Source: https://www.gtlaw-culturalassets.com/2015/05/california-cannot-require-resale-royalty-on-out-of-state-art-sales-but-the-most-important-issues-remain-to-be-addressed-on-remand/
Timestamp: 2019-04-22 06:56:51+00:00

Document:
On May 5th, the U.S. Court of Appeals for the Ninth Circuit, en banc, issued a long-awaited decision in a suit brought by a group of artists against several major auction houses, [Estate of Graham v. Sotheby’s Inc.; Sam Francis Foundation v. Christie’s, Inc., 860 F.Supp.2d 1117 (C.D. Cal. 2012)] upholding, but narrowing, the District Court’s 2012 decision, which struck down the California Resale Royalty Act (CRRA) for impermissibly regulating out-of-state conduct. Since it was enacted in 1976, the CRRA has been the only artist’s resale royalty statute in the U.S., and remains so, applying now exclusively to sales occurring within California. The economic impact of this California-only five percent resale royalty will likely be felt immediately, as California-based sellers weigh the convenience of a local sale against out-of-state sales.
On the question of whether that portion of the CRRA that applied the resale royalty to out-of-state sales, the Ninth Circuit was unanimous in holding that it did, in fact, facially violate the dormant Commerce Clause and was therefore unconstitutional. [Sam Francis Foundation v. Christie’s; Estate of Graham v. Sotheby’s, Case Nos. 12-56067, 12-56058, 12-56077, 2015 WL 2059003, *2 (May 5, 2015)] The Ninth Circuit was also unanimous in holding that the offending provision could indeed be severed from the rest of the CRRA, but the Ninth Circuit was divided on the extent of the portion to be severed. The CRRA provided that the five percent resale royalty would apply if “the seller resides in California or the sale takes place in California.” Cal. Civ. Code § 986(a). The majority severed “the seller resides in California,” leaving the in-state sales provision (“the sale takes place in California”) in effect.
The most interesting issues relating to the CRRA, and the issues with the most far-reaching ramifications for state and federal resale royalty statutes, have yet to be addressed. Because the District Court struck down the whole of the CRRA, it never reached the auction houses’ remaining arguments against the CRRA – namely, that it (i) effects an unconstitutional taking of private property, and (ii) is preempted by the federal Copyright Act of 1976. The Ninth Circuit noted that “[w]e return this case to the three-judge panel for its consideration of the remaining issues. We leave to the panel’s discretion the decision whether to address those issues on the merits or to remand them for the district court’s determination in the first instance.”[ Id. at *5] Decisions on either or both of these remaining issues could yet invalidate the CRRA’s in-state royalty regulation, and these issues are directly relevant to the proposed federal resale royalty, the American Royalties Too (ART) Act. I have previously discussed the re-introduced ART Act here.
The Fifth Amendment to the U.S. Constitution states that “private property [shall not] be taken for public use, without just compensation.” [U.S. Const. amendment V] Opponents of resale royalty statutes argue that such statutes violate the Fifth Amendment’s prohibition against uncompensated takings by compelling the transfer of the royalty amount from one private individual (the seller) to another private individual (the artist) without a public purpose or compensation to the seller. [Defendants’ Joint Motion to Dismiss the Complaints, 2012 WL 1580650, *15 (C.D. Cal. Jan. 12, 2012).
The U.S. Supreme Court’s takings jurisprudence recognizes two categories of governmental takings – physical takings (also known as per se takings), in which the government acquires private property typically as a result of condemnation proceedings or physical appropriations, and regulatory takings, in which governmental regulation interferes with private property owners’ reasonable investment backed expectations. Regulatory takings require a highly fact-based analysis. Resale royalty statutes are at their most vulnerable to takings challenges with respect to their retroactive application to already-created and already-purchased artworks – i.e., the application of the resale royalty to artworks already owned prior to the date the statute goes into effect. The reason for this is that a collector who acquired an artwork before the resale royalty went into effect made that purchase with an understanding that the collector was acquiring clear title to the artwork, free of the encumbrance of the resale royalty. When the resale royalty is applied to any resale of that already-owned artwork, the collector’s ability to realize on his or her investment is impaired, at least with respect to what the collector’s expectation was at the time the artwork was originally purchased.
With respect to the CRRA, the auction houses challenged the statute as effecting an uncompensated, non-public taking of private property. If the Ninth Circuit three-judge panel or the District Court were to find that the CRRA effects a per se taking, the statute could be stricken in its entirety; whereas, if the court were to analyze the statute as a regulatory taking (which is more likely where, as here, the taking at issue is economic, not physical, in nature) and find there to be a taking, the court would be more likely to strike down the statute only as it applies to artworks either created or purchased prior to 1976, the date the CRRA was enacted. In either case, the court’s analysis will be closely watched not only for its impact on the CRRA and the California secondary market, but even more as a harbinger of possible challenges to the Art Act, should it be enacted.
The second remaining issue raised by the auction houses is whether the CRRA (and, by extension, any resale royalty statute) runs afoul of the federal Copyright Act’s first sale doctrine. While the auction houses raised both the takings challenge and the first sale doctrine preemption argument in their motion to dismiss, they chiefly focused on the first sale doctrine argument in their appellate briefing.
While section 106(3) of the Copyright Act reserves to the copyright holder the right to “distribute copies. . . of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending,” [17 U.S.C. § 106(3)] that right is limited by section 109(a), which provides that “the owner of a particular copy . . . 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(a)] This right of the owner of a copy of a work is known as the “first sale doctrine,” and it cuts off the copyright holder’s right to control the further distribution of a copy of a work after the first sale to a purchaser. In the context of art, where a work may exist in a single copy or a limited number of copies, once the artist has sold a work/copy, the artist no longer controls any future sales of that work/copy. The first sale doctrine has been qualified in certain circumstances. Under the Visual Artists Rights Act (VARA), [17 U.S.C. § 106A] for example, restricts an owner’s right to modify an artwork in a manner that is prejudicial to the artist’s reputation.
The U.S. Copyright Office, in both its 1992 and 2013 reports, acknowledged that resale royalty statutes violate the Copyright Act’s first sale doctrine.  Leading copyright treatises have also noted that the first sale doctrine presents a strong challenge to resale royalty statutes. As the Copyright Office has noted, there is no constitutional bar to Congress modifying the first sale doctrine to provide for a resale royalty right.  While this is instructive in reviewing the text and policy discussions surrounding the federal ART Act, it does little to support a conclusion that the CRRA can survive the challenge that it is preempted by the Copyright Act’s first sale doctrine.
In the interim, those interested in the secondary art market will be watching and waiting to see what the Ninth Circuit three-judge panel or the District Court will make of these arguments, and what it will mean for the CRRA.

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