The One-Year Life Span of the California Resale Royalties Act (CRAA):
On July 6, 2018, the Ninth Circuit Court of Appeals affirmed the US District Court’s prior ruling that the CRAA is preempted by the 1976 Copyright Act (which became effective on January 1, 1978). As discussed in the April 13, 2016 update (below), the Ninth Circuit previously had struck down the CRAA on the ground that it violated the US Constitution’s “dormant Commerce Clause,” but left intact the provision of the statute that mandated a royalty payment to artists when the artwork was resold within California. Subsequently, the trial court ruled that the CRAA was preempted by the US Copyright Act, which set up the appeal that resulted in the Ninth Circuit’s recent opinion.
The Ninth Circuit did not render the CRAA entirely ineffective, concluding that the preemption argument left intact the one-year period of time between when the CRAA became effective, January 1, 1977, and the date which the 1976 Act became effective, January 1, 1978. The Ninth Circuit explained that the prior version of the US Copyright Act (the 1909 Act) does not have language that expressly preempted the CRAA. Thus, according to the Ninth Circuit, the CRAA has an effective shelf life of one year: artwork sold within California between January 1, 1977 and up to December 31, 1977 is potentially covered by the law.
Absent a request for an en banc review of the Ninth Circuit’s panel decision or an appeal to the US Supreme Court, the case is winding its way back to the trial court for a determination of whether any of the plaintiff artists’ works were sold during the one-year period during which the CRAA is not preempted. The Ninth Circuit also left to the trial court to determine is whether the CRAA is an unconstitutional taking in violation of the US Constitution’s Fifth Amendment, although the panel expressed some skepticism of the argument.
Update: April 13, 2016
On April 11, 2016, the US District Court dealt another blow to the California Resale Royalties Act (“CRRA”).[1] As we previously reported, the Ninth Circuit Court of Appeals struck down as unconstitutional a provision of the CRRA that had mandated the payment of a 5% royalty to the artist in situations when only the seller resided in California while the artwork, the artist, and the buyer never travelled to California. Sam Francis Foundation v. Christie’s, Inc., et al., 784 F.3d 1320, 1323, 1326 (9th Cir. 2015). The Court of Appeals had left intact the provision of the statute that mandated a royalty payment to artists when the artwork was resold within California, and sent the case back to the District Court for consideration of the defendants’ challenges to the in-state sales.
On April 11, the District Court ruled that the Copyright Act preempts the CRRA. Id. at 2. Having found preemption, the Court then ruled that the “first sale doctrine” under the Copyright Act bars artists’ royalty claims because the doctrine “prohibits copyright holders from exercising downstream distribution control of their products.” Id. The District Court has dismissed the case. We can anticipate that the plaintiffs will appeal the decision. Stay tuned.
[1] The case was originally filed as The Estate of Robert Graham v. Sotheby’s Inc., et al., 2:11-cv-8604 (C.D. Cal. 2011).
On January 11, 2016, the U.S. Supreme Court denied the Sam Francis Foundation’s petition for review of the Ninth Circuit’s ruling. This decision means that the portion of the Act that requires the payment of royalties upon resales taking place “wholly outside” of California is unenforceable.
As outlined in our original post, the trial court must now decide whether the remainder of the statute is invalid on other grounds. We will update this article when the trial court decides if anything of the Act remains enforceable.
Is the creator of an original artwork entitled to a royalty for the resale of the original work?[1] In some instances, yes. The Ninth Circuit Court of Appeals recently struck down as unconstitutional a provision of a California statute that had mandated a royalty if the seller resided in California. Still alive, however, is an artist’s royalty right when the artwork is resold within California. In short, what matters is where the artwork is sold and not the location of the seller. But, as discussed below, even that could change. And, apart from its constitutionality, who really benefits from this law?
By way of background, the U.S. Copyright Act is intended to protect artists’ rights to reproductions of their original works. However, it does not give an artist the right to royalties on any resale of their works.[2] Is the creator ever entitled to some portion of the increased value of a work? After all, one argument goes, the increase in the value of an original work is likely attributable to the subsequent works and popularity of that artist, not to anything the buyer has done.
In 1976, to address that perceived disparity, California enacted the Resale Royalties Act (“CRRA”), California Civil Code section 986. It provides for a 5 percent royalty to the artist[3] for any original work that is resold for $1,000 or more, whenever the seller resides in California or the sale takes place in California. However, the resale price must also exceed the purchase price paid by the seller. Cal. Civ. Code § 986(a) and (b).
The CRRA contains a number of rights to aid the artist in ensuring payment of royalties.[4] For instance, the right to a royalty payment cannot be waived, unless there is a written contract that provides for a royalty in excess of 5 percent of the resale amount. Moreover, the artwork seller or person(s) acting as the seller’s agent is required, upon a sale of the artwork, to (1) withhold 5 percent of the sale price, (2) locate the artist, and (3) pay the artist. If the artist is not paid, the artist may bring a civil action for damages. Furthermore, for artists who die after January 1, 1983, the rights succeed to the artist’s heirs for 20 years after the artist’s death.
In considering whether to pursue litigation to recover a royalty, the artist will need to consider the possibility that the court may award attorney’s fees. The CRAA provides that the “prevailing party shall be entitled to reasonable attorney fees, in an amount as determined by the court.” Civ. Code § 986(a)(3). That incentive cuts both ways, depending on how the court ultimately determines who is the “prevailing party.”
The validity of the entire statute was recently called into question when the members of three separate class actions, consisting of artists and their estates, brought suits against eBay, Inc. and two auction houses, Christie’s, Inc., and Sotheby’s Inc. The plaintiffs alleged that the defendants, acting as agents of sellers of original art, failed to pay mandatory royalties provided for under California Resale Royalties Act. The defendants argued that the Act impermissibly regulated conduct that took place wholly outside of California. Sam Francis Foundation v. Christie’s, Inc., et al., 784 F.3d 1320 (9th Cir. 2015). The main issue was that the CRRA is a California statute, but it may require the payment of royalties even when the artwork, the artist, and the buyer never travelled to California nor had any connection with California. Id. at 1323. The application of the statute would be based only on the seller’s residency in California per Section 986’s clause mandating royalty “Whenever a work of fine art is sold and the seller resides in California….” Id.Signaling that the issue was important, the entire 11-member panel that comprises the Ninth Circuit Court of Appeals heard the oral argument. The majority of the panel issued a decision holding that the above-mentioned portion of the CRRA is unconstitutional. The Court reasoned that the law violates what is commonly referred to as the U.S. Constitution’s “dormant Commerce Clause.”[5] Id. at 1323, 1326.
As a consequence, the sale of any original work “wholly outside” of California will not result in a mandatory royalty payment to the creator. In Sam Francis Foundation, the Court found that the sale took place “wholly outside” of California, despite the fact that both Christie’s and Sotheby’s have offices in California. While neither the appellate nor lower court decisions provide much analysis of the factors that constitute “wholly outside” California, it appears that for the present time sales through out-of-state auction houses, or even through online resellers like eBay, would not be subject to the mandatory royalty payment under the CRRA.
After Sam Francis Foundation, do artists retain any rights to resale royalties of their works? Yes. While the trial court originally held that the entire statute unconstitutionally violated the Commerce Clause, the Ninth Circuit did not go that far, leaving intact Section 986’s requirement that artists must be paid a royalty for sales made within California. But that remaining vestige of the statute seems to be rendered meaningless since sellers now will be motivated to sell their works out of state. Even before Sam Francis Foundation, however, the statute seemed more designed to benefit the smaller number of artists whose works command a significant enough resale price to make the issue worth anyone’s while.
We may not have seen the end of the debate about the Resale Royalties Act. The defendants raised other grounds for dismissal, namely, preemption under the Copyright Act and the claim that the statutory rights constitute an unlawful “takings” under both the U.S. and California constitutions. The Ninth Circuit remanded the case to the 3-judge Circuit Court panel with the discretion to either decide those issues or remand the case to the District Court for a ruling. The case has since been stayed because the plaintiffs have filed a request for review of the Ninth Circuit’s en banc decision before the U.S. Supreme Court. We will update this article when the Court makes a decision whether to accept the matter for review.
For more information, contact Robert Muller at bob@cypressllp.com.
[1] This article deals only with artists rights under California law. Various States have enacted their own statutes governing artists’ resale royalty rights, as have foreign countries, none of which are discussed here. Also, the statute exempts certain sales, such as the sale by an art dealer who acquired the work from the artist, if the sale occurs within 10 years of the initial sale of the work. Civ. Code § 986(b)(6). The latter scenario applies equally to downstream art dealers as long as all prior owners were art dealers. Id.
[2] The Copyright Act provides that the owner of an acquired original artwork “is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.” 17 U.S.C.A. § 109(a).
[3] “Artist” means 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. Cal. Civ. Code § 986(c)(1).
[4] All the rights referenced in this paragraph are enumerated in Section 986(a) of the California Civil Code.
[5] The Commerce Clause gives Congress the power to regulate commerce “among the several states.” The “dormant Commerce Clause” bars state regulations that “unduly burden” interstate commerce. (For a short summary of what the dormant Commerce Clause, see, https://en.wikipedia.org/wiki/Dormant_Commerce_Clause.)