Christie's, Sotheby's, EBay Say Calif. Royalties Law Illegal (Law360)

By Megan Leonhardt

Auction companies Christie's Inc., Sotheby's Inc. and eBay Inc. fired back Thursday against three proposed class actions filed by artists over resale royalties allegedly owed to them under the California Resale Royalties Act, arguing that the law is unconstitutional.

In motions to dismiss the punitive class actions brought by artists in California federal court, Christie's, Sotheby's and eBay contended that the Royalties Act violates the commerce clause of the U.S. Constitution by attempting to regulate interstate commerce.

"Because the CRRA expressly regulates commerce outside California, it violates the commerce clause per se, and the court need look no further to dismiss plaintiffs' claims based on out-of-state auction sales," Sotheby's motion to dismiss said.

The auction companies — which stand accused of failing 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 — also argued the artists' demands for disengagement of royalties are barred by the Fifth Amendment, as well as the federal Copyright Act.

Oral arguments on all three motions to dismiss are scheduled for Mar. 12 in front of U.S. District Judge Jacqueline H. Nguyen.

"If accepted, plaintiffs' claims would impede the free flow of interstate commerce in violation of the federal commerce clause, violate prohibitions on the taking of private property and impair the rights accorded property owners by federal copyright law," the action houses argued.

Artists Chuck Close and Laddie John Dill, the estates of Robert Graham and the Sam Francis Foundation lodged three separate putitive 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, the complaints

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.

But in Thursday's motion to dismiss the case, Christie's and Sotheby's contend that because the Royalties Act applies when a work of fine art is sold outside California — therefore attempting to control commerce between multiple states — it is unconstitutional.

"No state may force an out-of-state merchant to seek regulatory approval in one state before undertaking a transaction in another," the motion said, citing the Supreme Court's 1989 ruling in Healy v. Beer Institute Inc.

The auction companies also argue the suits' claims are barred by the Fifth Amendments' takings clause, which prohibited taking private property without just compensation.

"Because the CRRA takes 5 percent of the value of a resold work of art and transfers it to another person for his sole benefit without any compensation, the CRRA violates the Fifth Amendment and the California Constitution," according to Christie's motion to dismiss.

In addition to the unconstitutionality of the Royalties Act barring the suits, the auction houses argued the Copyright Act of 1976 preempted their demands for resale royalties.

The first sale doctrine of the federal Copyright Act protected buyers from incurring additional royalty fees, the auction houses argued, adding that the U.S. Supreme Court has upheld this provision in its 1989 ruling in Quality King Distributors Inc. v. L'anza Research International Inc., as well as in other cases.

Toby Usnik, a spokesman for Christie's, said Friday that the auction house viewed the California Resale Royalties Act as subject to serious legal challenges, adding Christie's looked forward to addressing these issues in court.

A representative for Sotheby's declined to comment on the case Friday. Representatives for eBay and the artists did not immediately respond to requests 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. 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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