Jonathan Pink — Entertainment, Internet and New Media Partner at Lewis Brisbois, LLP Rotating Header Image

The Art of Ending an Act: An End to the California Resale Royalties Act

In 1973, after a work by Robert Rauschenberg sold at auction for $85,000, Rauschenberg blew a gasket.

Presumably, Rauschenberg wasn’t ticked off about the fact that his work was being sold at Sotheby’s or that it had pulled in quite big chunk of change. Rather, as the story goes, he was angry about the fact that the investor to whom he had sold the work for $900 had just profited by roughly $84,100, while Rob-the-Artist wasn’t making a dime off of that Sotheby’s sale.

So what did Rauschenberg do? He allegedly stormed across the auction floor, sought out the gleeful seller, and shoved the man, screaming he had not worked so hard “just for you to make that profit.”

In fact, enough artists actually felt this way that – in California at least – the legislature passed a law entitling artists to receive a royalty each time their works were resold (subject to certain limitations). That law, the California Resale Royalties Act (CRRA), recently came under fire.

Specifically, in Estate of Robert Graham v. Sotheby’s, Inc., (— F.Supp.2d —-, 2012 WL 1765445 (C.D.Cal.)), a slew of artists (or their heirs) sued world-renowned auction houses Sotheby’s and Christies for allegedly failing to pay artists the appropriate resale royalty rate under the CRRA. The auction houses responded by arguing that the CRRA violates the Commerce Clause of the United States Constitution. (U.S. Const. art. I, § 8, cl. 3.)

Now before anyone gets off on the fact that Sotheby’s isn’t the “seller,” you should know that the CRRA additionally requires the seller’s agent to effect payment of the resale royalty. Cal. Civ.Code § 986(a)(1). It provides that “[w]hen a work of fine art is sold at an auction or by a gallery, dealer, broker, museum or other person acting as the agent for the seller the agent shall withhold 5 percent of the amount of the sale, locate the artist and pay the artist.” Id.

By the way, if the agent is unable to locate the artist within 90 days, the CRRA dictates that the agent pay the royalty to the California Arts Council, which is then required to search for the artist for seven years, after which the funds pass to the California Arts Council for “use in acquiring fine art.” Id. Which, in turn, would require that the Arts Council pay a royalty to the creator of the work purchased.

Bottom line, however, Sotheby’s and Christies are “in for a penny, in for a pound” if the CRRA applies.

But does it?

The Court in Graham v. Sotheby’s first found that “where works of fine art are sold from one state into another, each piece of fine art itself constitutes a ‘thing’ in interstate commerce” which Congress may regulate under the Commerce Clause. 2012 WL 1765445 at *4, (citing United States v. Lopez, 514 U.S. 549, 558-59 (1995)).

It then went on to analyze whether the CRRA substantially affects interstate commerce, concluding that it does. Specifically, the Court said that “[o]ne factor that a Court should ‘consider when evaluating whether a law has a ‘substantial effect’ on interstate commerce [is] … whether the statute has anything to do with ‘commerce or any sort of economic enterprise, however broadly one might define those terms.’’” Id. (citing San Luis & Delta–Mendota Water Auth. v. Salazar, 638 F.3d 1163, 1174 (9th Cir. 2011).

In fact, the Court noted that the Ninth Circuit had previously described the CRRA as “an economic regulation to promote artistic endeavors generally.” 2012 WL 1765445 at *4, (citing Morseburg v. Baylon, 621 F.2d 972 (9th Cir. 1980)). Thus, the Court concluded that when the number of art sales that the CRRA purports to regulate (throughout the United States) are considered in the aggregate, “the CRRA has a ‘substantial effect’ on interstate commerce such that Congress could regulate the activity” and thus the dormant Commerce Clause applies to the CRRA. Id. (citing Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56–57 (2003)).

Given that the dormant Commerce Clause applies, the Court asked whether the CRRA violates that Clause. It found it does. Reasoning that the defendants, both New York corporations, were being accused of violating a California by virtue of selling art owned by a California seller notwithstanding the fact that the sale took place wholly in New York, the Court ruled that the CRRA has the “practical effect” of controlling commerce “occurring wholly outside the boundaries” of California and therefore violates the Commerce Clause of the United States Constitution. 2012 WL 1765445 at *6.

Once an act violates the Commerce Clause, it’s prognosis for survival is not great. Here, the Court concluded that although the CRRA contains a severability provision, it did not believe that the offending portions could be severed, thus ruling that “the entire statute must fall.” Id. (citing Cal Civ.Code § 986(e) which provides that “If any provision of this section or the application thereof to any person or circum-stance is held invalid for any reason, such invalidity shall not affect any other provisions or applications of this section which can be effected, without the invalid provision or application, and to this end the provisions of this section are severable.”)

Now I understand that many artists may mourn the demise of this Act, but I don’t. I’ve never thought it was fair. Hear me out.

First, I think the CRRA conflicts with the first sale doctrine codified by the Copyright Act. That doctrine provides that “Notwithstanding the provisions of section 106 (3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” 17 U.S.C. 109. As applied, the first sale doctrine has come to mean that where one lawfully, and with the authorization of the copyright owner, comes to own a “copy” of a work, that person may likewise dispose of the work through sale to another without violating the Copyright Act.
So how then does the CRRA purport to create an on-going obligation to compensate the author of the work? While many artists described this as basic fairness, I disagree. It see it as a direct conflict with the notion as set forth in the first sale doctrine that once the work is lawfully sold or even transferred gratuitously, the copyright owner’s interest in the material object in which the copyrighted work is embodied is exhausted.

Secondly, the CRRA fundamentally ignores the reality of the art market. When an artist’s work increases in value (as measured through auction sales), the commercial value of his/her other works often see a similar financial up-tick. Take Rauschenberg for example. If his work hadn’t fetched $85K in 1978, it’s unlikely that it would have continued to climb in value. (One was recently offered at auction over $200,000.) So when an artist’s work start’s making big money for a collector, the artist him/herself also increase what they charge. Rauschenberg wasn’t charging $900 for his works by the time he died. Neither was Warhol. When prices go up at auction, they increase the value of the art and the artist. So do collectors potentially make out when they buy low and sell high? Sure, but the artists also benefit.

Also, and importantly, any increase in an artist’s value is seldom due only to the artist’s continuing endeavors. Rather it’s at least partially due to the dealers, collectors and critics who supported and bought his work while he was still unknown, overlooked and disregarded. In light of this, I’m wondering if artists want participate in the upside of future sales (even if they discount the ancillary contribution of collectors, dealers, etc.) do hey also feel that they should share in any subsequent loss in value?

In any event, I never saw the merit to the CRRA, and I’m glad to see it gone. Now, in the interest of full disclosure, my mom is a long time art dealer, but on the flip-side, I was a syndicated cartoonist before going to law school. In short, I take the position I do with all of my background.  And based on this, I think I’m being fair.

How about you?

Jonathan Pink is an intellectual property attorney and leads the Internet and New Media Team at Bryan Cave, LLP. He is located in Los Angeles and Orange County. He can be reached at jonathan.pink@bryancave.com.

Jonathan Pink is a business lawyer with a specialty in copyright, patent and trademark litigation. His clients include many of the biggest names in the automotive and motorcycle aftermarket parts industries, and one of world's largest media companies. He has extensive experience in a wide range of intellectual property and commercial disputes including breach of contract, fraud, and the misappropriation of trade secrets. He can be reached at 949.223.7173, or at jonathan.pink@bryancave.com, and his full profile can be viewed at www.bryancave.com.

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