Sheppard Mullin Richter & Hampton LLP: My Fellow Californians - Our Long National Nightmare Is Over

By Christine Steiner

In the same era Gerald Ford advised his fellow Americans that "our long national nightmare is over," as he succeeded Richard Nixon as president, the California Legislation enacted the sloppily-drafted California Resale Royalty Act, Civil Code Section 986. The act was not exactly a nightmare, in truth it slumbered for most of its thirty-plus lifetime. It seemed more honored in the breach than the observance. Recent awareness of the resale royalty obligation, though, has caused confusion and consternation for California sellers, for California artists and for the art trade nationwide. Some have, in fact, described it as a nightmare. As of late last week, the nightmare may be over.

On May 17, Judge Nguyen, the newly-appointed judge to the U.S. Ninth Circuit Court of Appeals, issued her District Court ruling in the class action lawsuit brought by a class of artist against auction houses Christie's, Inc. and Sotheby's, Inc., and internet auctioneer eBay, Inc., alleging that the defendants sold their artwork at California auctions and on behalf of California sellers, but failed to withhold royalties due.

In short, Judge Nguyen ruled that the statute violated the Commerce Clause because it expressly sought to regulate conduct beyond the California borders. The court struck down the statute in its entirety as unconstitutional.

There remains the likelihood that plaintiffs will appeal the action. They have 30 days to file notice of appeal (so the decision is not yet final); and while it's not over until it's over, we are close to conclusively resolving the matter. On a related note, actions under the statute are pending against certain defendant galleries, and rulings have not been issued in those cases.

Enacted in 1976 and effective in 1977, the Resale Royalty Act states that an artist shall be entitled to a royalty upon the resale of the artist's work of art provided that (a) the artist at the time of the sale is a United States citizen or has been a California resident for at least two years; (b) the seller resides in California or the sale takes place in California; (c) the work is an original painting, drawing, sculpture or original work of art in glass; (d) the work is sold by the seller for more money than she or he paid; (e) 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; and (f) the work is sold during the artist's lifetime or within 20 years of artist's death.

Finally, at the federal level, legislation proposing a nationwide artist resale royalty is currently making its way through the U.S. Congress. In an election year, most think there's not a glimmer of hope for passage. As we noted in our October blog article on this subject, we will continue to monitor these lawsuits. Please stay tuned.

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