Robert Cenedella – a satirical American artist – has apparently decided not to replead his antitrust case against five major New York City museums. On December 19, 2018, Judge John G. Koeltl of the Southern District of New York dismissed Cenedella’s class action complaint, but gave him the opportunity to submit an amended complaint by January 15, 2019.[1] That deadline has since passed, with nothing from Cenedella but a defiant email statement attacking the museums’ attorneys for preventing him from reaching the discovery phase of the case, which, he suggested, would have allowed him to expose “how the NY Museum Cartel works.” This case demonstrates once again the difficulty of attempting to use antitrust law to challenge the opaque dynamics of the art world.[2]

Cenedella’s Allegations

Cenedella – the subject of the 2016 documentary film Art Bastard, which, Judge Koeltl noted, portrayed Cenedella as “an unabashed art world outsider”[3] – embraces his rebellious image. (Art Bastard’s tagline – “An art world rebel becomes an overnight sensation after 50 years” – is prominently displayed on Cenedella’s website.) Nonetheless, Cenedella has a history of complaining that museums have never included him in their collections.[4] On February 6, 2018, Cenedella sued five museums[5] (“Defendants”) for $100 million, alleging that they conspire to promote a small number of artists whose works are already part of their collections.[6]

In his Complaint, Cenedella described the relationship between the defendant museums and other arts institutions in New York as “an anticompetitive closed ecosystem,” which deprives him and other similarly-situated artists of opportunities to sell their artwork and artificially drives down the value of that artwork.[7] Cenedella alleged that Defendants’ decision to include an artist’s work in their permanent collections or special exhibitions is “career-changing” for that particular artist.[8] These select artists enjoy an inflation in their works’ value that is, according to Cenedella, artificially imposed.[9] Meanwhile, those artists whose work is not selected suffer an “artificial depression” in the market for their work.[10]

Cenedella further alleged that Defendants conspire with galleries, auction houses, art critics and private collectors in a cycle that makes certain artists’ artworks highly valuable and excludes others.[11] Cenedella argued that Defendants consider only artists represented by “influential galleries,”[12] which allegedly sell pieces to Defendants at a discounted price.[13] Citing an Art Newspaper article, Cenedella alleged that those galleries provide direct financial and other support to Defendants in the lead-up to one of their artist’s museum exhibitions.[14] Cenedella complained of the secrecy surrounding the defendants’ “acquisition policies” and “curatorial decisions.”[15] In sum, as characterized by Judge Koeltl, Cenedella’s argument boiled down to: “If not for the alleged conspiracy, the museums would purchase the artwork of the plaintiff and others, and consequently the plaintiff and others would see a rise in the value of their artwork.”[16]

The Museums’ Response

As the defendants bluntly put it in their motion to dismiss: “Plaintiff is disappointed that . . . Defendants . . . have not purchased or exhibited his artwork. But this grievance has nothing to do with the law, let alone the antitrust laws.”[17] They argued that Cenedella had not sufficiently demonstrated standing, both in the constitutional sense and in the more specific sense required of an antitrust plaintiff. Regarding the constitutional standing requirement of redressability, Defendants pointed to Cenedella’s failure to allege facts to support that, “but for the purported conspiracy, curators’ artistic standards would alter so that his work, rather than another contemporary artist’s work, would be acquired or displayed by one of the Museums.”[18] Regarding antitrust standing, Defendants argued that Cenedella neither has suffered an antitrust injury nor is an efficient enforcer of the antitrust laws.[19]

Defendants underscored the lack of evidence in Cenedella’s case by arguing that he failed to plausibly plead an antitrust violation. Regarding the conspiracy that Cenedella alleged, Defendants noted that he relied on “generalities and speculation,” not “any well-pleaded facts.”[20] His complaint therefore “fails at the threshold,” Defendants argued, because it “does not contain ‘enough factual matter (taken as true) to suggest that an agreement was made.’”[21]

Defendants emphasized the point that Cenedella cannot resolve the deficiencies in his complaint. In discussing Cenedella’s claim that the alleged conspiracy “improperly inflate[s]” select artists’ work while “improperly deflat[ing]” his own, they stated that he “has not pleaded facts . . . (nor could he).”[22] They advocated for dismissal with prejudice, stating that “the very premise of Plaintiff’s claims is irredeemably implausible” and “cannot be fixed by amendment.”[23]

Judge Koeltl’s Ruling

In his December 19, 2018 opinion, Judge Koeltl sided with Defendants, recognizing that Cenedella provided no more than mere conclusory statements regarding the alleged conspiracy and no evidence to support his argument that discovery would have helped his case. However, against Defendants’ urgings, Judge Koeltl dismissed the Amended Complaint without prejudice, finding that “it is not plain that any amendment would be futile.”[24]

Judge Koeltl first found that Cenedella lacked standing to bring the suit. As a threshold matter, Judge Koeltl ruled that Cenedella had no constitutional standing due to the lack of redressability: Even if the Court were to enjoin the alleged conspiracy, he reasoned, there is no guarantee – rather, only Cenedella’s “subjective boast” – that Defendants would then purchase Cenedella’s work.[25] Judge Koeltl also found that Cenedella failed to establish antitrust standing. Although Judge Koeltl rejected Defendants’ arguments that Cenedella’s injury was not the type of injury that “antitrust laws were intended to prevent,” he found that Cenedella is not an “efficient enforcer” of antitrust laws, reasoning that art purchasers, such as “other museums outside of the alleged conspiracy who buy art at the alleged artificially inflated prices,” would be better suited to bring these claims.[26]

Judge Koeltl further found that Cenedella’s conspiracy claim was insufficient, because Cenedella failed to indicate either direct or circumstantial evidence of a conspiratorial agreement.[27] Judge Koeltl stated that there is “an obvious alternative explanation” to the conduct that Cenedella described – i.e., simply that certain artists are “worthy of collecting and showing” whereas others are not.[28]

Implications for Future Antitrust Cases

Grievances about supposed conspiracies in the art world are not new – and neither is the failure of those claims to gain traction in the courtroom. Successful antitrust claims in this arena are rare:[29]  for the most part, defendants prevail early on.[30] Tort law, rather than antitrust, has greater potential to apply to such claims. For instance, common law fraud seems sufficient to deal with shenanigans such as dealers’ attempts to manipulate the market for their artists’ works – e.g., by bidding at auction on their own inventory or silently substituting one work for another to favor a preferred collector.

Although Judge Koeltl gave Cenedella another chance at his Complaint, the stark lack of facts in Cenedella’s case represents more than just an inadequately drafted complaint. It highlights the difficulty in applying antitrust law to matters that involve personal preference, with subjective taste about art being a prime example. This truism has not stopped plaintiffs from bringing antitrust claims involving subjective determinations made by players in the art world. When the successful parties in these art law antitrust suits consistently shell out considerable funds to defend against baseless claims, it is not clear that these cases have any clear winners. One is left to wonder whether Cenedella’s objective in bringing his claims was in fact to put an end to an illegal art world conspiracy, or whether his ultimate objective was simply to gin up an abundance of publicity. If the latter, Cenedella may have prevailed after all.

Time will tell whether this case will garner enough media attention to bring Cenedella what he has been after all along: higher prices for his art. After Banksy’s stunt at a Sotheby’s auction where his “Girl With Balloon” suddenly shredded itself after it was sold, many speculated that Banksy would see an increase in prices for his art. It is unclear whether the same can be said for Cenedella. Banksy’s stunt was the first of its kind, referred to as “a part of art history.”[31] Cenedella’s use of the legal system is certainly not novel, as shown by the numerous claims before him that have been brought against the art world. It is the substance of Cenedella’s arguments, therefore, that will determine the public’s interest in him. Maybe in this respect, the more outlandish his claims, the better for him.

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[1] See Cenedella v. Metro. Museum of Art, No. 18 CIV. 01029 (JGK), 2018 WL 6629408, *3, *11 (S.D.N.Y. Dec. 19, 2018).

[2] As previously discussed on this blog, art authenticators have felt the brunt of these claims, paying sometimes prohibitively expensive litigation costs in order to defend against claims that ultimately fail.

[3] Cenedella, 2018 WL 6629408 at *1 (quoting Opp’n at 1).

[4] See, e.g., Bob Mondello, ‘Art Bastard’: A Rebel With A Canvas, npr (June 3, 2016 3:47 PM), https://www.npr.org/2016/06/03/480633326/art-bastard-a-rebel-with-a-canvas (“‘It’s not what they show that bothers me,’ [Cenedella] says quietly while visiting a museum in the film, ‘it’s what they don’t show.’”); Barbara Hoffman, Meet the NYC Artist who Crucified Santa Claus, New York Post (June 4, 2016 2:43 AM), https://nypost.com/2016/06/04/meet-the-nyc-artist-who-crucified-santa-claus/ (quoting Cenedella as stating, “I don’t have to worry about the government censoring [me] because the galleries and museums do it for them!”).

[5] The Metropolitan Museum of Art, the Whitney Museum of American Art, the Museum of Modern Art, the Solomon R. Guggenheim Foundation, and the New Museum of Contemporary Art.

[6] After Judge Koeltl recommended that Cenedella provide more support for some of his claims for antitrust damages, Cenedella filed an amended complaint on April 6, 2018.

[7] Am. Compl. ¶ 3, No. 18 CIV. 01029 (JGK), 2018 WL 6629408.

[8] Id. ¶ 14.

[9] Id. ¶¶ 22-23, 65, 66, 77, 78, 80.

[10] Id. ¶¶ 18, 22-23, 57, 68.

[11] Id. ¶¶ 1-4, 19.

[12] Id. ¶ 22. Cenedella quoted a Los Angeles Times article that states, “[A]lmost one-third of solo museum exhibitions in the United States are of artists represented by one of five prominent commercial galleries: Gagosian Gallery, Marian Goodman, Pace, David Zwirner and Hauser & Wirth.” Cenedella cited statistics which show that, between 2007 and 2013, artists represented by these five galleries made up 90% of all major solo exhibitions at the Guggenheim Museum; 45% of single-artists shows at the Museum of Modern Art; and 45% of major shows at the New Museum. Am. Compl. ¶ 30.

[13] Am. Compl. ¶ 19.

[14] Id. ¶¶ 32-33.

[15] Id. ¶ 16.

[16] Cenedella, 2018 WL 6629408 at *3.

[17] Mem. Of Law In Support of Defs. Mot. To Dismiss, No. 18 CIV. 01029 (JGK), 1.

[18] Id. at 7.

[19] Id. at 18-19.

[20] Id. at 9.

[21] Id. (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007)). Defendants further argued that “many of the ‘facts’” that Cenedella did include in his complaint were “demonstrably false,” such as Cenedella’s claim that “none [of the Museums’ acquisition policies] are publicly disclosed”; Defendants countered that it is in fact “required by law” that museums meeting certain criteria publicize these policies. Id. at 2 n.1 (quoting Am. Compl. ¶ 16 and citing 8 N.Y. Comp. Codes R. & Regs. § 3.27(6)(iii)).

[22] Id. at 16.

[23] Id. at 21.

[24] Cenedella, 2018 WL 662908 at *11 (emphasis added).

[25] Id. at *4.

[26] Id. (quoting In re Aluminum Warehousing Antitrust Litig., 833 F.3d 151, 157 (2d Cir. 2016)); id. at *6.

[27] See id. at *7.

[28] See id. at *8 (quoting Cavanaugh Decl. Ex. 1 at 2).

[29] See, e.g., Carol Vogel and Ralph Blumenthal, Art Auction Houses Agree to Pay $512 Million in Price-Fixing Case, New York Times (Sept. 23, 2000), https://www.nytimes.com/2000/09/23/business/art-auction-houses-agree-to-pay-512-million-in-price-fixing-case.html; Simon-Whelan v. Andy Warhol Found. for the Visual Arts, Inc., No. 07 Civ. 6423(LTS), 2009 WL 1457177, 2009 U.S. Dist. LEXIS 44242 (S.D.N.Y. May 26, 2009) (although the court permitted Simon-Whelan’s case to move forward, he dropped his suit due to the litigation costs).

[30] See, e.g., Bilinski v. Keith Haring Found., Inc., 96 F. Supp. 3d. 35 (S.D.N.Y. 2015); Navarra v. Marlborough Gallery, Inc., 820 F. Supp. 2d 477 (S.D.N.Y. 2011); Kramer v. Pollock-Krasner Foundation, 890 F. Supp. 250 (S.D.N.Y. 1995); Wainer v. Romm Art Creations, 74 F.3d 1237 (5th Cir. 1995).

[31] Scott Reyburn, How Banksy’s Prank Might Boost His Prices: ‘It’s a Part of Art History’, New York Times (Oct. 7, 2018), https://www.nytimes.com/2018/10/07/arts/design/banksy-artwork-painting.html.

Above: Plaintiff Chuck Close.
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The Ninth Circuit recently issued its decision regarding the validity of the California Resale Royalty Act (“CRRA”) in three consolidated appeals: Close v. Sotheby’s, Inc., No. 16-56234, The Sam Francis Foundation v. Christie’s, Inc., No. 16-56235 and The Sam Francis Foundation v. eBay Inc., No. 16-56252. 2018 WL 3322222 (9th Cir. July 6, 2018).

As previously discussed on this blog, the CRRA provides that an artist may recover a five percent royalty on subsequent sales of his or her artwork, subject to certain statutory limitations. The plaintiffs in these actions—The Sam Francis Foundation, the Estate of Robert Graham, and the artists Chuck Close and Laddie John Dill—sought recovery of these statutory royalties from the defendants—Christie’s, Sotheby’s and eBay. In response, the defendants argued that the CRRA was unconstitutional because it violated the principles of the “first sale doctrine,” codified in section 109(a) of the Copyright Act of 1976, pursuant to which the lawful owner of a copyrighted work is entitled to dispose of his or her ownership in that property without acquiring the permission of the copyright owner. The Ninth Circuit, therefore, was asked to determine whether the “first sale doctrine” preempted the CRRA.

Handing a resounding victory to the defendants, the Ninth Circuit upheld the Central District of California’s dismissal of the plaintiffs’ claims for resale royalties postdating January 1, 1978, the effective date of the 1976 Copyright Act. The Ninth Circuit largely adopted the defendants’ argument that the CRRA is expressly preempted by section 301(a) of the 1976 Copyright Act. In so holding, the Ninth Circuit determined that the right to resale royalties codified by the CRRA was “equivalent to the federal distribution right codified in § 106(3), as limited by the first sale doctrine codified in § 109(a).” Close, 2018 WL 3322222, at *6. As the court explained:

Although the CRRA’s resale royalty right and § 106(3)’s distribution right are not coextensive, they are equivalent. The two rights differ in that one grants artists the right to receive a percentage payment on all sales of artwork after the first, while the other grants artists the right to receive full payment on the first (and only the first) sale. But, at root, both concern the distribution of copies of artwork and define artists’ right (or lack thereof) to payment on downstream sales of those copies.

Id.

Significantly, the Court of Appeals determined that “the CRRA is designed precisely to . . . afford[] artists a right to at least some measure of payment on every sale after the first. . . . In effect, the CRRA creates an inalienable restraint on alienation.” Id. Accordingly, the court concluded, the CRRA conflicts with the first sale doctrine, which is meant to embody the rule against restraints on alienation:

In short, the CRRA does not merely grant an additional right beyond what federal copyright law already provides but fundamentally reshapes the contours of federal copyright law’s existing distribution rights. This runs counter to § 301(a), which precludes ‘all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright,’ even if they are not precisely within the contemplation of the Copyright Act.

Id.[1]

The Ninth Circuit rejected arguments from the plaintiffs distinguishing between the distributional rights under the Copyright Act and the monetary rights created under the CRRA. See id. at *7 (finding that, despite “differences in how the CRRA and § 106(3) affect artists’ right to payment,” the “significant overlap” between their impacts is a sufficient basis for preemption). The panel also rejected an analogy that the plaintiffs drew between artists’ rights under the CRRA and artists’ right to privately contract with purchasers for resale royalties, noting that, while artists are permitted to contract freely under the Copyright Act, a statutory provision mandating payments to the artist for any subsequent sales imposes an impermissible restraint on the right of contract. See id. (“Plaintiffs have misunderstood the difference between a law that permits an act and a law that compels an act.”).[2]

The Ninth Circuit’s decision will likely present a significant headwind for other states considering similar codifications of resale royalty legislation, and may shift the focus of those in favor of such protection back to the passage of federal resale royalty legislation.[3]

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[1] The Ninth Circuit declined to rule on the Takings Clause argument articulated by the defendants. Id. at *11.

[2] The decision did not end in total defeat for the plaintiffs. Relying heavily on its prior decision in Morseburg v. Balyon, 621 F.2d 972 (9th Cir. 1980), the Ninth Circuit found no preemption under the 1909 Copyright Act, which governed between the CRRA’s enactment on January 1, 1977 and the January 1, 1978 effective date of the 1976 Copyright Act. Close, 2018 WL 3322222, at *10. While acknowledging that several post-Morseburg Supreme Court cases cited by the defendants, including Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013) and Quality King Distributors, Inc. v. L’anza Research International, Inc., 523 U.S. 135 (1998), had created “tension” with Morseburg, the Ninth Circuit held steadfastly that it was “not persuaded that defendants have identified ‘clear irreconcilability’” between Morseburg and the intervening authority of the Supreme Court. Close, 2018 WL 3322222, at *9.

[3] The most recent legislation, the American Royalties Too Act of 2015, was introduced on April 16, 2015 in the House by Representative Jerrold Nadler (D-NY) and in the Senate by Senator Tammy Baldwin (D-WI), but both bills died in committee. See H.R. 1881, 114th Cong. (2015); S. 977, 114th Cong. (2015).

Above: Plaintiff Chuck Close.
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The Ninth Circuit has pending before it for the second time a significant challenge to the validity of the California Resale Royalty Act (“CRRA”) stemming from three related cases: Sam Francis Foundation v. Christie’s, Inc., Case No. 16-56235 (9th Cir. notice of appeal filed Aug. 26, 2016); Chuck Close v. Sotheby’s, Inc., Case No. 16-56234 (9th Cir. notice of appeal filed Aug. 26, 2016); and Sam Francis Foundation v. eBay Inc., Case No. 16-56252 (9th Cir. notice of appeal filed Aug. 26, 2016).

These cases will require the Ninth Circuit to examine the scope of the “first sale doctrine” and determine whether it is at odds with California’s attempt to establish economic rights for visual artists on subsequent sales of their works.

I.  Doctrinal Background

A. The CCRA

California enacted the CRRA in 1976 for the purpose of offering visual artists similar financial protections to artists in other media.1  The California statute codifies droit de suite (literally, “a right to follow”), which provides visual artists with a royalty each time one of their works is resold.2  The rationale, at least in part, is that visual artists are often disadvantaged by a time-lag between a work’s initial sale and the ultimate realization of that work’s value.3

To combat this perceived inequity, section 986(a) of the CRRA provides that, subject to certain limitations, “[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.”4

Notwithstanding several attempts by members of the United States Congress to enact federal resale royalty legislation,5 the CRRA represents the only U.S. codification of such a right at present.6  Nevertheless, droit de suite has been codified in several jurisdictions outside the U.S., including France, England and Australia.7

B. The First Sale Doctrine

Section 109(a) of the Copyright Act of 1976 enacts what is widely known as the “first sale doctrine.”8  Under the first sale doctrine, the lawful owner of a copyrighted work is entitled to dispose of his or her ownership in that property without acquiring the permission of the copyright owner.9  “[O]nce a work has been sold, the copyright owner has no further right to control the resale of the work, and the new owner is free to dispose of the work as he or she chooses.”10  As a matter of policy, the first sale doctrine is an embodiment of the rule against restraints on alienation, a central tenet of property law from time immemorial.11  The question raised by these cases is whether a resale royalty requirement imposes such a restraint on alienation of copyrighted works of art.

II.  Procedural Background

In 2011, plaintiffs The Sam Francis Foundation, the Estate of Robert Graham, Chuck Close and Laddie John Dill together filed putative class action lawsuits against each of Christie’s, Inc., Sotheby’s, Inc. and eBay, Inc., alleging “the willful and systematic violation by [each defendant] of its California law obligation [under the CRRA] to pay royalties to U.S. artists and their estates on artworks sold either in California or at auction by California sellers.”12

The defendants moved to dismiss, articulating several bases for the invalidity of the CRRA, including that the CRRA violated the Commerce Clause of the U.S. Constitution, violated the Takings Clause of the Fifth Amendment, and was preempted by the Copyright Act of 1976.13  In 2012, the Central District of California granted dismissal on the sole basis that the CRRA violated the dormant Commerce Clause by “controlling commerce ‘occurring wholly outside the boundaries’ of California even though it may have some ‘effects within the State.’”14

In June 2012, the plaintiffs appealed the Central District’s order. In 2015, sitting en banc, the Ninth Circuit concluded that, while the CRRA “facially violates” the dormant Commerce Clause insofar as it regulates the sale of fine art taking place outside the state of California, “the offending provision [of the CRRA] is severable from the remainder of the Act.”15  Thus, the CRRA remained valid as to in-state sales of fine art.16  Since the district court had ruled that the CRRA as a whole was invalid, the Ninth Circuit remanded for a determination on the defendants’ alternative grounds for dismissal.

On February 1, 2016, the defendants submitted a second round of motions to dismiss, largely renewing their previously-submitted bases for dismissal.17  In an April 2016 order granting the defendants’ motions to dismiss, the Central District of California held that the CRRA was invalid as preempted by federal copyright law.18  The court determined that the CRRA conflicted with the intent of Congress, which had demonstrated its desire to “keep downstream sales of copyrighted works [ ] free from restrictions imposed by copyright holders” when it enacted section 109(a).19  The court also found that the CRRA was expressly preempted by section 301(a) of the Copyright Act of 1976, which dictates that the rights contained in section 106 of the 1976 Act are the “exclusive rights of copyright holders.”20  This order is the decision from which the current appeals stem.

III.  Current Challenge to the CRRA

Critical to the arguments articulated in both parties’ appellate briefs lies one crucial sub-issue: how broadly the first sale doctrine should be interpreted.

Relying on the Ninth Circuit’s 1980 Morseburg decision, the plaintiffs contend in their opening brief that the district court erred in finding a conflict between the CRRA and the Copyright Act of 1976:  “The first sale doctrine prevents copyright holders from prohibiting or controlling downstream distribution of copyrighted works. . . .  It has nothing to do with the right of copyright holders to possess a financial interest in the proceeds of a sale.”21  The plaintiffs reiterate this argument in speaking to the district court’s determination that the CRRA was expressly preempted by section 301(a) of the 1976 Act, arguing that the CRRA does not create an “equivalent” right to those provided for in section 106; therefore, section 301(a) does not apply.22

In contrast, the defendants favor an expansive reading of the first sale doctrine in their answering brief. “Under the first sale doctrine, once a visual artist sells artwork, the artist loses the ability to interfere with future sales.”23  In support of this interpretation, the defendants look to Supreme Court and Ninth Circuit precedent addressing the first sale doctrine:  Kirtsaeng, Quality King, and Omega v. Costco.24  The defendants rely on these decisions for the proposition that the loss of the copyright holder’s exclusive right to control distribution of a work of art after its initial sale should be read to include a loss of the copyright holder’s ability to profit from subsequent sales.25  In other words, the defendants argue that “the Copyright Act intends [downstream resale transactions of works of fine art] to be unrestricted.”26

Addressing these arguments, the plaintiffs’ reply brief focuses on the Supreme Court’s recent Lexmark decision.27  In that patent case, the Supreme Court considered the scope of the “exhaustion doctrine,” which is essentially the patent law analog of the first sale doctrine.28  The CRRA plaintiffs’ reply brief cites dicta from the Supreme Court’s Lexmark opinion standing for the proposition that contract rights and patent rights exist side by side, and that while the sale of a product may extinguish the patent holder’s patent rights, it does not terminate the rights preserved by the patent holder in contract.29  Extrapolating from the Court’s rationale, and transposing it from the context of patent law to that of copyright law, the CRRA plaintiffs argue that, just as contract entitlements endure despite the first sale doctrine, statutory entitlements like the CRRA should not be terminated by the first sale of a copyrighted work.30

The CRRA plaintiffs’ reliance on Lexmark is particularly intriguing, given that the opinion also includes rhetoric that the CRRA defendants pointed to in support of their position – e.g., Chief Justice Roberts’s comment that “extending [intellectual property] rights beyond the first sale would clog the channels of commerce.”31  In any event, it will be interesting to see whether the Ninth Circuit applies Lexmark in determining these cases – and if so, to whose benefit.

IV.  Looking Forward

Despite the Ninth Circuit’s previous holding as to the in-state-only applicability of the CRRA, the Ninth Circuit’s decision on the current appeals has potential implications reaching beyond California’s borders. If the Ninth Circuit decides in favor of the plaintiffs, holding that the CRRA is not preempted by the Copyright Act of 1976, it may inspire other states to enact similar legislation codifying droit de suite. If the defendants prevail, and the CRRA is struck down, it may re-ignite interest in a federal codification of droit de suite that amends the first sale doctrine.

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1. See Anna J. Mitran, Note, Royalties Too?: Exploring Resale Royalties for New Media Art, 101 Cornell L. Rev. 1349, 1354 (2016); John E. McInerney III, California Resale Royalties Act: Private Sector Enforcement, 19 U.S.F. L. Rev. 1, 5 (1984).
2. See David E. Shipley, Droit de Suite, Copyright’s First Sale Doctrine and Preemption of State Law, 39 Hasting Commnc’s & Enter. L. J. 1, 2 (2017).
3. See McInerney, supra note 1, at 5; Mitran, supra note 1, at 1354.
4. Cal. Civ. Code § 986(a).  As discussed further below, the Ninth Circuit has ruled that the language “the seller resides in California or” facially violates the dormant Commerce Clause and should be read out of the statue. See infra nn.15–16 & accompanying text.
5. See Mitran, supra note 1, at 1363.
6. See Shipley, supra note 2, at 7; see also Droit de Suite: The Artist’s Resale Royalty, December 1992, A Report of the Register of Copyrights, 75 (“[Since the CRRA was enacted, d]roit de suite legislation has been introduced in Connecticut, Florida, Illinois, Iowa, Maine, Michigan, Nebraska, New York, Ohio, Rhode Island, and Texas.  To date, none has become state law.”).
7. See generally Herbert Lazerow, Art Resale Royalty Options, 63 J. COPYRIGHT SOC’Y 201 (2016).
8. See 17 U.S.C. § 109(a).
9. See McInerney, supra note 1, at 5; Shipley, supra note 2, at 2.
10. McInerney, supra note 1, at 17 n.110.  This entitlement of the new owner to resell the copyrighted work does not affect ownership of the copyright in that work.  Thus, the copyright holder’s rights and the new owner’s rights coexist within the same framework, without conflict with one another. Id.
11. See Kimberley Byer, Note, The Death of the First Sale Doctrine, 11 J. on Telecomm. & High Tech. L. 389, 392 (2013).
12. Complaint ¶ 1, Sam Francis Found. v. Christie’s, Inc., No. 11-08605-MWF-FFM (C.D. Cal. Oct. 18, 2011), ECF No. 1; Complaint ¶ 1, Estate of Robert Graham v. Sotheby’s, Inc., No. 11-08604-MWF-FFM (C.D. Cal. Oct. 18, 2011), ECF No. 1; Complaint ¶ 1, Sam Francis Found. v. eBay Inc., No. 11-06822-MWF-PLA (C.D. Cal. Oct. 18, 2011), ECF No. 1.  The Sam Francis Foundation was not a named plaintiff in the suit against Sotheby’s.
13. See, e.g., First Joint Motion to Dismiss, Christie’s, No. 11-08605-MWF-FFM, ECF No. 15.  The defendants’ motions also argued that the complaints failed to state a claim under Federal Rule of Civil Procedure 12(b)(6).
14. E.g., Order Granting First Joint Motion to Dismiss at 16, Christie’s, No. 11-08605-MWF-FFM, ECF No. 38.
15. Sam Francis Found. v. Christies, Inc., 784 F.3d 1320, 1322 (9th Cir. 2015).
16. See id. at 1326.
17. E.g., Second Joint Motion to Dismiss, Christie’s, No. 11-08605-MWF-FFM, ECF No. 103.
18. E.g., Civil Minutes: Order re Motions to Dismiss at 10, Christie’s, No. 11-08605-MWF-FFM, ECF No. 113.
19. Id.
20. Id. at 17 (quoting Laws v. Sony Music Entm’t, Inc., 448 F.3d 1134, 1137 (9th Cir. 2006)).  The Central District also held that (i) the CRRA did not constitute a Fifth Amendment “taking”; (ii) eBay was not a proper defendant (i.e., a seller of fine art or seller’s agent) under the CRRA; (iii) punitive damages were not available under the CRRA; (iv) the Estate of Robert Graham had no capacity to sue, and was thus not a proper plaintiff; (v) the complaints adequately plead sufficiently plausible facts under Rule 8; and (vi) Sotheby’s Motion to Dismiss for lack of subject-matter jurisdiction was more appropriately adjudicated on a motion for summary judgment.
21. See, e.g., Appellants’ Opening Brief at 27, eBay, No. 16-56252 (9th Cir. Mar. 8, 2017), ECF No. 8 (citing Morseburg v. Baylon, 621 F.2d 972 (9th Cir. 1980)).  In Morseburg, an art dealer who became obligated to pay royalties under the CRRA brought suit to challenge the validity of the act, arguing, among other things, that the CRRA was preempted by the first sale doctrine codified in the Copyright Act of 1909.  621 F.2d at 974-75.  The Morseburg court, upholding the validity of the CRRA, determined that there was no preemption under the 1909 Act. Id. at 978.  However, the court explicitly stated that it was not addressing the issue of CRRA preemption by the 1976 Copyright Act. Id. at 975.
22. See Appellants’ Opening Brief at 41-47; see also 17 U.S.C. § 301(a) (establishing that “all legal or equitable rights that are equivalent to any of the exclusive rights . . . specified by section 106 . . . are governed exclusively by this title” (emphasis added)).
23. See Joint Brief of Appellees Christie’s & Sotheby’s at 14, No. 16-56235 (9th Cir. June 20, 2017), ECF No. 26.
24. Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013); Quality King Distribs., Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135 (1998); Omega S.A. v. Costco Wholesale Corp., 776 F.3d 692 (9th Cir. 2015).
25. See Joint Brief of Appellees Christie’s & Sotheby’s at 14-18.
26. Id. at 20.
27. See, e.g., Appellants’ Reply Brief at 2-7, Sotheby’s, No. 16-56234 (9th Cir. Aug. 21, 2017), ECF No. 44 (discussing Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523 (2017)).
28. Cf. Lexmark, 137 S. Ct. at 1527 (analogizing the exhaustion doctrine and the first sale doctrine).
29. See Appellants’ Reply Brief at 5.
30. See id. at 6-7.
31. Joint Brief of Appellees Christie’s & Sotheby’s at 18 (quoting Lexmark, 137 S. Ct. at 1532); see also id. (quoting Lexmark, 137 S. Ct. at 1534 (characterizing the exhaustion doctrine as “reflect[ing] the principle that, when an item passes into commerce, it should not be shaded by a legal cloud . . . as it moves through the marketplace”)).

On July 11, 2017, Hughes Hubbard & Reed LLP hosted a brown-bag lunch on the business and law of auction houses.  The Fine Arts Committee of the New York State Bar Association’s Entertainment, Arts & Sports Law Section sponsored the event.

The lunch’s panel included Sherri Cohen, Director of Trusts and Estates at Bonhams; Margaret J. Hoag, Vice President & Senior Counsel at Christie’s; Jonathan Illari, General Counsel, Americas at Phillips; Daniel H. Weiner, Partner at Hughes Hubbard & Reed LLP; and Frank K. Lord IV, Partner at Herrick Feinstein LLP.  These experts in the industry provided different perspectives on auction sales of art.  Lena Saltos, Associate General Counsel at URBN, and Elizabeth Urstadt of Stropheus, LLC, moderated.  The discussion ranged from the business side of auction houses to legal challenges that arise in the art world.

In making business decisions, auction houses consider an array of questions distinct to the field.  When asked to respond to art dealer Larry Gagosian’s comment that, in a single sales transaction, he represents both the buyer and the seller of an artwork, the panel emphasized that an auction house’s primary allegiance is to the seller.  Sherri Cohen noted that auction houses must navigate situations in which the client has expressed objectives that do not necessarily result in selling to the highest bidder, and gave an example of a client who specified that the art she was selling must be used in an educational context once purchased.  Ms. Cohen also noted that appraisals should be used only for the specified purpose provided in the report and that valuations for the same property can vary widely; for instance, for insurance replacement cost verses fair market estate tax value.  Ms. Cohen explained that an auction house will provide complimentary auction estimates and once consigned ship the work to a known expert for authentication.

Maggie Hoag and Jonathan Illari discussed how the current trend of moving sales online poses new challenges for auction houses, as their historic business model depends on in-person interactions, and artwork seen in person can differ greatly from online reproductions, leading to greater potential for buyers’ dissatisfaction.  Auction houses also experience competitive pressures from each other — Dan Weiner shared that he had suggested a reverse auction (where the auction houses bid for a consignment) for a client who was trying to decide between auction houses, and ironically, one of those auction houses expressed deep reservations about participating in such a process.

With regard to a few of the ongoing legal and compliance issues that arise, auction houses continue to be vigilant in detecting fraud, copyright violations and other unlawful practices surrounding the sale of art.  They must be wary of perpetuating fraudulent artwork by putting it up for auction.  Dan Weiner and Frank Lord IV noted that, just because an artist copies another artist’s work, he or she does not necessarily break any laws, even if he or she uses the original artist’s name.  Whether the auction house’s actions in selling that copied work are legal depends on how it represents the artwork.  Specifying that a piece is from the school of a particular artist, as opposed to by that artist, may help to clarify any confusion.  However, liability can arise if auction houses themselves illegally reproduce images of artworks; this has happened when an auction house included images in its catalogue without permission of the copyright holder.  Another area of legal concern is ensuring that items sold privately by auction houses are subject to the same standards as objects consigned for public auction.  For example, if an object’s questionable provenance or title would preclude it from public sale by an auction house, that auction house would also be unable to broker a private sale for the object.

The discussion covered various challenges that auction houses face today.  The panel of experts conveyed that they both look to established practices and think creatively when answering questions that arise, whether as attorneys working in-house at an auction house or as their outside counsel.

Carolyn Harbus assisted with drafting this post.