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California Law Struck Down as Unconstitutional: U.S. District Court Dismisses California Resale Royalty Act Case against Sotheby’s, Christie’s, and eBay

Posted by Nicholas O'Donnell on May 18, 2012 at 5:08 AM

Consistent with expectations after reports from the court hearing in March, the U.S. District Court in Los Angeles dismissed the case brought by artist Chuck Close and others that alleged violations of the California Resale Royalty Act (the “CRRA”) by Sotheby’s, Christie’s and eBay, and ruled that the CRRA is unconstitutional in its entirety. Similar claims against eBay were also dismissed in a shorter opinion referencing the Sotheby’s and Christie’s decision.

The judge agreed with the auction houses that California’s passage of a law concerning art re-sales improperly affects commerce outside of the state, and thus violates the Commerce Clause to the U.S. Constitution that reserves regulation of that commerce to the U.S. Congress (and, by negative implication, forbids states from doing the same).

Judge Jacqueline H. Nguyen reviewed the California statute itself, as well as the failed efforts on a national level to enact resale royalty laws. She had little difficulty concluding that works of fine art are objects in interstate commerce, and that the California law thus has a “substantial effect” on interstate commerce by regulating secondary sales.

That is only the first part of the analysis required, however. If the law at issue “directly regulates” interstate commerce, it almost never survives judicial review. If the law “has only indirect effects” on interstate commerce, the court reviews whether the state has legitimate interests that do not unnecessarily burden interstate commerce.

Judge Nguyen found that the CRRA plainly violated the first test: “the CRRA explicitly regulates applicable sales of fine art occurring wholly outside California.” Not only that, California’s Legislative Council apparently itself took notice of this constitutional issue when the law was being considered—in 1976.

Taking the analysis a step further, the court ruled that the entire statute must be struck down because the offending parts that regulate commerce outside of California. Again looking to the history of the statute, the court noted that a draft to regulate only sales within California was rejected, from which it can be inferred that the intent was to do what now has been found improper. In other words, the whole law runs afoul of the Constitution, and the whole law has to go.

One can expect California to appeal, but the decision is well-reasoned and fairly conservative in its application of the law. Although there were noises last summer about reviving federal attempts to regulate resale (which, by contrast, would easily be constitutional for the U.S. Congress to do), there has been no real movement on that front. Perhaps the California decision will stoke those fires one way or another.

Topics: Legislation, Resale Royalties, Chuck Close, Commerce Clause, Christie's, California Legislative Council, Dormant Commerce Clause, Collections, California Resale Royalty Act, Copyright, Jacqueline H. Nguyen, Sotheby's, eBay

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The Art Law Report provides timely updates and commentary on legal issues in the museum and visual arts communities. It is authored by Nicholas M. O'Donnell, partner in our Art & Museum Law Practice.

The material on this site is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem.

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