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."9
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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