The fate of California’s 40-year-old law to provide artists royalties on future resale of their works faced a barrage of questions from an 11-judge appeals panel Tuesday over whether the law illegally regulates interstate commerce.
New York auction houses, Christie’s and Sotheby’s, as well as eBay, challenged California’s Royalty Resale Act as a violation of the Constitution’s dormant commerce clause.
The 9th U.S. Circuit Court of Appeals judges in the en banc panel in Pasadena fired questions at both sides over whether the law regulated sales in other states, amounted to a tax, violated the copyright law and if potentially problematic portions could be severed to at least a part of the law alive.
“The purpose of the dormant commerce clause is to stem protectionism,” said Eric George, attorney for the artists. “There is zero discrimination in any rule imposed by the California Resale Royalty Act,” he said.
“Actually, regulating any out of state transaction is a per se dormant commerce clause violation, isn’t it?” asked Judge Marsha Berzon.
“That is wrong. It takes more than that,” George said.
The U.S. Constitution gives Congress authority to regulate commerce among the states under the Commerce Clause. Over the decades, judges have said that because Congress has the power, states do not. The unwritten concept that states may not discriminate against one another or burden the flow of commerce between them has become known as the “dormant commerce clause.”
In 1976, California passed the CRRA to require that if a sale takes place in California, or the artist lives in California, they must receive a 5 percent royalty any time their art is resold.
In 2011, artists Chuck Close, Laddie John Dill, the estate of Robert Graham and the San Francisco Foundation, sued Christie’s, Sotheby’s and eBay Inc., accusing them of ignoring the royalty law.
U.S. District Judge Jacqueline Nguyen in Los Angeles threw out the case saying the law regulated the sale of art wholly outside California in violation of the dormant commerce clause.
The artists appealed and won a three-judge panel decision reinstating the law, but then the full court voted to reconsider the case.
Judge Andrew Hurwitz wanted to know if the law applied to auction houses that had no business in California.
Judge Susan Graber asked if California could regulate health standards for hot dogs and then regulate health standards of Nebraska hot dogs without violating the dormant commerce clause.
Attorney Diane Maynard, representing the art dealers, said Nguyen “correctly held that this law is a per se violation of the dormant commerce clause.”
Judge Connie Callahan wanted to know if striking down the CRRA would “undermine the ability of states to impose sales taxes in this age of online sales?”
The outcome will be significant over a wide array of legislation, particularly in California.
In just the past two years, the 9th Circuit has rejected dormant commerce clause violation claims in California laws that regulated carbon fuel standards, banned the sale of shark fin soup to prevent the brutal practice of “finning” sharts and banned sale of foie gras to protect ducks from force feeding to enlarge their livers.
Case: Sam Francis Foundation v. Christies Inc., No. 12-56067