Thursday 7 May 2015

Ninth Circuit Panel Held that California Resale Act Violates Dormant Commerce Clause

Several artists and estates of artists filed three separate class action suits in 2011 against two auctions houses, Christies and Sotheby’s, and with the online retailer and auctioneer eBay, alleging that they had failed to pay them royalties on sales of fine arts, as required by the California Resale Royalty Act, Cal. Civ. Code § 986(a), (CRRA).

Defendants had moved to dismiss, arguing that the CRRA violated the “dormant” Commerce Clause of the U.S. Constitution. The Central District Court of California granted Defendants ‘motion to dismiss in 2012, holding that the CRRA impermissibly violates out-of-state conduct, and thus violates the “dormant” Commerce Clause. On May 5, 2015, an en banc panel of the Ninth Circuit held that the CRAA indeed violates the “dormant” Commerce Clause.

The California Resale Royalty Act

The California Resale Royalty Act (CRRA), Cal. Civ. Code § 986(a), requires that sellers pay the author of the work sold a five percent royalty if the work is a work of fine art, that is, “an original painting, sculpture, or drawing, or an original work of art in glass.”The CRAA applies if the work is sold in California, or if the seller resides in California, or if the sale takes place in California. This type of royalties scheme is also known as droit de suite, and aims at giving artists and their heirs a way to profit from the rising market value of the work. Indeed, the heirs of a deceased artist can assert the artist's rights for 20 years after the artist's death, § 986(a)(7). However, sales below $1,000 and those involving an artist who died before 1983 are out of the scope of the CRRA.

The Dormant Commerce Clause of the U.S. Constitution

Even Dormant, The Commerce Clause Can Strike Down State Law
The Commerce Clause of the United States Constitution, Article I, §8, gives Congress the power to regulate commerce among the several States. This article has been interpreted by the Supreme Court as restricting the States from discriminating or burdening unduly interstate commerce, and this negative aspect of the Commerce Clause, as it limits the power of the States, is referred to as the “dormant” Commerce Clause.

The CRRA, § 986(c)(1), defines an “artist” as "the person who creates a work of fine art and who, at the time of resale, is a citizen of the United States, or a resident of the state who has resided in the state for a minimum of two years" and thus applies to all artists who are U.S. citizens, regardless of the state in which they reside, or to aliens who have resided in California for at least two years.

The Ninth Circuit gave as an example a sale, which would take place entirely outside of California, but which would nevertheless be within the scope of the CRAA, as a sale where “a California resident has a part-time apartment in New York, buys a sculpture in New York from a North Dakota artist to furnish her apartment, and later sells the sculpture to a friend in New York” noting , that, in this case, the CRRA “requires the payment of a royalty to the North Dakota artist—even if the sculpture, the artist, and the buyer never traveled to, or had any connection with, California.” The Court thus, “easily conclude[d] that the royalty requirement, as applied to out-of-state sales by California residents, violates the dormant Commerce Clause” (p. 8), as the CRAA “facially regulates a commercial transaction that takes place wholly outside of [California]’s border”(p. 9). However, the Ninth Circuit found that the CRAA’s provision offending the Commerce Clause can be severed from the remainder of the Act.

As the District Court had found that the CRAA violated the dormant Commerce Clause per se, and that the entire Statute had therefore to be stricken down, it had not addressed Defendant’s two additional arguments, the CRAA’s preemption by the Copyright Act and that it was a taking of private property in violation of the United States and California Constitutions. Therefore, the Ninth Circuit remanded the case to a three-judge panel for considerations of these remaining issues, leaving to the panel’s discretion the decision to address them on the merits or to remand them to the lower court. 

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