Ninth Circuit Cases Pose The Question: How Far Does The 'First Sale Doctrine' Go?

Author:Mr Webster D. McBride and Elizabeth Beitler
Profession:Hughes Hubbard & Reed LLP
 
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The Ninth Circuit has pending before it for the second time a significant challenge to the validity of the California Resale Royalty Act ("CRRA") stemming from three related cases: Sam Francis Foundation v. Christie's, Inc., Case No. 16-56235 (9th Cir. notice of appeal filed Aug. 26, 2016); Chuck Close v. Sotheby's, Inc., Case No. 16-56234 (9th Cir. notice of appeal filed Aug. 26, 2016); and Sam Francis Foundation v. eBay Inc., Case No. 16-56252 (9th Cir. notice of appeal filed Aug. 26, 2016).

These cases will require the Ninth Circuit to examine the scope of the "first sale doctrine" and determine whether it is at odds with California's attempt to establish economic rights for visual artists on subsequent sales of their works.

  1. Doctrinal Background

    1. The CCRA

      California enacted the CRRA in 1976 for the purpose of offering visual artists similar financial protections to artists in other media.1 The California statute codifies droit de suite (literally, "a right to follow"), which provides visual artists with a royalty each time one of their works is resold.2 The rationale, at least in part, is that visual artists are often disadvantaged by a time-lag between a work's initial sale and the ultimate realization of that work's value.3

      To combat this perceived inequity, section 986(a) of the CRRA provides that, subject to certain limitations, "[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."4

      Notwithstanding several attempts by members of the United States Congress to enact federal resale royalty legislation,5 the CRRA represents the only U.S. codification of such a right at present.6 Nevertheless, droit de suite has been codified in several jurisdictions outside the U.S., including France, England and Australia.7

    2. The First Sale Doctrine

      Section 109(a) of the Copyright Act of 1976 enacts what is widely known as the "first sale doctrine."8 Under the first sale doctrine, the lawful owner of a copyrighted work is entitled to dispose of his or her ownership in that property without acquiring the permission of the copyright owner.9 "[O]nce a work has been sold, the copyright owner has no further right to control the resale of the work, and the new owner is free to dispose of the work as he or she chooses."10 As a matter of policy, the first sale doctrine is an embodiment of the rule against restraints on alienation, a central tenet of property law from time immemorial.11 The question raised by these cases is whether a resale royalty requirement imposes such a restraint on alienation of copyrighted works of art.

  2. Procedural Background

    In 2011, plaintiffs The Sam Francis Foundation, the Estate of Robert Graham, Chuck Close and Laddie John Dill together filed putative class action lawsuits against each of Christie's, Inc., Sotheby's, Inc. and eBay, Inc., alleging "the willful and systematic violation by [each defendant] of its California law obligation [under the CRRA] to pay royalties to U.S. artists and their estates on artworks sold either in California or at auction by California sellers."12

    The defendants moved to dismiss, articulating several bases for the invalidity of the CRRA, including that the CRRA violated the Commerce Clause of the U.S. Constitution, violated the Takings Clause of the Fifth Amendment, and was preempted by the Copyright Act of 1976.13 In 2012, the Central District of California granted dismissal on the sole basis that the CRRA violated the dormant Commerce...

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