California Royalties Law May not Survive Appeal

     PASADENA, Calif. (CN) - The 9th Circuit seems inclined to strike down a law that allows artists to collect resale royalties when their works appear anywhere from Sotheby's to eBay.
     A three-judge panel met Tuesday in consideration of the cases brought in 2011 by group of artists clamoring for 5 percent royalties due to them under the California Resale Royalties Act.
     Parties to the lawsuit included painter and photographer Chuck Close, 73, known for his massive-scale photorealist portraits; artist Laddie John Dill; heirs of California sculptor Robert Graham; and the foundation for painter and printmaker Sam Francis.
     U.S. District Judge Jacqueline Nguyen ruled for eBay, Sotheby's and Christie's in 2012, striking down the royalties law as violating the commerce clause of the U.S. Constitution.
     Because the Resale Royalties Act effectively controlled commerce outside California, affecting businesses incorporated in New York, Nguyen said the law could not survive its "offending provisions," even if other parts of the statute were lawful.
     "Were the court to merely to sever the extraterritorial provisions of the statute, it would create a law that the legislature clearly never intended to create," Nguyen wrote.
     Eric George, an attorney for the artists with the Los Angeles firm Browne George Ross, urged the appellate court Tuesday to find the statute constitutional.
     If a California resident sells a piece of art in another part of the country, state law trumps the commerce clause, George said.
     Judge Ferdinand Fernandez seemed dubious.
     "The artist is outside the state, the buyer's outside state, the property's outside the state," Fernandez said. "The only nexus is residency in California. And I think you're saying that's sufficient to take care of any interstate commerce question. As long as the resident is in California, you can do anything you want."
     Fernandez was likewise skeptical of the idea that California could collect the 5 percent royalty as a tax or "levy" from an out-of-state business.
     "It's only a tax in somebody's dreams," Fernandez quipped.
     George pushed back.
     "The defendants here have a California presence," George told the panel. "When an out-of-state company has a presence in California - as Sotheby's does here, as Christie's does here - they are subjected to California's law."
     George said Nguyen's refusal to uphold the severability provision of the royalties law was a "clear error." Even if stripped of provisions that regulate sales outside of California, the statute should stand, the attorney argued.
     "There can be no question that the Legislature saw to it that, if part of the statute was deemed unenforceable, that the Legislature still wanted the law to apply," George added.
     Judge Mary Murguia asked, "Aren't there harmful effects to the state's art market?"
     Citing the severance clause, George insisted that the Legislature decided that issue.
     "It still wanted to have the effect of promoting the arts, and doing so even if it meant a cost for those being in California, and selling their art in California - of having to transfer that 5 percent levy," he added.
     Smelling the blood in the water, Sotheby's attorney urged the panel to affirm.
     "The court understands that this statute directly regulates transactions outside of California" and, "as the district judge found, clearly violates the commerce clause," said Steven Reiss of Weil, Gotshal & Manges.
     It would be just as unrealistic for California to collect sales tax from a resident who buys cigarettes in Nevada, the Los Angeles-based attorney said.
     "California could impose a use tax on bringing those cigarettes back to California," Reiss riffed. "But it can't regulate transactions, or sales or activities outside of California."
     Christie's attorney John Russell handled the severability portion of the argument. He told the court California's lawmakers did not intend to craft a law that applied only to art sales in the state.
     "They understood that the art market would collapse," said Russell of L.A. firm Skadden, Arps, Slate, Meagher & Flom. "No one is going to sell to a Californian in any way, shape, or form if it is clear it only has to occur in California. Why would you do that? You could avoid that royalty every time. So, it makes no sense."
     During rebuttal, George urged the court not to break away from precedent.
     "An affirmance of this statute would expand the law where it has never gone before," George said. "There is no dormant commerce clause case that strikes down a statute that wasn't discriminatory and didn't involve price-fixing."
     Earlier in the hearing, eBay attorney John Dwyer of Palo Alto firm Cooley told the court that his client should have been dismissed from the case because the Resale Royalties Act never applied to the retailer.
     As he said in his brief: "First, eBay is not a seller of fine art. It does not own the items bought and sold on its website, it never takes possession of them, and it has no ability to transfer title to those items. Further, courts have repeatedly and consistently held that eBay is not a seller under California law."
     At the hearing, Dwyer said eBay is more "analogous to the Los Angeles Times classified section."
     Judge Randy Smith sat with Judge Fernandez and Judge Murguia on the panel.