The defendants in the case on appeal over the constitutionality of California’s Resale Royalty Act have just briefed the court’s question about whether the full court should rehear the case.  Responding to an order that the parties explain whether the case conflicts with recent Ninth Circuit precedent, Christie’s, Sotheby’s, and eBay all argued emphatically that no conflict justifies reinstating the law that a District Court struck down in 2012

Two years ago, the U.S. District Court in Los Angeles held that the California law—which obliges a royalty to the original artist upon resale of the work under certain circumstances—was unconstitutional.  The court concluded that the law violated the Commerce Clause of the U.S. Constitution, or more specifically the “Dormant Commerce Clause,” which is another way of describing the negative implications of the Constitution’s exclusive grant of authority to Congress to legislate interstate commerce.  Put another way, the Dormant Commerce Clause describes the extent to which states are prohibited, by virtue of the Commerce Clause, from passing laws that regulate or unduly burden interstate commerce because that is Congress’s job.

Artist Chuck Close and others sued, seeking royalties that would otherwise have been due under the act.  But the court found that the law had a “substantial effect” on interstate commerce by regulating secondary sales: “the CRRA explicitly regulates applicable sales of fine art occurring wholly outside California.”  That was enough for Judge Jacqueline H. Nguyen. 

The plaintiffs appealed, and the issue was briefed and argued on April 8, 2014 to a three-judge panel of Judges Ferdinand F. Fernandez, N. Randy Smith, and Mary H. Murguia.

Somewhat unexpectedly (and before a decision by the three-judge panel), the panel issued an order on August 29, 2014, directing the parties to brief:

whether there is a conflict in our case law regarding the applicability of Healy v. Beer Inst., 491 U.S. 324 (1989). Compare Rocky Mountain Farmers Union v. Corey, 730 F.3d 1070, 1101 (9th Cir. 2013) (“[T]he dormant Commerce Clause holds that any ‘statute that directly controls commerce occurring wholly outside the boundaries of a State exceeds the inherent limits of the enacting State’s authority.’” (quoting Healy, 491 U.S. at 336)), with Ass’n des Eleveurs de Canards et d’Oies du Quebec v. Harris, 729 F.3d 937, 951 (9th Cir. 2013) (“[T]he [Supreme] Court has held that Healy . . .[is] not applicable to a statute that does not dictate the price of a product and does not ‘t[ie] the price of its in-state products to out-of-state prices.’” (quoting Pharm. Research & Mfrs. of Am. v. Walsh, 538 U.S. 644, 669 (2003)).

Healy dealt with a Connecticut law that required out-of-state shippers of beer to affirm that their posted prices for products sold to Connecticut wholesalers were no higher than the prices at which those products are sold in the bordering States of Massachusetts, New York, and Rhode Island..  The Supreme Court struck down the law in 1989, because it:

has the impermissible practical effect of controlling commercial activity wholly outside Connecticut. By virtue of its interaction with the regulatory schemes of the border States, the statute requires out-of-state shippers to take account of their Connecticut prices in setting their border-state prices and restricts their ability to offer promotional and volume discounts in the border States, thereby depriving them of whatever competitive advantages they may possess based on the local market conditions in those States. Moreover, the short-circuiting of normal pricing decisions based on local conditions would be carried to a national scale if and when a significant group of States enacted contemporaneous affirmation statutes similar to Connecticut’s that linked instate prices to the lowest price in any State in the country. It is precisely such results that the Commerce Clause was meant to preclude.

It is interesting, then, that the Ninth Circuit asked these parties to review Healy’s effect on two of its decisions, one from 2003 and one from last year.  Rocky Mountain Farmers Union v. Corey concerned California’s fuel standards and efforts to regulate carbon dioxide output, California’s Low Carbon Fuel Standard (Cal. Code Regs. tit. 17, §§ 95480–90 (2011)).  InRocky Mountain, the Ninth Circuit held that the law’s provisions were not facially discriminatory to out of state ethanol, nor discriminatory in purpose or effect against either that ethanol or against crude oil.

By contrast, Ass’n des Eleveurs de Canards et d’Oies du Quebec v. Harris affirmed the District Court’s denial of a motion to preliminarily enjoin the State of California from enforcing California Health & Safety Code § 25982, which bans the sale of products that are the result of force feeding birds to enlarge their livers beyond normal size.  The plaintiffs, non-California entities that raise ducks for slaughter, argued that the law discriminated against them as out of state actors, but the Ninth Circuit allowed the law to be enforced.

The question in the resale royalties case is whether the Ninth Circuit needed to harmonize its caselaw in some respect such that the Close case should be reheard.  This is really two questions in one, one substantive and one procedural.  The first is whether the Ninth Circuit’s caselaw is inconsistent with Supreme Court precedent, and the second is whether the answer to the first question justifies re-briefing and re-hearing the case (the very sort of thing that Google is asking the Ninth Circuit to do right now in the Garcia/”Innocence of Muslims” case).

Not surprisingly, Christie’s and the other auction houses submitted their briefs this week arguing that the answer to both questions is “no.”  “Both the Supreme Court and the Ninth Circuit, in an unbroken line of cases, have made clear that states may not directly regulate transactions that occur beyond their borders or use their regulatory powers to control out-of-state conduct,” Christie’s brief argued.

Commerce Clause decisions bring with them big stakes.  The extent to which an action affects interstate commerce can either justify federal regulation of all stripes (e.g., the battleground over the Affordable Care Act before the Supreme Court upheld it as a tax), or be the basis to prohibit state law and regulation (e.g., wine shipment restrictions).  California is a very active state in things like environmental legislation, so pushing the balance even slightly one way or another could be a very big deal, particularly since recently-introduced federal legislationshows no sign of going anywhere after early signs of action.