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Shortening California's Reach

By Kari Santos | Jan. 2, 2015

Law Office Management

Jan. 2, 2015

Shortening California's Reach

California's artists' resale-royalty law faces en banc review.

Nothing seems to discourage California lawmakers from extending their reach, even to areas that implicate national commerce. And in every case, it's the Ninth Circuit Court of Appeals that has had to determine just how far is too far.

For example, in 1976 the Legislature attempted to nurture artists through the California Resale Royalty Act (CRRA), which requires payment of a 5 percent royalty for any work of fine art resold during an artist's lifetime. The royalty is triggered under either of two conditions: if the seller lives in Cali-

fornia, no matter where the work is sold; or if the sale takes place in California. In cases where the artist cannot be found, the royalty goes to the California Arts Council.

The CRRA (Cal. Civ. Code § 986) is modeled on a doctrine known as droit de suite, which began in France in the 1920s and is now commonly recognized in most European nations. The doctrine acknowledges an artist's right to share in the profits of works as they pass from owner to owner. Several attempts to introduce resale-royalty legislation in Congress have failed; currently, California is the only state to enact such a right.

The Legislature has taken a broad purview on other issues as well. In 2006 lawmakers adopted AB 32, which targeted global warming and greenhouse gas emissions. Pursuant to that law, the state Air Resources Board approved a Low Carbon Fuel Standard (Cal. Code Regs. tit. 17, §§ 95480- 95490 (2011)) to reduce automobile carbon emissions to 1990 levels by 2020.

Five years later lawmakers sought to end the brutal, lucrative, and rampant practice of "finning" sharks - cutting off the dorsal fin (for commercial use) and tossing the fish back into the sea to die. The Legislature imposed a ban (Cal. Fish & Game Code §§ 2021-2021.5) on the sale or serving of shark-fin soup, a traditional Chinese delicacy, even for fins taken from sharks landed legally and despite an existing federal ban on finning.

In 2012 a federal judge refused to block enforcement of a law enacted by the Legislature in 2004 that banned the sale of foie gras, a traditional French delicacy produced by force-feeding ducks to enlarge their livers. The state law (Cal. Health & Safety Code § 25982) also prohibits force-feeding ducks no matter where foie gras may be produced. In October the U.S. Supreme Court denied certiorari in a petition supported by 13 other states.

Even the Alameda County Board of Supervisors has extended its purview, enacting a Safe Drug Disposal Ordinance that required prescription drugmakers selling products locally to provide disposal bins for unused medicines - in an effort to prevent the drugs from polluting landfills or water supplies.

However, in each case out-of-state companies, farmers - or in the case of shark fins, California's Chinese-American community - accused lawmakers of treading on the prerogatives of Congress by violating the so-called dormant Commerce Clause doctrine. Article 1, section 8 of the U.S. Constitution gives Congress the power "to regulate commerce with foreign nations, and among the several states, and with the Indian tribes." By implication, it denies states the power to discriminate against one another, or to burden the flow of commerce between states. The dormant Commerce Clause doctrine evolved in the courts, driven by concerns that states might enact laws that protect their own products and interests, while burdening out-of-state competitors.

The Ninth Circuit has generally tolerated the Legislature's long arms. In the past 18 months the court has reinstated California's low-carbon fuel standard (Rocky Mountain Farmers Union v. Corey, 730 F.3d 1070 (9th Cir. 2013); refused to enjoin the ban on shark-fin soup (Chinatown Neighborhood Assoc. v. Brown (539 F. App'x 761 (9th Cir. 2013)); upheld the foie gras ban (Ass'n des Eleveurs de Canards et d'Oies du Quebec (ADEC) v. Harris (729 F.3d 937 (9th Cir. 2013), cert. denied, 735 S. Ct. 398 (2014)); and upheld Alameda County's requirement that out-of-state manufacturers provide facilities for drug disposal (Pharm. Research & Mfrs. of America v. County of Alameda (768 F.3d 1037 (9th Cir. 2014)).

This year, however, the Ninth Circuit's laissez-faire attitude may change. Decades after the Legislature enacted the artists' resale-royalty law, the statute faces en banc review that could impose limits on the lawmakers' penchant for enacting protective legislation.

Early in its 40-year history, the CRRA survived a facial challenge by art dealer Howard Morseburg, who argued that the statute was preempted by the federal copyright act, and that it also violated the due process and contracts clauses of the U.S. Constitution. (Morseburg v. Balyon, 621 F.2d 972 (9th Cir. 1980).)

Still, compliance with the CRRA proved spotty. In 2011 artists Chuck Close, Laddie John Dill, the estate of artist Robert Graham, and the Sam Francis Foundation accused Christie's and Sotheby's auction houses and online auctioneer eBay of flouting the act. But after the cases were consolidated, U.S. District Judge Jacqueline H. Nguyen in Los Angeles granted a joint motion to dismiss, ruling that the CRRA explicitly regulates applicable sales of fine art occurring wholly outside California - and thus violates the dormant Commerce Clause. Furthermore, Nguyen agreed with the defendants that the offending portions of the CRRA could not be severed, holding that "the entire statute must fall." (Estate of Robert Graham v. Sotheby's Inc., 860 F. Supp. 2d 1117 (C.D. Cal. 2012).)

On appeal to the Ninth Circuit - where Nguyen has since been elevated - the plaintiffs sought expedited proceedings, fearing that third-party sellers and their agents might simply ignore compliance with the statute. But mediation failed and briefing took another year before the appeal was argued last April.

By then the foie gras and the carbon-fuel standard cases had been decided. In late August the Ninth Circuit asked the parties whether the consolidated CRRA cases should skip a panel opinion and be heard en banc to determine whether there is a conflict in circuit case law regarding the applicability of a decades-old U.S. Supreme Court ruling on the dormant Commerce Clause. (See Healy v. Beer Inst., 491 U.S. 324 (1989).) The court ultimately ordered en banc review and held a hearing in December (as California Lawyer went to press).

Although Ninth Circuit panels in both the foie gras and carbon-fuel standard cases rejected claims alleging violations of the dormant Commerce Clause, they did so on fundamentally inconsistent grounds. Now the full court may sort out whether its previous rulings can be reconciled with Healy, and with a more recent U.S. Supreme Court interpretation of that holding. (Pharm. Research & Mfrs. of America v. Walsh, 538 U.S. 644 (2003).)

In Healy the U.S. Supreme Court struck down a Connecticut law that required out-of-state beer shippers to confirm that their prices were no higher than for beer sold in the bordering states of Massachusetts, New York, and Rhode Island. The law had the practical effect of controlling commercial activity wholly outside Connecticut - and thus, the Court found, was precluded by the Commerce Clause.

In ADEC, the foie gras case, the appellate panel held that Healy does not apply "to a statute that does not dictate the price of a product." (ADEC, 729 F.3d at 951.) Using that standard, essentially only a price-control law would automatically violate the dormant Commerce Clause.

Two weeks after ADEC, a different panel decided in Rocky Mountain Farmers Union, the low-carbon fuel standard case, that the state's regulation did not discriminate against out-of-state ethanol, nor would it have a discriminatory purpose or effect on either ethanol or crude oil. The panel held that to be invalid under the dormant Commerce Clause a statute must "directly [control] commerce occurring wholly outside the boundaries of the state." (Rocky Mountain Farmers Union, 730 F.3d at 1101.)

The differing standards invited en banc review to decide whether a proper reading of Healy is narrow - applying only to statutes controlling the price paid for out-of-state transactions - or broad, invalidating any law affecting transactions outside state boundaries.

"I think the artists' resale act passes either test," says John J. Davis Jr., a partner at San Francisco's Davis, Cowell & Bowe who represented California Lawyers for the Arts in an amicus brief to the Ninth Circuit. "CRRA does not regulate prices, and it does not operate entirely outside the state."

Other supporters of the CRRA say the narrow reading under ADEC is the correct one, considering the Supreme Court's clarification of Healy in the Pharmaceutical Research case. In that ruling, the Court upheld a Maine regulation requiring rebates from prescription drugmakers who sell through taxpayer-supported financial-assistance programs. Although the Maine law has some impact on drug prices, the Court held that the Medicaid Act gives the states substantial discretion to design coverage, and therefor the program does not run afoul of Healy's extraterritorial limits.

"We have a system where states are presumptively allowed to make their own laws," comments Sean H. Donahue, a principal at Donahue & Goldberg in Washington, D.C., who represents the Environmental Defense Fund in Rocky Mountain Farmers Union. "The idea that if California sneezes, other markets get a cold is inherent in that system. If California bans a particular child toy as dangerous, for instance, it may have the effect of putting a company in Oregon out of business. That's unfortunate, but it's part of letting states make decisions," he says.

"The problem with reading Healy broadly," adds Katherine M. Lovett, an associate at San Francisco's Keker & Van Nest and co-author of the amicus brief in Estate of Robert Graham on behalf of California Lawyers for the Arts, "is that it is the exception that swallows the rule." In ADEC, Lovett says, the Ninth Circuit recognized that the Supreme Court's own reading of Healy meant that if a state law doesn't regulate a product's price, it can't be viewed as a per se violation of the dormant Commerce Clause.

California weighed in, as an amicus, to argue that both Rocky Mountain Farmers Union and ADEC correctly apply the Supreme Court's extraterritoriality doctrine. The low-carbon fuel standard, state Attorney General Kamala Harris argued, "directly regulated only the state's own market." And in ADEC, Harris wrote, prohibiting in-state sales of foie gras "did not control commerce in other states."

However, lawyers representing Christie's contend that in ADEC the Ninth Circuit misread the Supreme Court's Pharmaceutical Research opinion. Jason D. Russell, a partner in the Los Angeles office of Skadden, Arps, Slate, Meagher & Flom, writes in a brief supporting the auction houses, "Because it is clear that Healy applies to all state laws that purport to regulate wholly out-of-state conduct, en banc review would sacrifice precious time and resources simply to reaffirm what is obvious." Healy, Russell argues in the brief, cannot be restricted to price-control statutes. Nothing in the opinion suggests that the Supreme Court would allow state regulation unless it affect prices.

However the courts read Healy, Donahue says the dormant Commerce Clause is essentially a doctrine about discrimination between the states. "There must be trust in the political process," he says. "The alternative is a world where judges micromanage state legislation - and that's not a system we want."

Certainly that's not a system that members of the California Legislature would want, either.

Pamela A. MacLean is a contributing writer at California Lawyer.


Kari Santos

Daily Journal Staff Writer

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