Dialogue

One reason California will never be the art market force that is New York is the California Resale Royalty Law. Unfortunately.

Law360, Los Angeles (December 16, 2014, 10:48 PM ET) -- Visual artists seeking royalties on resale of their works by Christie's Inc., Sotheby's Inc. and eBay Inc. urged the Ninth Circuit on Tuesday to restore California’s Resale Royalties Act and revive their class actions, saying the statute doesn’t violate the federal Commerce Clause.

The appeals court had ordered an en banc rehearing of the appeal by artists Chuck Close and Laddie John Dill, the estate of Robert Graham and the Sam Francis Foundation, who sought to overturn a district court’s ruling that wiped out the entire statute and dismissed with prejudice three punitive class actions brought by the artists seeking resale royalties from the auctioneers.

During oral arguments Tuesday in Pasadena, Calif., the artists’ attorney, Eric George of Browne George Ross LLP, told a full panel of 11 circuit judges that the act does not violate the Commerce Clause because its effects outside the state do not cause price-fixing and do not conflict with another statute or discriminate against out-of-staters.

“Although the very purpose of dormant Commerce Clause jurisprudence is to stem protectionism ... there is zero discrimination of any sort imposed by the Resale Royalty Act here,” he said. “At no time since its 1976 enactment has this act purported to or in any way had the effect of regulating price, the terms of a sale, the conditions of a sale.”

The appeal stems from three proposed class actions the artists brought against the auction companies in October 2011, claiming that Christie’s, Sotheby’s and eBay owe the artists royalties under the Royalty Act, which required sellers to pay artists 5 percent of the resale price of all fine art sold in the state or put up for sale by California residents.

Under the Royalty Act, it was the seller’s responsibility to find the artist of the piece sold and pay the royalty, the artists claimed.

If a seller or a seller’s agent — in this case, the auction companies — could not find the artist, the 5 percent royalty fee was turned over to the California Arts Council to distribute to the artist, according to the law. But the artists claimed that the two auction houses and eBay have not handed over the royalties.

The auction companies fired back that the statute was unconstitutional. Because the Royalty Act applies when a work of fine art is sold outside California, thus attempting to control commerce between multiple states, the defendants argued, it violates the dormant Commerce Clause, which limits a state’s ability to enact legislation that infringes on other states' governing rights.

In May 2012, U.S. Circuit Judge Jacqueline H. Nguyen, sitting by designation, sided with the auction companies, finding that the Royalty Act violated the Commerce Clause by improperly attempting to gain royalties from transactions outside California between non-California parties.

The statute could also be applied to transactions made within the state, but Judge Nguyen found that the two parts could not be severed in order to save the statute.

The decision to hold a rehearing came after the court asked for supplemental briefing on whether there is conflict in Ninth Circuit case law between the 2013 rulings in Rocky Mountain Farmers Union v. Corey and Ass'n del Eleveurs de Canards et d'Oies du Quebec v. Harris, which would affect the application of the 1989 case Healy v. Beer Institute, all of which bear on determining what state actions are barred by the federal Commerce Clause.

On Tuesday, George told the full appeals court that it should apply Healy, and that under that case, the Royalty Act is not a tax but a regulation, which is allowed in some cases.

“I do look at it as a regulation, albeit one that does require payment of some monies,” he said. “Healy does not reach nondiscriminatory regulations unless they involve price tie-in or price controls of some sort.”

Sotheby’s attorney Deanne Maynard of Morrison & Foerster LLP, arguing for all of the defendants, argued that the court need resolve any tension in case law in order to rule in the auction houses’ favor, as the act should be viewed as a price regulation but is unconstitutional even if it is not.

“This is really a regulation of price by requiring 5 percent of the gross proceeds to be paid,” she said. “I do not think it is a correct statement to limit the dormant Commerce Clause to price only; the Commerce Clause itself exists beyond price.”

The plaintiffs are represented by Eric M. George and Ira Bibbero of Browne George Ross LLP and Irving H. Greines and Gary D. Rowe of Greines Martin Stein & Richland LLP.

Christie’s is represented by Jason D. Russell, Hillary A. Hamilton and Michael McIntosh of Skadden Arps Slate Meagher & Flom LLP. Sotheby’s is represented by Steven Alan Reiss and Howard B. Comet of Weil Gotshal & Manges LLP and Paul T. Friedman and Deanne Maynard of Morrison & Foerster LLP. EBay is represented by John C. Dwyer, Angela L. Dunning, Joshua M. Siegel and Michael G. Rhodes of Cooley LLP.

The case is Sam Francis Foundation et al. v. Christies Inc., case number 12-56067, in the U.S. Court of Appeals for the Ninth Circuit.

--Editing by Brian Baresch.

This article appears in Law 360 at http://www.law360.com/appellate/articles/605538?utm_source=shared-articles&utm_medium=email&utm_campaign=shared-articles

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