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Attorneys

Royalties, Preemption and Attorney’s Fees

December 13 2018

by James Kachmar
The IP Law Blog

The Ninth Circuit recently was called upon to decide awarding attorney’s fees in a case where artists were suing for unpaid royalties under the California Resale Royalties Act (“CRRA”).  In the case, Close v. Sotheby’s, Inc. (decided December 3, 2018), the Ninth Circuit ordered that the Plaintiff-artists be required to pay attorney’s fees to the defendants (eBay and art auction houses) for successfully defending against claims for unpaid royalties resulting from art sales.  This conclusion required a discussion of the doctrine of preemption and a determination that defendants could still be awarded attorney’s fees under CRRA despite a finding that the bulk of Plaintiffs’ claims under the CRRA were preempted by the 1976 Copyright Act.

Plaintiffs, including the well-known artist Chuck Close, brought an action claiming that they did not receive the appropriate royalties for the sale of their works under the CRRA, which had been enacted in California in 1976.  Under the CRRA, the seller of a work of fine art must withhold 5% of the sale price and remit that amount to the artist.  Artists who do not receive such payments can bring a claim under the CRRA, which also has a provision that the prevailing party in such an action “shall be entitled to reasonable attorney’s fees.”  The Plaintiffs essentially claimed that eBay, Sotheby’s and Christie’s had failed to remit them royalties under the CRRA for as far back as 1976.

At the district court level, the artists lost and their claims were dismissed.  The district court found that the CRRA, which had been enacted in 1976, was subsequently “preempted” by the 1976 Copyright Act that went into effect in 1978.  Preemption occurs where a Federal statute governs a subject matter so that it is the intent of Congress to “preempt” the state from enacting a contrary law.  In essence, the district court was finding that the sole remedy for the Plaintiff-artists for claiming royalties due them was under the1976 Copyright Act and not the California state CRRA.  After the Plaintiff-artists appealed the trial court’s decision to the Ninth Circuit, the Ninth Circuit affirmed the trial court for the most part but did remand some of the claims of Plaintiffs back to the trial court with regard to those sales that occurred between January 1, 1977 and January 1, 1978 (the enactment of the CRRA and the effective date of the Copyright Act).  After the Ninth Circuit’s ruling, the Defendants moved for an award of attorney’s fees claiming that they were the prevailing party under the CRRA.  The Plaintiff-artists opposed the request claiming that since their CRRA claims had been found to have been preempted by federal law, the defendants were not entitled to attorney’s fees under the CRRA for similar reasons.

The Ninth Circuit began by noting that the CRRA allows for an attorney’s fees award to the “prevailing party” and was mandatory because of the use of the language “shall be entitled.”  Nevertheless, because the attorney fee provision had only been added to the CRRA in 1982, the Court would limit its examination of an award of attorney’s fees to those claims pertaining to sales after that date.

Plaintiffs first claimed that because their CRRA claims had been adjudged to be preempted, that meant that the attorney’s fees provision in the CRRA was likewise preempted.  The Ninth Circuit rejected this claim.  First, it rejected the Plaintiffs’ argument that the decision had essentially rendered the CRRA “null and void.”  The Court noted that this is not the legal effect of preemption, rather under the doctrine of preemption, a court is refusing to enforce a claim under state law where it is preempted by an applicable federal statute.  Thus, a ruling that a claim is preempted does not mean that the state law itself is “null and void,” which can only happen if the state legislature subsequently repeals the legislation.  Furthermore, the Ninth Circuit noted that there was nothing in the CRRA that requires a prevailing party to prevail in a certain way, i.e., whether on the merits or by way of preemption. As long as a claim is brought under the CRRA, regardless of whether it is preempted or not, the prevailing party under the express language of the statute “shall be entitled” to its attorney’s fees.

The Ninth Circuit continued by noting that the attorney’s fees provision in the CRRA was not preempted by the 1976 Copyright Act.  First, there was nothing in the 1976 Copyright Act that expressly stated that it was preempting any state law-based attorney fee provisions.  Furthermore, fee-shifting provisions such as the one in the CRRA also appear in the Copyright Act. That is, the attorney’s fees provision in the CRRA is complimentary (rather than contradictory) to the language of the Copyright Act.  Thus, given that state law would apply to the determination of whether attorney’s fees would be awarded because diversity existed between the parties (i.e., the plaintiffs were citizens of states different from those of the defendants), the Court held that it would be proper to award attorney’s fees to defendants under the CRRA.

Finally, the Plaintiff-artists claimed that the Defendants were not necessarily the prevailing party since some of their claims had been permitted to survive, i.e., those claims for sales that took place between January 1, 1977 and January 1, 1978.  The Ninth Circuit rejected this argument and instructed that it was required to look at “the extent to which each party has realized its litigation objectives whether by judgment, settlement or otherwise.”  Here, although a small portion of the Plaintiff-artists’ claims survived, it was just a “sliver” of their claims as compared to those that have been subject to preemption and dismissed.  Therefore, in light of the overall objectives of the litigants, the Court concluded that the Defendants were the “prevailing parties” and entitled to their attorney’s fees.

The Close case demonstrates the importance of being aware of the applicability of fee-shifting statutes.  Although they may provide an incentive for attorneys to take such claims and litigate them, they can be a trap for the unwary if such claims are subject to dismissal through preemption.

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