The Gift – Or Sale – That Keeps On Giving (California Royalty Act)

November 3, 2011

Museum Law Blog

Dust off your collection sale checklist and add another set of boxes of bases to cover when you are contemplating the sale or exchange of artwork from your collection.  Perhaps in reaction to the dreadful state of the economy, or perhaps in reaction to a sudden urge to press oft-forgotten rights, a class of artists has sued eBay, Christies and Sotheby’s for violation of the unique California Royalty Act (California Civil Code section 986) to recoup unpaid royalties on the resale of artwork.

Artists Chuck Close, Laddie John Dill, the foundation of the late Sam Francis, and the estate of Robert Graham have commenced a suit against eBay, Christies and Sotheby’s alleging the willful violation of the California Royalty Act. While the action is only in its earliest stage, it is seeking class certification in order to represent countless other artists who may have claims under the act stemming from sales by the defendants. Although the complaint seeks unspecified damages, given the prices that each named plaintiff commands for their respective works, the damages could easily reach into the hundreds of thousands of dollars or more. Additionally, the act provides for reasonable attorneys’ fees to a prevailing party. And, as always, the specter of punitive damages always lies in the wings.

The Law
Enacted in 1977, the California Royalty Act (CRA) was loosely modeled on several European laws that provide artists with the right to collect royalties on the resale of their artwork by subsequent owners. The theory is artists should share in the reward for the appreciation in value of their created work during their lifetime and for a period of 20 years following their death.  The CRA requires, with only a few exceptions, the payment of such a royalty to the artist in the amount of 5% of the resale price.

Mechanically, the CRA requires the following in order for any artist to be entitled to a royalty payment:

  • The seller resides in California or the sale occurs in California
  • The artist is a united States citizen or has been a resident of California for at least two years
  • The work is an original painting, drawing, sculpture, or original work of art in glass
  • The work sold is for more money than the seller paid for the work
  • The work is sold for a gross price of more than $1,000 OR is exchanged for one or more works of art or for a combination of cash, other property, and one or more works of fine art with a fair market value of more than $1,000
  • The work is sold during the artist’s lifetime or within 20 years of the artist’s death.

The act does not apply if:

  • The sale is the initial sale of the work and the legal title of the work at the time of the initial sale vests in the artist
  • The resale of fine art is by an art dealer to a purchaser within ten years after the initial sale by the artist to an art dealer (provided that all intervening sales are between art dealers)
  • The work is stained glass permanently attached to real property and it was sold as a part of the sale of the real estate to which it is attached

The seller of the work is under an affirmative obligation to locate the artist and pay the royalty. Well-aware of the fact that many sellers may claim that they are unable to locate an artist, the CRA provides a default mechanism for such a claim: should you fail to locate and pay the artist within 90 days after the sale, the seller is required to pay the royalty amount to the California Arts Council. The California Arts Council will then seek out the artist for payment.  In the event that such a success bears no fruit, after a period of seven years, the royalty will revert to the California Arts Council for use in its Art in Public Buildings Program. Note that it never come back to you as the seller.

Not all is completely lost, however. The artist does have some slight obligation to investigate any sales.  The CRA provides that should the artist fail to bring an action within three years of the date of sale, or within one year after the discovery of the sale (whichever time period is longer), then the artist will lose his or her ability to pursue the action. This may be an Achilles heel for many a claim.  It may not be much, but any silver lining for a seller at this point is worth mentioning. And remember, this royalty right can only be waived in writing by the artist.

Potential Challenges to the CRA
Since its enactment, several theories have been posited as to why the act may not survive an aggressive challenge – many of which are certain to be championed by the defendants in the current case.

The foremost challenge may very well be sounded in pre-emption principles. Although there is a precedent that indicates that the 9th circuit believes that the act is constitutional and does not infringe on the federal government’s right to make and regulate copyright law, this idea may need to be revisited. You see, the precedent relied upon for this many years is based on a decision that interprets the 1909 Copyright Act not the current Copyright Act of 1976 (which took effect in 1978). The Copyright Act of 1976 took great pains to indicate that the federal copyright law is the exclusive law on copyright and effectively pre-empts all state attempts to regulate and legislate copyright matters. What does that mean? Well, essentially, if the federal government already provides for a regulation, a state is not allowed to legislate matters that have already been addressed by the federal legislation. Such a meaty discussion will undoubtedly be a primary battleground in this suit.

Why You Care
Museums, collectors, auction houses, and resellers should be cautious when engaging in the sale of any work that falls under the “fine art” definition of the CRA.  “Fine art” is defined broadly as “an original painting, sculpture or drawing or an original work of art in glass.” Such a definition covers a large canvas of works that would be included in any museum collection.

Any sale or exchange of works from a collection exceeding $1,000 should be examined in light of the CRA provisions. Add a checklist to include inquiry as to: (i) whether the seller is a resident of California or whether the sale occurred in California; (ii) whether the artist is alive (or if not the date of death of the artist); (iii) whether the artist is/was a U.S. citizen or had resided in California for two years; (iv) whether the sale/exchange is for more money than for which your institution acquired the work.

Armed with the knowledge that the extra checklist questions supply, your institution will be in a better position to plan for the payment of the five percent royalty, negotiate with the artist (if the initial purchase is from the artist) for a waiver of the royalty, and avoid the potential for attorneys’ fees and interest as a result of the failure to abide by the CRA.

Anything is helpful to anticipate and prepare for the gift that just may keep on giving.

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