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Copyright Office Requests Comments on Creating a Resale Royalty Right for Visual Artists

October 16, 2012. The Copyright Office (CO) published a notice on September 19 in the Federal Register (FR) that requests comments regarding creating a "resale royalty right" for visual artists. It published a second notice on October 16 that provides an extended comment deadline.

Outline of this Story:

Introduction. The Berne Convention addresses such rights, but does not require signatories to enact implementing legislation. To date, the European Union and EU member states have accounted for most of the implementation activity. Moreover, the actual legislative implementations vary considerably.

There are two pending bills in the US that would create a process that minimally resembles creation of a "resale royalty right".

On December 15, 2011, Rep. Jerrold Nadler (D-NY) introduced HR 3688 [LOC | WW], the "Equity for Visual Artists Act of 2011" or "EVAA". On the same day, Sen. Herb Kohl (D-WI) introduced S 2000 [LOC | WW], the companion bill in the Senate.

Sen. Kohl asserted in a statement in the Congressional Record that these bills would fulfill "our obligation under the Berne Convention". However, these bills actually are only tenuously related to the concept of "resale royalty rights" stated in the Berne Convention, and implemented in Europe.

Rep. Jerrold NadlerOn May 17, 2012, Rep. Nadler (at right) and Sen. Kohl sent a letter to the CO asking that it "assess how existing law affects and supports visual artists, and how a federal resale royalty provision would affect copyright law, visual artists and those involved in the sale of art work".

This CO notice of inquiry (NOI) follows through on this request. The extended deadline to submit comments is December 5, 2012.

The CO also wrote a report [760 pages, 30 MB] on this subject 20 years ago, titled "Droit De Suite: The Artist's Resale Royalty".

What is a Resale Royalty Right? The general principle is that a resale royalty right is a government created rule that the creator of certain works of visual art and other physical things, after he has sold all of his interest in the work, and in the absence of any contract, is nevertheless entitled to receive a portion of the sales price for all subsequent second secondary sales. The "right" is inalienable.

First, the concept of "resale royalty right" is inherently inconsistent. Under chattel property law, copyright law, and the first sale doctrine, when on physical object is sold, the buyer owns it, and may resell it. A seller may alienate all of his right, title and interest in something. In contrast, royalties pertain to per usage payments, such as for performing or making copies of a copyrighted work, that derive from contract, or are imposed by statute.

Second, a "resale royalty right" is not a right. It is more accurately described as a diminution of rights. Property rights, and quasi property rights, exist in the attributes, including the right to use, various rights of exclusion, and the right to alienate. The value of real property, chattel property, copyrights and patents, lies in significant part in the owners' ability to alienate, and the purchasers' ability to subsequently alienate. Imposing a "resale royalty right" limits the extent to which an owner can alienate his interest. This limits the value to purchaser, and hence, the price at which the creator can sell the object.

Third, a "resale royalty right", if one tries to incorporate it into copyright law, as the pending bills would do, is inconsistent with the American copyright system. As stated above, it flies in the face of the first sale doctrine. Also, the US system is based upon property rights in expressions and inventions, and a free market in these intellectual property rights. The "resale royalty right" limits market freedoms. In addition, the process that would be created by the pending bills would tax free market transactions to subsidize non-market entities and transactions.

Also, it should be noted that the pending bills would not even create a "resale royalty right". They would create a process that would be more accurately described as a tax and subsidy program, in which a small number of high value auction house sales are taxed, and non-profit museums are subsidized pursuant to Copyright Office regulation and oversight.

Berne Convention. The Berne Convention for the Protection of Literary and Artistic Works, at Section 14ter provides, in full, as follows:

This "right" is "inalienable". It applies to "original works of art and original manuscripts". It is not tied to copyright. The work need not be copyrightable subject matter. There is no limitation on term.

There are now 165 contracting states. European nations, the US, Canada, Japan, Korea, and even the north Korean communist dictatorship are members. However, neither the People's Republic of China (PRC) nor Taiwan have signed.

EU Implementation. In 2001 the European Union adopted Directive 2001/84/EC which requires EU member states to adopt laws regarding "the resale right for the benefit of the author of an original work of art".

This Directive allows states to limit the royalty right to transactions valued at over 3,000 Euro. However, it is not limited to auction sales. And, the royalties go to the creator, or heirs, not museums.

The EU Directive sets royalty rates, with a sliding scale that does not exceed 4 percent, with a cap of 12,500 Euro per transaction.

It also provides that "Member States shall provide that authors who are nationals of third countries and, subject to Article 8(2), their successors in title shall enjoy the resale right in accordance with this Directive and the legislation of the Member State concerned only if legislation in the country of which the author or his/her successor in title is a national permits resale right protection in that country for authors from the Member States and their successors in title."

The EU Directive covers "works of graphic or plastic art such as pictures, collages, paintings, drawings, engravings, prints, lithographs, sculptures, tapestries, ceramics, glassware and photographs, provided they are made by the artist himself or are copies considered to be original works of art."

And again, this "right" is separate from copyright.

There is considerable variation in the implementing statutes in Europe.

Summary of Nadler and Kohl Bills. These bills would, among other things, add a new subsection to 17 U.S.C. 106 that provides for the collection of 7 percent resale "royalty" whenever a "work of visual art is sold as the result of auction". Then, one half of the post expense collections would go to the creators, and one half to nonprofit art museums in the US.

The bills provide that "Whenever a work of visual art is sold as the result of auction of that work by someone other than the artist who is the author of the work, the entity that collects the money or other consideration paid for the sale of the work shall, within 90 days of collecting such money or other consideration, pay out of the proceeds of the sale a royalty equal to 7 percent of the price. Such royalty shall be paid to a visual artists' collecting society. The collecting society shall distribute, no fewer than 4 times per year, 50 percent of the net royalty to the artist or his or her successor as copyright owner. After payment to the artist or his or her successor as copyright owner, the remaining 50 percent of the net royalty shall be deposited into an escrow account established by the collecting society for the purposes of funding purchases by nonprofit art museums in the United States of works of visual art authored by living artists domiciled in the United States."

These bills define "visual work" as "a painting, drawing, print, sculpture, or photograph, existing either in the original embodiment or in a limited edition of 200 copies or fewer that bear the signature or other identifying mark of the author and are consecutively numbered by the author, or, in the case of a sculpture in multiple cast, carved, or fabricated sculptures of 200 or fewer that are consecutively numbered by the author and bear the signature or other identifying mark of the author".

A "visual artists' collecting society" (VACS) would receive the royalties, hold the authority to sue to collect unpaid royalties, and make distributions to artists and museums. It would be entitled to keep up to 18 percent as its administrative costs. Notably, there would be no authorial cause of action.

These bills would only apply to auction transactions valued at $10,000 or more. These bills would only apply to large commercial auction businesses (those with $25 Million or more in sales in the prior year), and contain an exemption for online only auction businesses, such as eBay.

Analysis of Nadler Kohl Bills. Rep. Nadler and Sen. Kohl titled their bills "Equity for Visual Artists Act". However, the primary function of these bills is not to provide equity for visual artists. The primary purpose is to create a government mandated tax and subsidy program for nonprofit museums.

Unlike the Berne Convention's and EU Directive's conception of this "right", these bills would insert this "right" into the Copyright Act's exclusive rights in copyrighted works. Conceptually, it does not fit.

The first bedrock principle of the America intellectual property system is that it exists to incent creation. But, these bills would apply retroactively to visual works created long ago. Passing a bill in 2012 that affects works made in 2011, or 11 BC, does nothing to incent creativity in 2011 or 11 BC. Time moves forward, not backward.

Of course, this was also a criticism of the Sony Bono Copyright Term Extension Act, Public Law No. 105-298, that members of Congress choose to ignore. But then, the purpose of that Act was to increase the revenues of large aggregators, publishers and distributors, not incent creativity.

A second fundamental principle of the America intellectual property system is that it is authorial. Authors, at least nominally, hold the rights of exclusion. Authors are granted the remedies.

Yet, while the key provision of these bills would be added to Section 106, this provision would not create a new exclusive right for authors. Moreover, these bills would give no new remedies to authors or creators.

In addition, most of the revenue collected would not go to authors. First, the VACS would be entitled to up to 18 percent. Then, the CO would be entitled to up to 5 percent. The remaining 77 percent would be divided between the subsidized non-profit museums, and the authors and their heirs. Thus, at most 38.5 percent of revenues would go to authors. But, the actual percentage of total revenues going to authors would likely be far less.

The bills refer to "Whenever a work of visual art is sold as the result of auction". The work need not be under copyright, or even be copyrightable. Thus, oil on canvass paintings from 15th Century Florence would be covered. Hellenistic vases from the 5th Century BC would be covered. For many of the transactions that would be taxed by these bills, there would be no author or heir to receive distributions. Thus, while the bills are not explicit on this point, the entire 77 percent would likely go to the non-profit museums.

Moreover, these bills would only apply to items sold for over $10,000 at auction houses with over $25 Million in sales per year. While this would sweep in many US transactions involving Renaissance and ancient masterpieces, it would benefit very few living artists. In short, few living authors and creators would be unlikely to ever receive a share of the revenues under these bills.

However, the subsidies for non-profit museums would result in museums buying more art works from living artists. Herein lies the only significant benefit to artists. But, a free market in the sale of rights in intellectual property, not government mandated and regulated subsidies to non-profit entities, is the concept embodied in the Constitution and Copyright Act.

By amending the Copyright Act to collect tax sales of certain works (that may or may not be subject to copyright), and then distribute that revenue to museums, this bill would constitute another step in an ongoing migration of the US copyright system away from its historical and Constitutional roots as a free market and authorial system.

It should also be noted that the VACS that might end up receiving up to 18 percent of these taxes, and deciding which museums would receive subsidies, is the Artists Right Society (ARS). It is located in Rep. Nadler's district in Manhattan. Many of the museums that would  benefit from enactment of these bills lie in either Rep. Nadler's 8th District, Rep. Carolyn Maloney's (D-NY) adjacent 14th District, or other New York City districts.

Rep. Nadler is ably advocating the interests of his constituents.

Maria PallanteNor should it escape notice that under these bills the CO would receive a share of the revenues, and write implementing regulations. The Register of Copyright, Maria Pallante (at right), previously worked for a nonprofit museum, the Guggenheim Museum, which is located in Manhattan in Rep. Maloney's district.

The CO Attorney assigned to its NOI proceeding is Jason Okai. He previously worked for the Motion Picture Association of America (MPAA).

On the Senate side, Sen. Kohl is not running for re-election in November, and hence, after the lame duck session in November and December, will not longer be a Senator.

Finally, there is also a discriminatory and protectionist aspect to these bills. Royalties would be collected on secondary sales at auctions in the US, including on secondary sales of works made by artists, who lived in, or now live in, other countries. However, the distribution of funds to nonprofit museums would go only to US museums, and only to purchase works by US artists. The subsidized museums could only use the funds to purchase "works of visual art authored by living artists domiciled in the United States".

CO Notice of Inquiry. This notice requests comments on numerous topics, such as what categories of works should be covered under a resale royalty right, how such a right would affect the first sale doctrine, what resale transactions would implicate the resale royalty right, and what should be the minimum threshold resale amount for the right to apply.

The notice asks if "the adoption of a federal resale royalty regime would further incentivize and protect the authors of certain visual artworks".

It asks "Is it possible, however, that a resale royalty right might add to the costs of those who buy and invest in artworks and, if so, are such costs acceptable from a policy perspective? In this regard, the art market should be broadly defined, including emerging artists, heirs, investors and collectors."

The notice asks about contractual terms affecting a resale royalty right.

It also also about payment and enforcement, what the royalty rate should be, and how it should be collected.

The deadline to submit comments is December 5, 2012. See, notice in the FR, Vol. 77, No. 182, September 19, 2012, at Pages 58175-58179, and extension notice in the FR, Vol. 77, No. 200, October 16, 2012, at Page 63342.

(Published in TLJ Daily E-Mail Alert No. 2,464, October 18, 2012.)