This article was originally published in The Art Newspaper on December 5, 2023.

A Californian ruling blocking the resale of an Academy Award may bring clarity over transfer of ownership of living artists' work

California's art market growth has been propelled by the sale of living artists' work—that is, the primary market—making the state a particularly relevant space for the development of resale restrictions aimed at protecting artists' careers. In Los Angeles, for example, these restrictions often take the form of language on gallery invoices that gives the gallery a right of first refusal (ROFR) to buy back a work if the collector decides to resell it. Since disputes over ROFRs have tended to resolve before getting to court, it has long been debated whether they are legally enforceable. Such restrictions can deprive property owners of resale profits by limiting the “alienability” (capacity to transfer ownership) of their own property—a traditionally disfavoured concept in US property law.

But we may now have a clearer answer after a recent ruling on a case closer in context to the art market than any previously seen in California. In Juarez v. Ward, a Los Angeles appellate court was asked to decide whether the Academy of Motion Picture Arts and Sciences had a perpetual ROFR to purchase back an awarded Oscar statuette for just $10. The ROFR was tested when an individual owed money by the Oscar recipient sought to collect on a money judgment by asking the court for permission to sell his assets, among them the Oscar statuette.

The court decided in February 2023 that if such a resale restriction is “reasonable” and “made within proper limitations”, it is enforceable—importantly, against not only the contract party but also against a subsequent owner, as long as the restriction was part of a “written agreement” and the subsequent owner had “notice”.

Let us unpack this decision a bit. The first question, whether the resale restriction is “reasonable”, asks whether a valid justification for the restriction exists. The court held that the academy was justified in seeking to preserve its investment in its goodwill: namely, the perception of the Oscar as a one-of-a-kind object incapable of being bought. The court agreed that the potential public sale of the Oscar at issue would harm the academy by diminishing the value of all Oscars and, with them, the academy's general prestige. The second question, whether the resale restriction was “made within proper limitations”, was not analysed in detail by the court. However, the ROFR at issue does have two notable limitations: heirs have the right to acquire the Oscar, and the academy has 30 days after a purchase offer is made to exercise its ROFR.

Protecting investment

The justification for the art world's ROFRs is similar to the academy's: galleries use them to protect their investment in their goodwill, namely their reputation for spotting and supporting art of genuine value in a famously subjective market. It is reputation that entices artists to sign with, and convinces collectors to acquire from, particular galleries. Since an artist's career can be influenced by the owners of their works, a gallery might argue that its thoughtful, private placement of works (which ROFRs enable) is a natural investment in its goodwill, whereas an auction house's public sale of works (which ROFRs militate against) could harm the gallery's reputation, just as the public sale of Oscar statuettes would harm the academy's.

Juarez teaches artists, galleries and collectors, at least in California, that ROFRs can be enforceable in court if they are written, reasonable and within proper limitations. Although the exact language that will satisfy this test is still an open question, and court rulings will be made on a case-by-case basis, the decision offers some guidance. A perpetual ROFR is unlikely to be enforceable if the justification is to prevent flipping shortly after purchase, but a ROFR term of three to five years is likely “reasonable” to prevent the same. “Proper limitations” might include matching the gallery's buy-back price to either that of a willing third-party offer or the then-current fair-market value, along with defining how long the gallery has to decide to exercise its right.

Looking ahead, galleries and artists interested in drafting enforceable ROFRs should do so with the aim of satisfying the Juarez test. Collectors should read all the terms of a sale agreement, negotiate ROFRs as desired and note that any ROFR enforceable against them will likely also be enforceable against their heirs or any subsequent purchasers of a work with notice of it. Finally, consignees, such as secondary-market galleries or auction houses, should require consignors to warrant that no ROFRs are tied to the work in question.

All parties would also be wise to re-examine the terms of invoices and agreements they have already finalised, as the fine print of ROFRs now has clearer weight in California courts.

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