United States: California Resale Royalty Act Claims Dismissed As Preempted By Copyright Law, Despite 1980 Ninth Circuit Holding To The Contrary

Last Updated: April 14 2016
Article by Nicholas M. O'Donnell

Just three months after the Supreme Court denied certiorari review of last year's Ninth Circuit decision finding California's Resale Royalty Act unconstitutional under the Dormant Commerce Clause in part—but also valid in part—the U.S. District Court in Los Angeles has ruled the entire law invalid as preempted by copyright law. Critically, the opinion relies on last year's Ninth Circuit ruling on the Commerce Clause issue to overrule a 1980 Ninth Circuit case that expressly rejected the idea that the law was preempted. This core holding of yesterday's opinion is hard to square with Ninth Circuit precedent, but that will be tested on appeal, for sure. As before, expect proponents of Congressional efforts to enact national legislation to use this decision as support for the idea that a federal solution is necessary, but those efforts have born little fruit to date.

The California Resale Royalty Act, Cal. Civ. Code § 986, (the CRRA) as originally written obliged payment of 5% of the sales price to an artist "if the seller resides in California or the sale takes place in California." The plaintiffs, artist Chuck Close among them, sued on behalf of a class of plaintiffs, alleging that Christie's, Sotheby's, and eBay had not paid the royalties due under the act.

The initial dismissal in 2012 and reversal last year dealt with the power of California, or any state, to make legislation that affects commerce across state line. The grant of authority to Congress to make such laws carries with it the negative implication that states may not regulate that commercial activity. The Ninth Circuit reviewed the CRRA and held that its regulation of sales outside of California violated the Dormant Commerce Clause, but its royalty prescription on transactions entirely within California presented no constitutional problem. The Supreme Court declined to revisit that question and the case returned to the District Court.

There, the defendants made a new argument, also grounded in the Constitution. This time, it was the concept of preemption, something we have had occasion to address frequently in the context of another California law, the various efforts to amend the statute of limitations on Nazi-looted art. Preemption comes from the Supremacy Clause of the Constitution, and there are different kinds, as the District Court explained yesterday:

Conflict preemption applies "when a state law actually conflicts with federal law or when a state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress in enacting the federal law." [] Express preemption refers to instances where a "preemption clause" in a federal statute expressly displaces the challenged state law.

In reviewing the prospect of conflict preemption, the District Court held that the Copyright Act, by its nature, defines "the scope of the limited monopoly that should be granted to authors or to inventors in order to give the public appropriate access to their work product." State laws must give way when they disrupt that balance by broadening the scope of the copyright beyond what Congress intended."

The problem for the CRRA is the existence of the First Sale Doctrine within the Act itself:

Notwithstanding the provisions of section 106(3), the owner of a particular copy . . . lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy. 17 U.S.C. § 109(a).  

That is to say, the Copyright Act does not only regulate the right of copying, it also addresses the rights that adhere to the physical copy that was sold—and grants to that owner a broad right to dispose of it as he or she sees fit. The CRRA, by contrast, places just such a limitation on that subsequent owner's rights. That is different from bilateral, "downstream" contracts by which owners agree to grant, or waive, subsequent royalty payments, because that is a question of private ordering, not a normative law:

Without § 109(a), copyright holders would not need to bargain for downstream control; they would simply sue for copyright infringement as soon as their products entered secondary markets.

The District Court also addressed the larger topic of these subsequent royalties, the concept of droit de suite. The court took the view that because Congress has considered, but not adopted droit de suite laws, the First Sale Doctrine enshrined in the language of § 109 was the final word on downstream rights.

This interpretation is entirely understandable. The problem is that the District Court has admittedly sided with copyright scholars and against an earlier decision by the Ninth Circuit on that very point. In 1980, the Court of Appeals decided Morseburg v. Baylon. In Morseburg, the Ninth Circuit addressed essentially the same challenge: that the language of the 1909 Copyright Act (which is similar to § 109 of the 1976 Copyright Act now in effect) preempted the CRRA.

In Morseburg, the Ninth Circuit noted that the Supreme Court had approved of other California regulations about music piracy. Morseburg upheld the CRRA as not preempted:

The Copyright Clause does not prevent the enactment by California of the Resale Royalties Act. Nor has the Copyright Act of 1909 explicitly forbidden the enactment of such an act by a state. A bar by implication cannot be found in the word "vend" in section 1 of the 1909 Act. Doubt concerning the correctness of this conclusion disappears when the rights of the artist who creates a work of fine art are analyzed. Prior to the initial sale he holds title to the work and, assuming proper steps have been taken, all rights given to him by reason of his copyright. None of these provide the right afforded to him by the California Resale Royalties Act. This is an additional right similar to the additional protection afforded by California's anti-pirating statute upheld in Goldstein. It is true that under the California Act the right it bestows cannot be waived or transferred. This limits the right created by state law but not any right created by the copyright law.

Morseburg v. Baylon, 621 F.2d 972, 977 (9th Cir. 1980).

The 1909 Act read: "nothing in this title shall be deemed to forbid, prevent, or restrict the transfer of any copy of a copyrighted work the possession of which has been lawfully obtained." The current § 109 reads that an owner is "entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy." It is the same law, one is phrased in the negative, one in the positive.

Yet the District Court yesterday held that Morseburg did not dispose of the question, because more recent Supreme Court interpretations of the First Sale Doctrine undermined its rationale—in particular the 2013 decision in Kirtsaeng v. John Wiley & Sons, Inc. The District Court held that in this light, "Indeed, in contrast to a law that merely protects a category of work left unprotected under the Copyright Act, the CRRA encroaches on a subject matter Congress expressly addressed in § 109(a)." Kirtsaeng had held "absurd" the contention that downstream control could be reconciled with § 109.

Lastly, the District Court looked to the Ninth Circuit opinion last year, which "rejected Morseburg's premise that the CRRA "in no way restrict[s] the transfer of art works," [] by holding that the CRRA does, in fact, "facially regulate[] . . . commercial transaction[s]" between resellers and buyers." citing Sam Francis Found. v. Christies, Inc., 784 F.3d 1320, 1324 (2015). That quote from last year's case is a tortured ellipsis (and it is also inaccurate). None of the language in that sentence appears on p. 1324 of last year's decision. In fact, on the previous page, the Sam Francis stated: "the state statute facially regulates a commercial transaction that 'takes place wholly outside of the State's borders.' Id. Accordingly, it violates the dormant Commerce Clause." Sam Francis, 784 F.3d at 1323. In any event, the District Court felt that Sam Francis dispensed with the logic that had led to Morseburg.

The District Court also found express preemption problems by virtue of § 301 of the Copyright Act, which states that:

[A]ll legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106. . . are governed exclusively by this title. . . . [N]o person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.

Here, the District Court held, "the CRRA does no more than broaden the distribution rights granted under the Copyright Act. By requiring sellers to remit royalties to the copyright holders, the CRRA fills the gap that Congress intentionally left open in § 109."

But that is hardly clear, because it only follows if the First Sale Doctrine analysis that ignores Morseburg is correct, which is far from obvious.

I had a professor in law school who often said "when I see that my opponent's brief relies primarily on treatises or law review articles, I know I've got them." That is, in a way, what is going on in this case. The opinion is particularly persuaded by treatises like Nimmer on Copyright, not the precedent of the Court of Appeals by which it is bound.

More remarkably given the importance it assigns to the intent of Congress, the District Court rejected the legislative history of the Visual Artists Rights Act of 1990, which included statements in the Congressional Record such as "the law will not preempt a cause of action for a misattribution of a reproduction of a work of visual art or for a violation of a right to a resale royalty." That presumes that as of 1990 the possibility of resale royalty—not already preempted—existed.

The opinion concludes with consideration of a number of other issues raised that need not be reached to make a determination, but made a series of finding in case the Ninth Circuit decides to reach those issues.

There is no question that the District Court's preemption analysis will come under heavy scrutiny on appeal. The Ninth Circuit will certainly be able to decide whether its own opinion in Morseburg is still good law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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