In February 2009, a bill was introduced in the New York State Assembly that would require the seller to pay 5% of the sale price to the artist every time a work of art by a living artist is sold in New York for $1,000 or more. The bill was referred to committee, where it remains as of the date of this issue.

The formal justification for the bill was to provide "basic protection of the rights of artists who fall at the very bottom of the economic spectrum. Very few artists are able to support themselves and their families by the income derived from the sale of their works. This will permit artists to benefit fractionally from the appreciation of the value of their works."

This rationale has informed the concept of the resale royalty ever since it was first introduced as the droit de suite in France in the 1920's. On first blush, it seems like a simple – and even compelling – concept. The artist who creates the work should not live (and die) in poverty while others benefit from the appreciation of his work's value. In an article published in 1972 in The Art Journal, Monroe and Aimée Price described the "theology" of the droit de suite:

At its core is a vision of the starving artist, with his genius unappreciated, using his last pennies to purchase canvas and pigments which he turns into a misunderstood masterpiece. The painting is sold for a pittance, probably to buy medicine for a tubercular wife. The purchaser is a canny investor who travels about artists' hovels trying to pick up bargains which he will later turn into large amounts of cash. Thirty years later, the artist is still without funds and his children are in rags; meanwhile his paintings, now the subject of a Museum of Modern Art retrospective...fetch small fortunes at Parke-Bernet and Christie's…. The droit de suite is La Boheme and Lust for Life reduced to statutory form.

The use of the word "theology" in the article is apt; it connotes an article of faith that persists in the face of contrary evidence or argument. The resale royalty is an idea that has never really worked, but will not go away.

The Fundamental Flaws

The central feature of a resale royalty is that it requires a resale of a work of art. In other words, it only applies to secondary market transactions – and only a tiny fraction of artists ever make it to the secondary market. Moreover, even where an artist's work does sell on the secondary market, the overwhelming bulk of resale royalties are paid to the estates of the wealthiest and best known artists – such as Picasso and Matisse. This has to do not only with the significantly higher prices that are achieved for the works, but also with the difficulty and expense of enforcement. It costs money to enforce private legal rights – and the risk/reward analysis that any artist or estate must make before bringing lawsuit will be to compare the royalty to be received to the cost of litigation, as well as the cost of angering a collector who has no interest in adding the royalty to his bill.

Resale royalty schemes have also proven to be a questionable use of government resources. As an example, in California, the only state that imposes a resale royalty, if the seller of a work is unable after 90 days to locate the artist to whom a royalty is owed, the money is payable to the California Arts Council, which then has 7 years to locate and pay the artist before the funds are kept by the state to support a public arts program. An article in the Wall Street Journal in March 2009 outlined the Council's difficulties in disbursing the funds, describing one (presumably extreme) situation in which a state employee spent five months attempting to deliver an $80 check to an artist. A similar structure is proposed for New York.

As a result, the enforcement of the resale royalty laws is sporadic at best. Add to that the difficulty of even tracking sales in the private market – sales by dealers and by private collectors – and you get legislation that is likely to be more honored in the breach than in the observance.

The Australians take a turn.

Legislation became effective in June in Australia that aims to address these enforcement issues. Under the Australian scheme, every commercial sale of an original work of art (i.e., every sale in which an art market professional is involved) is required to be reported to Copyright Agency Ltd. (or CAL), a private organization designated by the Australian government to implement the legislation. The report must contain the sale date; the price; a description of the work; the title of the work; the name of the artist who created it; the artist's nationality, and whether the artist is living or dead. Where CAL deems it necessary in order to enforce payment of the royalty, it can also require the names of the parties to the transaction. Using that information, CAL determines as to each transaction whether the payment of the royalty – 5% of the sale price – is required by the statute. If it is, the seller, buyer and art market professional all bear joint responsibility for its payment.

The Australian royalty is payable with respect to (i) sales of artwork for $1000 or more, (ii) by artists who are living or have been dead less than 70 years, and (iii) who are (or were) Australian or citizens of other countries that have resale royalty legislation. In order to be paid a resale royalty, artists or their estates must be registered with CAL.

Once CAL has made a determination that the royalty is payable with respect to any reported sale, it is required by the legislation to publish on its website all of the information that it has about the transaction other than the names of the parties and the sale price of the artwork. The information stays on the website for 21 days, during which time artists or their estates who have not yet registered with CAL may register and seek payment of the royalty, and artists who are already registered may decline to receive the payment. The legislation requires that artists who decline to receive the payment do so with respect to each individual transaction; CAL is not permitted to honor blanket waivers.

Where an artist declines to receive the royalty, CAL does not collect it. In all other circumstances, CAL is required to collect the royalty and to pay it to the entitled recipient. Where, after six years, CAL is unable to locate any entitled right-holders, it will attempt to repay the party who paid it. Failing that, it will retain the money to finance the administration of the scheme.

An unintended consequence?

CAL is authorized to take steps to ensure that it is receiving the mandatory reports of every commercial art transaction and to impose penalties where parties fail to make those reports. The legislation will therefore create a comprehensive record of every sale of art that goes through Australian dealers, galleries, advisors, and auction houses. In its publications about the new rules, CAL says that "as far as it is aware" it is not required to share any of the information with any part of the Australian government, including the tax authorities. Nor is it aware of any obligation on its part to disclose information pursuant to a private inquiry under Australia's freedom of information laws. But the law is new, and the possibility remains that the information may one day be used for other purposes.

Will it work?

It remains to be seen whether the Australian experiment will work and how its success or failure will be defined.

A particular focus of the Australian legislation is the population of indigenous artists – artists whose work has recently found a broader international audience. Special efforts have been made to reach these artists, including outreach to the indigenous art centers that promote their work. This particular focus may be the closest modern equivalent of the nineteenth century starving artist in a garret, in need of protection from a sophisticated market always eager for the "next new thing."

More generally, though, the underlying fairness and usefulness of a resale royalty regime has been widely questioned.

First, as noted above, resale royalties largely benefit artists for whom the market has already amply provided. That may be an acceptable result. Some recent proponents have begun to justify the need for a resale royalty by arguing that authors and musicians receive royalties when their works are published, purchased, and performed. Shouldn't painters and sculptors get equivalent treatment? Whether or not the analogy works, it is a far cry from promoting the support of unpaid and unappreciated artists.

Second, when a collector purchases a work of art, it is a statement of confidence in the particular work. Where the purchase takes place early in the artist's career, it is a statement of confidence in the artist's future – and the purchase itself may help the artist achieve that future. There is no guarantee at the time of the purchase that the value of the art will increase. If it does, it is often related to the later work of the artist himself. If his career is strong, not only will the value of his earlier work increase, but his later work will also command higher prices. If his reputation fades as he gets older – i.e., if he and his work do not stand the test of time – the prices of his earlier works will likely decline. If the artist is to be entitled to a portion of the upside, should he also share in the collector's loss if the price declines?

Finally, as a practical matter, galleries who work with emerging artists often use the proceeds of secondary market sales to subsidize their sales efforts on behalf of new and emerging artists. By diverting the funds that dealers would otherwise use to support as–yet unsuccessful artists, or that collectors might otherwise use to purchase work by those artists, the royalty may actually be counterproductive.

Each of these arguments would be less persuasive if a resale royalties scheme could be shown to accomplish its proffered goal – that is, to assist the artists "at the very bottom of the economic spectrum." Perhaps the enforcement mechanism now in effect in Australia will make a step in that direction. It will be interesting to assess its effectiveness over the next five or ten years.