United States: Federal Art Resale Royalty Inches Toward Reality

In May 2012, a California federal court ruled that the California Resale Royalty Act (Cal. Code § 986) was unconstitutional under the Commerce Clause because it authorized one state to regulate commerce conducted in other states by requiring royalties to be paid to artists who are either U.S. citizens or California residents on sales of their art occurring in California or by sellers who are California residents.1 That ruling is awaiting a decision on appeal from the Ninth Circuit (the appeal was argued in April 2014).  The California statute, which was enacted in 1977, has been the only one in the country to provide artists with a right to recover royalties upon the subsequent resale of their original works, subject to certain conditions.

Regardless of the appeal's outcome, the decision has created a strong impetus for potential enactment of a federal resale royalty law (or droit de suite, as it is known in Europe) that would amend the U.S. Copyright Act.  Under U.S. copyright law, once an original copyright-protected work of authorship is sold, the buyer and all subsequent purchasers are free to resell that work (but not any underlying copyright rights in the work) without any compensation to the original artist or author.  This is known as the first sale doctrine, as codified in Section §109 of the Copyright Act.  In other words, once the original artist/author transfers title, his or her rights to any further compensation are exhausted.

Historically, the concept of a resale royalty originated in France in 1920 as a reaction to negative publicity about starving artists, and is now well-entrenched throughout Europe as part of a bundle of "moral rights."2  Yet it never has been part of U.S. copyright law.  While the Berne Convention copyright treaty incorporated droit de suite rights in 1948, due to objections by several countries, the right was made optional and reciprocal.  The U.S. became a member of the Berne Convention in 1989 without implementing that provision.  

Even before the California decision, movement was underway at the federal level.  In 2011, representative Jerrold Nadler (D-NY) introduced a droit de suite bill (H.R. 3688 - "Equity for Visual Artists Act of 2011") that would have required artists to be paid a 7% fixed royalty, but only for a sale by an auction house with collective sales of $25 million or more in the prior year or for individual works of art selling for $10,000 or more.  Excluded from coverage, however, were any entities that "solely conduct the sale of visual art by the Internet."  That bill died without attracting any co-sponsors.

On the heels of the 2012 California court decision, however, the issue got new legs when the Copyright Office solicited comments in late 2012 and held a roundtable hearing on April 23, 2013, to assess whether a resale royalty scheme should be added to the Copyright Act, so as to bring the U.S. in line with Europe.  In Congress, Representative Nadler re-introduced a new resale royalty bill on February 26, 2014 (H.R. 4103 - "American Royalties Too Act of 2014"), which significantly lowered the coverage thresholds from his failed 2011 bill, as discussed below.3

Copyright Office Proceedings and Report

The Copyright Office (the "Office") had previously considered a possible resale royalty in 1992, but concluded that there was no need for such legislation because it was "not persuaded that sufficient economic and copyright policy justification exists to establish droit de suite in the United States."  The Office expressed two main concerns at that time: first, that implementing a resale royalty right "might be harmful to visual artists who lack a viable resale market because primary market prices might decline as a result of factoring in the future royalty;" and second, that a federal right might conflict with U.S. copyright law's statutory first sale doctrine because "the notion of an encumbrance attaching to an object that has been freely purchased is antithetical to our tradition of free alienability of property."4

Twenty years later, Congress asked the Office to solicit public comments about a resale royalty.  In particular, the Office's mandate was to "review how the current copyright legal system affects and supports visual artists; and how a federal resale royalty right for visual artists would affect current and future practices of groups or individuals involved in the creation, licensing, sale, exhibition, dissemination, and preservation of works of visual art."5 

Following its receipt of numerous comments from diverse stakeholders by December 2012,6 the Office held a roundtable hearing on April 23, 2013, concerning a possible federal resale royalty right.7 The issues raised at the hearing broke down into the following eight subcategories:

(1) The changing legal landscape; (2) portability of the secondary art market; (3) effect on the primary art market and the incentive to create new works; (4) first sale and the free alienability of property; (5) visual artists and sales of works; (6) the Equity for Visual Artists Act (Rep. Nadler's then-pending bill); (7) effect on museums; and (8) constitutional concerns.8

The Office then issued a detailed report on December 12, 2013 (the "Report"), in which the Register of Copyrights, Hon. Maria A. Pallante, made the following observations:

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.  Today more than seventy foreign countries – twice as many as in 1992 – have enacted a resale royalty provision of some sort to address this perceived inequity.

Concluding there was "no evidence to conclusively establish that [establishing resale royalties] would harm the U.S. visual market," the Report made 10 legislative recommendations, most of which are incorporated in Rep. Nadler's 2014 bill and supported "congressional consideration of a resale royalty right, or droit de suite."

With respect to the market concerns it had voiced in 1992, the 2012 Report made a number of observations:

  • The "value of the global art market appears to have increased" and the market has undergone fundamental changes," citing the explosion of the Chinese art market.
  • "The art market has seen an increase in the number of dealers opting to sell works from their homes or offices and at centralized events, such as art fairs," most of which occur outside the U.S., a "trend [that] suggests that the art world is becoming less an exclusive club and more of a general market."
  • "The Internet may be enhancing these new sales models by providing an efficient and inexpensive means to communicate with buyers, regardless of geographic location.... [O]nline auction and market websites, such as eBay.com and Amazon.com, now include works of fine art among their items for sale."
  • "The emergence of various auction price databases, indexes, and news and analytics resources has made the art market somewhat more transparent, particularly in the last twenty years as art increasingly has become an appealing addition to diverse investment portfolios and as private equity art funds have evolved."  Nevertheless, 60% of all art sales are by private auction, gallery, dealer, or consultant sales, which maintain the confidentiality of prices.
  • While public auctions offer more transparency, they "conceal or closely guard information about buyers, sellers, valuations, and prices," although sale prices can be ascertained. 
  • There is an overall lack of regulation of U.S. art markets.  

In support of a resale royalty, the Report emphasized that unlike authors of other types of creative works, visual artists typically do not enjoy the full benefits of the exclusive rights granted to copyright owners, noting that reproduction and similar rights generate only a small fraction of a typical fine artist's income. 

On the other hand, opponents of resale royalties argue that initial sales of art can generate much higher revenues than other types of works; reproduction rights may be quite valuable if an artist is in demand; the Internet provides new outlets for artists; and it is not the role of the Copyright Act to insure market and economic parity among authors.  The Report itself was inconclusive on this last point, noting that "there is insufficient evidence to conclude that a resale royalty is an effective, much less optimal, means of incentiving such creativity."

Opposing comments by Christie's and Sotheby's have emphasized that droit de suite is inconsistent with the first sale doctrine as well as U.S copyright law generally, which is based largely on economics, in contrast to the European model that focuses on an extension of the author's personality.  Enactment of a resale royalty, they say, would upset the Copyright Act's balance between incentivizing creation of new works and the public interest in accessing and using works "by likely reducing the prices paid to artists in the primary market for their works... while providing artists with little or no additional incentive to create." 

While the Office acknowledges the "constitutional mandate to maintain and foster incentives for continued creativity," supporters of resale royalties argue that providing a post-sale royalty will incentivize artists to create more.  Yet the Report is cautious on this key point, noting that "[i]t does appear that most of the direct benefits created by resale royalty schemes inure to artists at the higher end of the income spectrum."

Opponents agree, and emphasize that "because only a tiny percentage of artworks are ever resold, the vast majority of artists would gain nothing from a resale royalty, which would instead provide a new stream of revenue to already very successful artists."10

Opponents also argue that a resale royalty will discourage buyers from purchasing works in the primary market because buyers will demand reduced first sale prices or artists will waive their right in exchange for higher initial prices.  The Report responds that such concerns "may be overblown, as many buyers in the primary market are motivated by factors other than the prospect of future profit," also noting that, based on the European experience, there is "little empirical evidence that a resale royalty has actually harmed primary art markets when applied in practice."        

With respect to the secondary art market, which a resale royalty would most directly impact, proponents argue that the royalty would encourage artists to be more prolific and help expand secondary markets, and reciprocity with foreign resale royalty schemes would produce new foreign revenue streams for American artists.  They also argue that associated transactional costs would be minimal and no different from current auction administrative fees, such as buyers' premiums, which provide no benefit for the artist.

Opponents argue that only a small number of artists would benefit from resale royalties, thus creating disproportionate administrative and enforcement costs.  They also claim that a resale royalty would dampen enthusiasm for resales, thereby depressing the secondary market in its entirety.  The Report notes that while available quantitative information can be interpreted in various ways, "there is no conclusive proof that the U.K. or EU markets have suffered (or, for that matter, benefitted), directly or indirectly, from the resale royalty."

Opponents further raise the specter of the secondary market fleeing from the U.S. to countries like China and Switzerland that do not have a resale royalty scheme.  The Report again concludes there is insufficient empirical evidence from Europe to support or reject this notion, noting that the "secondary art market is a complex ecosystem, with many correlating and confounding variables that affect market transactions."  In particular, the Report cites a lack "of any evidence that the growth in popularity of art fairs, private sales, and other nontraditional venues for art sales is the result, or a byproduct, of the spread of resale royalty schemes around the world."

In the Report's conclusions, the Office finds no hard evidence to "support the contention that adoption of a resale royalty right would cause substantial harm to the U.S. art market."  But with respect to the issue of a likely benefit to U.S. artists, "the evidence is less obvious....Accordingly, while the Copyright Office finds no significant legal or policy impediments to adoption of a U.S. resale royalty, and indeed supports consideration of a resale royalty right as one option to address the historic imbalance in the treatment of visual artists, it is less persuaded that such legislation represents the best or only solution." Other suggested options include voluntary initiatives and establishing best practices among stakeholders in the visual art community.

Pending Legislation

Rep. Nadler's current bill (and the companion Senate bill), the "American Royalties Too Act of 2014," or "ART," is much broader in scope than his 2011 bill.11  It would apply to any auction entity with only $1 million or more of total sales in the prior year and to individual works of art (including photographs) selling at auction for $5,000 or more.  Rather than a fixed royalty, payment would be required based on the lesser of 5% of the purchase price or $35,000 (subject to cost-of-living adjustments).  Auction entities would make payments to a visual artist's copyright-collecting society, which would be required, at least four times each year, to distribute the appropriate royalties (minus administrative expenses) to authors or successor copyright owners.  The bill would cover artists who (i) are citizens of or domiciled either in the U.S. or a country that provides resale royalty rights; or (ii) have first created the work in the U.S. or a country that provides such royalty rights.

The bill would authorize the Office to further assess whether coverage should be expanded to cover non-auction entities, such as galleries, dealers, and other professionals involved in the sale of visual arts.  At last count, there were 15 co-sponsors of the bill, all Democrats.  To put teeth into enforcement, the bill would amend the Copyright Act to establish an infringement offense for the failure to pay the royalty by imposing statutory damages and liability for the full royalty.  The sale, assignment, or waiver of the right to collect the royalty would be prohibited, subject to exceptions for works made-for-hire and transfers of copyright ownership.

A further Congressional hearing occurred on July 15, 2014, at which time it was reported that the Chairman of the House committee considering the legislation, Republican Howard Coble, said he was "not uncomfortable with the concept of a resale royalty."12

Prospects of Passage

With the Office encouraging Congressional examination of the resale royalty issue and enactment of some form of relief for artists, and Rep. Nadler's bill having garnered multiple co-sponsors, the prospect for resale royalty legislation has real potential.  If the Nadler and Senate bills don't reach a final vote by the time the current Congress ends at year-end, they likely will be reintroduced.  Yet strong opposition exists.  Even the Office observed in its Report that more evidence is needed on certain key issues.  That will take time, more hearings, and heavy lobbying by interest groups as any resale royalty will be a sea change for the U.S.  The ball is rolling, but we don't know where it will stop.

Footnotes

1 Estate of Graham v. Sotheby's Inc., 860 F. Supp. 2d 1117 (C.D. Cal. 2012).  The issue of Copyright Act preemption of the California statute under the first sale doctrine also has been raised on the appeal.

2 The European Union ("EU") harmonized droit de suite national laws in 2001 under Directive 2001/84/EC, which generally required Member States to adopt national implementing legislation by 2006, but allowed Member States that had not previously enacted a resale right to limit application of the right to works of living artists until 2010, or, upon notice from the Member State to the European Commission, for an additional two years, with full implementation required by all Member States by January 1, 2012.  The Directive caps the royalty to be paid at €12,500, regardless of the resale price, based on a sliding royalty scale.

3 On March 20, 2014, Rep. Nadler's bill was referred to the Subcommittee on Courts, Intellectual Property, and the Internet.

4 See Report, p. 8.  The full Report can be accessed at http://www.copyright.gov/docs/resaleroyalty/usco-resaleroyalty.pdf .

5 Report, Appendix "A" (Federal Register Notice).

6 Comments were submitted by both U.S. and foreign interest groups, such as The Confédération Internationale des Négociants en Ruvres d'Art (CINOA), Artists Rights Society (ARS), American Society of Media Photographers (ASMP), New York University Art Law Society and California Lawyers for the Arts, Sotheby's, Inc., Christie's Inc., and eBay, Inc.  All comments can be accessed at http://www.copyright.gov/docs/resaleroyalty/comments/77fr58175/

7Seehttp://www.copyright.gov/fedreg/2013/78fr19326.pdf .

8 Id.

9 Report, p. 2.

10 Comments of Sotheby's, Inc. and Christie's Inc. in Response to Copyright Office's Notice of Inquiry re Resale Royalty Right (available at  http://goo.gl/hJuX5b).

11 The same day that Rep. Nadler introduced his ART bill, an "America Royalties Too Act" also was introduced in the Senate by Senator Tammy Baldwin (D-WI).

12 Seehttp://www.theartnewspaper.com/articles/Artist-resale-rights-gain-support-in-US-Congress/33303 .

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