The California Resale Royalties Law: a Primer

Why Now?

Since enforcement of the law has always been shoddy and its constitutionality has long been in doubt, we wondered why it is just now making news. Part of the reason, one lawyer explained, is the tricky financial calculations that the law sets up. For example, let’s say that a collector sells a work by a California artist for $50,000 and decides to skip out on the resale fee of $2,500. If the artist happened to find out about the sale—always a big if—she could sue, but the legal fees would rather quickly eclipse that $2,500 payment she is owed. A provision of the law requires the losing party to cover the legal fees of the winner, but the risk for such a relatively small sum has discouraged potential plaintiffs.

“Making it a class action lawsuit was very clever,” one lawyer told us of the lawsuit brought by Chuck Close and others against the auction houses. Assuming they can successfully certify their case as a class action suit, a victory would result in resale royalties being owed to hundreds of artists, and would likely easily cover the considerable legal fees that the case is expected to generate.

As for Mr. Grotjahn’s ongoing case against Mr. Valentine, that may be something else entirely. The artist claims that Mr. Valentine has made $3 million off of selling his work, meaning that he stands to gain only about $150,000 in the case of a successful lawsuit. “That just looks like a pissing contest,” one dealer said, arguing that they are actually battling over the credit for the success of Mr. Grotjahn’s career.

The Plaintiffs’ Gambit

Given the issues of constitutionality, the plaintiffs in the ongoing cases are taking an enormous risk, according to some lawyers we spoke with. “This could backfire,” one said. Another lawyer told us that the first thing Sotheby’s and Christie’s are likely to do is ask for the case to be dismissed on constitutional grounds. If the court agrees to do so, we could see a protracted series of appeals. However, if, in the end, the courts side with the auction houses, the law’s reach beyond California could be dissolved. California collectors, then, could complete a sale beyond their borders and avoid the tax entirely. Alternatively, the entire law could be declared unconstitutional, ending resale royalties entirely.

Handicapping Californians?

“California collectors shouldn’t have to operate under different laws,” one dealer told us, saying that having a law that requires one state’s residents to lose five percent on transactions could put them at a significant disadvantage on the global playing field. Five percent may not seem like a lot, but on a $1 million transaction, the seller would need to pay a $50,000 fee—plenty of money to buy a small trove of works by young artists. “People fight about one percentage point in auction guarantees!” the same source said. Five percent, in other words, is far from a small matter for collectors looking to compete with their international brethren.

What Next?

Some dealers proposed the idea of passing a national resale royalty law, which would put all American collectors on the same playing field, and theoretically protect all American artists–at least those that have significant secondary markets (a minute percentage). “I think it’s such a great law,” one dealer told us. “Every state should have one.” But at the same time, other sources noted that the art market is so intensely global these days that such a wide-ranging law could put American collectors at a significant disadvantage on the world stage.

One dealer may have best summed up the larger issue in question in these cases when he said, “Some people think that one of the reasons the art market has thrived so much over the past decades is because it is so unregulated.” These lawsuits could change that, albeit only slightly, but they have tremendous hurdles to overcome first.

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