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
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