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May 11, 2015 Practice Points

Ninth Circuit Draws Fine Line Around Fine Art Resale Royalties

A partial victory for artists such as Chuck Close and the Sam Francis Foundation—and for other visual artists who sold early works for rent money before establishing their name and value.

By Dennis O. Cohen

In a partial victory for artists such as Chuck Close and the Sam Francis Foundation—and for other visual artists who sold early works for rent money before establishing their name and value—the Ninth Circuit Court of Appeals last week resurrected part of a California law that enables fine artists to share in the profits from resale of their works. Whether the state law interferes with federal copyright laws remains to be seen.

The 1976 Resale Royalty Act required California art sellers or their agents to locate artists after selling their work in order to pay them 5 percent of the purchase price. The well-intentioned law ran afoul of the so-called "dormant Commerce Clause" by purporting to regulate not only sales in California, but also all sales on behalf of California domiciles, even if the sale itself occurred wholly outside of California. The Commerce Clause, contained in Article I, Section 8 of the U.S. Constitution, permits Congress to regulate interstate commerce, and by implication the dormant Commerce Clause prohibits States from regulating commerce taking place outside of its own boundaries. See, e.g., Healy v. Beer Instit., 491 U.S. 324 (1989). The Resale Royalty Act was therefore struck down in its entirety by the Central District of California. On appeal, however, the Ninth Circuit severed the offending "California domicile" portion, leaving intact the remainder of the law regulating resale taking place in California.

The decision was handed down by a divided en banc court and included concurring opinions that would have more finely limited the law's application, essentially exempting out-of-state auction houses Christies, Sotheby's, and eBay, which had successfully challenged the law's constitutionality in the district court. The Ninth Circuit majority did not draw the line as fine as the concurrences, but also did not paint with as broad a brush as the district court. It agreed that, by attempting to regulate sales by California domiciles wherever they may occur, the legislature violated the Commerce Clause. Where the district court struck down the entire Act, however, the Ninth Circuit found it permissible and appropriate merely to sever the portion applying to California domiciles.

This effectively lets the auction houses off the hook for non-California sales. The interesting question remains: Does the Resale Royalty Act impermissibly interfere with the Copyright Act, which pre-empts any state incursion into copyright laws? California auction houses still affected by the law can argue that the law encroaches upon the first-sale doctrine, which generally permits the rightful owner of a copyrighted work to resell the original freely. The defendants in the current case made a copyright pre-emption argument in the district court, but it has not yet been considered. If any portion of the case survives, this key question may be considered on remand.

The Ninth Circuit's editing of California's statute, together with the copyright pre-emption issue, begs the question of whether Congress should act. As U.S. Register of Copyrights Maria A. Pallante recently opined to Congress, visual artists do not benefit from late-career fame the way, say, film or music artists might, as fine art is valued more for its scarcity than for its reproducibility. See The Register's Perspective on Copyright Review Before the H. Comm. on the Judiciary, 114th Cong. 18–19 (2015). Therefore, the Copyright Act does not protect visual artists, who spend enormous effort to produce singular works, in the same way that it protects authors and musicians. A limited federal resale royalties law could correct this disparity. One reason Congress has not acted is the complexity of administrative and enforcement costs. If California's experiment is instructive, such complexities have indeed presented barriers to effective enforcement. But unlike California, a federal law could put the onus on the big auction houses and avoid the biggest enforcement problems, which, coupled with modern information technology, could make national resale royalties a reality for those once-starving artists.

The case is Sam Francis Foundation et al. v. Christies, Inc., et al. (9th Cir. May 5, 2015).

Keywords: intellectual property, litigation, royalties, fine art, Commerce Clause, Resale Royalty Act

Dennis O. Cohen is with BakerHostetler in New York, New York.

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Dennis O. Cohen – May 11, 2015