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The “Chandelier” in the Phantom of the Auction

July 24, 2018

By Hanna Feldman

In the elusive, exclusive world of art auctions, there is a practice called chandelier bidding which is little-known by outsiders and widely used among auctioneers. (No it does not refer to bidding on a chandelier).

What is it? Many may assume that an auction begins with a legitimate bid in the room, but auctioneers instead frequently employ “nonexistent bids . . . —usually with their gaze fixed at a point in the auction room that is difficult for the audience to pin down—in order to create the appearance of greater demand or to extend bidding momentum for a work on offer.”

Why is this practice in effect? Depending on whom you ask, chandelier bidding is used to add drama to auctions and conceal the reserve price, or it’s a way to manipulate buyers into bidding higher prices on items. The reserve price is a term of art meaning the lowest price for which a consignor had agreed to sell her property at auction. As Debra Force, owner of Debra Force Fine Art and a former director of Christie’s American paintings department stated in an interview with ARTnewsletter in September 2007, “The auctioneer has to start the bidding somewhere. People don’t start bidding right away, and you need to build up momentum.” Or, as Steve Schindler puts it in The Art Law Podcast (May 2018), the auctioneer has to “warm up the room.” Chandelier bidding also allows auction houses to conceal the reserve price, which helps free up the bidding by not revealing what the seller’s minimum selling price is. If a work fails to sell above the reserve price, then it is disclosed as BI or bought in and the work is considered burned. Both auctions and sellers want to avoid being burned because, per a 2017 Artsy article,  the work’s value decreases and now there is a “public record of a lack of interest in a particular piece.” This is the conventional wisdom regardless of whether actual bidders bid on the work below the reserve price and thus demonstrated interest in the piece. A 2008 study by Oxford professors Alan Beggs and Kathryn Graddy analyzed auction sales by Christie’s and Sotheby’s between 1980 and 1990 and found that burned works yielded 30% less than their “un-scorched counterparts.”    

Is it legal? Like “code red” in A Few Good Men, “chandelier bidding” is not defined by the major auction house manuals or terms of service and is more of an implied practice in the auction world. Despite the seeming unfairness of such a theatrical practice, it is legal in New York, so long as the phantom bids are below the reserve price. However, under New York City law, auction houses are required to disclose “in the catalogue or any other printed material published or distributed in relation to the sale” whether the item up for auction is subject to a reserve price (6 RCNY 2-122(f)(1), passed in 1991 and unamended since then). Further, if auctioneers do employ the practice of “chandelier bidding” in a sale, they must disclose that even though the sale must close above the reserve price, they can commence bidding on behalf of the seller below such reserve price (6 RCNY 2-123, passed in 1991 and not amended since 1992). Auction houses generally tend to stick these disclosures in the terms and conditions at the back of the catalogue with language similar to the following:

Unless otherwise indicated, all lots are offered subject to a reserve….The auctioneer may implement the reserve by opening bidding on any lot by placing a bid on behalf of the seller. The auctioneer will not specifically identify bids placed on behalf of the seller. The auctioneer may further bid on behalf of the seller, up to the amount of the reserve, by placing successive or consecutive bids for a lot or by placing bids in response to other bidders. (Doyle Post-War & Contemporary Art Catalogue, 2015).

Thus, the catalogues do not explicitly say they’re employing chandelier bidding and instead state that they reserve the right to commence the bidding on behalf of the seller. Despite what the terms and conditions say, the seller is rarely explicit about requesting chandelier bids, but it is presumed the auctioneer is acting in the seller’s best interest by trying to drive up the bid prices to well above the reserve price, which generally ranges from half to 90% of the low estimate (each item in a sale is given a low-to-high estimate by the auction house).      

The NYC Municipal Code also requires auctioneers to make such “disclosure . . . on signs prominently displayed in the auction room and at the entrance thereto, and . . . announced by the auctioneer immediately prior to the commencement of any auction.” The Code is explicit about the sign requirements and contents, stating it must be:

[A]t least 12 inches by 18 inches in dimension with letters at least one inch high, and must read as follows, or convey a substantially similar disclosure:

The auctioneer may open bidding on any lot by placing a bid on behalf of the seller. The auctioneer may further bid on behalf of the seller, up to the amount of the reserve, by placing successive or consecutive bids for a lot, or by placing bids in response to other bidders.    

The Uniform Commercial Code also contains a provision allowing buyers to “avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale” should the auctioneer fail to provide notice that they are “knowingly receiv[ing] a bid on the seller’s behalf or the seller makes or procures such a bid” (UCC § 2-328(4)). However, the UCC is not actually law, but merely a guideline that states can choose to adopt in their code. Most states, but not all, require auctioneers to have a license and generally the requirements for disclosure of reserve prices must be followed in order to obtain an auctioneer license. (See here for a list of states that require auctioneer licenses. Some states do not have statewide requirements but rather municipal codes requiring licensure. For instance, New York State does not require auctioneers to have licenses but New York City does.)

Can the practice be eradicated? Past attempts at passing legislation in New York to eradicate chandelier bidding have failed, but not for lack of trying. Even in the 2017-18 New York State Senate session Democrat Daniel Squadron introduced Bill S2024, aimed at increasing “transparency and disclosure in the auction process.” However, the bill suffered a similar fate as the ones before it, as the latest legislative session ended on June 29, 2018 without the bill having left the NY Senate Consumer Protection Committee. Such bills are usually met with staunch opposition by the auction houses, for fears that such regulation would “push business from New York to places where the practice is legal, such as London.”

The practice has yet to be challenged in a lawsuit, but it would be hard to sue for fraudulent inducement for bidding higher prices than the reserve and bidding against ghosts when the auctions technically disclose their use of phantom bidding in writing. As it stands, chandelier bidding is an entrenched and widely used theatrical tactic deployed by auctioneers to get the sale going and remains unlikely to be eradicated anytime soon, to the chagrin of the NY Senate Consumer Protection Committee.       

Selected Sources and Suggested Reading:

About the Author: Hanna Feldman is a Summer 2018 Legal Intern with the Center for Art Law. She is a rising 2L at Fordham University School of Law and and has a special interest in Intellectual Property, Art, and Entertainment. She received her undergraduate degree at Grinnell College in Iowa and originally hails from Los Angeles. She can be reached at hfeldman7@law.fordham.edu.

 

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advice. For legal advice, readers should seek a consultation with an attorney.

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