The Gift – Or Sale – That Keeps On Giving (California Royalty Act)

November 3, 2011

Dust off your collection sale check-list and add another set of boxes of bases to cover when you are contemplating the sale or exchange of artwork from your collection. Perhaps in reaction to the dreadful state of the economy, or perhaps in reaction to a sudden urge to press oft forgotten rights, a class of artists has sued eBay, Christies and Sotheby’s for violation of the unique California Royalty Act (California Civil Code section 986) to recoup unpaid royalties on the resale of artwork.

Artists Chuck Close, Laddie John Dill the foundation of the late Sam Francis and the estate of Robert Graham have commenced a suit against eBay, Christies and Sotheby’s alleging the willful violation of the California Royalty Act. While the action is only in its earliest stage the action is seeking class certification in order to represent countless other artists who may have claims under the act stemming from sales by the defendants. Although the complaint seeks unspecified damages, given the prices that each named plaintiff commands for their respective works, the damages could easily reach into the hundreds of thousands of dollars or more. Additionally, the act provides for reasonable attorneys’ fees to a prevailing party. And, as always, the specter of punitive damages always lies in the wings.

The Law

Enacted in 1977, the California Royalty Act (CRA) was loosely modeled on several European laws that provide artists with the right to collect royalties on the resale of their artwork by subsequent owners. The theory is that the artist should share in the reward for the appreciation in value of their created work during their lifetime and for a period of 20 years following an artist’s death. The CRA requires, with only a few exceptions, the payment of such a royalty to the artist in the amount of 5% of the resale price.

Mechanically, the CRA requires the following in order for any artist to be entitled to a royalty payment:

• The seller resides in California or the sale occurs in California;
• The artist is a united States citizen or has been a resident of California
for at least two years;
• The work is an original painting, drawing, sculpture or original work of
art in glass;
• The work sold is for more money than the seller paid for the work;
• The work is sold for a gross price of more than $1,000 OR is exchanged
for one or more works of art or for a combination of cash, other
property and one or more works of fine art with a fair market value of
more than $1,000;
• The work is sold during the artist’s lifetime or within 20 years of the
artist’s death.

The act does not apply if:

• The sale is the initial sale of the work and the legal title of the work at
the time of the intial sale vests in the artist;
• The resale of fine art is by an art dealer to a purchaser within 10 years
after the initial sale by the artist to an art dealer (provided that all
intervening sales are between art dealers).
• The work is stained glass permanently attached to real property and it
was sold as a part of the sale of the real estate to which it is attached.

The seller of the work is under an affirmative obligation to locate the artist and pay the royalty. Well aware of the fact that many sellers may claim that they are unable to locate an artist, the CRA provides a default mechanism for such a claim: should you fail to locate and pay the artist within 90 days after the sale, the seller Is required to pay the royalty amount to the California Arts Council. The California Arts Council will then seek out the artist for payment. In the event that such a success bears no fruit, after a period of 7 years the royalty will revert to the California Arts Council for use in its Art in Public Buildings Program. Note that it never come back to you as the seller.

Not all is completely lost, however. The artist does have some slight obligation to investigate any sales. The CRA provides that should the artist fail to bring an action within 3 years of the date of sale, or within 1 year after the discovery of the sale (whichever time period is longer), then the artist will lose its ability to pursue the action. This may be an Achilles heel for many a claim. It may not be much, but any silver lining for a seller at this point is worth mentioning. And remember, this royalty right can only be waived in writing by an artist.

Potential Challenges to the CRA

Since its enactment, several theories have been posited as to why the act may not survive an aggressive challenge – many of which are certain to be championed by the defendants in the current case.

The foremost challenge may very well be sounded in pre-emption principles. Although there is a precedent that indicates that the 9th circuit believes that the act is constitutional and does not infringe on the federal government’s right to make and regulate copyright law, this idea may need to be revisited. You see, the precedent relied upon for this many years is based on a decision that interprets the 1909 Copyright Act not the current Copyright Act of 1976 (which took effect in 1978). The Copyright Act of 1976 took great pains to indicate that the federal copyright law is the exclusive law on copyright and effectively pre-empts all state attempts to regulate and legislate copyright matters. What does that mean? Well, essentially, if the federal government already provides for a regulation, a state is not allowed to legislate matters that have already been addressed by the federal legislation. Such a meaty discussion will undoubtedly be a primary battleground in this suit.

Why You Care

Museums, collectors, auction houses, and resellers should be cautious when engaging in the sale of any work that falls under the “fine art” definition of the CRA. “Fine Art” is defined broadly as “an original painting, sculpture or drawing or an original work of art in glass.” Such a definition covers a large canvas of works that would be included in any museum collection.

Any sale or exchange of works from a collection exceeding $1,000 should be examined in light of the CRA provisions. Add a check-list to include inquiry as to: (i) whether the seller is a resident of California or whether the sale occurred in California; (ii) whether the artist is alive (or if not the date of death of the artist); (iii) whether the artist is/was a U.S. citizen or had resided in California for two years; (iv) whether the sale/exchange is for more money than for which your institution acquired the work.

Armed with the knowledge that the extra check-list questions supply, your institution will be in a better position to plan for the payment of the 5% royalty, negotiate with the artist (if the initial purchase is from the artist) for a waiver of the royalty, and avoid the potential for attorneys’ fees and interest as a result of the failure to abide by the CRA.

Anything is helpful to anticipate and prepare for the gift that just may keep on giving.


Twitter Squatting – A Growing Concern

August 26, 2009

Recently a client of mine forwarded an email it received from a Twitter user which read in part “I have been told that your company uses the ___________ name in its ordinary course of business.  I happen to own the _____ name and would be willing to sell this name to you at a mutually agreeable price.” 

It turns out that the Twitter user had registered a Twitter name that was identical to a long standing federally registered trademark of my client.

Such a phenomenon appears to be growing.  In May of this year baseball manager Tony LaRussa was forced to file a lawsuit against Twitter and Does 1-25 in order to stop a Twitter user from using the Twitter name “TonyLaRussa”.  The case was settled shortly thereafter, however, such a filing highlights the growing issue of name squatting that Twitter, and the public at large will need to confront.

Back in the infancy of the web, domain name squatting was a significant issue.  To that end, several major companies paid millions of dollars to retrieve domain names containing either the company name or valuable trademarks.    The enactment of anti-cybersquatting laws quickly curtailed this action.  It appears that enterprising people have now decided to push the limits of name squatting with Twitter.

To Twitter’s credit, Twitter has a specialized “Name Squatting” page on which instructions exist on how to report a name squatting incident to Twitter – www. twitter.zendesk.com/forums/26257/entries/18370  .  Twitter indicates that “Selling free user names is against Twitter Rules.  Accounts created in a serial fashion will be suspended, and user names will no longer be available.”  Further Twitter indicates that: “Attempts to sell or extort other forms of payment in exchange for user names will result in account suspension.”  Laudable intentions by Twitter, but do they really work?  In my case, it remains to be seen.

What this means for museums is that some vigilance is required to protect a person from scooping a Twitter name and using the name for less than admirable purposes – i.e. “hate” tweets for your museum, or otherwise using the Twitter name to intentionally, or unintentionally, deceive recipients as to the origin of the “tweets”.  Remember that even if you are successful in recovering the Twitter name from a third party, any tweets may remain on the Internet and searchable through any search engine.  Thus, the damage may be mitigated but not eliminated.

All museums may want to consider obtaining a Twitter account bearing the museum name.  It is free and it may just help prevent unwanted name squatting by a third person.


Deadline Extended: March 1, 2010 Proposed New Deadline for Data Seucity Compliance (MA)

August 26, 2009

Once again, businesses handling the personal information of a Massachusetts resident have been granted an extension to comply with the Massachusetts Data Security Regulations.  The proposed new deadline for compliance is March 1, 2010. Personal information is defined as first name (or initial) and last name, combined with social security number, bank account number, credit card number or other financial account number.
 
On August 17, 2009, the Office of Consumer Affairs and Business Regulation (OCABR) released revised regulations which Undersecretary Barbara Anthony believes will “feature a fair balance between consumer protection and business realities.”  According to OCABR, they listened to the concerns of small business leaders and “understand[s] that there were issues regarding the impact these regulations have on those companies.”
 
The new regulations adjust the compliance requirements to reflect the size, business scope, amount of stored data maintained by a company, the available resources to a company for compliance, and the need for security and confidentiality of both consumer and employee information. As a result, the new regulations are “risk based in implementation” rather than at the time of enforcement, which is a reversal of the previous regulation mandate.  This will allow businesses greater flexibility in tailoring an appropriate program that fits each individual business.
 
In addition, the regulations are now technology neutral, which is an acknowledgement that technical feasibility will play a role in determining what many businesses must do to protect data.  This is a welcome departure from the original regulations and an indication that OCABR recognizes the significant economic and practical issues facing many businesses, large and small, in complying with these regulations.
 
Despite this temporary reprieve for compliance, businesses handling the personal information of Massachusetts residents should begin the process of evaluating their data security measures and implementing the mandated comprehensive written information security program (“WISP”).  Prince Lobel’s Privacy Group is working with clients to provide the necessary guidance for developing and implementing WISPs and documenting compliance with the new regulations.
 
A public hearing on the proposed regulations will be held on September 22, 2009 at 10:00 AM at the Transportation Building, 10 Park Plaza, Boston, MA.  


The Artful Benefits of the 1031 Exchange

August 26, 2009

Often, museums are fortunate enough to acquire a piece of artwork or a full collection at a wonderfully low price. Sometimes equally as wonderful, the artwork or collection may suddenly experience a dramatic rise in value, especially in a volatile market environment. Such a confluence of good luck can be extremely beneficial for a museum. However, such bounty can sometimes turn into a fiscal nightmare should a museum wish to sell an appreciated piece of artwork or entire collection. For example, Museum A purchases a piece of work for $500,000.00 in 2005. In 2009 Museum A wishes to sell the artwork and has a buyer willing to pay $2,500,000.00 for the work. Museum A is staring down the barrel of a maximum capital gain tax rate of 28% (which is dramatically higher than 15% rate for other capital assets) on the $2,000,000.00 gain. That is a large tax nut to swallow. Museum A, however, could take advantage of IRC (Internal Revenue Code) Section 1031 to help defer this gain and provide the museum with increased buying power. Like any other interaction with the tax code, the 1031 exchange does come with some threshold requirements. First, the art work being sold must have been held for productive use in trade or business or held for investment purposes. If this initial threshold requirement can be met, you are off and running. Second, and perhaps more complicated in the art arena, is that the taxable gain derived from the sale proceeds of the qualified sold artwork must be rolled into the purchase of a “like-kind” asset. Here comes the rub: the IRS is still slightly unclear as to what is a “like-kind” exchange when dealing with artwork. The quality of the artwork is not taken into account when making the “like-kind” analysis. Rather, the IRS struggles with whether the purchase of an artwork in a different medium would qualify as a “like-kind” exchange for 1031 purposes. For example, can a Monet be exchanged for a Rodin sculpture? Maybe. Unfortunately, such a decision is rather subjective. Third, there are very stringent timing requirements in a 1031 exchange. For instance, the replacement artwork for the sold work must be unambiguously targeted and designated in writing no later than 45 days after the sale of the relinquished artwork. Additionally, you must take possession and ownership of the replacement artwork no later than 180 days after the date of the transfer of the relinquished artwork. Finally, the replacement piece of artwork needs to be of a value equal to or greater than the relinquished artwork (thus allowing you to use all of the taxable gain for the purchase, and thus maximizing your tax savings). The 1031 exchange is becoming more popular in the art world. However, proper planning and advice must be sought prior to initiating such a tax saving maneuver.


When the Unthinkable Happens – Museum Shut-Down

January 28, 2009

Brandeis University’s decision to “boost endowment” by closing the Rose Art Museum has been met with shock and dismay.  According to the Wall Street Journal, Tony Pals of the National Association of Independent Colleges and Universities called the move “the most severe cost-cutting step” a university has taken since the economic downturn.  Who could disagree with such a statement?  The collection itself is worth approximately $350 million dollars, according to Michael Rush, the museum’s director.

This situation is not, however, a first of its kind.  Several schools, including Randolph College in Lynchburg, Virginia and Fisk University in Nashville Tennessee have resorted to such drastic measures in recent times.  While Randolph College moved forward, after legal challenges were dropped, with the sale, the Fisk University situation remains in flux.

It is important for all museums and colleges/universities to be aware of the significant risks associated with such a tactic such as breach of contract actions by donors and allegations of charitable intent violations.  At the very minimum, a museum must be fully conversant with donor contracts and trusts before undertaking a wholesale auction of its prized work.  Rigorous deaccession policies and notice requirements should be implemented and followed by museums to help mitigate donor angst and donor lawsuits.  I always recommend that donor agreements include certain language that would address a catastrophic event, such as a museum closing.  Although this may not be an immediate concern at the time of the donation, the uncertain economic times call for heightened diligence.  At the very least, you will have had the conversation with your donors about the potential for a catastrophic event, however unlikely. 

In light of the economic crisis and the economic strain placed on donors and museums alike, now is a perfect time to review your donor contracts, deaccession policies and overall museum purpose.  Such a review will not only help ease any latent concerns, it will enable you to adjust your documents and policies to meet the potential for a catastrophic event.


Cultural Branding

January 14, 2009

A recent article in the Wall Street Journal’s Leisure & Arts section (January 13, 2009) highlighted a novel approach to museum marketing and cultural branding.  Italy has called upon the corporate world in an attempt to boost the visibility, value and customer satisfaction of visitors to Italy’s 464 nationally owned museums.  Mario Resca, a corporate “self-described turnaround specialist”, has been tapped to improve the physical condition of Italy’s museums, improve museum interactivity and to “add value” to the experience of all visitors to the national museums.  Sounds like a noble endeavor, right?  Well, a 7,000 person petition, signed by curators of such storied institutions as the Louvre and the Metropolitan Museum of Art has served as one of the welcome gifts for Mr. Resca.  The concerns of his detractors and the petition signatories is that Mr. Resca will turn the museum collections into a “negotiable commodity” while introducing “a process of disposable consumerism” into the cultural history of Italy.

According to the Wall Street Journal, Mr. Resca does speak about “benchmarking” and certain business alliances, jargon which is often harsh and unusual in certain museum cultures.  Additionally, Mr. Resca has indicated a desire to “make Italian culture a brand, like Ferrari’s Formula One racing team.”  From a purely academic viewpoint, Mr. Resca’s ideas may appear to infringe upon what many feel is sacred about art and the function of museums:  an escape from the consumerism into an aesthetic experience that serves to preserve our culture while stimulating our senses.  From a practical and business standpoint, especially in light of today’s economic trials, Mr. Resca’s ideas may actually help to highlight the essential function of museums and custodians of national culture, while enhancing the overall experience of each and every visitor to a museum under his watch.

The results of this new approach are yet to be determined.  It will be an interesting case study to watch to determine whether Mr. Resca can strike the delicate balance of preserving the sacred function of the museum while promoting and marketing the cultural heritage of Italy.  Stay tuned….


Privacy Law Extension Dates

November 25, 2008

Massachusetts recently responded to an outcry from the business community in regard to the new privacy regulatiosn promulgated by the office of consumer affairs.  An earlier blog entry summarized the new requierements.  Here are the new deadlines:

Deadline Extension

The Office of Consumer Affairs and Business Regulation (OCABR) has extended its January 1, 2009 deadline for compliance with the newly promulgated Massachusetts privacy regulations.  According to OCABR, the extension of time will assist businesses in implementing the required measures during this economically uncertain time. 

The new standards deadlines are:

  • May 1, 2009 for general compliance.  This has been changed from the original deadline of January 1, 2009.
  • May 1, 2009 for ensuring that third-party service providers are capable of providing safeguards for personal information and for executing contracts with third-party providers to provide such safeguards.  This has been changed from the original deadline of January 1, 2009.
  • May 1, 2009 for encryption of company laptops.  This date has changed from January 1, 2009.
  • January 1, 2010 to receive written certification from third-party service providers that they have complied with the new Massachusetts privacy regulations.  This will assist businesses in educating their third-party service providers, many of whom may be located outside of Massachusetts, or, replace non-compliant third-party service providers as required by the regulations.  This date has been changed from January 1, 2009.
  • January 1, 2010 for the encryption of all other portable devices, aside from laptops, such as memory sticks and PDAs.  This has been changed from January 1, 2009.

Most Museums in Massachusetts and even Museums outside of Massachusetts will need to comply with the regulations.  Any Museum that collects the personal information of a Massachusetts resident is subject to the regulations.  “Personal Information” refers to a Massachusetts resident’s first name and last name or first initial and last name in combination with any one or more of the following:  (a) Social Security Number; (b) driver’s license number or state issued identification card number; or (c) financial account number, or credit card or debit card number.  If you collect any of this information int he course of accepting memberships, accepting donations or from sales in yuor retail shop or online store, you must comply.


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