Today, Sotheby’s sold Edvard Munch’s iconic painting The Scream at auction in New York for $119.9 million. To keep in the spirit of this occasion, I think it is appropriate to write a blog article on art law. An interesting issue faced by artists and sellers of art in California is compliance with the California Resale Royalty Act.

The California Resale Royalty Act (the “Act”), found in California Civil Code §986, provides that an artist must receive five percent of the sales proceeds from the resale of his or her artwork (i.e., an original painting, drawing, sculpture or original work of art in glass) when: (1) the seller resides in California or (2) the sale takes place in California. At the time of the sale, the artist must be a United States citizen or must have been a California resident for at least two years. In addition, the work must be sold by the seller for more than $1,000 (gross amount) than he or she paid. The work may be sold for a gross price of more than $1,000 or may be exchanged for one or more works of art or for a combination of cash, other property, and one or more works of fine art with a fair market value of more than $1,000. The sale must occur during the artist’s lifetime or within 20 years of the artist’s death. If the artist is deceased, the artist’s estate or the artist’s heirs are entitled to the artist’s resale rights for up to 20 after the artist’s death.

The Act, however, does not apply if:

1.         The sale is the initial sale of the artwork and the legal title of the artwork at the time of the initial sale is vested in the artist;

2.         The resale of fine art is by an art dealer to a purchaser within 10 years after the initial sale by the artist to an art dealer, provided that all intervening sales are between art dealers; or

3.         The sale consists of a work of stained glass artistry permanently attached to real estate that is sold as part of the sale of the real property.

No other state in the United States has a similar law. However, many European countries have laws comparable to the Act.

Not surprisingly, it may be difficult for the seller to locate the artist or his or her heirs. If this is the case, royalty payments due pursuant to the Act are to be sent to the California Arts Council, who will attempt to locate the artist (or the artist’s heirs) and distribute the funds. If the Council cannot locate the artist, and the artist (or the artist’s heirs) does not file a written claim for the funds within seven years of the date of the sale, the artist’s (or the artist’s heirs’) right to the funds terminates. The Council will use the unclaimed funds to acquire fine art pursuant to the Art in Public Buildings program.

There has been much controversy surrounding compliance with the Act. In October 2011, three federal lawsuits were filed by artists and their estates claiming they had not been properly compensated under the Act by the auction houses Sotheby’s, Inc., and Christie’s, Inc. and the internet company E-Bay. In court papers, the auction houses have argued that the Act is unconstitutional as it violates the Commerce Clause of the Constitution, which provides that no state law may regulate economic activity outside that state. In addition, they have asserted that the Act is preempted by the federal Copyright Act, which “entitles a lawful owner of a copyrighted work to resell that work without restriction.” We will have to wait to find out the resolution of these lawsuits.  Until then, sellers must continue to pay the five percent royalty on art  sales.

[Update: On May 17, 2012, the U.S. District Court, Central District of California, ruled in favor of the auction houses and held that the California Resale Royalties Act (CRRA) violated the U.S. Constitution’s Interstate Commerce Clause.  The matter will be appealed to the 9th Circuit Court of Appeals.]

If you would like to discuss this or other trusts and estates issues, please contact the attorneys at Drucker Law Offices, 468 North Camden Drive, 2nd Floor, Beverly Hills, CA 90210, 310.285.5375 Tel, 310.444.9754 Fax, www.druckerlaw.com