CA District Court Finds State Resale Royalty Unconstitutional

By Peninah Petruck

Artists vs. Auction Houses. Round one, the winner, the auction houses. In Estate of Robert Graham et al v. Sotheby’s, Inc., and Sam Francis Foundation v. Christie’s, Inc. (consolidated cases), the California District Court found the 1977 California Resale Royalty Act unconstitutional under the Commerce Clause. The decision stated:

• Under its clear terms, the (Resale Royalties Act) regulates transactions occurring anywhere in the United States, so long as the seller resides in California. Even the artist — the intended beneficiary of the CRRA — does not have to be a citizen of, or reside in, California. For these reasons, the court finds that the (law) has the ‘practical effect’ of controlling commerce ‘occurring wholly outside the boundaries’ of California even though it may have some ‘effects within the state.’ Therefore, the (law) violates the Commerce Clause.

But plaintiffs, Chuck Close, Laddie John Dill, and the estate of Robert Graham, aren’t giving up. They’re appealing Judge Jacqueline Nyugen’s May 17th decision. They want the same rights that photographers, filmmakers, writers and composers have under U.S. Copyright Act. Every time a photographer’s work is sold, she earns royalties, but a painter gets nothing when her work changes hands. The painting belongs wholly to the buyer; no part of the profits from its resale belongs to the painter. So when a painter’s work appreciates in value, only its owner benefits. The painter—the creator of the work—is out of luck.

In the class action suit against Christie’s and Sotheby’s, plaintiffs claimed millions in resale royalties. They argued that California Resale Royalty Act says that an artist is entitled to royalties. Anytime work is resold in California, or is resold by a California resident, even outside California, an artist earns 5% of a sale price over $1000. In Europe, artists collect royalties under droit de suite laws, but in the U.S., California is the only state that has even tried to protect artists.

The California court bought Skadden Arp’s Slate Meager Flom’s argument. (Skadden represented Christie’s; Morrison Forester, and Weil, Gotshal & Manges, for Sotheby’s.) For support, the court noted, that when California was drafting CRRA, its counsel advised that it wouldn’t pass Constitutional muster; the Commerce Clause prohibited extending resale royalties to sales outside the state. Apparently, California legislators figured limiting royalties to in-state sales would invite dealers and auction house to do business out of state.

As for round two, the appeal, the artists’ lawyer, Eric George of Browne George, is confident about a reversal in the Ninth Circuit. He is counting on a separation of power argument:

• The artist protection law was properly enacted by California’s legislative and executive processes, pursuant to powers the U.S. Constitution reserves to the states. For a single federal judge to invalidate the law more than 35 years later… marks a departures from established constitutional law.

That’s a hard win. So many advocates think that artists should push for federal legislation. But that’s difficult too.  Previous attempts for the U.S. to enact droit de suite laws have failed. In fact since 1978, California Representative Henry Waxman’s has tried to pass a bill modeled after CRRA. Then, in 1992 the Copyright’s Office 1992 reported that neither economic or copyright policy justified legislation. And last year New York Congressman Jerry Nadler and Wisconsin’s Senator Herb Kohl introduced The Equity for Visual Arts Act, that would require royalty payments from bigwig auction houses’ reselling of works over $10,000; artists and non-profit art museum would split 7% of the works’ price. Galleries, dealers and on-line auction houses, and private auction house sellers sighed with relief because the proposed legislation would apply only to auction houses with revenue over $25 million annually.

Currently the Nadler-Kohl bill is languishing. Maybe the Ninth Circuit’s decision will kick- start the fight for artists. Round three is worth fighting.