Sam Francis Foundation v. Christies, Inc. , 784 F.3d 1320 ( 2015 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
SAM FRANCIS FOUNDATION; ESTATE No. 12-56067
OF ROBERT GRAHAM; CHUCK
CLOSE; LADDIE JOHN DILL, D.C. No.
Plaintiffs-Appellants, 2:11-cv-08605-
MWF-FFM
v.
CHRISTIES, INC., a New York
corporation,
Defendant-Appellee.
SAM FRANCIS FOUNDATION; ESTATE No. 12-56068
OF ROBERT GRAHAM; CHUCK
CLOSE; LADDIE JOHN DILL, D.C. No.
Plaintiffs-Appellants, 2:11-cv-08622-
MWF-PLA
v.
EBAY, INC., a Delaware corporation,
Defendant-Appellee.
ESTATE OF ROBERT GRAHAM; No. 12-56077
CHUCK CLOSE; LADDIE JOHN DILL,
individually and on behalf of all D.C. No.
others similarly situated, 2:11-cv-08604-
Plaintiffs-Appellants, MWF-FFM
2 SAM FRANCIS FOUND. V. CHRISTIES
v.
OPINION
SOTHEBY’S, INC., a New York
corporation,
Defendant-Appellee.
Appeals from the United States District Court
for the Central District of California
Michael W. Fitzgerald, District Judge, Presiding
Argued and Submitted En Banc
December 16, 2014—Pasadena, California
Filed May 5, 2015
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
SAM FRANCIS FOUND. V. CHRISTIES 3
SUMMARY*
California’s Resale Royalty Act
The en banc court held that a clause of California’s Resale
Royalty Act regulating sales of fine art outside the state of
California facially violates the dormant Commerce Clause,
but the clause is severable from the remainder of the Act.
Artists and the estates of artists alleged that Christies,
Inc., EBay, Inc., and Sotheby’s, Inc., violated the Act by
failing to pay mandatory royalties on sales of fine art. The
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). The en
banc court held that the Act’s clause regulating sales outside
the state of California facially violated the “dormant”
Commerce Clause but that the offending provision was
severable from the remainder of the Act. Because the district
court held that the Act fell in its entirety, the district court did
not reach defendants’ alternative arguments, and the en banc
court returned the case to the three-judge panel for its
consideration of the remaining issues.
Judge Reinhardt concurred with the majority’s conclusion
that under the Supreme Court’s dormant Commerce Clause
jurisprudence, the out-of-state regulation of out-of-state
entities was unconstitutional, and therefore the auction house
defendants could not be subjected to the Act’s obligations
required of them in connection with sales that take place
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4 SAM FRANCIS FOUND. V. CHRISTIES
outside of California. Judge Reinhardt dissented from the
majority’s extension of the dormant Commerce Clause to
declare a substantial portion of the Act unconstitutional.
Judge Berzon, joined by Judge Pregerson, concurred in
part, and would hold the Act unconstitutional as applied to
out-of-state art sales conducted by out-of-state agents, and go
no further. Judge Berzon stated that the majority opinion
unnecessarily decides that the Act is unconstitutional as
applied to out-of-state art sales by California residents.
COUNSEL
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, California, for
Plaintiffs-Appellants.
Deanne E. Maynard (argued), Morrison & Foerster LLP,
Washington, D.C., and Paul T. Friedman, Morrison &
Foerster LLP, San Francisco, California; John C. Dwyer,
Angela L. Dunning, and Joshua M. Siegel, Cooley LLP, Palo
Alto, California; Michael G. Rhodes, San Francisco,
California; Jason D. Russell, Hillary A. Hamilton, Allon
Kedem, Michael McIntosh, Skadden, Arps, Slate, Meagher &
Flom, LLP , Los Angeles, California; and Steven A. Reiss,
Howard B. Comet, Weil Gotshal & Manges LLP, New York,
New York, 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
SAM FRANCIS FOUND. V. CHRISTIES 5
General, and Robert W. Byrne, Senior Assistant Attorney
General, San Francisco, California, for Amicus Curiae State
of California.
Steven A. Hirsch and Katherine M. Lovett, Keker & Van
Nest LLP, San Francisco, California; Craig A. Pinedo,
PinedoLaw, San Francisco, California, and Jesse H. Choper,
University of California School of Law (Boalt), Berkeley,
California; Michael Tenenbaum, Santa Monica, California;
Greg Christianson and Jeremy Esterkin, Morgan Lewis &
Bockius LLP, and Melissa Grant and Arnab Banerjee,
Capstone Law APC, Los Angeles, California, for Amici
Curiae.
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
6 SAM FRANCIS FOUND. V. CHRISTIES
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,
SAM FRANCIS FOUND. V. CHRISTIES 7
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,’
8 SAM FRANCIS FOUND. V. CHRISTIES
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 (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
(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 (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
SAM FRANCIS FOUND. V. CHRISTIES 9
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 (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)).
Cases such as Rocky Mountain Farmers Union v. Corey,
730 F.3d 1070 (9th Cir. 2013), and Association des Eleveurs
de Canards et d’Oies du Quebec v. Harris, 729 F.3d 937 (9th
Cir. 2013), do not apply here. Unlike this case—which
involves regulation of wholly out-of-state conduct—Corey
and Harris concerned state laws that regulated in-state
conduct with allegedly significant out-of-state practical
effects. See Corey, 730 F.3d at 1080 (California’s imposition
of a low-carbon fuel standard, which applied to fuels
“consumed in California” (emphasis added)); Harris,
729 F.3d at 941–43 (California’s ban on the in-state sale of
certain types of foods, including foie gras made by the
plaintiffs).
10 SAM FRANCIS FOUND. V. CHRISTIES
Nor do cases that concerned the validity of state-imposed
taxes, such as Quill Corp., 504 U.S. 298, and Complete Auto
Transit, Inc. v. Brady, 430 U.S. 274 (1977), control here. The
rules applied in those cases do not govern because the Act
does not impose a tax; it regulates conduct among private
parties. The Act requires the seller or the seller’s agent to pay
a royalty to the artist, a private party, not to the government.
Cal. Civ. Code § 986(a). The Act even spells out additional
procedural requirements for agents of sellers: “the agent shall
withhold 5 percent of the amount of the sale, locate the artist
and pay the artist.” Id. § 986(a)(1). The agent must withhold
the royalty, undertake affirmative efforts to locate the artist
and, once found, pay the artist. Nothing of the sort is
required by an ordinary tax law, such as those at issue in
Quill Corp. and Complete Auto.1
It matters not that, in some circumstances, the royalty
amount eventually may wind up, through a form of escheat,
in a special fund of the State’s coffers. If the seller or the
agent withholds the royalty, attempts unsuccessfully to locate
the artist, remits the royalty to the Arts Council after 90 days,
and if the Arts Council attempts unsuccessfully to locate the
artist for seven years, only then does “the right of the artist
terminate[],” and an amount equal to the royalty may be used
by the Arts Council to purchase fine art. Id. § 986(a)(5).
That contingent consequence seven-and-a-quarter years after
1
For the same reasons, we reject the partial concurrence’s assertion that
the Act is “only a minor regulation of the proceeds.” Partial concurrence
at 17. The Act requires the seller or the seller’s agent affirmatively to look
for the artist and to pay the artist a royalty. If the seller or the seller’s
agent fails to locate the artist adequately, the artist may sue for damages
plus attorney fees. The Act’s regulation of the conduct of the seller and
the seller’s agent is neither “minor” nor a “regulation of the proceeds”
alone.
SAM FRANCIS FOUND. V. CHRISTIES 11
the sale does not change the fact that the Act directly
regulates the conduct of the seller or the seller’s agent for a
transaction that occurs wholly outside the State. Accordingly,
Healy governs. Under Healy, the Act’s clause regulating out-
of-state art sales where “the seller resides in California,” Cal.
Civ. Code § 986(a), and no other connection to California
need exist, violates the dormant Commerce Clause as an
impermissible regulation of wholly out-of-state conduct.
The partial concurrence urges us to impose an artificial
limitation—one never urged by any party—on that
straightforward holding by limiting it to agents and not
deciding the issue with respect to sellers. We decline for the
simple reason that the constitutional doctrine that we apply
operates without regard to that distinction. Under Healy, “the
Commerce Clause precludes the application of a state statute
to commerce that takes place wholly outside of the State’s
borders.” 491 U.S. at 336 (ellipsis and internal quotation
marks omitted). As we explain above, the Act’s regulation of
out-of-state sales runs afoul of that constitutional rule;
accordingly, we must strike that portion of the Act as an
impermissible regulation of wholly out-of-state commerce.
The scope of our holding is neither improper nor
inconsistent with the Supreme Court’s guidance. It is always
possible to narrow a holding. For example, we could limit
our holding today to agents from New York and reserve the
question with respect to agents from, say, Pennsylvania. Or
we could limit our holding to corporate agents and reserve the
question with respect to natural persons. But, where the
constitutional rule applies without regard to those facts,
issuing an artificially constrained opinion serves no purpose;
indeed, it would confuse the issue and lead to judicial
inefficiency. Contrary to the partial concurrence’s assertion,
12 SAM FRANCIS FOUND. V. CHRISTIES
we neither “anticipate a question of constitutional law” nor
“formulate a rule of constitutional law.” United States v.
Raines, 362 U.S. 17, 21 (1960); partial concurrence at 19.
We merely apply the simple, well established constitutional
rule summarized in Healy.
C. Severability
We next consider whether we may sever the invalid
clause—“the seller resides in California or”—from the
remainder of the Act. “Severability is . . . a matter of state
law.” Leavitt v. Jane L., 518 U.S. 137, 139 (1996) (per
curiam). In California, courts “look first to any severability
clause.” Cal. Redev. Ass’n v. Matosantos, 267 P.3d 580, 607
(Cal. 2011). Here, the California legislature enacted the
following provision:
If any provision of this section or the
application thereof to any person or
circumstance is held invalid for any reason,
such invalidity shall not affect any other
provisions or applications of this section
which can be effected, without the invalid
provision or application, and to this end the
provisions of this section are severable.
Cal. Civ. Code § 986(e). That broadly worded clause covers
the situation here. Accordingly, there is “a presumption in
favor of severance.” Cal. Redev. Ass’n, 267 P.3d at 607; see
also Santa Barbara Sch. Dist. v. Superior Court, 530 P.2d
605, 618 (Cal. 1975) (holding that “a severability clause
normally calls for sustaining the valid part of the enactment”
(internal quotation marks omitted)).
SAM FRANCIS FOUND. V. CHRISTIES 13
We must also look to “three additional criteria: The
invalid provision must be grammatically, functionally, and
volitionally separable.” Cal. Redev. Ass’n, 267 P.3d at 607
(internal quotation marks omitted). The first two criteria are
met easily. After severance, the revised provision reads:
“Whenever a work of fine art is sold and . . . 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)
(severed clause replaced with ellipsis). Grammatical
separability exists because “the invalid part[] can be removed
as a whole without affecting the wording or coherence of
what remains”; the revised provision above is perfectly
coherent.2 Cal. Redev. Ass’n, 267 P.3d at 607 (internal
quotation marks omitted). Similarly, there is functional
separability because “the remainder of the statute is complete
in itself.” Id. at 608 (internal quotation marks omitted). The
revised provision has a reduced scope, of course, because it
applies only to in-state sales; but it is complete, has coherent
functionality, and does not conflict with any of the Act’s
other provisions.
2
If we adopted the partial concurrence’s approach, the grammatical
separability test almost certainly would fail, and we would be required to
invalidate the Act in its entirety. The partial concurrence refutes that
conclusion by citing an earlier California Supreme Court case that
purportedly does not require grammatical separability. Partial
concurrence at 22–23 n.9 (citing People v. Kelly, 222 P.3d 186 (Cal.
2010)). Because the latest California Supreme Court precedent plainly
requires grammatical separability, though, we apply that test. See also
Vivid Entm’t, LLC v. Fielding, 774 F.3d 566, 574–75 (9th Cir. 2014)
(applying the grammatical separability test from California
Redevelopment Ass’n).
14 SAM FRANCIS FOUND. V. CHRISTIES
The volitional separability test, although not facially
obvious, also is met. We conclude that “the remainder [of the
statute] would have been adopted by the legislative body had
[it] foreseen the partial invalidation of the statute.” Id.
(internal quotation marks omitted). Indeed, we think that the
legislature actually foresaw the partial invalidation of the
statute. In detailed letters to the bill’s legislative sponsor and
to the governor, while deliberations were underway and
before the Act’s passage, legislative counsel explained that
the law’s “application to sales which occur outside of the
State of California” would violate the Commerce Clause.
But, counsel opined, the law “would be valid . . . as to sales
which occur in California.” Despite those warnings, the
enacted version of the law included regulation of both in-state
sales and out-of-state sales in easily separable clauses.
Perhaps most tellingly, the enacted version also added the
severability clause, which expressly states the legislature’s
intent that “the provisions of this section are severable” if
“any provision of this section or the application thereof to any
person or circumstance is held invalid for any reason.” Cal.
Civ. Code § 986(e). We find no reason to deviate from the
“presumption in favor of severance.” Cal. Redev. Ass’n,
267 P.3d at 607.
D. Conclusion
California Civil Code section 986 regulates out-of-state
and in-state sales of fine art. We hold that the provision
regulating out-of-state sales violates the dormant Commerce
Clause but that the provision is severable from the remainder
of the Act. Because the district court held that the Act fell in
its entirety, the court did not reach Defendants’ alternative
arguments. We return this case to the three-judge panel for
its consideration of the remaining issues. We leave to the
SAM FRANCIS FOUND. V. CHRISTIES 15
panel’s discretion the decision whether to address those issues
on the merits or to remand them for the district court’s
determination in the first instance.
REMANDED to the three-judge panel.
REINHARDT, Circuit Judge, concurring in part and
dissenting in part.
In 1976, California passed the California Resale Royalty
Act (the Act) — a law that, for the last 39 years, has secured
invaluable benefits for talented artists. The Act requires that
when a fine art sale takes place in California or the seller of
the art (sometimes referred to in this opinion as the owner)
resides in California, the seller or the seller’s agent must pay
a five-percent royalty to the artist. Cal. Civ. Code § 986(a).1
Under the Act, when a wealthy collector of modern art
purchases for several million dollars a work of art that the
prior owner bought for a minimal amount from a then-
unknown young artist, the now-well-known artist will for the
first time receive a measure of reasonable compensation for
the art that he created.2
1
The statute contains various exceptions. See Cal. Civ. Code § 986(b).
It does not apply, for example, to resales after the death of the artist, id.
§ 986(b)(3), unless the artist died after January 1, 1983, in which case “the
rights and duties created under [the Act] shall inure to his or her heirs,
legatees, or personal representative, until the 20th anniversary of the death
of the artist,” id. § 986(a)(7).
2
Of course, the compensation the artist receives is by no means
excessive. If a painting sells for $1 million, the artist does not become a
16 SAM FRANCIS FOUND. V. CHRISTIES
In the case before us, the defendants who challenge the
statute are not the seller, the buyer, or even the artist, but two
New York auction houses who under the Act are the sellers’
agents.3 The Act imposes certain duties on them with respect
to the disbursement of the royalty payments. The auction
houses argue that because the Act imposes those duties in
connection with art sales that take place outside of California,
it violates the dormant Commerce Clause.4 I agree that, for
better or worse, the majority is compelled to conclude that,
under the Supreme Court’s dormant Commerce Clause
jurisprudence, the out-of-state regulation of out-of-state
entities is unconstitutional and that, as a result, the auction-
house defendants cannot be subjected to the obligations
required of them in connection with sales that take place
outside of California. That, however, has little to do with the
fundamental purpose and operation of the Act, or with the
majority’s unwarranted extension of the dormant Commerce
Clause to declare a substantial portion of the Act
unconstitutional — specifically, the portion that obligates
Californians to pay to the creators of the work of art a small
part of the proceeds from the fine art that they sell at a profit
regardless of where the actual sale takes place.
millionaire; he receives $50,000, while the individual who was wise
enough to purchase the painting originally retains $950,000.
3
The third defendant, eBay, is not an “agent” within the meaning of the
Act, and is therefore not subject to the Act. Cf. Cal. Att’y Gen. Op. No.
02-111 (2003) (“eBay does not act as an ‘agent’ for either the seller or
buyer during the auction bidding process.” (citing Cal Civ. Code § 2295)).
4
The defendant auction houses in this case are Christie’s, Inc., and
Sotheby’s, Inc.
SAM FRANCIS FOUND. V. CHRISTIES 17
It is unfortunate that the majority goes far beyond
deciding the constitutionality of the Act as applied to the out-
of-state auction-house defendants. It decides a question
entirely unnecessary to the resolution of this case when it
holds the Act unconstitutional as applied to California art
owners who ultimately receive proceeds from out-of-state
sales and are then responsible for the payments to the artists.
The majority does so despite the fact that no California art
owners are a party to the case, and despite the fact that we
could and should affirm the district court’s grant of the
auction-house defendants’ motion to dismiss on far narrower
constitutional grounds.
To make matters worse, the majority not only decides an
unnecessary, highly disputable question regarding California
art owners, but it decides it incorrectly. Indeed, I strongly
disagree with the majority that Californians who sell their art
by means of out-of-state transactions may not be required by
California law to remit a portion of the proceeds they
ultimately receive to the artists who created the works of art.
If I found it necessary or even permissible to reach this issue,
I would hold that the Act as applied to California art owners
is not an extraterritorial regulation. In fact, the California
statute represents only a minor regulation of the proceeds
received from art sales by a small number of wealthy
Californians.5 It in no way regulates the actual extra-
5
The majority takes exception to my characterization of the Act as
constituting only a “minor regulation of the proceeds.” See Majority Op.
at 10 n.1. Although I disagree with the majority’s view that requiring
wealthy art owners to remit a five-percent royalty payment from profitable
art sales to the artists of the works sold is more than “minor,” that
disagreement is entirely immaterial to the legal issue before us: whether
the Act, as-applied to California art owners, regulates out-of-state
transactions and thus violates the dormant Commerce Clause.
18 SAM FRANCIS FOUND. V. CHRISTIES
territorial sales. Indeed, it in no way affects such sales, but
only imposes on Californians who dispose of their art for
profit6 an obligation to remit a small part of the proceeds to
a third party after the transaction has been completed.
Moreover, unlike in the Court’s extraterritorial regulation
cases under the dormant Commerce Clause, the Act does not
regulate the price or terms of sales in other states, nor require
Californians whose art is sold out-of-state, or the buyers of
such art, to seek regulatory approval in California before the
institution or completion of such sales. For the above
reasons, I dissent from the majority opinion to the extent that
it holds the Act unconstitutional as applied to the actions of
a California owner whose work of art is sold out-of-state.
As to the only question it is necessary for the court to
answer — the application of the Act to out-of-state “agents”
of California art sellers whose business is to sell art whether
its owners are in-state or out-of-state residents — this case
presents an entirely different legal question. That question is
whether under the dormant Commerce Clause a California
law may impose duties on out-of-state business entities that
engage in out-of-state transactions. The defendant auction
houses that sell the art work of Californians and the residents
of numerous other states are New York entities engaged in
the business of selling art primarily in New York. That the
defendants are called agents of the owners of the art work is,
for purposes of the dormant Commerce Clause, of no legal
significance. The Supreme Court’s current case law requires
us to hold unconstitutional the requirement by state laws that
out-of-state entities take or refrain from taking actions outside
6
The Act does not apply “[t]o the resale of the work of fine art for a
gross sales price less than the purchase price paid by the seller.” Cal. Civ.
Code § 986(b)(4).
SAM FRANCIS FOUND. V. CHRISTIES 19
of the regulating state. The California statute does just that.
Therefore, although I have serious doubts that this aspect of
the Supreme Court’s dormant Commerce Clause
jurisprudence is wise, I reluctantly concur in the majority’s
judgment that the Act is not constitutional as applied to the
imposition of obligations on out-of-state agents (i.e.,
professional sellers of art, including the auction houses) of
California art owners with respect to sales that are conducted
outside of California.
I. California Art Owners
A. The Majority’s Unnecessary and Improper
Decision
The Supreme Court has made clear that we are “bound by
two rules . . . : one, never to anticipate a question of
constitutional law in advance of the necessity of deciding it;
the other, never to formulate a rule of constitutional law
broader than is required by the precise facts to which it is to
be applied.” United States v. Raines, 362 U.S. 17, 21 (1960)
(citation and internal quotation marks omitted).7 By deciding
7
See also New York v. Ferber, 458 U.S. 747, 768 (1982) (“By focusing
on the factual situation before us, and similar cases necessary for
development of a constitutional rule, we face ‘flesh-and-blood’ legal
problems with data ‘relevant and adequate to an informed judgment.’”
(footnotes omitted)); Broadrick v. Oklahoma, 413 U.S. 601, 610–11
(1973) (“[U]nder our constitutional system courts are not roving
commissions assigned to pass judgment on the validity of the Nation’s
laws. Constitutional judgments . . . are justified only out of the necessity
of adjudicating rights in particular cases between the litigants brought
before the Court. . . .” (citations omitted)).
The above principles, of course, do not apply to the First Amendment
overbreadth doctrine, under which the Supreme Court has “allowed
20 SAM FRANCIS FOUND. V. CHRISTIES
a constitutional question entirely unnecessary to the
resolution of this case, the majority flagrantly violates both of
these rules.
We have before us two lawsuits in which the defendants
are out-of-state auction houses that acted as agents in New
York for California art owners. They have moved to dismiss
lawsuits filed against them as a result of their alleged
noncompliance with the Act. We may affirm the district
court’s grant of the defendants’ motions to dismiss by simply
holding that the Act is unconstitutional as applied to the out-
of-state agents. We need do no more, and under Raines, we
therefore must do no more. By striking down not only the
Act’s out-of-state applications to the two out-of-state agents,
but also its applications to the in-state actions of California
art owners who receive money from out-of-state sales, the
majority opinion goes far beyond what is necessary to decide
the case. Indeed, it decides a constitutional question
regarding the application of the dormant Commerce Clause
to California residents that is both highly disputable and
wholly unprecedented. In doing so, the majority formulates
a constitutional rule far broader than is necessary to decide
this case, in direct contravention of Raines.
The justification the majority puts forth for not narrowing
its constitutional decision is plainly insufficient. The
majority “decline[s]” to narrow its decision “for the simple
reason that the constitutional doctrine that we apply operates
without regard to” the distinction between out-of-state agents
and in-state sellers. Majority Op. at 11. Here, the majority
persons to attack overly broad statutes even though the conduct of the
person making the attack is clearly unprotected and could be proscribed
by a law drawn with the requisite specificity.” Ferber, 458 U.S. at 769.
SAM FRANCIS FOUND. V. CHRISTIES 21
“simply” assumes the answer to the fundamental question in
this case — whether the imposition of obligations on out-of-
state agents conducting business outside of the regulating
state is constitutionally indistinguishable from that state’s
regulation of monetary proceeds received by its own
residents. However one may ultimately resolve that question,
it is at least clear that it is a highly controversial one on which
we lack clear precedent. When such a question exists, but it
is not necessary to decide it in the case before us, Raines is
clear: we must not decide it.8
There is no other justification for the majority’s decision
to disregard Supreme Court precedent and decide an
unnecessary constitutional issue. That the defendants have
asked us to decide a broader question that does not affect
them is no excuse for such an unnecessary constitutional
holding. Nor is the majority’s approach justified by the fact
that the district court relied on broader reasoning than is
necessary to grant the motions to dismiss. “We may affirm
a district court’s judgment on any ground supported by the
record, whether or not the decision of the district court relied
on the same grounds or reasoning we adopt.” Atel Financial
8
In contrast to the distinction between out-of-state agents and in-state
sellers, the hypothetical distinctions offered by the majority — between
New York agents and Pennsylvania agents, and between corporate agents
and natural persons — obviously do not present highly controversial
questions relevant to this case; indeed, they do not present any questions
relevant to this case, and thus would provide no basis for narrowing the
decision. The majority’s hypothetical distinctions, unlike the differences
that lie at the heart of the constitutional question that divides us, are, for
all purposes, as irrelevant as the brown-cow / spotted-cow distinction
about which most first-year law students learn during their first week’s
class attendance, even at the law school that the majority opinion’s author
and I attended.
22 SAM FRANCIS FOUND. V. CHRISTIES
Corp. v. Quaker Coal Co., 321 F.3d 924, 926 (9th Cir. 2003).
The majority has simply decided an unnecessary
constitutional question without any need or cause to do so, in
blatant disregard of the Supreme Court’s instructions to the
contrary.9
9
The majority is incorrect that the limited approach that Raines requires
would, if applied here, compel the invalidation of the entire Act. See
Majority Op. at 13 n.2. To the contrary, under California law, were we to
hold the statute unconstitutional as applied to the defendants “the
appropriate remedy . . . is to disapprove, or disallow, only the
unconstitutional application of [the Act], thereby preserving any residuary
constitutional application with regard to the other provisions of the [Act].”
People v. Kelly, 222 P.3d 186, 213 (Cal. 2010). The Act’s severability
clause expressly provides that “[i]f any . . . application [of the Act] to any
person or circumstance is held invalid for any reason, such invalidity shall
not affect any other provisions or applications of [the Act] which can be
effected, without the invalid . . . application . . . .” Cal. Civ. Code
§ 986(e) (emphasis added). “A severability clause, although not
conclusive, ‘normally calls for sustaining the valid part of the enactment
. . . . The final determination depends on whether ‘the remainder . . . is
complete in itself and would have been adopted by the legislative body
had the latter foreseen the partial invalidation of the statute.’” Walnut
Creek Manor v. Fair Emp’t & Hous. Comm’n, 814 P.2d 704, 717 (Cal.
1991) (citation omitted) (internal quotation marks omitted). These
requirements are clearly met in this case, as all of the duties imposed by
the Act on agents are imposed in the alternative on California art owners.
Indeed, after holding the Act unconstitutional as applied to the defendants,
all of the duties imposed by the Act in connection with out-of-state sales
would be fully “effected,” as they would simply fall on California art
owners alone, and all could be performed in California following the
receipt of the proceeds by those owners. As to what the legislature would
have done, even the majority acknowledges that it would have adopted the
Act regardless of its partial invalidation.
The majority also protests that the application of the Raines
requirement would fail the grammatical separability test. The grammatical
separability requirement exists, however, only when we sever invalid
portions of a statute, as the majority mistakenly does. See Cal. Redev.
SAM FRANCIS FOUND. V. CHRISTIES 23
B. The Act Is Not Extraterritorial As Applied to
Californians
Although the majority should not have reached the issue
whether the Act is constitutional as applied to the conduct of
California art owners, it compounded its error by deciding it
incorrectly. The Supreme Court has explained that “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 Inst., 491 U.S. 324, 336
(1989) (citation omitted). From this principle, the majority
concludes that the Act must fall as to Californians who
arrange for the sale of their art in New York or other states
outside of California. Its rationale is that requiring
Californians to give the artists a portion of the proceeds they
receive from out-of-state sales of the art they created “facially
regulates a commercial transaction that ‘takes place wholly
outside of the State’s borders.’” Majority Op. at 9 (quoting
Healy, 491 U.S. at 336). Contrary to the majority, were we
permitted to resolve this question I would hold that the Act’s
requirement that California art owners remit to the original
Assn. v. Matosantos, 267 P.3d 580, 607 (Cal. 2011) (applying that
requirement when determining “whether the invalid portions of a statute
can be severed” (emphasis added)). In contrast, the limited approach that
is required here would not invalidate any portions of the Act, but would
rather hold only that its application in particular circumstances is
unconstitutional, as the court did in Kelly and Walnut Creek. No
grammatical separability requirement applies in California when a court
holds a statute unconstitutional as applied in particular circumstances, as
no words of the Act must be stricken in doing so. See Walnut Creek,
814 P.2d at 716. Indeed, neither Kelly nor Walnut Creek applied the
grammatical separability requirement, despite the fact that such
requirement preceded those cases in California law. See Calfarm Ins. Co.
v. Deukmejian, 771 P.2d 1247, 1256 (Cal. 1989).
24 SAM FRANCIS FOUND. V. CHRISTIES
artist a portion of the proceeds they receive from art sales is
not in any respect a “regulat[ion of] a commercial
transaction.” In my view, what the Act regulates is the use of
the money that Californians ultimately receive from the
transaction — not the transaction itself, and certainly not any
out-of-state transaction.
Nowhere in its opinion does the majority explain how
requiring Californians to remit a small percentage of the
proceeds they ultimately receive from an out-of-state sale of
art constitutes “regulat[ing] a commercial transaction,” let
alone a “commercial transaction that ‘takes place wholly
outside of the state’s borders.’” In fact, the Act in no way
regulates the sale.10 With respect to Californians whose art is
sold out of state, the Act operates only after the transaction is
completed, just as it does in the case of art sold in-state. In
both cases, the Act deals solely with the income received by
Californians — a clearly permissible subject of California’s
regulatory authority. The Act tells Californians only that
when they receive profits from a sale of fine art, they must
comply with the obligations the law places on them. As
applied to Californians, the Act is plainly a regulation of
Californians’ in-state obligations — not a regulation of out-
of-state entities, and not a regulation of out-of-state
transactions. In sum, the Act is simply a regulation of the
proceeds that Californians have received from the sale of art,
regardless of where the sale takes place.
10
In this section, I assume that the obligations placed on out-of-state
agents by the Act are stricken, and all of the proceeds from the sale are
transmitted to the California seller. Under this assumption, it is the
Californian and not the agent who has the obligation to remit a small
royalty payment to the artist.
SAM FRANCIS FOUND. V. CHRISTIES 25
My conclusion is further supported by the Court’s cases
that strike down laws as having an impermissible
extraterritorial reach. In all such cases, the laws at issue have
had a direct effect on out-of-state commercial transactions by
regulating the price or terms of such transactions, see, e.g.,
Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511 (1935), or by
otherwise requiring “an out-of-state merchant to seek
regulatory approval in one State before undertaking a
transaction in another,” Healy, 491 U.S. at 337 (citation
omitted); Brown-Forman Distillers Corp. v. New York State
Liquor Auth., 476 U.S. 573 (1986); Edgar v. MITE Corp.,
457 U.S. 624, 641–43 (1982) (plurality opinion). The Act, as
applied to California art owners, is far different. It does not
in any respect affect out-of-state actors or their transactions.
Indeed, nothing in the Act dictates the price that a California
art seller may charge when selling art outside of the state, and
California does not impose any preconditions whatsoever on
sales by Californians who wish to dispose of their art out-of-
state. The Court’s cases striking down state laws as
extraterritorial regulations simply do not apply.
If we were permitted to reach this issue, I would uphold
the Act as applied to Californians who sell their art in-state or
out-of-state, in this country or elsewhere. I would hold that
the Act’s requirement that Californians pay to the artists a
portion of the proceeds they receive as a result of the sale of
their art does not violate the dormant Commerce Clause.
II. Out-of-State Agents of California Art Owners
The constitutionality of the Act as applied to out-of-state
agents of California art sellers presents a far different
constitutional question. In an attempt to make the Act more
effective, the legislature provided that whenever fine art is
26 SAM FRANCIS FOUND. V. CHRISTIES
sold by an agent of a Californian — even if the agent is not a
Californian, and even if the sale takes place outside of
California — “the agent shall withhold 5 percent of the
amount of the sale, locate the artist and pay the artist.” Cal.
Civ. Code § 986(a)(1). The agents that the law contemplates
are primarily major auction houses, such as defendants
Christie’s and Sotheby’s, which, along with major auction
houses in other countries, have the ability and experience to
obtain the widest buyer pool and the highest prices for the
sale of fine art. They also have the resources necessary to
locate artists all over the world and to comply with the terms
of the Act by remitting to them a portion of the proceeds. By
relying on major auction houses to locate and pay artists,
however, the Act imposes obligations on out-of-state entities
with respect to transactions that occur outside of California.
That obligation is a part of the transaction they conduct, and
their role in that transaction is not completed until they have
disbursed a portion of the funds they have received to the
artist when he can be located.
Unlike the obligations imposed by the Act on Californians
after they receive monetary proceeds from the sale of their art
regardless of where it is sold, it cannot be said that the Act’s
imposition of special obligations on out-of-state agents for
out-of-state transactions represents a regulation solely of the
actions of the residents of the regulating state. Nor can it be
said that as applied to out-of-state agents this case is a
“practical effects” case — i.e., a case concerning an intrastate
regulation with possibly significant practical effects on out-
of-state commerce. Majority Op. at 9. Instead, as applied to
the actions of out-of-state agents in conducting a sale of art
outside of California, the Act directly applies “to commerce
that takes place wholly outside of the State’s borders,” and is
therefore per se invalid under the Court’s dormant Commerce
SAM FRANCIS FOUND. V. CHRISTIES 27
Clause jurisprudence. Healy, 491 U.S. at 336 (citation
omitted); see also Valley Bank v. Plus System, Inc., 914 F.2d
1186, 1190 (9th Cir. 1990).
I have serious doubts that such a per se rule is wise as a
matter of policy or that it is within the purview of the
dormant Commerce Clause as properly framed. The Supreme
Court has explained that the “crucial inquiry” under the
dormant Commerce Clause is whether the law at issue is “a
protectionist measure, or whether it can fairly be viewed as a
law directed to legitimate local concerns.” City of
Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978); see
also McBurney, 133 S. Ct. at 1719 (“Our dormant Commerce
Clause jurisprudence . . . is driven by a concern about
‘economic protectionism — that is, regulatory measures
designed to benefit in-state economic interests by burdening
out-of-state competitors.’” (citation omitted)). In its
extraterritoriality cases, however, the Court neglects this
central concern of the dormant Commerce Clause. Indeed,
the Court’s requirement that we invalidate all state laws that
apply extraterritorially “has nothing to do with favoritism.
Even state laws that neither discriminate against out-of-state
interests nor disproportionately burden interstate commerce
may run afoul of extraterritoriality . . . .” American Beverage
Ass’n v. Snyder, 735 F.3d 362, 378 (6th Cir. 2013) (Sutton, J.,
concurring).
This case is one such example. The Act imposes
obligations on out-of-state entities not to serve any
protectionist purpose, but rather to make the law’s valid
requirement that Californians remit a portion of the proceeds
they receive from art sales more effective. It does not
provide any incentive for auction houses to sell the art of
Californians relative to other states’ residents, nor does it
28 SAM FRANCIS FOUND. V. CHRISTIES
impose more stringent regulations on out-of-state auction
houses than it does on California auction houses. The Act, in
short, is simply not the type of law to which the Court’s
dormant Commerce Clause jurisprudence is primarily aimed;
it in no way provides an advantage to California residents or
discriminates against out-of-state businesses, and it serves a
clearly legitimate local goal — strengthening an in-state
regulation benefitting the arts.
Circuit courts in recent years have been compelled by the
Court’s extraterritoriality doctrine to invalidate other state
laws that serve no protectionist purpose whatsoever and that
further clearly legitimate state goals, for the sole reason that
they apply to out-of-state conduct directly. Michigan, for
example, promoted recycling by requiring consumers for each
beverage container purchased to pay a ten-cent deposit that is
redeemable upon returning an empty container. Id. at 366
(majority opinion). In order to prevent the fraudulent
redemption of ten cents for a container not purchased in
Michigan, the state passed a law requiring that containers sold
in Michigan bear a unique mark, and that the unique mark
used on Michigan containers not be used on containers sold
in other states. Id. at 367. Although the Sixth Circuit
concluded that the law does not discriminate against interstate
commerce in any manner, id. at 370–73, it held that the law’s
unique-mark requirement was extraterritorial in violation of
the dormant Commerce Clause because it regulated the marks
on containers sold in other states, id. at 373–76. Like its Big
Ten rival (though surely not its primary one) to the north,
Indiana also had a laudable goal when it sought to protect its
residents from predatory lending. It did so by subjecting all
loan companies that advertise in Indiana and enter into a loan
transaction with a resident of Indiana — irrespective of
whether the loan company operates in Indiana — to Indiana
SAM FRANCIS FOUND. V. CHRISTIES 29
lending regulations. Midwest Title Loans, Inc. v. Mills,
593 F.3d 660, 662–63 (7th Cir. 2010). Despite the fact that
this law, like the Michigan unique-mark law, did not
discriminate against or disadvantage out-of-state companies,
id. at 665, the Seventh Circuit — correctly under the Supreme
Court’s cases — held that the law’s application to an Illinois
loan company violated the dormant Commerce Clause, id. at
665–69.
It is unfortunate that Supreme Court jurisprudence
compels our Court in this case, and has compelled our fellow
circuit courts in others, to invalidate the extraterritorial
application of such innocuous and beneficial state laws. I
suspect that, in our increasingly interconnected country, we
will continue to see efforts from states to further legitimate
local goals even though, in some respects, they may directly
affect conduct outside of their borders. Some efforts may
well intrude on the autonomy of other states, and federal
courts may be forced to intercede. I have serious doubts,
however, that we should invalidate every state law that
applies to out-of-state conduct. In short, I would hope that,
given the numerous changes in commerce that have recently
occurred, the Supreme Court would reconsider whether the
per se rule it articulated in Healy remains a necessary aspect
of our dormant Commerce Clause jurisprudence.
In the meantime, I regret that my colleagues in the
majority have extended the extraterritoriality doctrine far
beyond where it has ever previously been invoked by
invalidating the California Resale Royalty Act not only as it
applies to out-of-state agents who conduct out-of-state
auctions or sales, but also as to its provisions that require
Californians to pay a royalty to artists following a profitable
fine art sale regardless of the site of the sale.
30 SAM FRANCIS FOUND. V. CHRISTIES
BERZON, Circuit Judge, with whom Circuit Judge
PREGERSON joins, concurring in part.
I concur in the majority opinion insofar as it holds the
California Resale Royalty Act, Cal. Civ. Code § 986 (“the
Act”), unconstitutional as applied to out-of-state art sales
conducted by out-of-state agents. As the Act so applied
“directly controls commerce occurring wholly outside the
boundaries” of California, it violates the dormant Commerce
Clause. Healy v. Beer Inst., Inc., 491 U.S. 324, 336 (1989);
see also Valley Bank of Nev. v. Plus Sys., Inc., 914 F.2d 1186,
1189–90 (9th Cir. 1990).
But I would stop there. The majority opinion, in my
view, unnecessarily decides that the Act is unconstitutional as
applied to out-of-state art sales conducted by California
residents as well. The partial dissent also reaches this issue,
arriving at the opposite conclusion. Yet none of the parties
before us are California sellers, nor does the record contain
any evidence pertaining to out-of-state sales by California
residents. Furthermore, the Act imposes somewhat different
obligations on California sellers and sellers’ agents.
Compare Cal. Civ. Code § 986(a) with id. § 986(a)(1).
That the Act’s requirement that out-of-state agents
“withhold 5 percent of the amount of [an out-of-state] sale,
locate the artist and pay the artist,” id., directly regulates
extraterritorial commercial transactions in violation of the
Supreme Court’s dormant Commerce Clause jurisprudence is
clear. It is not so clear to me, however, that the royalty
obligations the Act imposes on California sellers similarly
regulate commercial transactions, as opposed to the post-sale
income of Californian residents. But we need not decide the
latter question. Indeed, the disagreement between the
SAM FRANCIS FOUND. V. CHRISTIES 31
majority opinion and the partial dissent as to whether the Act
“directly regulates the conduct of the seller,” Majority Op. at
10–11, or simply “regulat[es] . . . the proceeds that
Californians have received from the sale of art,” Partial
Dissent at 24, illustrates why we should not, in the absence of
sufficient information concerning the Act’s operation on out-
of-state sales by California residents, determine the
constitutionality of the Act more generally.
Consequently, I would hold the Act unconstitutional as
applied to out-of-state art sales by out-of-state agents, such as
the New York auction houses party to this case, and go no
further.