As previously discussed on this blog, the validity of the California Resale Royalty Act (the “RRA,” Civil Code Section 986), a 1976 law that requires resellers of fine art to pay a royalty of 5 percent to the artists behind the works, was challenged in a dispute between a group of artists and Christie’s Inc., Sotheby’s Inc., and eBay Inc. The group of artists, which includes painter Chuck Close, brought three related proposed class actions in 2011 in the Central District of California, Estate of Robert Graham v. Sotheby’s Inc., 2:11-cv-08604; The Sam Francis Foundation v. Christie’s Inc., 2:11-cv-08605; and The Sam Francis Foundation v. eBay Inc., 2:11-cv-08622. The cases each involve allegations that the auction houses failed to honor their payment obligations under the RRA.

The auction house defendants recently filed a motion in the Central District of California arguing that the RRA is preempted by federal copyright law because it “runs headlong” into the first sale doctrine codified in the Copyright Act at 17 U.S.C. § 109(a). On April 11, 2016, Judge Michael Fitzgerald of the Central District agreed, and granted the motion to dismiss.

The court first explored the scope of the first sale doctrine, which historically has limited a copyright owner’s ability to control the distribution of his or her work once it has been sold and placed into the stream of commerce. Judge Fitzgerald then sought to determine whether the defendants’ preemption argument should be evaluated under principles of conflict preemption (where a state law frustrates the intention of or presents an obstacle to the full application of a federal law) or express preemption (where express language in a federal law serves to displace a challenged state law).

The court found conflict preemption should apply, holding that the RRA “stands as an obstacle” to the Copyright Act, and that because the RRA “disrupts Congress’s efforts to balance the interests of copyright holders and downstream consumers, it must be preempted.”  In doing so, the court distinguished contractual agreements not to resell copyrighted works from the restraints on resale imposed by the RRA, finding that “[n]o authority supports the proposition that states can eliminate the first sale doctrine and imbue copyright holders with unprecedented market power, simply because a reseller can enter into a distribution agreement with a copyright holder.”

Judge Fitzgerald acknowledged a 1980 decision where the Ninth Circuit rejected a conflict preemption argument for the RRA, Morseburg v. Balyon, 621 F.2d 972 (9th Cir. 1980), but also opined that recent Supreme Court and Ninth Circuit opinions have impacted its vitality.

Acknowledging that Morseburg might nonetheless preclude its finding of conflict preemption, the court also held that express preemption applied because the preemption provision of the Copyright Act, 17 U.S.C. 301(a), had a preemptive effect on the RRA. The decision, relying on legislative history, found that the RRA “creates garden-variety copyright claims based on a violation of artists’ rights from the distribution of their artwork” and that this led to the “inescapable conclusion” that the RRA was preempted.

While the court’s ruling disposed of all of the plaintiffs’ viable claims in the three related actions, the court noted that it anticipated the plaintiffs would appeal its decision to the Ninth Circuit. We will continue to monitor this dispute.