THE CALIFORNIA RESALE ROYALTIES ACT (Revised July 2018)

Ivan Hoffman, B.A., J.D.

     AS OF JULY 6, 2018:  This case (Close vs. Sotheby’s) and companion cases have been in the courts for several years.  The Ninth Circuit Court of Appeals has now ruled (absent appeal to the Supreme Court), that this statute is unenforceable (for the most part) because it violates the pre-emption provisions of the Copyright Act.  The Court, however, also ruled that there are no pre-emption provisions under the prior copyright law (the “1909 Act”) and thus the statute may be applicable to sales within California but only for the 1 year period before the effective date of the current Copyright Act.  The CRRA went into effect January 1, 1977 and the Copyright Act on January 1, 1978 (and see further discussion below).

     Thus, as of this decision, the statute is unenforceable except possibly as above and below.

     Some details:

     The Court discussed the applicability of the “droit de suite” set of moral rights that gives artists the right to control their work and to participate financially in increases in value of their work.  However, the United States has never adopted that set of rights. The current copyright law does, however, contain certain aspects of these rights under the “Visual Artist’s Rights Act.”  Read the article by that name on my site. 

     The Court discussed the history of the various litigations and then addressed the issue of pre-emption.  Article VI, clause 2, provides that federal law is the “supreme Law of the Landany Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”  So whenever there are laws covering the same matters in both federal and state legislation, the federal law controls.

     Section 301 (a) of the Copyright Act provides expressly that: 

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of copyright as specified by sections 102 and 103, whether created before or after that date and whether published or unpublished, are governed exclusively by this title.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.

     Thus if the CRRA deals with “legal or equitable rights that are equivalent to…” copyright rights under the Copyright Act, the Copyright Act controls. 

     There are 3 kinds of pre-emption under federal law: express pre-emption, conflict pre-emption and field pre-emption.  The issue in all discussions however, is whether a given federal law, in this instance the Copyright Act, covers a particular issue and if so, whether a given state law (in this instance the CRRA) covers the same issue and changes federal law in that regard.

     In discussing express pre-emption, the Court found that the CRRA is pre-empted by federal law in that the Copyright Act provides that when the owner of a copyrighted work places that work into the stream of commerce, the owner loses the ability to further control distribution.  (section 109 (a)) This is often referred to as “the first sale doctrine.”  (Read "The First Sale Doctrine" and "The First Sale Doctrine: Further Issues" on my site.)  The Court found that the CRRA attempts to further provide rights to the seller (in this instance the artist) after the seller has sold the work and as such, the statute provides for rights greater than those intended by Congress.  

     The Court wrote:

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 right. 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.

     The Court then discussed conflict pre-emption and stated that because the 1909 copyright act did not provide for express pre-emption, there was no conflict between the CRRA and that earlier copyright act and thus claims for re-sales under the CRRA taking place under that 1909 act and before the effective date of the Copyright Act (i.e. between January 1, 1977 and December 31, 1977) could be subject to the CRRA (but see more below).

     Because the Copyright Act does not cover all aspects of copyright (reserving to the states copyright issues related to works not fixed in a tangible medium of express for example), there was no issue about field pre-emption. 

     In a tantalizing bit of “dicta” (meaning that it is not part of the Court’s ruling), the Court discussed the defendant’s claims that the CRRA was unconstitutional because it amounted to a “taking” of property without due process, in violation of the 5th and 14th amendments to the Constitution.  The essence of the argument was that by imposing a royalty on the re-sale, the statute deprived the seller of that amount of “property.”   In the words of the Court:

According to defendants, the Copyright Act grants artists a property right in their works but only until they sell the works; after that, the artists have no further property interest. The CRRA upsets this arrangement by taking 5% of the proceeds on resales of fine art and giving those proceeds to artists.

     The Court did not agree with that position as concerns art that had been acquired before January 1, 1978 but after the effective date of the CRRA since the provisions were not arbitrary or capricious.  As to those parties, presumptively those parties did so with either actual or constructive knowledge of the provisions of the CRRA requiring the royalty to the artist.

In some respects at least, the droit de suite resembles legislation imposing rent control, setting a minimum wage, or requiring a zoning permit. All of these measures impose real economic costs on people or businesses and may result in a wealth transfer to someone else, but they are not, for that reason alone, a governmental taking. See id. at 223 (“In the course of regulating commercial and other human affairs, Congress routinely creates burdens for some that directly benefit others. For example, Congress may set minimum wages, control prices, or create causes of action that did not previously exist. Given the propriety of the governmental power to regulate, it cannot be said that the Taking Clause is violated whenever legislation requires one person to use his or her assets for the benefit of another.”).

     However, the Court left open the possibility that as to art that had been acquired prior to the effective date of the CRRA (prior to January 1, 1977) and thus before the enactment of the Copyright Act (prior to January 1, 1978), the argument may have more merit.  The Court stated:

The application of the CRRA to sales of fine art acquired before the CRRA’s enactment suggests greater interference with “investment-backed expectations,” Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 539 (2005) (citing Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978)), and may raise a concern under the Takings Clause.

     In other words, as to a party who acquired art prior to the effective date of the CRRA, they presumptively did not contemplate later having to pay a royalty upon a re-sale and thus their “investment-backed expectations” may have been frustrated by the statute.  If that were so, then perhaps as to those works, the CRRA may be unconstitutional.  The Court expressly did not rule on this issue at this time since there were no facts before the Court to support any such claim.

Conclusion

     This situation presents a glimpse into the legal issues that arise at the interplay between federal and state law.  It again reveals the brilliance of those who were there at the beginning and contemplated situations like this arising and provided for the same.    

Copyright © 2018 Ivan Hoffman.  All Rights Reserved. 

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  You should not rely on this article in any manner whatsoever and you should not draw any conclusions of any sort from this article.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States laws but the laws of other countries may be different.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation. 

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