ROYAL INSTITUTION OF CHARTERED SURVEYORS THE ARTS SURVEYOR APRIL 2012 ART RESALE ROYALTY LAWS AMERICA AND EUROPE ALEXANDRA DARRABY DISCUSSES THE NEW UK RESALE REGULATIONS [Excerpted] Alexandra Darraby Alexandra Darraby is the principal in the Art Law Firm, an international art law practice. A former gallery owner and art law professor, she has taught appraisal practice and advised American appraisal societies. The author of Art, Artifact, Architecture And Museum Law, she chairs Intellectual Property in the International Section of the American Bar Association.

2012 UK Resale Right Regulations

On 1 January, 2012, UK Intellectual Property Law, Statutory Instrument (SI) 2011 No 2873, became law and supplements the UK’s Artist’s Resale Right Regulations, SI 2006 No 346. Artists and their heirs and beneficiaries for up to 70 years after the artist’s death are owed money (a royalty) on every resale of art that satisfies the UK regulations. A resale royalty is owed if the same artwork sells multiple times, regardless of whether the sales occur in short time span or over the course of the duration of the resale right.

Common law and civil law

Monies owed to artists based upon resales of their works as a matter of law and policy are unknown in common law. This civil law resale right, known as the droit de suite, is part of the droit moral, a civil law concept known as moral rights, imported into UK common law because the UK is a member of the European Union, and thus subject to civil law directives of the European Commission (EC), including the Resale Right Directive (2001/84/EC). This directive is based on Article 14ter, a resale right provision in an international copyright treaty referred to as the Berne Convention.

The US is a member of the Berne Convention, but the US Congress decided in the 1980s that an American resale law was not necessary to satisfy its membership and to harmonise its laws with the Berne Convention. The UK, however, has Member responsibilities of EU compliance. Both the 2006 and 2011 UK resale regulations are the UK’s responses to harmonise common law with the EU Directive.

What is a resale right?

A resale right is the right to collect an added cost on a sales price on the resale of certain artworks, payable to a living artist and the artist’s heirs or beneficiaries. In California and the UK, this add-on cost is called a resale royalty. The artist is entitled to a resale royalty on each and every qualifying resale of art. In the UK, collecting societies are authorised to manage the royalties, if the artist so chooses, in return for a fixed fee or percentage of the royalty.

The UK regulations expressly tie the resale right to resale of copyrighted works. The California law is silent on copyright. In fact, certain artworks that would constitute ‘fine art’ for the purposes of the California law would not be defined under American federal copyright law as ‘works of original authorship’, a requisite for American copyright ownership.

What type of artworks are covered by resale rights?

UK Regulation 4(1), based on the EU Directive, and California law defines broadly the types of artworks subject to the resale right. California amended the Resale Royalty Act to include glassworks, but as the statute has not been challenged in a court, it remains to be determined whether other works, like new media, techno-based works, or ceramic art, as examples, would qualify. UK Regulation 4(2) contemplates ‘copies’ such as editions of prints or sculptures, commonly called ‘multiples’ in the US, by opening the door for copies of works. The right thus applies to the “copy if it is one of a limited number…made by the author or under his authority”.

Duration of the resale right

In the UK, the new 2012 law makes the royalty payable to the artist’s heirs and beneficiaries for 70 years after the artist’s death (in Copyright Bar parlance, this is referred to as ‘life plus 70’). The extension of the resale right to heirs makes the UK term of the resale right the same as the copyright term. In California, the resale right continues by state statute for 20 years after the artist’s death, or life plus 20. This term is inconsistent with the American term of copyright for natural persons.

Can buyers and sellers contract out of the resale?

The resale amount owed, whether in California or in the UK, is established by law and is non-waivable and non-negotiable. A willing buyer and a willing seller (or willing artist) cannot opt out of the resale, or reduce the amount owing.

Who is liable for payment of the resale?

The resale royalty in California is imposed by law on the seller, unlike the UK where the resale is a joint and several liability owed by the seller and the ‘relevant person’ listed as the seller’s agent, or if none, the buyer’s agent, or in the absence of that agency, the seller and buyer. A key issue in the challenge to the California law is who is the seller for purposes of owing payment – the auction house, dealer or ultimate collector? The California statute does not define the terms ‘seller’ or ‘agent’. One argument is that the collector who consigns the artwork to an auction house for sale like a collector is not the ultimate seller, because a separate provision of the California law requires auction houses, galleries and other agents to find the artist and pay the 5% royalty.

Auction sales

In the UK, certain auction houses describe the resale right and how the royalty will be collected at the time of purchase. Christie’s, for example, has imposed the liability on the buyer alone.

Is the resale right imposed only on ‘sales’?

The trade name for the resale art market is the secondary market, but the California law and UK regulations may apply more broadly. The UK regulations refer to “any sale of the work which is resale subsequent to the first transfer of ownership by the artist,” defined as one in which the resale price is at least £838 (€1,000) and either the buyer or seller, or their respective agents, are “acting in the course of a business of dealing in works of art….”

It is important to note that the resale right in the UK applies not just to the artist’s first sale, but to various types of transfers initiated by the artist.

How is the resale royalty calculated?

The amount of the resale is calculated by applying a factor percentage to the total sales price. In California, this is a flat rate 5%. In the UK, SI 2011/2873 3(3) provides for an inverse sliding scale based upon increasing sales price increments, denominated in euros in the text of the UK regulations. For sales from £0-41,900 (€0-50,000) the resale is 4% decreasing to 0.25% for sales above £419,000 (€500,000). Some EU members impose 5% for sales under £4,190 (€5,000): others exclude from the resale right lowend sales under a certain minimum, ranging from £1,257-2,514 (€1,500-3,000). In the UK, resales less than £838 (€1,000) are exempt from the royalty right. In California, no resale royalty is owed for resales at $1,000 or less.

What is the ‘sale price’ upon which the resale amount is based?

Californian law does not define ‘sale price’. According to UK Regulation 3(4), the sale price “is the price obtained for the sale, net of the tax, payable on the sale, and converted into euros at the European Central Bank reference rate” on the contract date. VAT is excluded from the right and is not part of the
royalty calculation.

Are auction premiums part of the ‘sales price’?

The auctioneer calls out the ‘hammer price’ after the final bid is accepted, not the total price owed by the buyer with the premium add-on. However, certain auction price indexes include the premium in the published auction sales price.

Christie’s in the UK has decided that the hammer price is the sale price for purposes of calculatingthe royalty, thus excluding the premium from the resale calculation. Neither California law nor the UK regulations expressly address auction premiums.

In the California litigation, the artist contended that the seller owed 5% of the hammer price plus 5% of the buyer’s premium, which could be as much as 20% added to the hammer price. Should an artist be owed a resale on a post-sale administrative cost imposed by the auction house that is controlled by and paid to, the auction house for its own return, as part of the moral right of resale? No American court has yet ruled on this.

Do dealer discounts reduce the ‘sales price’?

Galleries may offer certain collectors, museums, architects and designers a reduced price in the form of a discount or offset. Is the ‘sales price’ for calculating the resale based upon the net price after deducting the discount, or the invoice price prior to deducting the discount? The only aspect of the ‘net’ mentioned in the UK regulations is taxes, which are expressly excluded from the sales price for purposes of calculating the resale. Thus, if the price were £83,800 (€100,000) and the discount were 10%, is the royalty owed on £83,800 booked or £75,420 (€90,000) paid?

According to UK Regulation 3(4), the sale price “is the price obtained for the sale, net of the tax, payable on the sale, and converted into euros at the European Central Bank reference rate” on the contract date. VAT is excluded from the right and is not part of the royalty calculation

Is there a cap on the resale owed?

In the UK, the total resale royalty payable on any single sale cannot exceed £10,475 (€12,500). In California, there is neither a sliding scale nor a cap. Thus on a $10m resale under California law, the seller owes a hefty royalty of $500,000. If the resale were made by an auction house and the buyer’s premium was hypothetically 20%, an additional $100,000 could be owed. In the UK, by comparison, the royalty owed under intellectual property (IP) 3(3) would max out at £8,694 (€10,375) and for any resale the royalty could never exceed £10,475 (€12,500).

Is a royalty due when art is traded without the exchange of money?

It is not uncommon for collectors to barter works or trade with galleries or dealers. In the California case, the artist claimed a resale royalty on the value of a trade of various works, of which his work was one piece. Neither the UK regulations nor the California law address non-monetary barter, in which noneconomic factors and often multiple works are bundled together to close the deal. Under UK regulations, trades appear to create a resale right if undertaken by one “acting in the course of a business of dealing in works of art…” Appraisers may well be called upon to test and provide values, even in trades where the dealers have set a ‘price’ for an individual object in a bundled trade.

The California law refers to royalties imposed on sales, except for certain excluded transfers between galleries and dealers. UK Regulation 3(5) makes clear that a royalty is owed where the work transfers by a will or intestacy, is distributed through the artist’s estate, or disposed of by a receiver or trustee in bankruptcy winding-up liabilities on the artist’s estate.

Both California and the UK exclude the ‘first transfer of ownership’. In California, where primary market operates largely on consignment, the sales by the gallery representing the artist, which hold the work as consignees, are implementing the initial transfer from the artist to the buyer upon the sale. No resale royalty would be owed.

However, under the UK law, a gallery that buys inventory from the artist and then sells it, even though this is the first non-artist sale to a third party, would be subject to the royalty. This highlights the common practice of many galleries to pay artists an advance against sales or purchase to support the artist before or after an exhibition. Dealers and artists need to know how to structure this form of financing in view of the resale obligations.

Does the resale royalty apply to donated gifts to museums?

The US system of federal income tax permits individual taxpayers to deduct from their personal income tax liability charitable contributions to qualified
organisations like hospitals and museums. This is a significant effort by the Internal Revenue Code to incentivise transfer of private assets to arts institutions and museums, which do not receive governmental funding in the same way as UK museums.

The California plaintiff contended that the resale royalty should apply to artwork donated to museums. In that scenario, collectors and the collectors’ estates would owe the artist or artist’s heirs 5% of the appraised value of the donation, even though no ‘sales’ were taking place. In a private market-driven art market, this means that for donations, collectors would not recoup any financial benefit from purchasing the artwork, nor would they participate in its investment profitability, and their philanthropy would be subject to 5% of the appraised value of the donation.

Here is where it gets interesting for appraisers, particularly for artists whose works are singular, unique, do not have an established market or lack reasonable comparable markets (e.g. site-specific works, installations, as well as innovative new media and technological works, if deemed to be covered).

Would the royalty be calculated on the appraised value? Would there be differing appraised values, with the artist asserting higher values? Who will be responsible for the administrative costs of assessing non-sale transfers? What about the privacy afforded donors: are philanthropic donations of artwork going to bear the additional costs and scrutiny?

Art owned by a British collector may be viewed in Dubai, auctioned in Europe and 
sold to a collector in Shanghai

Global changes in art markets

The 21st century is the era of a global art market. From the 1970s-2011, dramatic changes in the way art is bought and sold on the internet have altered appraisal and trade more than any trade practice during the 500 years between the Renaissance and the 1970s. Today an appraiser of contemporary and modern art, to which the resale applies, must examine and evaluate world auction prices.

The internet, the global price margins on art, the published price indices, mean art owned by a British collector may be viewed in Dubai, auctioned in
Europe and sold to a collector in Shanghai, all of which would affect the artist’s market around the globe and impact the galleries dealing in the work, the museums promoting it and the collectors purchasing it.

Auction houses like Christie’s, Sotheby’s and Bonhams launch international tours of important collections, post and publish glossy catalogues, exhibit and conduct sales on the internet and travel collections to exotic international destinations for museum-like public viewings. A resale royalty imposed in California on art sold inside and outside California and in the UK impacts not only the country and the art community where it is imposed, but the entire art trade.

In the next part of this article, we will consider the resale right in other EU countries, the conclusions of the EU on the economic efficacy of the right, the practical applications for UK appraisers, including how to communicate and disclose to clients the royalty in the valuation, and guidelines for best practices regarding the royalty in a professional appraisal practice.                

Further information 
www.artlawfirm.com
Alexandra Darraby is an American art lawyer in private practice
This email address is being protected from spambots. You need JavaScript enabled to view it.

ROYAL INSTITUTION OF CHARTERED SURVEYORS THE ARTS SURVEYOR JULY 2012 APPRAISAL PRACTICE & ART RESALE ROYALTY LAWS PART 2 OF ALEXANDRA DARRABY'S ARTICLE ON THE ARTIST'S RESALE RIGHT DIRECTIVE [Excerpted] Alexandra Darraby Alexandra Darraby is the principal in the Art Law Firm, an international art law practice. A former gallery owner and art law professor, she has taught appraisal practice and advised American appraisal societies. The author of Art, Artifact, Architecture And Museum Law, she chairs Intellectual Property in the International Section of the American Bar Association.

Resale royalty right as an economic factor

The EU asserts that the art market in 2010 was €43bn, a staggering global economic factor, considering that art is often portrayed as an elite market for the well-heeled and well-connected, with interesting, but marginal, economic indicators.

The EU’s market share of 2010 global sales were a commanding €16m or just under 40%, with the US holding a 34% share followed by China’s share at 23%. A preliminary report, The Report on the EU Resale Right Directive, published in 2011 by the European Commission1, lists almost 60,000 art businesses in the EU as of 2010, including 4,000 auction houses and 55,000 art traders. More than 270,000 people are employed directly in this trade according to the report, plus an estimated 110,000 or more in ancillary services, a conservative number depending on what businesses are included.

The resale royalty adds up to €2.1bn of this pie based on fine art auction sales: the figure would be higher if the data were calculated for galleries and private dealers. What is the art appraiser’s role in this monetary brew of prices, values and royalties?

One court’s ‘art’ is another court’s ‘not art’

The ARR is only triggered under certain conditions, as described in Part 1 (The Arts Surveyor, April 2012), and only for certain objects. UK Regulation 4(1)’s preamble cuts a broad swathe, covering “any work of graphic or plastic art,” and continues with examples such as pictures, collages, paintings, drawings, engravings, prints, lithographs, sculptures, tapestries, ceramics, glassware, and photographs.

Would the ceramics of Gertrude and Otto Natzler be considered ‘art’ for purposes of the resale royalty? The UK Regulation 4(1) identifies ceramics in its list of examples. By contrast, California law mentions sculptures but does not refer to ceramics: the State law was later revised to add fine art glassworks, but nothing else.

The UK regulation connects the imposition of the royalty to artworks that are covered by UK intellectual property law, the Copyright, Designs and Patents Act of 1988: in other words, the work must be covered by UK copyright law to claim a right of royalty recovery under the UK ARR. (This is not the case in California where the royalty is unrelated to copyright law, a constitutional problem, the defence argued in challenging the State resale royalty law.) And when the copyright terminates in the UK, the intellectual property right of the resale royalty also terminates.

Would the digital files of performance art or conceptual works fall within UK copyright law? Such determinations are fact-specific and turn upon underlying policy and particular context. But it is instructive to see how courts handle contested definitions as to which objects qualify as works of art for purposes of copyright.

For example, the High Court delivered an opinion through Justice Mann that the stormtrooper helmets featured in the iconic film Star Wars were mere props, not cultural ‘works of art’, and therefore were outside UK intellectual property law. This was a critical conclusion as the helmets were the subject of an American copyright infringement action against Andrew Ainsworth, the original British designer who had been producing and selling them from his studio in Twickenham. Lucasfilm won a $20m judgment in a California federal district court against Ainsworth for infringing Lucasfilm’s copyright under American copyright law, but that judgment was deemed unenforceable in the UK.

One can see how the legislative intent and the underlying policy of ARR could be reasonably urged from contradictory positions.

To whom does the resale royalty apply?

Previous UK Regulation 10(3) established nationality requirements to be eligible for ARR, detailed in a chart referred to under the former law as Schedule 2. UK Regulation 10 amends nationality requirements and revokes Schedule 2.

The current law allows the resale right to be exercised by living artists who at the date of sale are nationals of a European Economic Area (EEA) state, or a non-EEA state, if that state has legislation that provides the right to artists of EEA states and their qualifying successors. If the artist is deceased at time of sale, the resale right applies if at the time of death the artist fell within those two categories, either as living in an EEA state, or from a non-EEA state that has reciprocal resale rights for EEA artists.

RICS Rules of Conduct for Members

RICS members and regulated firms are regulated to provide assurance that they meet the professional, ethical and technical standards expected of them, as outlined in the RICS Rules of Conduct for Members (Version 4, effective 1 January 2011). The five principles of regulation that are applied by RICS are proportionality, accountability, consistency, targeting and transparency. Currently, the RICS Rules of Conduct do not have any additional particular clauses for professional arts appraisal practice. Arts appraisers are regulated for certain types of tax appraisals in the US under the banner of the Uniform Standards for Professional Appraisal Practice (USPAP) that devotes distinct sections to personal property appraisal. So what is a UK arts appraiser to do regarding ARR and the royalty it engenders?

Appraisers are not situated in the secondary market resale firmament, to undertake – or argue – legal positions as to whether or not an object qualifies as a work of art under any particular iteration of law, or whether its resale has traction for imposition of the right. Appraisers fulfil their obligations to clients by transparency and disclosure. This is a general duty that would seem to be met by appropriate conditional language in written appraisals regarding the existence of ARR and its general application to qualifying modern and contemporary profitable sales in the secondary market.

The EU asserts that the art market in 2010 was €43bn, a staggering global economic factor, considering that art is often portrayed as an elite market for the well-heeled and well-connected

 Appraisers are not tasked with the responsibility for determining ARR eligibility or inheritance disputes regarding posthumous ARR holders and qualifying successors in interest. And it is not a role to which professional best practices direct them. Referential notification would seem a reasonable business practice in the ever more complex world of the art transaction (see box).

Is the royalty included in the valuation of an artwork?

Resale royalties are not subject to VAT. The Intellectual Property Office agrees. Auction practice is that the hammer price, also known as the knock-down price, is the sales price. Certain data services that aggregate and publish auction prices report ‘final’ purchase prices, inclusive of the buyer’s premium. It is important that appraisers be cognisant of this. Given the auction house practice of signifying sales price as the hammer price, exclusive of post-sale add-ons like commissions and premiums, it is unlikely that auction houses or even data aggregating services would include royalties in establishing or reporting prices.

What does all this mean for the appraiser when preparing a valuation?

As the EU report on the resale directive makes clear, the royalty right was developed to enable artists to participate in the economic success of their creations in the marketplace. The heirs’ extension provisions mean the benefit from the economic reward repeats and endures for a very long time, indeed the entire life of the artist plus 70 years from the end of the calendar year after death. For those artists blessed with longevity, the duration of reaping the economic reward in the same artwork by heirs and rightful successors could easily be a century and perhaps as long as 150 years.

However, the royalty accrual does not add intrinsic market value to the work of art. In other words, a Lucian Freud painting has an inherent value, the appraisal of which is based upon the painting itself, irrespective of an ARR royalty. The ARR royalty operates as a transactional financial obligation that impedes full realisation of appreciated value in the commercial markets where ARR is imposed. Every new qualifying transaction creates a post-sale value added to the artist’s sunk cost in the original object, but only for the artist and heirs.

From the collector’s vantage point, the ARR can distort value, displace market sales, and undercut competition, financial realities submitted by stakeholders solicited by the EU and acknowledged in the EU report. Based on the little data there is, and the restricted time period of reporting (which includes 

The five principles of regulation that are applied by RICS are proportionality, accountability, consistency, targeting and transparencythe economic downturn of 2008 and the aftermath effects in 2009-2010) the ARR in that preliminary context is not seen as diverting secondary market sales from the EU.

Valuation is based upon evaluating the sales performance of the object in particular and most appropriate markets, a process that functions where practical on comparable sales. The resale royalty has no place in that performance valuation, and ought not to be included in sales prices for purposes of establishing comparables.

UK compulsory collective management

Collecting societies claim 10-20% or more for administration costs to collect the ARR royalties, which are typically deducted prior to distribution of the royalty to a rightful recipient or as otherwise provided by law.

The UK adapted ‘compulsory collective management’: UK Regulation 14(1) provides that the right to receive the money and distribute it under ARR must be done through a collecting society. The UK has two collecting societies for ARR, including the Artists’ Collecting Society (www.artistscollectingsociety.org.uk) and the Design and Artists Copyright Society (www.dacs.org.uk).

Update on the California resale royalty case

The California resale royalty case the author defended in federal court settled out of court after remand to the State court. In autumn 2011, other litigation was filed based on the same California law. Artists such as Chuck Close and artists’ estates, including that of Robert Graham, filed litigation in American federal court alleging they are owed uncollected resale royalties.

The United States District Court in California declared the California Resale Royalty Act unconstitutional on 17 May 2012. Proposed federal bills to introduce a federal royalty are pending.

Further information 
www.artlawfirm.com
Alexandra Darraby is an American art lawyer in private practice
This email address is being protected from spambots. You need JavaScript enabled to view it.