California Resale Royalty Act: A Nail in the Coffin After 35 Years

August 2012Art & Advocacy

In 1977, the California state legislature enacted a statute to provide additional compensation to fine artists each time their works were resold by California sellers or otherwise within the state of California. Entitled the California Resale Royalty Act (“CRRA”), the California statute1 embodied a form of droit de suite, a legal concept that has become engrained in European art law.2 Droit de suite creates a “‘continuing remunerative relationship between a visual artist and his creation,’ by providing the artist with a right to a royalty payment— consisting of a percentage of an original work’s resale price— each time the ‘original, tangible embodiment’ of the artist’s work is resold.”3 The CRRA was the first, and remains to date the only, droit de suite legislation in the United States.

Under the CRRA, “[w]henever a work of fine art is sold and the seller resides in California or the sale takes place in California, the seller or the seller’s agent shall pay to the artist of such work of fine art or to such artist’s agent 5 percent of the amount of such sale.” Cal. Civ. Code § 986(a). This royalty right can be waived by an artist “only by a contract in writing providing for an amount in excess of 5 percent of the amount of such sale.” Id. The CRRA excludes any resale where the gross sales price is less than $1,000. § 986(b)(2).

The CRRA defines a work of “[f]ine art” as “an original painting, sculpture, or drawing, or an original work of art in glass.” § 986(c) (2). An “[a]rtist” is defined as “the person who creates a work of fine art and who, at the time of resale, is a citizen of the United States, or a resident of the state who has resided in the state for a minimum of two years.” § 986(c)(1). Upon the death of an artist, the rights under the CRRA inure to the artist’s heirs until the 20th anniversary of the artist’s death. Thus, despite the law being enacted only in California, the CRRA applies to all artists who are U.S. citizens, regardless of the state in which they reside.

The CRRA additionally requires the seller’s agent (including a “gallery, dealer, broker or museum”), to pay the resale royalty. The agent must “withhold 5 percent of the amount of the sale, locate the artist and pay the artist.” If the agent cannot locate the artist within 90 days, the agent must pay the applicable royalty to the California Arts Council, which is then required to search for the artist for seven years. After that time, if the artist cannot be located, the funds are to pass to the California Arts Council for “use in acquiring fine art.” If the seller or the agent fails to pay the royalty, “the artist may bring an action for damages within three years after the date of sale or one year after the discovery of the sale, whichever is longer.” § 986(a)(3).

After 35 years, in the consolidated cases of Estate of Robert Graham v. Sotheby’s Inc. and Sam Francis Foundation v. Christie’s Inc., a United States District Court in California for the first time ruled on May 17, 2012, that the CRRA was unconstitutional because it violated the Commerce Clause of the U.S. Constitution (see Note 3). A class of artists and their heirs – including famous pop artist, Chuck Close, who resides in New York – filed a class action lawsuit against Sotheby’s, Christie’s, and others acting as agents for California sellers, for selling works of art at auction without payment of the requisite royalty under the CRRA. In January 2012, the defendants filed a motion to dismiss the case on the grounds that the statute (1) violates the Commerce Clause of the United States Constitution; (2) effects a taking of private property in violation of the United States and California constitutions; and (3) is preempted by the Copyright Act of 1976.

A handful of prior legal challenges to the CRRA have failed, primarily based on a preemption claim under the Copyright Act, which has exclusive jurisdiction over all claims that encompass rights equivalent to the bundle of exclusive rights reserved to a copyright owner. In particular, the “first sale doctrine,” codified in Section 109 of the Copyright Act, provides that once a copyright owner sells or otherwise disposes of a copyright-protected work, the copyright owner can no longer control the future sale or disposition of that work.4 In December 1992, the Copyright Office issued a report concluding that it was “not persuaded that sufficient economic and copyright policy justification exists to establish droit de suite in the United States.”5

Soon after the CRRA was enacted, it was challenged unsuccessfully as being a violation of the copyright first sale doctrine and, therefore, preempted by federal copyright law. On the appeal in that case, Morseburg v. Balyon, the Ninth Circuit Court of Appeals in California upheld the law under what was then the prior Copyright Act of 1909, finding no preemption because, unlike the 1976 Copyright Act (which did away with common law copyright), the 1909 Act contained no federal preemption provision.6 No challenge was raised to the CRRA under the Commerce Clause.

In April 2011, faced directly with a preemption challenge in Baby Moose Drawings, Inc. v. Valentine, another California District Court declined to find that the CRRA was preempted by the 1976 Copyright Act because “the Copyright Act’s preemption analysis only requires an examination of the exclusive rights reserved to a copyright owner under 17 U.S.C. § 106,” as opposed to state law claims concerning a violation of the limits imposed by the first sale doctrine under Section 109.7 No appeal was taken from that decision and the issue of preemption under the 1976 Copyright Act remains hotly debated to this day.

In the May 2012 decision in Estate of Graham, yet another California District Court held that the CRRA violates the Commerce Clause and is unconstitutional. To understand why, a brief primer on the Commerce Clause, as explained by the California District Court, is in order. The Commerce Clause states: “The Congress shall have Power . . . [t]o regulate Commerce . . . among the several States….”8 Although the Clause is phrased as an affirmative grant of regulatory power to Congress, the U.S. Supreme Court has interpreted the Clause as having a “negative aspect,” referred to as the “‘dormant Commerce Clause . . . .’” Under this construction, the court noted, states do not have the “‘power [to] unjustifiably . . . discriminate against or burden the interstate flow of articles of commerce.’” The Clause thus is a limitation on the powers of the states, which must “even-handedly regulate to ‘effectuate a legitimate public interest,’ and its impact on interstate commerce must only be ‘incidental.’” A state statute is unconstitutional under the Clause if it either “‘(1) directly regulates interstate commerce; 2) discriminates against interstate commerce; or 3) favors in-state economic interests over out-of-state interests.’”

Against this background, the court found the CRRA invalid under the Commerce Clause because: (1) works of fine art sold from one state to another are “things” in interstate commerce that can be regulated by Congress; (2) the CRRA “substantially affects interstate commerce” (noting that the Ninth Circuit in its Morseburg decision described the CRRA as “an economic regulation to promote artistic endeavors generally”), particularly when “the number of art sale transactions throughout the United States that the CRRA purports to regulate are considered in the aggregate“; and (3) “the CRRA explicitly regulates applicable sales of fine art occurring wholly outside California, so long as the seller resides in California” (even if the artist, such as plaintiff Chuck Close, is not a citizen or resident of California). The court held that “[f]or these reasons, the Court finds that the CRRA 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 CRRA violates the Commerce Clause.”

Having so ruled, the last question the court had to tackle was whether the entire statute should be ruled invalid or whether it could be salvaged by limiting it, for example, only to sales that actually occurred within California between California buyers and sellers. The CRRA itself contains a “severability” provision, which likely was included in anticipation of future legal challenges. The District Court noted that Supreme Court precedent provides that “‘[t]he more relevant inquiry in evaluating severability is whether the statute will function in a manner consistent with the intent of [the state legislature].’” The District Court concluded that the “legislative history of the CRRA … reveals that the [California] legislature abandoned the initial version of the CRRA that purported to regulate only sales that took place in California.” Further supporting the court’s conclusion was advice given by the California Legislative Counsel, which in 1976 advised then- Governor Gerry Brown, in opinion letters, that the CRRA bill “would constitute an undue burden on interstate commerce in contravention of the Federal Constitution in its application to sales which occur outside the State of California.” As a result, the court found that the California legislature “would not have enacted” the CRRA without its extraterritorial reach, and for the court “merely to sever the extraterritorial provisions of the statute would create a law that the legislature clearly never intended to create…. Therefore, the Court finds that the CRRA must fall in its entirety.”9

The plaintiffs in the consolidated cases have filed an appeal to the Ninth Circuit Court of Appeals. They also filed a motion to stay enforcement of the court’s ruling pending the appeal, but that motion was denied on June 6, 2012, by a different District Court judge, who was assigned the motion because the judge who issued the main decision was elevated in May to the Ninth Circuit. The court explained that it denied the stay because the decision did not actually grant any affirmative relief, but rather only granted the motions to dismiss the claims.10

While the Estate of Graham court found the CRRA unconstitutional, it is an opinion of only one federal district court, and other courts may decline to adopt it if challenges are raised in other jurisdictions. How the Ninth Circuit will rule is anyone’s guess. Although that Court had upheld the CRRA in its early Morseburg decision, as noted, that case did not involve a challenge under the Commerce Clause. Whether auction houses and galleries will now cease complying with the CRRA altogether based on one District Court’s decision remains to be seen. The district judge who denied the stay motion opined that some may be “emboldened by the Order to flout the Act — or continue to flout it, as the filings suggest. If so, higher courts will determine whether the Act deserves that scorn… The Order will have as much or as little influence as its reasoning deserves, and a stay would neither decrease nor increase its persuasive authority.”

Sparked perhaps by the attention drawn to the CRRA, both the U.S. House and Senate introduced a proposed bill on December 15, 2011, entitled the “Equity for Visual Artists Act of 2011.”11 This bill to amend the Copyright Act by adding a new Section 106(b) would require that whenever a work of art is sold at auction (other than by the artist and other than in Internet-only auctions), for at least $10,000, the entity receiving payment must pay a royalty of 7% of the price to the artist’s “collecting society.” An auction entity would only be covered if the “amount of such works sold [by it] during the previous year is more than $25,000,000.” The “collecting society” would then have to distribute half the net royalty (after first deducting for itself an “administrative expense” not to exceed 18%) to the artist, or the artist’s successor copyright owner, and deposit the other half into an escrow account to fund purchases by U.S. non-profit visual arts museums. The bill would make it an infringement offense for the failure of the entity collecting the sale proceeds to pay the royalty, and would subject an infringer to statutory damages (an odd construct as none of the exclusive statutory rights of a copyright owner under Section 106 would be violated otherwise).

Why the bill is targeting only major auction house sales and not gallery or museum sales is perplexing, and could have the practical effect of driving some sales of high-valued art out of the auction market to private sales or to new Internet-only auction sites. Moreover, how a new droit de suite statutory right would interplay with the Copyright Act’s first sale doctrine remains to be seen, as it would make non-payment of the royalty an infringement offense, whereas the first sale doctrine expressly permits unlimited resales of copies of works under copyright once they leave an author’s hands. In addition, a new breed of artist “collecting societies” could spring up to earn fees as high as 18%; query the wisdom of that outcome. The future of droit de suite in the U.S. may soon be played out in both the courts and the Congress.

1 Cal. Civ. Code § 986. The statute was enacted after a 1958 Robert Rauschenberg painting, originally purchased for $900, was resold in a 1973 auction for $85,000.

2 For example, the United Kingdom’s Artist’s Resale Right, which is based on the French “Droit de Suite” or “right to follow,” grants artists the right to receive a royalty every time one of their works is resold at auction or by an art market professional. The majority of states within the European Union have similar laws.

3 Estate of Graham v. Sotheby’s Inc., 2012 WL 1765445, 103 U.S.P.Q.2d 1142 (C.D. Cal. May 17, 2012), discussed infra.

4 Section 109 provides: “[T]he owner of a particular copy…lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy….” 17 U.S.C. § 109.

5 U.S. Copyright Office, Droit de Suite: The Artist’s Resale Royalty (1992).

6 621 F.2d 972 (9th Cir. 1980).

7 2011 WL 1258529 (C.D. Cal. Apr. 1, 2011). Section 106 of the Copyright Act delineates the exclusive rights reserved to a copyright owner, including rights of reproduction, display, distribution, public performance, and the right to create derivative works.

8 U.S. Const. art. I, § 8, cl. 3.

9 The District Court did not address the defendants’ alternative grounds for invalidating the CRRA.

10 Sam Francis Foundation et al. v. Christies, Inc., No. CV-11-8605 (Document 47), “Order Denying Ex Parte Application” (C.D. Cal. filed June 6, 2012).

11 H.R.3688 and S.2000, Equity for Visual Artists Act of 2011, with the expressed purpose: “To amend the copyright law to secure the rights of artists of works of visual art to provide for royalties, and for other purposes.”