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Online Art Auction: New Rules of the Old Game

April 1, 2015

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Online Auctions Apr 1

By Melissa (YoungJae) Koo

Name of the Game

There are no federal rules governing auctions in the United States. Regulations governing conduct of auctioneers, as well as licensing and bonding requirements are reserved for individual states and municipalities. While some states do not require licenses, states like Georgia, Texas, Virginia, have statewide auction laws that require continuing education courses for auctioneers. On the other hand, while New York and Oklahoma do not have state laws governing auction licensing, they have cities that have promulgated licensing requirements. For example, in New York City, to conduct a public auction, an auctioneer must be licensed and backed by a surety bond. The license fee is $400 for a two-year period. With the emergence of online auctions, the traditional methods of conducting and regulating public auctions are in transition.

Still in the early stages of adoption and overshadowed by traditional auctions at physical auction rooms, online art auctions have been steadily growing in popularity and generating a more substantial portion of overall art market sales. Notably, leading brick-and-mortar auction houses have already taken part in online ventures and observed an increase in numbers of online bidders. After the abandonment of the short-lived online auction partnership with eBay in early 2000s, Sotheby’s and eBay signed a new agreement in July 2014 to stream online Sotheby’s auctions on eBay. Sotheby’s and eBay’s first scheduled sales were to start April 1, 2015. Reportedly, even earlier Sotheby’s has seen a 20% surge in number of new online bidders in 2014, and ten lots sold for more than $500,000 to online bidders. As reported in the Wall Street Journal, Christie’s sold $35 million of art online in 2014, which is up 60% from 2013. Chairman and CEO of Phillip’s, another major auction house, hinted at the possibility of Phillip’s expanding into online sales as well.

New Players

With traditional auction houses giving some attention to online art auctions, auctioneer start-ups have been forging a strong presence online. Since their launch, businesses like Paddle8, Artnet, and Auctionata have been attracting art buyers to buy and sell artworks online. For example, Paddle8, launched in 2011 in response to the “increasing thirst for access to contemporary art,” has been funded by a consortium of big-name investors, both private investment firms and individual investors of the art world. Paddle8 had four founding members, each with finance, auction house, business and curatorial background. Artnet, a publicly traded corporation listed in the Prime Standard of the Frankfurt Stock Exchange, was originally founded in 1989 and migrated online in 1995, providing various resources for the international art market such as the Price Database, Analytics Reports, and artnet News. It established artnet Auctions in 2008 as the world’s first online auctions platform for the sale of modern and contemporary artworks. Auctionata was founded in 2012 in Germany with investment capital funded by investment firms, and held the first live auction in the history of the internet in December of 2012. Recently, on March 30, 2015, Auctionata announced that it has raised $45 million from venture capital, making the total capital raised close to $100 million. Unlike online auction competitors which focus mainly upon on works of fine art, Auctionata also holds auctions for memorabilia, wine, jewelry, and watches.

One of the main differentiating factors between the traditional auction houses and online art auctions is the limitations in the highest prices realized. In 2013, the European Fine Art Foundation’s Art Market Report indicated that online art sales accounted for only a small segment of total revenue of the art market, generating about 2.5 billion euros compared to the total 47.4 billion euros in the whole art market. Online art market has been known to focus on the mid market range of art prices, from a few hundred dollars to a little over $100,000. This tendency is in part due to the buyers’ concerns about provenance and authenticity of the items consigned and may account for online buyers’ aversion to bid on or buy art priced over $100,000 with confidence. Also, traditionally, collectors want to experience an artwork’s scale and texture first-hand, as the “spectre of forgery makes [buyers] wary of dealing with virtual vendors” in the secondary market. Steve Lazarides, a specialist who runs both physically gallery and an online shop, has been reported as stating that a relationship is formed between a buyer and a seller when the price of an artwork tops $8,000. In addition, discussing buyers’ need for trust when bidding over $10,000 for an artwork online, Ben Hartley, International Managing Director of Auctionata, stated that art collectors are less comfortable buying emerging contemporary artists’ works than works of well-known artists which have established provenance and have already been sold at auction houses or reputable galleries in the past.

Numbers Game

Despite the limitations sprouting from buyers’ concerns about provenance and authenticity, the “ceiling is gradually lifting upwards.” Indeed, prices on online art auctions have been steadily increasing, with some sales getting close to or surpassing the million dollar range. Artnet set the $1 million record in 2011 with the sale of “Flowers” (1978) by Andy Warhol for $1.3 million, a record they have not since been able to beat. Later, Auctionata sold Egon Schiele’s “Reclining Woman” (1916) for $2.3 million at a streamed auction in Berlin to an online buyer, who had sent an art expert to inspect the painting first. With these ceiling-shattering sales in online-only art auctions, the prospect of further growth looks promising. Paddle8 reported total sales of $17.8 million in the first half of year 2014 with 60,000 registered members worldwide and, similarly, Auctionata has reported a boost of 163% in sales for 2014 with the vastly growing client base, according to a recent report from Art Market Monitor.

As the online art auction businesses grow, their legal implications are little-known or reported. Few cases relating to Internet art auctions have been filed and “to date none has been found at the precedential level,” according to the author of Art, Artifact, Architecture and Museum Law, Alexandra Darraby.

Spotlight: Auctionata

Center for Art Law recently sat down with the Vice President and General Counsel of Auctionata, Jonathan Illari, to discuss business and legal aspects of being in-house at an online auction house. Before joining Auctionata, Mr. Illari, a graduate of Boston University School of Law, was Associate General Counsel of another major international auction house. With his valuable experience earned at a traditional art auction house, he is an asset in the field of emerging online art auction business.

According to Illari, a career at an online art auction platform like Auctionata has two intertwined aspects of business: promotional and legal. In terms of promotional aspect, Illari pointed out the unique two-fold business model of Auctionata: live video stream auctions, filmed in a New York studio, and the “Online Shops” e-commerce marketplace with a set price, subject to counter-offer. Due to the nature of live video stream auctions, which is broadcasted by a local crew specialized in TV productions, the legal department has to make sure that the company follows all applicable auction and dealer rules and regulations in New York City such as an official auctioneer and auction house licensing rules under the New York City Administrative Code Title 20, much like with established auction houses. In addition, Illari said that the location of the business, New York City, the biggest art market in the United States where all the major art auction houses are headquartered, comes with equally most expansive codes and regulations relating to art auction such as business licenses and tax certifications. The legal department has to ensure the auctions comply with the local laws—not just those related to auctions but those related to types and quality of products being auctioned such as wine and cultural property, for example. In addition, international laws such as EU Data Protection laws are another example of issues online auction businesses should be mindful of, as there is a significant client base abroad.

Illari pointed out that one of the most common legal issues arising at the online art auction business is related to client identification and verification. Given that the business transactions occur online only, attracting many international clients all over the world, issues arise in identifying bona fide purchases and minimizing business risks and liabilities. Illari stated that buyers are vetted from Auctionata directly as well as its third party partner sites. Although admittedly verification can be an issue in an online marketplace, which always has the potential to host bad actors, Illari commented that one advantage from a fine art perspective is that when unique goods are auctioned online, people tend to bid in good faith because they want the particular item being offered, not just “any” painting, print, sculpture, etc. Despite the best efforts, the issue could still be aggravated when clients do not pay. Illari stated that when nonpayment occurs, debt collection in an international online marketplace can become a jurisdictional hindrance, as it is difficult to pursue the client and the client’s assets especially when he or she is located outside of the United States. When a buyer absolutely refuses payment, like other auction houses, Auctionata could choose to cancel the sale and offer the item to an underbidder, although the original bidder would still remain liable for any loss in revenue or costs to resell. Depending on the circumstances, a buyer can also lose all future bidding privileges. For Auctionata, in terms of jurisdiction of all legal matters arising from the business including contract disputes, New York law remains the binding law, regardless of where claimants are based.

Illari also mentioned various types of buyers of online art auctions: they range from individual collectors to galleries, similar to clients of traditional auction houses. The variety of goods offered on Auctionata makes the site attractive to both the casual and educated consumers, meaning that the online art auction business “must be a hybrid to be able to fully serve the needs and requests” of the full range of clients. Another unique aspect of online art auction business is the impersonal relationship with the clients, given the nature of the client base and limited proximity. To minimize issues arising from the lack of in-person interactions with clients, online business may offer on-site exhibition of the works being auctioned as well as free valuation services.

In summary, traditional art auction houses have reported to continuously renew the record on sales of art both offline and online, young online art auction businesses, too, have been growing in parallel. Illari stated that as online auctions are generally an emerging market, there many not much laws, regulations, or case law specifically governing this field of business, leaving online auction businesses to largely adapt to their own environments. As we explore the little-known or reported legal issues arising from the new promising businesses, it would be interesting to monitor how they develop in the legal realm.

**The author wants to thank Jonathan Illari for his time and kindness for the interview.

Selected Sources:

About the Author: Melissa (YoungJae) Koo, Legal Intern with Center for Art Law, is a third year student at Benjamin N. Cardozo School of Law, concentrating in Intellectual Property law, especially art and fashion law. She can be reached at youngjae.koo@law.cardozo.yu.edu.

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