusive right: (1) to print, reprint, publish, copy and vend the copyrighted work." Section 27 stated, "Nothing in this title shall be deemed to forbid, prevent or restrict the transfer of any copy of a copyrighted work the possession of which has been lawfully obtained." (Id.) The Ninth Circuit held that the CRRA was not preempted by the 1909 Act because Congress had not intended to occupy the field, inasmuch as "Congress had evidenced no intent, either expressly, or impliedly, to bar the states from exercising their power." (Id at 977.) Notably, the Court opined that CRRA did not occupy the area of the 1909 Act and that CRRA could coexist and "function harmoniously rather than discordantly" with the 1909 Act. (Id). Neither did the Court view the CRRA as conflicting with the federal law, because nothing in the CRRA technically restricted the transfer of the works. (Id at 978). The Court reasoned that the CRRA did not require a lien on the work of art to secure the royalty, "nor is the buyer made secondarily liable for the royalty." (Id.) However, the Court acknowledged that the CRRA may have the effect of slowing down the marketplace, as it surmised that dealers and collectors may be more inclined to hold onto artworks for a longer period of time before resale. (Id.)

The Court then addressed the Contracts Clause issue. It stated that not all impairments of contracts are improper when serving a public need for the impairment. (Id at 979.) The Court then ruled that the CCRA did not violate the Contracts Clause because the impairment it caused to Morseburg's contract was not severe and served a "broad, generalized economic or social purpose." (Id.) Morseburg similarly fell short on his Due Process Argument in which he argued that the royalty required by the CRRA deprived him of property without due process. (Id.) The Court was not moved, as it did not find the acts of the legislature which adjusted the "burdens and benefits of economic life" to be arbitrary or capricious. (Id.)

A Federal Law's Time Has Come?

All the media attention these suits have garnered begs the question, is a federal law conferring resale royalty rights to artists an idea whose time has come? Although Senator Kennedy tried and failed to incorporate such a right into the Visual Artists Rights Act in 1987, there is new life for resale royalties in the form of a Bill sponsored by Senator Cole of Wisconsin. This Bill has the backing of The Artist Rights Society (ARS), an organization that monitors copyrights and licensing for over 50,000 artists worldwide, which has been lobbying for a federal version of the CRRA over the past year. The Bill is also championed by Bruce Lehman, former Commissioner of the United States Patent and Trademarks Office, and has the support of numerous artists, including Frank Stella, an ARS member. Federal resale royalty legislation on artworks would effectively level the playing field of visual artists with other artists who enjoy Copyright status; for example, authors, performers and musicians who receive royalties for each successive use of their work. However, such legislation may be viewed as more of a tax on artworks and may even work to the detriment of up and coming (read -- starving and/or struggling) artists, because collectors, curators, auction houses and dealers who make the market for these artists may be more likely to hold onto works for longer periods of time. Already established or famous artists are not likely to suffer from this, and in fact, may be the primary beneficiaries of any federal resale royalty law, since their works are already sought after and highly desirable in the marketplace. A federal resale royalty would also have administrative costs attached to it (unless built into the royalty) that dealers and auctions houses would most likely pass onto either the purchaser or seller of the art, creating another layer of cost to do business in the art world.

The Europeans Are Doing It

If the time for a federal resale royalty has indeed arrived, then Legislators may look to some of the European models to help determine what might be appropriate in the United States. As of 2006, the European Union required member states to implement an artist resale royalty (ARR) on artwork sold after the initial sale. Different member states treat this tax differently. The UK, in particular, uses a sliding scale, starting at 4% of the resale price to .25% for prices over € 500,000. In addition, when the ARR came into effect in 2006 in the UK, it only benefitted living artists. However, in January 2012, the ARR will go into effect there for deceased artists as well. In France, the ARR is 3% and in Germany 5%. Auction houses are aware of the ARR, and currently demarcate works which are subject to ARR in auction catalogues. This may not bode well for Sotheby's and Christies, if the allegations in the complaint are true, that they do not make the same or similar demarcation for works in their catalogues subject to CRRA, especially since the complaint accuses the auction houses of "an intentional election to flout" the law. (2011 WL 4947397 (C.D.Cal) (Trial Pleading).)

Stacy Lefkowitz Brown is a portrait artist and an attorney admitted to practice in the State of New York. She can be reached via email at stacylefkowitz@gmail.com.

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