Will High-Priced Art Ever Be Auctioned Again in California?

ARTWORKS event photo - H 2013
Leslie Miranda

ARTWORKS event photo - H 2013

On Tuesday, the Ninth Circuit Court of Appeals ruled that the California Resale Royalties Act is unconstitutional, but it has also declared that the objectionable portion of the law can be stripped out. The result could lead to questions about whether the law has been effectively neutered, and might cause art sellers to flee the California marketplace.

Famous artists including Chuck Close, Laddie John Dill and the estate of the sculptor Robert Graham brought a class-action lawsuit against Sotheby's, Christie's and eBay, alleging violations of the law entitling artists to 5 percent of resale royalties on any work sold for more than $1,000, so long as the seller resides or the transaction happens in California.

The lawsuit was dismissed by a federal judge who focused on the fact that California was regulating sales that happened outside of California.

As today's opinion, authored by Judge Susan Graber, to affirm that decision puts it, "If a California resident has a part-time apartment in New York, buys a sculpture in New York from a North Dakota artist to furnish her apartment, and later sells the sculpture to a friend in New York, the Act requires the payment of a royalty to the North Dakota artist—even if the sculpture, the artist, and the buyer never traveled to, or had any connection with, California. We easily conclude that the royalty requirement, as applied to out-of-state sales by California residents, violates the dormant Commerce Clause."

Here's the entire opinion.

The Ninth Circuit heard this case en banc — meaning with a fuller panel of judges. The case has importance beyond the art realm, as decisions on whether state laws impermissibly control interstate commerce can impact big subjects like whether states can unilaterally impose measures such as cap-and-trade to curb climate change. (In a concurrence, Judge Stephen Reinhardt writes that the majority opinion represents an "unwarranted extension of the dormant Commerce Clause.")

But let's stick to art.

After deciding that it's improper for California to attempt to regulate transactions happening outside of California — even if the seller is Californian — the majority of judges at the Ninth Circuit say it's possible to sever the invalid clause.

And so the law is now revised to read: "[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.”

Whether or not this will ultimately be a victory for the artists who are suing is an open question. The case has been remanded back to a three-judge panel for consideration on other issues. At least their claims survive for now, but what happens to the California art market is another story.

The Ninth Circuit doesn't really touch on the effect of a stripped-down law, but if resales of art happening in California mean that sellers must give up 5 percent of their proceeds, doesn't that provide an easy loophole and financial incentive for Californians and others to sell elsewhere?