Addressing the constitutionality of California’s Resale Royalty Act, Cal. Civ. Code § 986 (“the Act”), the U.S. Court of Appeals for the Ninth Circuit held that a portion of the Act violated the dormant Commerce Clause of the U.S. Constitution. The Court remanded for further proceedings. Sam Francis Found. v. Christie’s, Inc., Case Nos. 12-56067, -56068, -56077 (9th Cir., May 5, 2015) (Graber, J.) (Berzon, J., concurring) (Reinhardt, J., concurring-in-part and dissenting-in-part).

The Act generally required 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.” The plaintiffs brought three class actions against defendants Sotheby’s, Christie’s and eBay, claiming that the defendants failed to comply with their obligations under the Act. The defendants moved to dismiss the case arguing, among other things, that the Act violated the dormant Commerce Clause, which prohibits a state from regulating commerce that takes place wholly outside of that state. The district court agreed and granted the defendants’ motions to dismiss, holding that the Act’s regulation of sales outside of California was an impermissible regulation of out-of-state conduct. The district court further held that the offensive provision could not be severed from the rest of the Act, thus rendering the entire Act unconstitutional.

On appeal, the 9th Circuit agreed in part with the district court and held that the Act’s regulation of sales outside of California, even if made by California residents, violated the dormant Commerce Clause. As the 9th Circuit explained, the “Commerce Clause precludes the application of a state statute to commerce that takes place wholly outside of the State’s borders, whether or not the commerce has effects within the State.” Here, the state statute facially regulates a commercial transaction that “takes place wholly outside of the State’s borders.” Accordingly, it violates the dormant Commerce Clause. The 9th Circuit, however, explained that the offending provision could be severed from the Act, meaning that the Act’s royalty requirement for art sales taking place in California stands. The 9th Circuit remanded the case for consideration of the plaintiffs’ other arguments.

In her concurring opinion, Judge Berzon agreed that the Act was unconstitutional as applied to out-of-state art sales conducted by out-of-state agents, but argued that the majority opinion went too far in holding that the Act was unconstitutional as applied to out-of-state art sales conducted by California residents, as no plaintiff was a California resident.

In his dissenting opinion, Judge Reinhardt chided the majority for “not only deciding an unnecessary, highly disputable question regarding California art owners, but . . . decid[ing] it incorrectly.” In Judge Reinhardt’s view, the Act, as applied to sellers of art that reside in California, did not violate the dormant Commerce Clause as the Act dealt with income received by California art owners. Judge Reinhardt concluded his dissent with a call to the Supreme Court to revisit its dormant Commerce Clause jurisprudence, as it is “unfortunate that [it]. . . has compelled [courts] to invalidate the extraterritorial application of such innocuous and beneficial state laws.”

Practice Note: This decision comes less than one month after the introduction of the American Royalties Too (ART) Act of 2015 (H.R. 1881) in the U.S. House of Representatives, which would require an art seller to pay the artist a royalty of the lesser of either 5 percent of the purchase price or $35,000 and would establish a federal copyright infringement offense for failure to pay such a royalty. This bill could become law prior to a final decision in the remand proceedings in this case.