A recent decision by the U.S. Court of Appeals for the Ninth Circuit held that claims brought under the California Resale Royalties Act (“CRRA”), based on the resale of artwork after January 1, 1978, are expressly preempted by 17 U.S.C. § 301(a) of the U.S. Copyright Act.  Chuck Close, et al. v. Sotheby’s, Inc., et al., Nos. 16-56234, 16-56235 and 16-56252, ____ F.3d ____ (9th Cir. July 6, 2018).  The CRRA was enacted in 1976, and granted visual artists the unwaivable right under certain circumstances to receive 5% of the proceeds on any resale of their artwork.  The right to resale royalties was limited to the resale of original paintings, sculpture or drawings and original works of art in glass.  The seller of the artwork or the seller’s agent was required to withhold 5% of the resale price and pay it to the artist, or if the artist could not be found, to the California Arts Council.  The artist could bring a cause of action for damages if the 5% resale royalty was not paid.

In 2011, Chuck Close, Laddie John Dill and other artists or their estates sued the auction houses Sotheby’s, Christie’s and eBay alleging that the defendants in auctioning the artists’ works had violated their obligation to pay royalties to the plaintiffs under the CRRA.  The District Court for the Central District of California dismissed the claims on the ground that the CRRA violated the Commerce Clause of the U.S. Constitution by purporting to regulate commerce outside the State of California.  Estate of Graham v. Sotheby’s, Inc., 860 F.Supp.2d 1117 (C.D. Cal. 2012).  On appeal, the Ninth Circuit in May 2015, agreed but held that the CRRA might nevertheless apply to resales of artwork taking place within California, and remanded the case to the District Court for further consideration.  Sam Francis Foundation v. Christie’s, Inc., 784 F.3d 1320 (9th Cir. 2015), cert. denied, 136 S.Ct. 795 (2016).  On remand, the District Court dismissed the complaint on the ground that the CRRA is preempted by the federal Copyright Act of 1976.  Estate of Graham v. Sotheby’s, Inc., 178 F.Supp.3d 974 (C.D. Cal. 2016).  The plaintiffs filed an appeal to the Court of Appeals for the Ninth Circuit which affirmed the decision of the District Court.  Close v. Sotheby’s, supra.

California is the only state to have enacted a statute recognizing a resale royalty right for visual artists.  The right to a royalty each time a work is resold is known as the droit de suite (literally, the right of following on) and finds its origin in a French law enacted in 1920.  Since then, more than 70 countries have enacted a resale royalty law of some sort including Australia and most of the European Union, but not the United States.

In December 2013, the U.S. Copyright Office issued a report, Resale Royalties: An Updated Analysis, in which it concluded that “certain visual artists may operate at a disadvantage under the copyright law relative to authors of other types of creative works.  Visual artists typically do not share in the long-term financial success of their works because works of visual art are produced singularly and valued for their scarcity, unlike books, films, and songs, which are produced and distributed in multiple copies to consumers.  Consequently, in many, if not most instances, only the initial sale of a work of visual art inures to the benefit of the artist and it is collectors and other purchasers who reap any increase in that work’s value over time.”

For example, the New York Times recently reported that the artist Robert Rauschenberg sold a collage, entitled “Thaw,” to a collector for $800, only to have the work sold later at auction for $85,000.

California’s attempt to address the disadvantage faced by visual artists through the CRRA however runs afoul of the preemption clause in the federal Copyright Act of 1976, which provides as follows:

On and after January 1, 1978, all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103, whether created before or after that date and whether published or unpublished, are governed exclusively by this title.  Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State. 17 U.S.C. § 301(a).

The Ninth Circuit held in Close v. Sotheby’s that the plaintiffs’ claims under the CRRA were expressly preempted by § 301(a).  In reaching its conclusion, the Court used a two-pronged test:  (1) does the subject matter of a claim under the CRRA fall within the subject matter of copyright as described in 17 U.S.C. §§ 102 and 103 of the federal law; and (2) if so, are the rights asserted under State law equivalent to the exclusive rights of copyright holders contained in 17 U.S.C. § 106?   The Court answered in the affirmative to each question.

First, it was undisputed that claims under the CRRA for resale royalties on works of “fine art,” described as original paintings, sculptures, drawings or works in glass, fall within the subject matter of copyright under § 102.  Second, the CRRA was held to run counter to § 301(a) by granting an additional right beyond what federal copyright law already provides while at the same time “reshaping the contours of federal copyright law’s existing distribution right.” Close v. Sotheby’s, supra.

The Court explained its reasoning by referring to the “first sale doctrine” codified in 17 U.S.C. 109(a).  Although a copyright owner has the exclusive right to control distribution of his or her work, the right is limited to the first sale of a copy of the work.  The owner of a particular copy of a copyrighted work is entitled, without the authority of the copyright owner, to sell that copy.  17 U.S.C. § 109(a).

The Court found that the federal right to control distribution, as limited by the first sale doctrine, is equivalent to the CRRA’s resale royalty right because they “both concern the distribution of copies of artwork and define artists’ right (or lack thereof) to payment on downstream sales of those copies.”  Close v. Sotheby’s, supra. The CRRA therefore expands the federal distribution right by granting artists a royalty of 5% on all downstream sales while the first sale doctrine limits an artists’ right to payment to the first sale.  The CRRA also restricts the federal distribution right by forbidding artists from fully alienating, or transferring full ownership of, copies of their artwork because the right to a resale royalty in unwaivable.  The Court considered this restraint on alienation to be at odds with federal copyright law’s existing distribution right.

The 1976 Copyright Act had an effective date of January 1, 1978.  Prior to that date under the 1909 Copyright Act there was no express preemption provision in federal copyright law.  The CRRA’s effective date was January 1, 1977.  The Court therefore remanded the case to the District Court to determine if any of the plaintiffs’ claims under the CRRA arose between January 1, 1977 and December 31, 1977, the one-year period during which the CRRA coexisted with the 1909 Act.

The CRRA attempted to address the economic disparity faced by visual artists such as painters, illustrators, sculptors and photographers vis a vis the authors of other creative works protected by copyright such as literary works, musical compositions, sound recordings and motion pictures.  The U.S. Copyright Office agrees that “under the current legal system, visual artists are uniquely limited in their ability to fully benefit from the success of their works over time.”  Resale Royalties: An Updated Analysis, published by the U.S. Copyright Office, December 2013, at 1.  While the authors of other creative works can receive income from various forms of reproduction and derivative uses of their works, the first sale of a work is the main or exclusive source of income for almost all American visual artists.  Id. at 2. Since the resale of works created by visual artists may result in substantial financial gains for third parties such as auction houses, collectors and art galleries, it would seem fair that consideration should be given to enacting some form of resale royalty right, or droit de suite, under the Copyright Act for visual artists.  The Ninth Circuit’s decision making the CRRA ineffective as a means of correcting the disparate treatment of visual artists under copyright law may provide the impetus for the issue to be reconsidered by Congress where previous efforts have died in committee.

If you have any questions about copyright or entertainment law, contact Frank Morgan at 410-783-3524 or fmorgan@agtlawyers.com.