Why California Art Resales Will Never Be Significant

9th Circ. Royalty Case To Drive Art Resales Out Of Calif.

Sam Francis. Untitled, 1990, collage and acrylic on canvas. 245 x 183 cm

Sam Francis. Untitled, 1990, collage and acrylic on canvas. 245 x 183 cm

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Law360, San Diego (May 05, 2015, 11:40 PM ET) -- After decades of scattershot compliance with California’s Resale Royalty Act, the Ninth Circuit’s decision Tuesday upholding the law’s requirement that fine-art sellers pay visual artists royalties on California sales is likely to undercut the secondary art market in the Golden State, experts say.

The appeal stems from three proposed class actions by artists alleging that Christie’s Inc., Sotheby’s Inc. and eBay Inc. owe them royalties under the state’s Resale 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.

Although the underlying California federal court in 2012 agreed with the auction companies that the act should be struck down entirely because it violated the U.S. Constitution’s commerce clause by regulating out-of-state sales conducted by California residents, the Ninth Circuit’s en banc court found that only the portion of the law governing out-of-state sales was unconstitutional and upheld the requirement that fine-art sellers must pay royalties to artists on sales that occur in California.

The 1976 state law shoulders art galleries and other art sellers with the responsibility of tracking down artists or their estates to give them royalties on artwork that resold for $1,000 or more, and if they can’t find the artist, they are required to turn over the royalty fee to the California Arts Council — obligations that are not likely followed by the majority of sellers in the art world — according to Jonathan Pink, a partner at Lewis Brisbois Bisgaard & Smith LLP.

“It puts a big burden on galleries to track people down, and galleries are not always making much money on these transactions,” he said. “My guess is that most galleries have not been 100 percent in compliance with the law.”

Following the decision Tuesday, a 5 percent resale royalty that has been in effect since 1976 will continue for sales that occur within California, but now it won’t apply to sales that take place outside of California, even when the seller is based in California, according to Kevin Ray, of counsel at Greenberg Traurig LLP.

“If any given seller has the option of selling in or out of California, the 5 percent royalty certainly will factor into its decision,” he said. “We’re more likely to see sales moving outside of California.”

The en banc ruling invalidates the royalty requirement on sales occurring outside of California that are conducted by galleries, auction houses and other agents on behalf of California residents and on sales occurring outside of California directly by California residents.

As a result, if California galleries partner with an out-of-state gallery and transfer the art there for sale, they are exempt from the royalty requirement, according to Karl Manheim, a professor at Loyola Law School in Los Angeles.

“No other state has a resale royalty law, so galleries outside of California will be able to sell works of art for 5 percent less than could a California gallery, [which] might result in a shift in the high-end art business,” he said. “Or owners could accept 5 percent less if they want their art sold in a California gallery. In either case, I think we'll see a reduction in the secondary art market in California.”

Pink said the portion of the Resale Royalty Act left intact by the Ninth Circuit on Tuesday creates tension with the Copyright Act’s first-sale doctrine because books, movie posters and other commercial artwork doesn’t require a portion of the proceeds of a resale to be paid to the creator of the work.

“This ruling creates a multi-tiered class system where fine visual artists are treated differently,” he said. “If I buy a movie poster of ‘Jaws,’ and then I want to sell it, I’m not obligated to pay a portion of the sale to Universal Studios or Steven Spielberg, but if I buy the original of that painting, I owe the artist a percentage of the sale. It seems to create palpable tension with the first-sale doctrine that is difficult to resolve.”

The state’s Resale Royalty Act is extremely difficult for sellers to comply with, according to Pink.

“The Ninth Circuit leaves in place the majority of problems with the law before this ruling, namely, how do you effectively ensure compliance?” he said. “How do you educate the art world so that people can comply with it in a reasonable and expeditious basis and how do you reconcile that with the Copyright Act? … Because it seems to leave all the same problems in place, I would expect an appeal to follow.”

In April, the American Royalties Too Act was re-introduced by U.S. Sens. Tammy Baldwin, D-Wis., and Ed Markey, D-Mass. The federal measure seeks to entitle visual artists to a royalty upon the resale of their work. It would apply to works resold for at least $5,000 and would require auction companies, but not private sellers, to pay a royalty of five percent of the purchase price to visual artists of up to $35,000.

If that measure took effect, it could eclipse the California law, according to Ray.

“I think there would be a strong argument that if the federal resale royalty bill was enacted, the California Resale Royalty Act would be found to be preempted,” he said.

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.

--Additional reporting by Beth Winegarner. Editing by Jeremy Barker.

Sam Francis (1923-2010).  Untitled (SFP study2), 1990. Acrylic on canvas, 170 x 134,5 cm.

Sam Francis (1923-2010). Untitled (SFP study2), 1990. Acrylic on canvas, 170 x 134,5 cm.