Resale Rights for Artists: New Developments

Canada may soon join France, the UK and more than 90 other countries in implementing a system of resale royalties for artists. Under the droit de suite (literally, “right to follow”), artists in those countries have a legal right to recoup a percentage of resales of their works. The droit de suite has never been a part of U.S. copyright law. There have been numerous legislative attempts to change that, most recently in 2018 when Congressman Jerry Nadler introduced the American Royalties Too Act. In the 1970s California attempted to create such a right in state law. The Ninth Circuit all but invalidated that statute, finding that it was preempted by federal copyright law’s “first sale” provisions (17 U.S.C. Section 109). Those provisions reserve to the purchaser of a work the right to sell, display or otherwise dispose of that particular copy, notwithstanding the interests of the copyright owner.

In the European Union, the droit de suite has been incorporated into the Resale Rights Directive (2001/84/EC), which provides that:

Member States shall provide, for the benefit of the author of an original work of art, a resale right, to be defined as an inalienable right, which cannot be waived, even in advance, to receive a royalty based on the sale price obtained for any resale of the work, subsequent to the first transfer of the work by the author.

Proponents of the proposed Canadian legislation, which would pay artists 5% of the resale value of their work during the term of copyright, argue that it is badly needed to improve economic conditions for indigenous artists:

When you look at urban, rural and remote communities, art brings in cash and supplements low income. The artist's resale right will have a positive financial impact as 10% of Canada’s export is Inuit art. Imagine how much more the other Canadian artists who sell within the 93 countries would bring into Canada. The remote communities would really benefit from the artist’s resale right as we in Nunavut have the highest cost of living.

The Art Newspaper, "Canada moves toward adopting artist's resale rights law," by Hadani Ditmars, 8/12/22

Not everyone agrees. For example, the Art Dealers Association of Canada has called this “a terrible idea,” claiming it would create a bureaucratic nightmare, especially for small galleries, raise the price of art and reduce sales.

Similar debates exist in the U.S. One argument in favor of resale royalties is the perceived need for greater harmony in the international market, since without such laws, U.S. artists cannot receive royalties on the resale of their works in droit de suite countries and vice versa. On the other side of the debate, some argue that only well-established artists whose work commands high prices, or their estates, can benefit from resale royalties. Another argument against resale royalties is that artists will have to reduce the prices of their works upon primary sale in view of the royalty obligation down the line. And there will always be issues of enforcement. For example, a lawsuit has been initiated in the U.K. against multi-millionaire art dealer and collector Ivor Braka and his company alleging that he owes unpaid royalties dating back to 2006, when the U.K. law was enacted.

There has been a great deal of discussion about resale royalties in connection with the sale of NFTs. Upon initial sale of the NFT the artist can program into the code stored on the blockchain that creates or “mints” the token representing the digital asset a right to a specified percentage of the proceeds each time the NFT is resold. Artist Frank Stella has long been an advocate for artist resale rights and has recently begun issuing NFTs, apparently to implement a mechanism to secure such rights.

So called “smart contracts” are self-executing (that is things happen automatically upon the occurrence of certain pre-conditions), so the royalty payment is made upon transfer of the NFT. In reality, however, the mechanics are more complicated:

What is not well understood is that most of NFT resale percentages are not actually coded into the same contract as that comprising the NFT. For NFTs minted with Ethereum, the resale royalties are layered on top of the standard contract, and is known as the 721. When traveling to another Ethereum-based platform, the standard 721 provisions are recognised, while the additional layer containing the resale royalties may not. It is unclear what would happen should a dispute be raised and brought to court.

Because the technology is new, and because of the lack of interoperability among platforms, the resale provisions of the smart contract can be avoided:

That means if a user buys on one ethereum-based platform and resells it on another, the buyer and seller can get around the resale terms by taking the transaction “off chain.”

Moreover, a downside of smart contracts is the inability to amend the terms to adapt to unforeseen circumstances. The unanswered questions around smart contracts are in addition to the significant vulnerabilities of blockchain transactions generally and, except for a few states, the lack of legal enforceability.

For an artist’s commentary on the vulnerabilities of smart contracts, see a site-specific augmented reality (AR) series by artist Nancy Baker Cahill entitled “Contract Killers” (2021), which

…uses the contractual vocabulary of blockchain technology to highlight broken social contracts of all kinds. … [A]n AR handshake dissolves into thin air upon contact. Each of the three handshakes represents a realm of obligation and agreement where trust evaporates, where stated contracts continue to fail individuals and communities...

Lutzker & Lutzker will continue to follow the Canadian legislation and other developments relating to artist resale royalties, including whether Representative Nadler’s proposals will resurface in the next Congress.