Artist royalties case asks en banc 9th Circ.: Can Calif. regulate whole U.S.?

October 31, 2014

On Thursday, the 9th U.S. Circuit Court of Appeals decided that the court needs to convene en banc to decide whether California’s Resale Royalties Act — which grants California fine artists a small percentage of the revenue from resales of their work — runs afoul of the Commerce Clause of the U.S. Constitution. Resale royalties for artists, who otherwise receive no reward from works that have skyrocketed in value since their original sale, is an interesting question in and of itself: Though nearly 80 countries around the world grant artists a piece of the proceeds from such sales, California is the only state in the United States with a resale royalties law. But there’s much more at stake in this appeal than money for artists. The 9th Circuit took the case en banc to resolve a conflict in its previous rulings on California laws that affected out-of-state businesses. The court’s decision in the resale royalties case will shape California’s ability to extend its regulations beyond state lines.

The Resale Royalties law, passed in 1976, requires art resellers such as galleries and auction houses to pay California artists 5 percent of the sale price when their works are resold, even when sales take place outside of California. (There are a bunch of additional conditions, including a set-aside based on sales in California, but you get the gist.) Artists have a right under the law to sue for unpaid royalties, and in 2011 several artists, including the painter Chuck Close, took advantage of that right, suing Christie’s, Sotheby’s and eBay in consolidated cases in federal court in Los Angeles. The defendants moved to dismiss the cases, arguing that the California law violates the dormant Commerce Clause. That doctrine is a corollary of the U.S. Constitution’s clause granting Congress the right to regulate interstate commerce. It holds that states may not regulate commerce outside of their borders.

In an opinion issued in June 2012, 9th Circuit Judge Jacqueline Nguyen, sitting as a trial judge, tossed the artists’ claims, finding the Resale Royalties law unconstitutional because, she wrote, it “explicitly regulates applicable sales of fine art occurring wholly outside California.” Nguyen’s ruling rested in large part on the U.S. Supreme Court’s 1989 Healy v. Beer Institute, which said that “a statute that directly controls commerce occurring wholly outside the boundaries of a state exceeds the inherent limits of the enacting state’s authority and is invalid regardless of whether the statute’s extraterritorial reach was intended by the legislature.”

The artists, represented by Brown George Ross and Greines, Martin, Stein & Richland, appealed to the 9th Circuit. A three-judge panel — Ferdinand Fernandez, Randy Smith and Mary Murguia — heard oral arguments in the case in April 2014. A few months later, at the end of August, they issued an unusual order: The panel asked both sides to brief the question of whether the case should be reheard en banc to address a possible conflict in the 9th Circuit’s application of the Supreme Court’s holding in Healy.

The possible conflict arises from a pair of 2013 decisions from different three-judge panels of the 9th Circuit, both interpreting California laws that impact commerce outside of the state. As it happens, both panels concluded that the laws under their consideration do not violate the dormant Commerce Clause. In Rocky Mountain Farmers v. Corey, the 9th Circuit ruled that because California’s low carbon fuel standard regulates only the California fuel market, the state hadn’t exceeded its intrastate authority; and in Association des Éleveurs de Canards et d’Oies du Québec v. Harris, a different 9th Circuit panel said that California’s ban on the sale of foie gras produced through force-feeding is within the bounds of the U.S. Constitution because it targets all force-feeding, not just out-of-state producers.

The two opinions, however, offered apparently different views of the applicability of the Supreme Court’s broad language on extraterritorial impact in the Healy decision. In Healy, the justices struck down a Connecticut statute requiring out-of-state beer shippers to affirm that the beer they were selling in Connecticut was priced no higher than beer sold in Massachusetts, New York and Rhode Island. The 9th Circuit panel in the foie gras case said that Healy was irrelevant in that case because it applies only to price control statutes in which states attempt to preclude out-of-state producers from undercutting in-state rivals. The fuel standard case, on the other hand, said that courts have extended Healy’s holding beyond cases involving price-support laws.

Does Healy apply to the artists’ resale royalties law — and, by extension to other laws that aren’t based on price controls? The artists argued in their brief on Healy applicability that the foie gras court got it right. Judge Nguyen, they said, should not have extended the Supreme Court’s language in Healy to strike down a law that has nothing to do with controlling out-of-state prices. Christie’s (represented by Skadden, Arps, Slate, Meagher & Flom) and Sotheby’s (represented by Weil, Gotshal & Manges and Morrison & Foerster) said that there’s not actually a split within the 9th Circuit on Healy — and that the circuit’s precedent in the foie gras and fuel standards cases is beside the point since both of those laws regulated commerce within California and the Resale Royalties law impacts sales outside the state. Moreover, Christie’s said, federal courts all over the country have refused to read Healy to apply only to price control cases. (Represented by Cooley, eBay didn’t submit its own detailed analysis, instead adopting the other defendants’ briefs.)

The artists argued for en banc review and the defendants opposed it, so Thursday’s grant is presumably good news for  Chuck Close and his colleagues. But if the en banc 9th Circuit ends up deciding that Healy bars any California law that impacts out-of-state commerce, they’re not going to be the only Californians regretting the result.

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