Enter to open, tab to navigate, enter to select
District Court Strikes Down California Resale Royalties Act
Practical Law Legal Update 5-519-5580 (Approx. 4 pages)
District Court Strikes Down California Resale Royalties Act
by PLC Intellectual Property & Technology
| Published on 22 May 2012 • USA (National/Federal) |
In Estate of Robert Graham v. Sotheby's Inc., the US District Court for the Central District of California determined that the California Resale Royalties Act violates the Commerce Clause and struck down the entire statute as unconstitutional.
Key Litigated Issue
The key litigated issue in Estate of Robert Graham v. Sotheby's Inc., was whether the California Resale Royalties Act (CRRA) violated the Commerce Clause of the US Constitution.
Background
On October 18, 2011, the plaintiffs, a collection of artists and their heirs, filed class action suits against auction houses, Sotheby's Inc., and Christie's, Inc., alleging that they acted as the agents for California sellers and sold works of fine art at auction without paying the appropriate royalty required under the California Resale Royalties Act (CRRA), which requires that:
"[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."
If the agent is unable to locate the artist within 90 days, the CRRA requires the agent to pay the royalty to the California Arts Council, which must search for the artist for seven years. If the artist is not located after that time, the funds pass to the California Arts Council for use in acquiring fine art. (Cal. Civ. Code § 986(a).)
The defendants filed a joint motion to dismiss the complaints arguing that the CRRA:
- Violates the Commerce Clause of the US Constitution.
- Effects a taking of private property in violation of the US and California Constitutions.
- Is preempted by the Copyright Act of 1976.
Outcome
In a matter of first impression, the US District Court for the Central District of California determined that the CRRA violates the Commerce Clause. Since the district court determined that the CRRA violates the Commerce Clause, it did not address the takings and preemption arguments.
While acknowledging that droit de suite, or resale royalty rights, are common in Europe and the CRRA was the first doit de suite legislation in the US, the district court noted that:
- The Copyright Office issued a report in December 1992 concluding that it was not persuaded that sufficient economic and copyright policy justification exists to establish droit de suite rights in the US.
- Other states, including New York, considered similar legislation but have not adopted any measure creating a resale royalty right for visual artists.
In striking down the statute, the district court relied on the negative aspect of the Commerce Clause, known as the Dormant Commerce Clause, which limits states' power so they cannot unjustifiably discriminate against or burden the interstate flow of articles of commerce. The district court determined that the CRRA implicates the Dormant Commerce Clause because the activity it regulates could be regulated by Congress. Specifically, the district court determined that:
- Where works of fine art are sold from one state into another, each piece of fine art itself constitutes a "thing" in interstate commerce.
- When the number of art sales throughout the US that the CRRA purports to regulate are considered in the aggregate, the CRRA has a substantial effect on interstate commerce.
The district court concluded that the CRRA violates the Dormant Commerce Clause because the statute explicitly regulates applicable sales of fine art occurring wholly outside of California. The district court noted that under its clear terms:
- The CRRA regulates transactions occurring anywhere in the US, as 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.
The district court struck down the entire statute rather than just the offending portions because:
- California's Legislative Council advised that the application of the CRRA to out-of-state sales would be invalid under the Commerce Clause.
- After the initial introduction of the bill, all amended versions were consistent in applying to sales taking place outside of California as long as the seller resided in California.
The district court therefore determined that the California legislature would not have enacted the CRRA without its extraterritorial reach.
Practical Implications
Although California's passage of the CRRA represented the first droit de suite legislation in the US, those rights are no longer available and fine artists cannot rely on the CRRA for resale royalty payments.