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Art Law

by Simon J. Frankel

February 2013

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In May 2012, a federal district court in Los Angeles found unconstitutional a California statute that provides a resale royalty right to creators of fine art. (Estate of Graham v. Sotheby's, Inc., 860 F. Supp. 2d 1117 (C.D. Cal. 2012).) While the decision is on appeal, artists, dealers, collectors, and auction houses are left to ponder the implications for future sales.

The California Resale Royalties Act applies to works of fine art - defined as an "original painting, sculpture, or drawing, or an original work of art in glass." Under the CRRA, whenever such a work is resold at a profit and for more than $1,000, and either the sale occurs or the seller resides in California, the artist is entitled to receive 5 percent of the resale price. (Cal. Civ. Code § 986(a).) The artist must be a U.S. citizen or a resident of California for at least 2 years, and the royalty right continues for 20 years after the artist's death. (§§ 986(a)(7), (c)(1).)

Notably, when a work of fine art is resold by an agent for a seller (such as an auction house or dealer), the agent is required to withhold 5 percent of the price and pay it to the artist (or, if the artist cannot be located, to the California Arts Council). If the seller or the seller's agent fails to pay the royalty, the artist may bring an action for damages and recover attorneys fees. (§ 986(a)(1)-(3).)

Court Ruling
In October 2011 various artists and artists' estates sued Sotheby's, Christie's, and eBay in federal court in Los Angeles, alleging failure to pay the resale royalty. On motions to dismiss, the district court held that the CRRA violates the dormant commerce clause of the U.S. Constitution because the statute effectively regulates art sales that occur outside of California. The court noted that the CRRA purports to apply even if a California owner sold a work by a New York artist at auction in New York to a New York buyer. Because the court determined that the California Legislature would not have enacted the statute without this extraterritorial reach, it declined to sever that portion and held the entire statute - including its application to sales entirely within California - unconstitutional and unenforceable. Plaintiffs have appealed to the Ninth Circuit.

Implications
As to the parties involved (the plaintiffs, Sotheby's, Christie's, and eBay), the ruling is effective immediately and the statute unenforceable. As to other parties, the result is less clear, as a district judge's ruling is not binding precedent in a different judicial district, the same judicial district, or even with respect to the same judge in a different case. (See Hart v. Massanari, 266 F.3d 1155, 1174 (9th Cir. 2001).)

To be sure, if the Ninth Circuit affirms, the case will bind all federal courts in the circuit and the CRRA will be unenforceable as to all parties therein. (Hart, 266 F.3d at 1171.) For this reason, sellers and their agents may be inclined not to pay artists the resale royalty while the appeal is pending.

However, if the Ninth Circuit reverses, the statute would be enforceable - including during the time the case was on appeal. (See Harper v. Virginia Dep't of Taxation, 509 U.S. 86, 97 (1993).)

Given this uncertainty, sellers' agents should consider withholding and placing in escrow 5 percent on transactions within the statute's scope pending resolution of the appeal. The same would be appropriate for unpaid royalties on any sales made prior to the district court decision; otherwise, if the statute is upheld auction houses and dealers may be liable to artists for the royalties - but they will have already paid out that money to the sellers.

So if the Ninth Circuit reverses the decision striking down the statute, the money can be paid to the artists; if it affirms, to the sellers. This course of action may be particularly appropriate for transactions occurring entirely within California, as it is possible that the Ninth Circuit may agree that the CRRA is unconstitutional as to extraterritorial sales but let the statute stand as to in-state transactions.

Simon J. Frankel is a partner in Covington & Burling's San Francisco office, where his practice includes legal issues related to visual art.

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