Dealers, auction houses cheer ruling on Calif. Resale Royalty Act

For more than 30 years, California gallery owners have complained about the state’s resale royalty law, which gives visual artists in certain cases a percentage of repeat sales of their artworks. But few disputes over royalties have ever reached court, and the law has gone virtually untested for decades.

That all changed last week when federal judge Jacqueline Nguyen declared the California Resale Royalty Act of 1976 unconstitutional because, she wrote, it attempts to regulate commerce outside the state.

She struck the law down in dismissing a class-action suit brought last year by artists Chuck Close, Laddie John Dill, the estate of Robert Graham and the Sam Francis foundation against Christie’s andSotheby’s auction houses.

An attorney for the artists, Michael Bowse, said they would appeal “as soon as we can.”

“All parties have really understood and expressed all along that the constitutionality of this law would have to be resolved by the 9th Circuit [appellate court] — and possibly by the Supreme Court,” said Bowse.

The case is being closely watched not just by the New York auction houses but by gallery owners in California who handle resale business. And for now, the dealers sound relieved.

“I’m gratified that our legal system, according to our Constitution, is able to follow through with correct and just resolution to this issue,” said Los Angeles gallerist Leslie Sacks, who was also sued for resale royalties last year by the Sam Francis Foundation. (His suit was recently settled.)

“I’ll be thrilled if this sticks,” said another local gallery owner, who declined to be identified for fear of being the target of a lawsuit himself. “We’ve been waiting since the 1970s for some clarity on this mess.”

The California Resale Royalty Act — the only one of its kind in the U.S. — has been controversial since it was signed into law in 1976 with the support of artist Robert Rauschenberg and state Sen. Alan Sieroty. Supporters like the fact that artists share in the financial appreciation of their own work. Critics tend to focus on the “unfair burden” or “competitive disadvantage” placed on California-based sellers and their intermediaries.

As it’s written, the California act applies to the resale of an “original” work of art, provided the transaction takes place in the state or the seller lives there. Nguyen, a central district court judge in California who was recently appointed to the 9th Circuit Court of Appeals, was troubled by the part of the law governing out-of-state transactions by a California-based seller.

For example, she wrote, imagine a “California resident places a painting by a New York artist up for auction at Sotheby’s in New York, and at the auction a New York resident purchases the painting for $1,000,000,” she wrote. According to the resale act, she continued, Sotheby’s would have to withhold 5% of the sales price ($50,000) and locate the artist and pay him or her, even though the entire transaction “occurs wholly in New York.”

Because this part of the law attempts to regulate commerce “occurring wholly outside the boundaries” of California, she ruled that it violates the commerce clause of the U.S. Constitution. She also found that this part of the law could not be separated or “severed” from its overall intent in a way that would allow the rest of the law to stand.

The suit that Nguyen considered against the auction houses had the odd effect of bringing Christie’s and Sotheby’s — the Pepsi and Coke of the art world in their longstanding rivalry — together on the same team.

The auction houses filed a joint brief in February that outlined their arguments against the law’s constitutionality. In addition to invoking the commerce clause, the auction houses argued that the California act violates both the Copyright Act of 1976 and the “takings” clause of the Constitution that prevents the unfair seizure of private property.

Lawyers for both auction houses expressed confidence in the soundness of Nguyen’s ruling, but they declined to speak on record.

On Tuesday, lawyers for the artists requested an order preventing enforcement of the judgment pending appeal, an unusual legal maneuver that was used in the legal wrangling over Proposition 8, the ban on same-sex marriage. In that case a stay was issued to prevent the judge’s ruling that Proposition 8 is unconstitutional from taking effect before appeal.

Bowse also reported that his firm has resolved and dismissed the suits it filed last year on behalf of the Sam Francis Foundation against nine California-based galleries. Along with Sacks, the defendants were Ace, Hamilton/Selway, Manny Silverman, Denis Bloch, and Lora Schlesinger galleries in Los Angeles, and Scott Richards, Martin Lawrence and Hackett/Mill in San Francisco.

All nine galleries agreed to comply with the California law going forward. Five of the galleries also agreed to make royalty payments to the Sam Francis Foundation for reselling works by the artist in the last three years. According to court records, Scott Richards agreed to pay $1,900; Hamilton/Selway, $8,250; Manny Silverman, $4,837.50; Martin Lawrence, $4,102.07; and Leslie Sacks, $3,200.

Silverman, who worked closely with Francis during the artist’s lifetime, said he would have liked to challenge the law through a trial but decided not to for financial reasons. “We never went to court. We just at that point decided it wasn’t worth taking any further. It was getting to be too costly,” he said.

He expressed relief at Nguyen’s decision. “I’m very happy with her ruling,” he said, describing the law as disadvantageous to California galleries who make a lot of resales. “It’s a very clear and concise decision that levels the playing field for all of us.”

jori.finkel@latimes.com