Resale Royalties

The California Resale Royalties Law: a Primer

chuckclose The California Resale Royalties Law: a Primer

Chuck Close and other artists have filed suit against Sotheby's and Christie's demanding resale royalties. (Courtesy Getty Images)

“I’ve been working my ass off for you to make that profit?” the artist Robert Rauschenberg said to collector Robert Scull in 1973 as he shoved him after an auction at Sotheby Parke Bernet, at which Mr. Scull sold a number of contemporary artworks for sums far exceeding what he had initially paid. The artists who had produced the works, of course, received nothing.

Three years later, California governor Jerry Brown signed into law the California Resale Royalties Act, which required people selling art to pay five percent of the sales price to the artist, if certain requirements were met. Today, the law is not frequently enforced, and, based on interviews with art market players, not completely understood. However, the law has been thrust into the news of late thanks to two lawsuits.

Chuck Close, Laddie John Dill and other artists have joined forces to sue Sotheby’s and Christie’s, arguing that the houses owe them hundreds of thousands of dollars in resale royalties. Meanwhile, Los Angeles painter Mark Grotjahn has been waging a legal battle against collector Dean Valentine–who refuses to pay the royalties, arguing that they are discriminatory–and that case finally has a court date.

While all of this looks, on the surface, to be a bit dry, what is at stake is nothing less than how we value the roles of various players in the art market. Mr. Scull argued, as many collectors do today, that their risk-taking support of an artist justifies their making a profit off the sale of the work. Rauschenberg, like many other artists, disagreed.

While royalty laws exist in Europe–France, for instance, adopted a droit de suite statue in the 1920s to support artists’ widows after World War I–they have not been popular in the U.S. The European Union passed a royalties statute in 2006, which has been implemented in stages. (England, the home of auction hotbed London, will be required to adopt the rules next year.)  To get a better understanding of the Calfornia law and the ongoing legal fights, we spoke with a number of lawyers and dealers. (Given the stakes involved in the lawsuits—and the fact that many have interests involved in these lawsuits–most sources asked to remain anonymous or speak only on background.) Below, we offer a short primer on the action.

How the Law Works

Talking with California dealers, there appears to be some confusion about the law. One dealer thought that, for a transaction to require royalties, the artist, seller and buyer all needed to reside in the state of California. Not so! The California Arts Council has a handy list of factors that must be met for resale royalties to take effect, including:

- The seller resides in California or the sale takes place in California.
- The work is sold during the artist’s lifetime or within 20 years of the artist’s death.
- The work is sold for a gross price of more than $1,000.
- The work is sold by the seller for more money than she or he paid.
- The artist at the time of the sale is a United States citizen or has been a California resident for at least two years.

The Enforcement Question

Talking to dealers at a variety of galleries, many noted that enforcement of the law has been irregular and sporadic. Some collectors selling work make a point of paying the royalty to artists, while others ignore it entirely. One dealer compared it to marijuana laws, which California residents–like all Americans–have been quite adept at skirting in various ways for decades. Since artists often do not know when one of their works has been sold privately between two parties, it is rather difficult for them to ensure that they are paid. “It’s one of the most ridiculous laws on the books,” one dealer argued.

Questionable Constitutionality

Reading that list of requirements, one will notice that the law says that a California seller is required to pay the royalty even if he sold the work at an auction house in New York. “It very well could be unconstitutional under the Commerce Clause,” one lawyer told us. The Constitution provides the power to regulate interstate commerce to the federal government, meaning that California may be overreaching. While states can tax residents’ income in other states, this would appear to go well beyond a tax. A recent article from the Bureau of National Affairs also argued that it could violate U.S. copyright law, in which “the owner of a copy of a creative work has the right to dispose of it without the authorization of, or payment to, the creator.”

Why Now?

Since enforcement of the law has always been shoddy and its constitutionality has long been in doubt, we wondered why it is just now making news. Part of the reason, one lawyer explained, is the tricky financial calculations that the law sets up. For example, let’s say that a collector sells a work by a California artist for $50,000 and decides to skip out on the resale fee of $2,500. If the artist happened to find out about the sale—always a big if—she could sue, but the legal fees would rather quickly eclipse that $2,500 payment she is owed. A provision of the law requires the losing party to cover the legal fees of the winner, but the risk for such a relatively small sum has discouraged potential plaintiffs.

“Making it a class action lawsuit was very clever,” one lawyer told us of the lawsuit brought by Chuck Close and others against the auction houses. Assuming they can successfully certify their case as a class action suit, a victory would result in resale royalties being owed to hundreds of artists, and would likely easily cover the considerable legal fees that the case is expected to generate.

As for Mr. Grotjahn’s ongoing case against Mr. Valentine, that may be something else entirely. The artist claims that Mr. Valentine has made $3 million off of selling his work, meaning that he stands to gain only about $150,000 in the case of a successful lawsuit. “That just looks like a pissing contest,” one dealer said, arguing that they are actually battling over the credit for the success of Mr. Grotjahn’s career.

The Plaintiffs’ Gambit

Given the issues of constitutionality, the plaintiffs in the ongoing cases are taking an enormous risk, according to some lawyers we spoke with. “This could backfire,” one said. Another lawyer told us that the first thing Sotheby’s and Christie’s are likely to do is ask for the case to be dismissed on constitutional grounds. If the court agrees to do so, we could see a protracted series of appeals. However, if, in the end, the courts side with the auction houses, the law’s reach beyond California could be dissolved. California collectors, then, could complete a sale beyond their borders and avoid the tax entirely. Alternatively, the entire law could be declared unconstitutional, ending resale royalties entirely.

Handicapping Californians?

“California collectors shouldn’t have to operate under different laws,” one dealer told us, saying that having a law that requires one state’s residents to lose five percent on transactions could put them at a significant disadvantage on the global playing field. Five percent may not seem like a lot, but on a $1 million transaction, the seller would need to pay a $50,000 fee—plenty of money to buy a small trove of works by young artists. “People fight about one percentage point in auction guarantees!” the same source said. Five percent, in other words, is far from a small matter for collectors looking to compete with their international brethren.

What Next?

Some dealers proposed the idea of passing a national resale royalty law, which would put all American collectors on the same playing field, and theoretically protect all American artists–at least those that have significant secondary markets (a minute percentage). “I think it’s such a great law,” one dealer told us. “Every state should have one.” But at the same time, other sources noted that the art market is so intensely global these days that such a wide-ranging law could put American collectors at a significant disadvantage on the world stage.

One dealer may have best summed up the larger issue in question in these cases when he said, “Some people think that one of the reasons the art market has thrived so much over the past decades is because it is so unregulated.” These lawsuits could change that, albeit only slightly, but they have tremendous hurdles to overcome first.

Follow Andrew Russeth on Twitter or via RSS. arusseth@observer.com

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