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IP Alert: District Court Holds California Resale Royalty Act Preempted by Copyright Law

April 28, 2016

On April 11, 2016, in Estate of Robert Graham, et al. v. Sotheby’s Inc., the U. S. District Court for the Central District of California issued an opinion concluding that the California Resale Royalty Act (CRRA) was preempted under the Copyright Act of 1976.

The CRRA requires a reseller of fine art to pay the artist a 5 percent royalty as long as “the seller resides in California or the sale takes place in California.” Four years ago, the court concluded that the CRRA’s regulation of sales outside California violated the dormant Commerce Clause of the U.S. Constitution. Subsequently, the Court of Appeals for the Ninth Circuit affirmed, but determined that the unconstitutional portion of the CRRA—the portion applying to out-of-state sales—could be severed from the remaining provisions.

Estate of Robert Graham addressed the remaining provisions of the CRRA. The court determined that two types of preemption were relevant to its analysis: conflict preemption and express preemption. First, citing Montalvo v. Spirit Airlines, the court explained that conflict preemption applies “when a state law actually conflicts with federal law or when a state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress in enacting the federal law.” In this regard, the court observed that the Copyright Act codifies the “first sale doctrine” in 17 U.S.C. § 109(a). Per Quality King Distributors, Inc. v. L'anza Research Int'l, Inc., this first sale doctrine provides that “once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.” The court concluded that the CRRA stood in conflict with the first sale doctrine. As noted in leading treatises on copyright law, the CRRA’s royalty obligation acts as a disincentive for art investors to resell their art, thereby restricting the secondary markets for fine art in California. The court determined that it was not bound by an earlier case under the Copyright Act of 1909, Morseburg v. Balyon, because Morseburg was simply wrong in characterizing the CRRA as a regulation of proceeds and resellers’ income, rather than a restriction on downstream transactions.

Second, express preemption refers to instances where a “preemption clause” in a federal statute expressly displaces the challenged state law. The court concluded that the CRRA was preempted under the express preemption clause of 17 U.S.C. § 301(a) because the CRRA created garden-variety copyright claims premised on a violation of the artists’ rights in the distribution of their artwork.

The court issued a number of additional opinions in this case, including these noteworthy points:
(1) The CRRA was not invalid under the Takings Clause of the Fifth Amendment because California’s redistribution of the interest was not an infringement on traditional property rights. Instead, it was a valid regulation of intellectual property that had been practiced for hundreds of years.
(2) Defendant eBay was not a proper defendant under the CRRA because the CRRA imposed the royalty requirement only on “the seller or the seller’s agent,” and eBay operated neither as a seller nor as an agent for those who sell goods on its platform.

For more information on this decision, please contact Fitch Even partner Alisa C. Simmons.

--Written by Fitch Even trainee Yumi Ito

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