Estate of Graham v. Sotheby’s, Inc., 2016 U.S. Dist. LEXIS 53079 (C.D. Cal. Apr. 11, 2016):

Before the Court are three Motions filed in these related actions:

   o Auction House Defendants' Joint Motion to Dismiss the Complaints (the "Joint Motion"), filed on February 1, 2016. (No. 11-8604: 99; No. 11-8605: 103). Plaintiffs submitted an Opposition to the Joint Motion on February 22, 2016, followed by the Auction Defendants' Joint Reply [*3]  on March 7, 2016. (No. 11-8604: 101, 106; No. 11-8605: 106, 109).

o Defendant Sotheby's Motion to Dismiss Class Action Complaint under Rule 12(b)(1) (the "Sotheby's Motion"), filed on February 1, 2016. (No. 11-8604: 98). Plaintiffs filed an Opposition on February 22, 2016, and Defendant Sotheby's Reply followed on March 14, 2016. (No. 11-8604: 104, 107).

o Defendant eBay's Motion to Dismiss Plaintiff's Complaint (the "eBay Motion"), filed on February 1, 2016. (No. 11-8622: 92). Plaintiffs filed an Opposition on February 22, 2016, and Defendant eBay's Reply followed on March 7, 2016. (No. 11-8604: 92, 99).

Having considered the papers filed on the Motions and the parties' arguments at the hearing held on March 21, 2016, the Court rules as follows:

The Joint and eBay Motions are GRANTED to the extent they argue that the California Resale Royalty Act ("CRRA") is preempted under the Copyright Act of 1976. The CRRA stands in conflict with the first sale doctrine codified in 17 U.S.C. § 109(a), which prohibits copyright holders from exercising downstream distribution control of their products. Because the CRRA regulates secondary transactions of fine art by permitting artists to recover unwaivable royalties from resellers, [*4]  the state law frustrates the purpose of § 109(a) and disrupts the equilibrium of the Copyright Act. Plaintiffs' claims, moreover, are independently preempted under the express preemption clause of 17 U.S.C. § 301(a) because they are not qualitatively different from garden-variety copyright claims.

The eBay Motion is also GRANTED to the extent it contends that Defendant eBay is not a proper Defendant under the CRRA. Plaintiffs' allegations that Defendant eBay acted as a seller or a seller's agent are implausible in light of the functionality of Defendant eBay's website. Because the CRRA imposes liability on only sellers of fine art or their agents, Plaintiffs' claims against Defendant eBay are deficient.

The Joint and eBay Motions are DENIED, however, to the extent they claim that the CRRA violates the Takings Clause of the Fifth Amendment and that Plaintiffs' allegations against Defendants Sotheby's and Christie's fail under Rule 8. As to the Takings Clause, the property interests in royalties belong to Plaintiffs, not to Defendants or their clients. There can be no "takings" under these circumstances. And as to Plaintiffs' allegations, the Complaints plead sufficient plausible facts to put Defendants Sotheby's and Christie's on notice of their misconduct.

The Sotheby's [*5]  Motion is DENIED. The jurisdictional arguments Defendant Sotheby's makes are so intertwined with the merits of these actions that they are not appropriately adjudicated under Rule 12(b)(1).

I. BACKGROUND

At the core of these actions is the disputed validity of the CRRA. The CRRA requires the seller of fine art to pay the artist a five percent royalty as long as "the seller resides in California or the sale takes place in California." Cal. Civ. Code § 986(a). The right to royalties may not be limited through contract, but it may be expanded beyond the five percent of the sale proceeds. Id. The term "fine art" is defined as "an original painting, sculpture, or drawing, or an original work of art in glass." Id. § 986(c)(2). Some sales of fine art are excluded from the royalty requirement, such as those for less than $1000. Id. § 986(b)(2).

The CRRA applies not only to sellers but also their agents. Cal. Civ. Code § 986(a)(1). When an art gallery, for instance, sells a collector's painting at an auction, it must "withhold 5 percent of the amount of the sale, locate the artist and pay the artist." Id. If the agent is unable to locate the artist within ninety days, it must pay the royalty to the California Arts Council. Cal. Civ. Code § 986(a)(2). And if the agent fails to comply, the artist may sue [*6]  to recover the royalty and reasonable attorneys' fees. Cal. Civ. Code § 986(a)(3), (7).

Plaintiffs allege that Defendants--two auction houses and an online retailer--have failed to comply with the CRRA as agents for various art sellers. All three Complaints are based on materially identical allegations and plead putative class actions on behalf of artists whose work Defendants allegedly sold without paying royalties. Each proposed class is divided into two subclasses: one covering sales that occurred within three years of the filing of these actions, and the other covering older sales that did not provide sufficient information to ascertain whether the artists were owed royalties. Plaintiffs seek to obtain royalties, punitive damages, attorneys' fees, and injunctive relief. (See Sotheby's Complaint ¶¶ 14-25 (No. 11-8604: 1); Christie's Complaint ¶¶ 15-26 (No. 11-8605: 1); eBay Complaint ¶¶ 13-24 (No. 11-8622: 1)).

The parties are no strangers to this Court. Four years ago, the Court (the Honorable Jacquelyn H. Nguyen, then-United States District Judge) granted Defendants' first round of Motions to Dismiss, concluding that the CRRA's regulation of sales outside California violated the dormant Commerce Clause of the United States Constitution. (Order Granting Joint [*7]  Motion to Dismiss at 19 (No. 11-8604: 43)). Plaintiffs appealed the ruling to the Ninth Circuit, and after oral argument before the three-judge panel, the majority of active circuit judges voted to hear the cases en banc. (Order from the Ninth Circuit at 1 (No. 11-8604: 73)). The en banc panel affirmed the Court's holding but determined that the unconstitutional portion of the CRRA--the portion applying to out-of-state sales--could be severed from the remaining provisions. Sam Francis Found. v. Christies, Inc., 784 F.3d 1320, 1323-26 (9th Cir. 2015) (en banc). Plaintiffs then unsuccessfully petitioned the Supreme Court for a writ of certiorari. See Sam Francis Found. v. Christies, Inc., 136 S. Ct. 795 (2016).

The parties now return to adjudicate Plaintiffs' remaining claims concerning art sold in California. Because the Joint Motion raises the most significant arguments common to all three actions, it is with that Motion that the Court begins its analysis.

***

IV. EBAY'S MOTION

Defendant eBay seeks dismissal for an independent reason: it is not a proper defendant under the CRRA. (eBay Motion at 8).

As Defendant eBay rightly notes, the CRRA imposes the royalty requirement only on "the seller or the seller's agent." Cal. Civ. Code § 986(a) (stating that "seller or the seller's agent shall pay . . . 5 percent of the amount of such sale" and that when "a work of fine art is sold at an auction or by a gallery, dealer, broker, museum, or other person acting as the agent for the seller, the agent shall withhold 5 percent of the amount of the sale") (emphasis added). The Court takes judicial notice of Defendant eBay's website [*53]  and its operation. See, e.g., Hendrickson v. eBay Inc., 165 F. Supp. 2d 1082, 1084 n.2 (C.D. Cal. 2001) (noting how eBay's website works and holding that, "[t]o the extent some of the descriptions about eBay's website are not in the record, the Court takes judicial notice of www.eBay.com and the information contained therein pursuant to Federal Rule of Evidence 201"); Action Tapes, Inc. v. Weaver, No. Civ. 3:05-CV-1693-H, 2005 WL 3199706, at *2 & n.2 (N.D. Tex. Nov. 23, 2005) (holding that eBay's website "is, after almost a decade in existence, now a matter of common knowledge of which the Court takes judicial notice"); Missing Link, Inc. v. eBay, Inc., No. C-07-04487 RMW, 2008 WL1994886, at *4-7 (N.D. Cal. May 5, 2008) (considering and taking judicial notice of eBay's User Agreement); Noll v. eBay, Inc., 282 F.R.D. 462, 463 n.1, 466 (N.D. Cal. 2012) (same); Rosado v. eBay Inc., 53 F. Supp. 3d 1256, 1260 n.1 (N.D. Cal. 2014) (same). As even a cursory examination of www.ebay.com demonstrates, Defendant operates neither as a seller nor as an agent for those who sell goods on its platform.

It is virtually common knowledge that Defendant eBay is not a seller of goods. The Second Circuit has described Defendant eBay as follows:

   eBay is the proprietor of www.ebay.com, an Internet-based marketplace that allows those who register with it to purchase goods from and sell goods to one another. It connects [*54]  buyers and sellers and enables transactions, which are carried out directly between eBay members. In its auction and listing services, it provides the venue for the sale of goods and support for the transactions, but it does not itself sell the items listed for sale on the site nor does it ever take physical possession of them.

Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d 93, 96-97 (2d Cir. 2010) (alterations and quotation marks omitted); see also Butler v. eBay, Inc., No. 5:06-cv-02704-JW (N.D. Cal. 12, 2006) ("[T]he seller is in control of the sale, not eBay . . . . Thus, the sale transaction is between the seller and the bidder."). Even the California Attorney General rejected any suggestion that eBay is a "seller," stating, "We have little doubt that eBay does not sell or offer to sell or buy or offer to buy, on behalf of another or others, any of the items." Cal. Att'y Gen. Op. No. 02-111 (2003), available at http://www.dbw.ca.gov/YNS/AGEBay.aspx. As this authority demonstrates, it is highly implausible, to put it mildly, that Defendant eBay holds title to the goods offered for sale on its platform. Cal. Com. Code § 2103(1) (defining a "sale" as "the passing of title from the seller to the buyer for a price).

For similar reasons, it is equally implausible that Defendant eBay acts as an [*55]  agent for sellers of goods. As Judge Reinhardt noted in Sam Francis, Defendant eBay "is not an 'agent' within the meaning of the [CRRA] and is therefore not subject to the Act." Sam Francis Found., 784 F.3d at 1327 & n.3 (Reinhardt, J., concurring in part and dissenting in part). That observation was not challenged by any other members of the en banc panel for an obvious reason: Defendant eBay is a platform that permits sellers and buyers to interact with one another--not an agent. The California Attorney General reached the same conclusion, stating:

   eBay does not act as an "agent for either the seller or buyer" . . . . eBay does not sell or offer to sell or buy or offer to buy, on behalf of another or others, any of the items . . . listed on its website. Rather, sellers and buyers, not eBay, initiate and directly control the selling and buying process.

Cal. Att'y Gen. Op. No. 02-111. This observation appears correct. It is implausible that Defendant eBay could, for example, enter into binding contracts on behalf of an art seller, or that the art seller could "exercise control" over Defendant eBay. Palomares v. Bear Stearns Residential Mortgage Corp., No. 07-CV-01899-WQH-BLM, 2008 WL 686683, at *4 (S.D. Cal. Mar. 13, 2008) ("To allege an agency relationship, a plaintiff must [*56]  allege: (1) that the agent or apparent agent holds power to alter legal relations between principal and third persons and between principal and himself; (2) that the agent is a fiduciary with respect to matters within scope of agency; and (3) that the principal has right to control conduct of agent with respect to matters entrusted to him."). It is the seller himself who would close the transaction, using online tools that Defendant eBay provides.

Accordingly, eBay's Motion on this point is GRANTED with leave to amend, although the Court strongly questions whether any successful amendment is possible that would be consistent with the Court's reasoning. To successfully assert claims under the CRRA against Defendant eBay, Plaintiffs must offer at least some facts supporting their conclusory allegations that Defendant eBay "sold works of Fine Art" and "acted as an agent on behalf of California sellers" (eBay Complaint ¶¶ 11).