Federal Court Strikes Down California Resale Royalty Act

The U.S. District Court for the Central District of California struck down a California state statute providing for a droit de suite, or resale royalty right, for the benefit of fine artists on the ground that it impermissibly infringed on the U.S. Congress’s dormant power to regulate interstate commerce. Estate of Graham v. Southeby’s, Inc., No. 2:11-cv-08604-JHN-FFM (C.D. Cal. May 17, 2012).

The California Resale Royalty Act (“CRRA”) provides that “[w]henever a work of fine art is sold and the seller resides in California or the sale takes place in California, the seller or the seller’s agent shall pay to the artist of such work of fine art or to such artist’s agent 5 percent of the amount of such sale.” Cal. Civ. Code § 986(a). An artist can waive his rights under the CRRA “only by a contract in writing providing for an amount in excess of 5 percent of the amount of such sale.” Id. The Act does not apply to resales in which the gross sales price is less than $1,000. The CRRA places on the seller’s agent the obligation to withhold the royalty from the proceeds, and to “locate the artist and pay the artist.” Id. If the agent cannot locate the artist within 90 days, the agent must pay the royalty to the California Arts Council, which then is required to search for the artist for seven years.

The U.S. Supreme Court has interpreted the Commerce Clause of the U.S. Constitution to prohibit states from enacting certain types of laws that interfere with the U.S. Congress’s authority to regulate interstate commerce, even when Congress has not acted to regulate the matter in question. One of the consequences of this “dormant” feature of the Commerce Clause is that a state “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.” Healy v. Beer Institute, Inc., 491 U.S. 324, 336 (1989).

The court in the instant case found that,

… the CRRA explicitly regulates applicable sales of fine art occurring wholly outside California. See Cal. Civ. Code § 986(a). Under its clear terms, the CRRA regulates transactions occurring anywhere in the United States, so long as the seller resides in California. Id. Even the artist–the intended beneficiary of the CRRA–does not have to be a citizen of, or reside in, California. § 986(c)(1).

Because the CRRA had the “practical effect” of controlling commerce “occurring wholly outside the boundaries” of California, the court determined that the statute violated the Commerce Clause of the U.S. Constitution. In addition, after examining the legislative history of the Act, the court determined that the California legislature would not have enacted the CRRA. For this reason, any attempt to sever and strike down only the unconstitutional applications of the CRRA and to leave the law intact as to intrastate transactions “would create a law that the legislature clearly never intended to create.” Accordinglym, the court struck down the Act in its entirety.

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