Calif. Royalties Act Struck Down As Unconstitutional (Law360)

By Megan Leonhardt

A California federal judge struck down the state's Resale Royalties Act as unconstitutional on Thursday, handing a major defeat to artists trying to recover royalties on sales of fine art from Christie's Inc., Sotheby's Inc. and eBay Inc.

U.S. Circuit Judge Jacqueline H. Nguyen wiped out the entire statute, dismissing with prejudice three punitive class actions brought by artists Chuck Close and Laddie John Dill, the estate of Robert Graham and the Sam Francis Foundation.

Judge Nguyen –who was sitting by designation—sided with the auction companies, finding that the Royalties Act violated the commerce clause of the U.S. Constitution by improperly attempting to gain royalties from transactions occurring outside California between non-California parties.

"The court finds little doubt that the [Royalties Act] has a ‘substantial effect' on interstate commerce such that Congress could regulate the activity," Judge Nguyen said, finding the statute had the practical effect of controlling commerce outside of California.

The statute — which required sellers to pay artists 5 percent of the resale price of all fine art sold in the state or put up for sale by California residents — could also be applied to transactions made within the state, but Judge Nguyen found that the two parts could not be severed in order to save the statute.

"Were the court merely to sever the extraterritorial provisions of the statute, it would create a law that the legislature clearly never intended to create," she said, adding that California's legislature would not have passed the law without its extraterritorial reach.

Eric George of Browne George Ross LLP, attorney for the artists, said in a statement Friday that the law was properly enacted and that he was confident the case would ultimately be resolved by the Ninth Circuit, which previously upheld the statute in 1981.

"For a single federal judge to invalidate the law, more than 35 years later and without allowing any evidence to be taken, marks a departure from established constitutional law," George said.

A spokeswoman for Christie's said Friday that the auction house was very pleased that the court determined that California's Resale Royalty Statute violated the United States Constitution, as Christie's had argued.

Artists lodged three separate proposed class actions against the auction companies in October. They claimed that under the Royalties Act, Christie's, Sotheby's and eBay owed the artists royalties on artwork resold in the state or resold by California residents.

The Royalties Act is unique to California in the U.S., although similar laws exist in Europe. The act applies to U.S. artists' original paintings, drawings, sculptures and glassworks that are put up for resale in California or by individuals who reside in the state.

Under the Royalties Act, it is the seller's responsibility to locate the artist of the piece sold and pay the royalty, the artists claimed.

If a seller or a seller's agent — in this case, the auction companies — cannot locate the artist, the 5 percent royalty fee is turned over to the California Arts Council to distribute to the artists, according to the law. But the artists claim that the two auction houses and eBay have not handed over the fees to the council.

The auction companies fired back against the suits in January, however, arguing the statute was unconstitutional. Because the Royalties Act applies when a work of fine art is sold outside California — therefore attempting to control commerce between multiple states — the defendants argued it violated the dormant commerce clause, which limits a state's ability to enact legislation that infringes other state's governing rights.

Following oral arguments in March, Judge Nguyen took the parties arguments under consideration, dismissing the suits on Thursday with prejudice.

Judge Nguyen also noted that California's own legislative counsel even noted before the statute was enacted that attempting to apply the Royalties Act to out-of-state sales would violate the commerce clause.

The Sam Francis Foundation had also sued several California galleries and their owners, including Hamilton-Selway Fine Art, the Manny Silverman Gallery, Ace Gallery, Leslie Sacks Fine Art and Hackett Mill. Those cases, filed in Los Angeles and San Francisco Superior courts, have all been resolved.

A spokeswoman for Sotheby's on Friday said only that the auction house was pleased with the decision. A representative for eBay could not be immediately reached for comment.

The artists are represented by Eric George, Ira Bibbero, Michael Bowse and Peter Shimamoto of Browne George Ross LLP.

Christie's is represented by Jason D Russell of Skadden Arps Slate Meagher & Flom LLP. Sotheby's is represented by Paul T. Friedman and Deanne E. Maynard of Morrison & Foerster LLP and by Steve Reiss, Howard Comet, Greg Silbert, Adam Banks and Andrey Spektor of Weil, Gotshal & Manges LLP. EBay is represented by John C. Dwyer and Jeffrey M. Walker of Cooley LLP.

The cases are Estate of Robert Graham v. Sotheby's Inc., case number 11-cv-08604; The Sam Francis Foundation v. Christie's Inc., case number 11-cv-08605; The Sam Francis Foundation v. eBay Inc., case number 11-cv-08622, in the U.S. District Court for the Central District of California.

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