Sam Francis Found. v. Christies, Inc., s. 12–56067

• Decision Date: 05 May 2015
• Docket Number: Nos. 12–56067,12–56077.,12–56068,s. 12–56067
• Citation: 784 F.3d 1320
• Parties: SAM FRANCIS FOUNDATION ; Estate of Robert Graham; Chuck Close; Laddie John Dill, Plaintiffs–Appellants, v. CHRISTIES, INC., a New York corporation, Defendant–Appellee. Sam Francis Foundation ; Estate of Robert Graham; Chuck Close; Laddie John Dill, Plaintiffs–Appellants, v. eBay, Inc., a Delaware corporation, Defendant–Appellee. Estate of Robert Graham; Chuck Close; Laddie John Dill, individually and on behalf of all others similarly situated, Plaintiffs–Appellants, v. Sotheby's, Inc., a New York corporation, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

784 F.3d 1320

SAM FRANCIS FOUNDATION ;

Estate of Robert Graham;

Chuck Close;

Laddie John Dill, Plaintiffs–Appellants

v.CHRISTIES, INC., a New York corporation, Defendant–Appellee.

Sam Francis Foundation ;

Estate of Robert Graham;

Chuck Close;

Laddie John Dill, Plaintiffs–Appellants

v.eBay, Inc., a Delaware corporation, Defendant–Appellee.

Estate of Robert Graham;

Chuck Close;

Laddie John Dill, individually and on behalf of all others similarly situated, Plaintiffs–Appellants

v.Sotheby's, Inc., a New York corporation, Defendant–Appellee.

Nos. 12–56067

12–56068

12–56077.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted En Banc Dec. 16, 2014.

Filed May 5, 2015.

Eric M. George (argued) and Ira Bibbero, Browne George Ross LLP, and Irving H. Greines and Gary D. Rowe, Greines, Martin, Stein & Richland LLP, Los Angeles, CA, for Plaintiffs–Appellants.

Deanne E. Maynard (argued), Morrison & Foerster LLP, Washington, D.C., and Paul T. Friedman, Morrison & Foerster LLP, San Francisco, CA; John C. Dwyer, Angela L. Dunning, and Joshua M. Siegel, Cooley LLP, Palo Alto, CA; Michael G. Rhodes, San Francisco, CA; Jason D. Russell, Hillary A. Hamilton, Allon Kedem, Michael McIntosh, Skadden, Arps, Slate, Meagher & Flom, LLP, Los Angeles, CA; and Steven A. Reiss, Howard B. Comet, Weil Gotshal & Manges LLP, New York, N.Y., for Defendants–Appellees.

Aimee Feinberg (argued), Deputy Solicitor General, Gavin G. McCabe, Supervising Deputy Attorney General, Kamala D. Harris, Attorney General of California, Edward C. DuMont, Solicitor General, Mark J. Breckler, Chief Assistant Attorney General, and Robert W. Byrne, Senior Assistant Attorney General, San Francisco, CA, for Amicus Curiae State of CA.

Steven A. Hirsch and Katherine M. Lovett, Keker & Van Nest LLP, San Francisco, CA; Craig A. Pinedo, PinedoLaw, San Francisco, CA, and Jesse H. Choper, University of California School of Law (Boalt), Berkeley, CA; Michael Tenenbaum, Santa Monica, CA; Greg Christianson and Jeremy Esterkin, Morgan Lewis & Bockius LLP, and Melissa Grant and Arnab Banerjee, Capstone Law APC, Los Angeles, CA, for Amici Curiae.

Appeals from the United States District Court for the Central District of California, Michael W. Fitzgerald, District Judge, Presiding. D.C. Nos. 2:11–cv–08605–MWF–FFM, 2:11–cv–08622–MWF–PLA, 2:11–cv–08604–MWF–FFM.

Before: SIDNEY R. THOMAS, CHIEF JUDGE, AND HARRY PREGERSON, STEPHEN REINHARDT, DIARMUID F. O'SCANNLAIN, BARRY G. SILVERMAN, SUSAN P. GRABER, M. MARGARET MCKEOWN, MARSHA S. BERZON, CONSUELO M. CALLAHAN, CARLOS T. BEA, and ANDREW D. HURWITZ, Circuit Judges.

Opinion by Judge GRABER

; Partial Concurrence and Partial Dissent by Judge REINHARDT ; Concurrence by JUDGE BERZON.

OPINION

GRABER, Circuit Judge:

California's Resale Royalty Act requires the seller of fine art to pay the artist a five percent royalty if “the seller resides in California or the sale takes place in California.” Cal. Civ.Code § 986(a). Plaintiffs in these consolidated appeals are artists and the estates of artists. Sitting en banc, we address Plaintiffs' allegation that Defendants—two auction houses and an online retailer—violated the Act by failing to pay mandatory royalties on sales of fine art. Reviewing de novo the district court's order dismissing this action, Zadrozny v. Bank of N.Y. Mellon, 720 F.3d 1163, 1167 (9th Cir.2013), we hold that the Act's clause regulating sales outside the state of California facially violates the “dormant” Commerce Clause but that the offending provision is severable from the remainder of the Act. We return the case to the three-judge panel for its consideration of the additional issues raised by the parties on appeal.

A. Background

The Act requires that, “[w]henever a work of fine art is sold and the seller resides in California or the sale takes place in California, the seller or the seller's agent shall pay to the artist of such work of fine art or to such artist's agent 5 percent of the amount of such sale.” Cal. Civ.Code § 986(a). The artist's right to the royalty may not be waived or reduced by contract. Id. The Act defines “fine art” as “an original painting, sculpture, or drawing, or an original work of art in glass.” Id. § 986(c)(2). The Act exempts some sales, including those for less than $1,000 and those involving an artist who died before 1983. Id. § 986(b).

When art is sold by an agent, “the agent shall withhold 5 percent of the amount of the sale, locate the artist and pay the artist.” Id. § 986(a)(1). If the seller or the seller's agent cannot locate the artist within 90 days, the seller or agent must transfer the royalty to the California Arts Council. Id. § 986(a)(2). In that event, the Arts Council must attempt to locate the artist and deliver the royalty. Id. § 986(a)(5). If the artist still has not been located after seven years, the Arts Council may use the funds for “acquiring fine art.” Id. If the seller or the seller's agent fails to comply with the Act, the artist or the artist's heirs may sue the seller or the seller's agent for the royalty plus reasonable attorney fees. Id. § 986(a)(3), (7).

Invoking the royalty provision, Plaintiffs brought three separate class actions against Defendants Sotheby's, Inc., Christie's, Inc., and eBay, Inc., alleging that Defendants, acting as agents of sellers of fine art, failed to comply with the Act's requirements. Plaintiffs allege that some sales took place in California and that other sales took place outside California but on behalf of a seller who is a resident of California. Defendants moved to dismiss the cases arguing, among other things, that the Act violates the dormant Commerce Clause.

The district court granted Defendants' motions to dismiss. The court held that the Act's regulation of sales outside California is an impermissible regulation of wholly out-of-state conduct, in violation of the dormant Commerce Clause. The court next held that the entire Act must be stricken as unconstitutional, because the invalid portion of the Act could not be severed. The court declined to reach the parties' alternative arguments, such as Defendants' argument that the Act is preempted by federal copyright laws and Defendant eBay's argument that it is neither a seller nor a seller's agent.

Plaintiffs timely appealed, and we consolidated the separate appeals. A three-judge panel heard oral argument last year. But, after argument, the panel directed the parties to file simultaneous briefs setting forth their positions on whether this case should be heard en banc. Thereafter, a majority of nonrecused active judges voted to hear the case en banc.

B. Dormant Commerce Clause

The Commerce Clause of the United States Constitution assigns to Congress the authority “[t]o regulate Commerce with foreign Nations, and among the several States.” U.S. Const. art. I, § 8, cl. 3. Implicit in this “affirmative grant of regulatory power to Congress” is a “ ‘negative aspect,’ referred to as the dormant Commerce Clause.” Conservation Force, Inc. v. Manning, 301 F.3d 985, 991 (9th Cir.2002). The dormant Commerce Clause is a “limitation upon the power of the States,” Great Atl. & Pac. Tea Co. v. Cottrell, 424 U.S. 366, 371, 96 S.Ct. 923, 47 L.Ed.2d 55 (1976) (internal quotation marks omitted), which “prohibits discrimination against interstate commerce and bars state regulations that unduly burden interstate commerce,” Quill Corp. v. North Dakota, 504 U.S. 298, 312, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992) (citation omitted). This principle ensures that state autonomy over “local needs” does not inhibit “the overriding requirement of freedom for the national commerce.” Great Atl. & Pac. Tea Co., 424 U.S. at 371, 96 S.Ct. 923 (internal quotation marks omitted).

California's Resale Royalty Act requires the payment of royalties to the artist after a sale of fine art whenever “the seller resides in California or the sale takes place in California.” Cal. Civ.Code § 986(a) (emphasis added). Defendants challenge the first clause because it regulates sales that take place outside California. Those sales have no necessary connection with the state other than the residency of the seller. For example, if a California resident has a part-time apartment in New York, buys a sculpture in New York from a North Dakota artist to furnish her apartment, and later sells the sculpture to a friend in New York, the Act requires the payment of a royalty to the North Dakota artist—even if the sculpture, the artist, and the buyer never traveled to, or had any connection with, California. We easily conclude that the royalty requirement, as applied to out-of-state sales by California residents, violates the dormant Commerce Clause.

The Supreme Court has held that “our cases concerning the extraterritorial effects of state economic regulation stand at a minimum for the following proposition[ ]: ... the Commerce Clause precludes the application of a state statute to commerce that takes place wholly outside of the State's borders, whether or not the commerce has effects within the State.” Healy v. Beer Instit., 491 U.S. 324, 336, 109 S.Ct. 2491, 105 L.Ed.2d 275 (1989) (ellipsis and internal quotation marks omitted); see also id. (holding that “a statute that directly controls commerce occurring wholly outside the boundaries of a State exceeds the inherent limits of the enacting State's authority and is invalid regardless of whether the statute's extraterritorial reach was intended by the legislature”). Here, the state statute facially regulates a commercial transaction that “takes place wholly outside of the State's borders.” Id. Accordingly, it violates the dormant Commerce Clause. See also Valley Bank of Nev. v. Plus Sys., Inc., 914 F.2d 1186, 1189–90 (9th Cir.1990) (“Direct regulation occurs when a state law directly affects transactions that take place ... entirely outside of the state's borders. Such a statute is invalid per se....” (citation and internal quotation marks omitted)).

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