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California Resale Royalty Act

By Quinn Heraty

On May 17, 2012, the United States District Court for the Central District of California granted the joint motion of Sotheby's and Christie's to dismiss the claims against them, because the plaintiffs' claims were based on the California Resale Royalties Act (California Civil Code §986, http://www.leginfo.ca.gov/cgi-bin/displaycode?section=civ&group=00001-01000&file=980-989, CRRA), which the court found to violate the Commerce Clause (U.S. Const. art I, §8, cl.3, http://pages.citebite.com/a9d5h3ltvtx, Commerce Clause).

The court's decision represents a victory for art auction houses and for art sellers who reside in California and a defeat for fine artists. However, the parties' respective victory and defeat may be short-lived, because the Equity for Visual Artists Act of 2011 (EVAA) was introduced in each house of Congress in December 2011 (S 2000, http://www.govtrack.us/congress/bills/112/s2000 / HR 3866, http://www.govtrack.us/congress/bills/112/hr3688). The EVAA, sponsored by Rep. Jerrold Nadler (D-NY) and Sen. Herb Kohl (D-WI), provides for a nationwide artist resale royalty on somewhat similar terms as the CRRA.

The CRRA provides fine artists with a droit de suite, or resale royalty right, which gives fine artists a right to a percentage of the sales price of the artist's work each time the work is resold. The CRRA mandates that the seller of a work of fine art (or the seller's agent) pay to the artist a resale royalty in the amount of 5% of the gross sales price of the work of fine art. This royalty requirement applies to both sales of fine art by residents of California and sales of fine art that take place in California (Cal. Civ. Code §986[a], http://pages.citebite.com/b9k5b4kjkkx). The CRRA exempts sales of fine art for less than $1,000 from the resale royalty provisions.

The statute defines a work of "fine art" as "an original painting, sculpture, or drawing, or an original work of art in glass" (Cal. Civ. Code §986[c][2], http://pages.citebite.com/w9o5x6nqios). For the purpose of the CRRA, an "artist" is defined as "the person who creates the work of fine art and who, at the time of resale, is a citizen of the United States, or a resident of [California] who has resided in [California] for a minimum of two years."

Sotheby's and Christie's argued that the CRRA (1) violates the Commerce Clause of the United States Constitution, (2) effects a "taking" of private property in violation of the constitutions of the United States and of California, and (3) is preempted by the Copyright Act of 1976.

The court, in applying the two-tiered analysis of Nat'l Collegiate Athletic Ass'n v. Miller (10 F.3d 633 (9th Cir. 1993), http://scholar.google.com/scholar_case?case=3708408270532117994) (Miller), found that the CRRA violates the Commerce Clause per se. The test in Miller required the court to inquire as to whether the CRRA "(1) directly regulates interstate commerce; (2) discriminates against interstate commerce; or (3) favors in-state economic interests over out-of-state interests." (Miller, 10 F3d at 638). "If it does any of those things, 'it violates the Commerce Clause per se, and we must strike it down without further inquiry. Id." As the court found that the statute violates the Commerce Clause, it did not reach the defendants' "takings" or "preemption" arguments.

The court held that the CRRA violated the Commerce Clause because the CRRA explicitly regulated applicable sales of art occurring wholly outside of California. The example of the "problematic reach" that the court used was one in which a California resident places a painting by a New York artist up for auction at Sotheby's in New York, and at the auction a New York resident purchases the painting for $1,000,000. In such a situation, the transaction that the CRRA regulates - the one between the New York auction house and the New York purchaser - occurs wholly in New York. Despite the fact that even the artist receiving the royalty is a New York resident, the CRRA reaches out to New York and regulates the transaction by mandating that Sotheby's (1) withhold $50,000 (i.e., 5% of the auction sale price); (2) locate the artist; and (3) remit the $50,000 to the New York artist. Should Sotheby's in New York fail to comply, the New York artist may bring a legal action against the seller's agent in New York under the CRRA to recover the applicable royalty (Cal. Civ. Code §986[a][3], http://pages.citebite.com/t9f5p5crvcg).

The court declined to sever the offending clause (Cal. Civ. Code §986, http://pages.citebite.com/w9g5j7ioaol) to save the rest of the statute because, in its review of the statute's legislative history, the court found that the legislature intended for the statute to reach past commerce occurring within California. The initial draft of the statute applied only to "an original work of fine art sold at an auction or by a gallery or museum in California." The legislature then amended the bill to apply to sales of fine art where "the buyer or the seller resides in California or the sales takes place in California." The legislature then amended the bill again, deleting the reference to California buyers but continuing to require a resale royalty for sales outside of California where the seller resides in California. The court stated: "[T]he reason for the legislature's decision seems obvious: were the CRRA to apply only to sales occurring in California, the art market would surely have fled the state to avoid paying the 5% royalty."

Striking down the entire legislation is obviously a blow to fine artists and the decision will likely be appealed to the Ninth Circuit Court of Appeals. The plaintiffs' attorney, Eric George, was quoted in the Los Angeles Times as saying, "For a single federal judge to invalidate the law, more than 35 years later and without allowing any evidence to be taken, marks a departure from established constitutional law. We are confident, as both sides have always believed, this case will ultimately be resolved by the Ninth Circuit Court of Appeals, which already upheld this very statute in 1981." (http://www.latimes.com/entertainment/arts/culture/la-et-cm-california-art-resale-royalty-act-unconstitutional-20120521,0,705518.story)

Meanwhile, it remains to be seen whether the EVVA of 2011 will be enacted to provide fine artists with nationwide "continuing remunerative relationship between a visual artist and her creation." You can sign up to track the EVAA here: S 2000 (http://www.govtrack.us/congress/bills/112/s2000) / HR 3866 (http://www.govtrack.us/congress/bills/112/hr3688)

Some initial coverage of this case can be found here:
Jori Finkel, Artists sue two auction houses, Los Angeles Times (October 19, 2011) (http://articles.latimes.com/2011/oct/19/entertainment/la-et-auction-house-suit-20111019).

Quinn Heraty is principal of Heraty Law PLLC (http://heratylaw.com) and is admitted to practice in New York and California. Her practice focuses on professionals and small businesses in the entertainment, design, and fashion industries.

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This page contains a single entry from the blog posted on May 25, 2012 11:08 AM.

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