Peter J. Karol and Guy A. Rub on resale contract law and the secondary market
April 05, 2021
Peter J. Karol and Guy A. Rub on resale contract law and the secondary market
THE CONFOUNDING PRICES realized by cyptoart sales recently have overshadowed another extraordinary aspect of these transactions. Many NFT “smart contracts” include an embedded resale royalty—often 10 percent—that flows back to the artist every time the work is resold. Better yet for the creators, when used, this NFT technology distributes those royalties automatically upon any change of ownership registered on the blockchain (without the need for lawyers and letters). Beeple himself, maker of this year’s Everydays: The First 5000 Days, has benefited from this income stream. When an earlier work, Crossroad, was resold six months after its initial purchase, he reportedly netted more from the resale royalty than the original transaction.
The ease with which resale royalties have been secured through the blockchain only serves to underscore how difficult it has historically been for traditional artists to control downstream use and, in particular, sales of their works. Ownership of physical objects is governed by a complex web of longstanding legal rules. Those rules typically allow buyers of art to do almost as they please with their purchases. They can choose whether and how to present them; they can lend them to anyone they like; they can donate them; and they can sell them for large profits that they do not need to share with the artists that made them. Moral rights laws prevent buyers from destroying or modifying some of these works, and copyright law adds certain restrictions, particularly when it comes to making and showing digital copies of an acquisition. But the laws governing purchased originals are, for the most part, minimal in the United States.
That framework has created a fraught dynamic between some artists and their buyers. While artists want their works to be sold, they also want, at times, to limit some of the actions that their buyers can take. For example, since the ’70s, prominent American painters like Robert Rauschenberg, Frank Stella, and Chuck Close have complained that resellers of their works do not share with artists the profits they make on their art’s appreciation in value.
Many date the beginnings of this resale-rights movement to an (in)famous auction in 1973 in which the collector Robert Scull sold a Rauschenberg combine, Thaw, 1958, for more than eighty-five times what he had paid for it a decade or so earlier. Rauschenberg can be heard in footage of the event complaining to Scull of the “great mark-up” and noting that he had “been working my ass off for you to make that profit.” (Lesser known is that the two went on to embrace on camera after Scull pointed out to Rauschenberg that Rauschenberg, too, would benefit from the sale because his other works would be worth more as a result of the high auction price. This turned out to be an accurate prediction).
In recent years, prefiguring the rise of NFT resale royalties, a new wave of artists and their gallerists have been attempting to exercise control over the secondary markets of their object-based works. In August 2020, Christie’s required buyers of works from an exhibition of emerging and mid-career Black artists, curated by Destinee Ross-Sutton, to sign a contract promising to give the artists a right of first refusal for five years and a right to receive 15 percent of the proceeds of certain future resales. Similarly, it was recently reported that Brian Donnelly, aka KAWS, requires his buyers to sign a contract stipulating that they will only resell the work only to his gallery, and not through an auction house, for five years.
These are not the first attempts by artists to use contract law to manage the postsale use of their works. Seth Siegelaub and Robert Projansky, for example, created a resale-royalties contract in 1971. But while that contract remains a focal point of academic interest, it was never adopted on a wide enough scale to have any meaningful impact on the art market. This new resale movement, by contrast, seems to be gaining true commercial traction.
Unfortunately, these new efforts have repeatedly been misconstrued as essentially ineffectual, symbolic gestures. The New York Times Magazine recently reported, for instance, that the contracts Donnelly uses “aren’t legally binding.” Even artists and their dealers echo those sentiments, undercutting their own powers. Ross-Sutton was recently quoted by Artsy as observing that the contracts she uses “aren’t really there to completely stop people from doing anything.” Similar assertions are made, at times, by art-market participants and their representatives who find those efforts by the artists and the changes they entail undesirable. Reporters often too eagerly rely on those resources.
We, however, are highly skeptical of such cautious and conservative views of the power of these contracts. As law professors who work in this space, we see multiple legally binding avenues for artists and their dealers to control the use and resale of their works, at least under US law. For instance, a properly drafted contract entered into in New York giving Donnelly a right of first refusal if the buyer resells the work in the next five years is almost certainly enforceable against that buyer.
It is true that contract law is not without limits. Courts, at times, try to protect uninformed buyers, or those without negotiating leverage, from manifestly unfair deals. But Donnelly’s buyers, like most purchasers at the big auction houses, are neither uninformed nor weak. They are typically some of the wealthiest, most financially savvy people in the world. Similarly, the law sometimes limits unreasonably long or effectively perpetual restraints on resale. However, a short-term right of first refusal is fundamentally different from the type of arrangements that courts strike down. It is highly likely to survive any legal challenge and be fully enforceable.
Actions for breach of these provisions may be hard and expensive to bring. Artists might only be able to sue the buyers who originally purchased the work from them and not the new purchasers. And there could be cases, however unlikely, in which the original buyers are beyond the legal reach of artists (if, for example, they and their assets are located abroad or if they suddenly go broke). But that doesn’t mean that such lawsuits can’t be brought, successfully, by a sufficiently passionate and wealthy artist. Together with the reputational harm they might cause, the risk of losing such lawsuits should be enough to deter many purchasers from breaching their contracts with artists.
In 2004, the Zach Feuer Gallery in Chelsea reportedly decided to sell Dana Schutz’s painting Civil Planning, 2004, to David Teiger with the understanding that he would later gift it to the Museum of Modern Art. Otherwise, the gallery said, it would not have made the sale. Unfortunately, there appears to have been no formal attempt to document this understanding. When Teiger died, his heirs sold the painting at Sotheby’s for 160 times the purchase price, contravening the intent of the earlier transaction and leaving the gallery without legal recourse. The gallery, however, could have easily avoided the situation by using a host of legally binding tools, from a simple contract to just lending the work to Teiger for the rest of his life.
The decision of whether to place restrictions on an artwork’s buyer isn’t trivial. It might cause some buyers to pay less or to refuse to purchase the work altogether. It is a decision that should not be taken lightly. However, it is one that artists—including those working in a medium as traditional as paint on canvas—should be able to make. The law empowers them to do so.
Peter J. Karol is a professor of law and director of the intellectual-property certificate program at New England Law | Boston, where he focuses his scholarship on art and intellectual-property law.
Guy A. Rub is a professor of law at the Ohio State University Moritz College of Law. His scholarship explores the intersection of art, copyright, and commercial law.