Steve and Katie give a brief update on New York City’s recent repeal of its regulations governing auctioneers and auction practices. These regulations provided consumer protections by enforcing a measure of transparency into the auction process, such as requiring auctioneers to publicly disclose when they had a financial stake in an object being sold. Interestingly, major stakeholders appeared surprised by the repeal, which they had not requested and seemed indifferent about.
Resources
https://codelibrary.amlegal.com/codes/newyorkcity/latest/NYCrules/0-0-0-16336
https://www1.nyc.gov/assets/buildings/local_laws/ll80of2021.pdf
Episode Transcription
Steve Schindler: Hi, I’m Steve Schindler.
Katie Wilson-Milne: I’m Katie Wilson-Milne.
Steve Schindler: Welcome to the Art Law Podcast, a monthly podcast exploring the places where art intersects with and interferes with the law.
Katie Wilson-Milne: The Art Law Podcast is sponsored by the law firm of Schindler Cohen & Hochman LLP, a premier litigation and art law boutique in New York City. Hi, Steve.
Steve Schindler: Hi, Katie. Welcome back by the way.
Katie Wilson-Milne: Thank you so much. It’s wonderful to be back and we’ll be back together for a full episode very soon, but we had to dip our toes in here for a quick update, because there’s been some— a surprise sort of regulatory legal change in the art auction world this week. And we wanted to update our listeners. So, Steve, what has happened this week?
Steve Schindler: Well, I’ll tell you what happened from my perspective. On Wednesday, I was heading to a breakfast at Christie’s, a preview of some of the wonderful works that are coming up for auction. And I was looking and reading the New York Times and getting past some of the very bad news of the day. And I managed to scroll down into the section about New York, and I saw, lo and behold, that the regulations that have been in effect in New York that governed the auction business have suddenly been repealed. And I was incredibly surprised, because I had no idea that there was any talk about their being repealed. And when I got to the preview at Christie’s, I happened to run into two very distinguished art lawyers. And I said, do you guys know about this? I was just reading about this for the first time in The Times. And they looked at me like I had two heads, and they said, “no, we don’t know anything about it.” And so these very significant regulations have apparently been rolled back by the New York City Council as part of a what seems to be— have been a much larger roll back of regulations intended to help the city recover and to promote business in the wake of the pandemic. And somehow the rules regulating auctions in New York fell into this basket and, lo and behold, they have now essentially disappeared.
Katie Wilson-Milne: So Steve, these are New York City regulations, I guess we should be clear. So they’re specific to auctions in New York City, and we actually did a whole episode on auctions with a very esteemed auctioneer at Sotheby’s, [Oliver] Barker, where we talked about some of this. We just, obviously— we’ll let everyone know that that episode has been superseded by these changes to a large degree. But, Steve, let’s take a step back. What were the regulations?
Steve Schindler: There were a number of regulations and honestly, I think some of them may be okay to retire, but I’m going to talk about the principle regulations that I think do make the auction market more transparent. For one, there’s a requirement that auctioneers have to obtain a license. which I guess to some extent there seems to have been very little complaints about auctioneers without licenses. I don’t know how important that is ultimately, but auctioneers for now in New York City do not need to obtain a license.
The other few important things are that the auction house was obligated to disclose that there was a reserve on any lot consigned by a consigner. And just as a review for those who are not that familiar with the auction process, most auctions of fine art are sold with a reserve, which is a secretly set price, below which the lot will not be sold. The public is not entitled to know what the reserve price is, but they are entitled to know that there is a reserve price. And that was one of the regulations. In addition to that, there was a regulation that basically said that this secret reserve price could not be set higher than the low estimate that was given for the work, and we can come back to that.
Another regulation that went into effect was that the auction houses were required to disclose to purchasers whether the auction house had any kind of financial interest in the work being consigned. And that would include whether they had made a loan advance. It would include whether or not they had made a guarantee or any other kind of financial arrangement between the consigner and the auction house.
The other practice that the regulations addressed was so-called “chandelier bidding.” And we talked about that on our earlier episode about auctions. And the notion is when you have an auction with a reserve, the auctioneer often bids or appears to bid on a work up to the reserve price. And the reason it’s called chandelier bidding is that it somehow seems like the auctioneer is taking bids off the ceiling, or the chandelier, when in fact he’s simply just making them up. And that could be viewed as a deceptive practice in some instances. I think most people who attend, certainly, auctions of higher-end works in New York understand this. But the regulation that went into effect reiterated that the auction house was not entitled to bid for its own account, but that the auctioneer could make these bids up to the reserve price because it was well understood that unless an actual bid came in at the reserve price, the work would not be sold. So it’s just a way to kind of warm up the room, I think is the way the auction houses see it and the way the regulations codified it.
Katie Wilson-Milne: So, Steve, why did these regulations come into play?
Steve Schindler: I think you have to go back to the mid-1980s before these regulations were promulgated, and there was a fairly notorious case that came to light at Christie’s at the time. There was a significant consignment of works to Christie’s, and for a variety of reasons, many of the works did not sell. It had to do with the fact that the reserves were set too high and weren’t adjusted when Christie’s seemed to have known that the works would not sell. But after the auction, rather than indicating that the works didn’t sell, Christie’s went public and said falsely that these works did sell. And that was sort of the, I think, the triggering event that led to a New York City investigation of the auction houses and auction practices, and ultimately to a series of rules that were intended to make the auction market more transparent for consumers.
Katie Wilson-Milne: So now all these rules are gone. The auctions don’t have to abide by these?
Steve Schindler: They appear to be.
Katie Wilson-Milne: As of, like, April 10th, or something.
Steve Schindler: As of April 10th, there’s a— you know, and if you look at the register of the laws that the city council published that said— it’s just a teeny entry indicating that section 2-120 of the Rules of the City of New York have been repealed. So now, it’s a little unclear what comes next.
Katie Wilson-Milne: Yeah, so we’ll talk about how perplexing this is from a business-politics perspective in a moment, but there are other laws in place. So it’s not like these New York City regulations go away, and it’s a total Wild West in the auction world. It’s still a more regulated, visible market than, let’s say, the private sale market. We have the UCC, the Uniform Commercial Code, which governs the sale of goods. It has a very, very small section on auctions. It doesn’t speak to these kinds of trade practices, which are really consumer-focused, but it does talk about if an auctioneer has a reserve or not. When something sells, what it means when the hammer comes down. So there’s a little bit in the UCC. It says if the auctioneer receives a bid on the seller’s behalf or the seller causes a bid to be made and notice is not given that that’s permitted at the auction, the buyer can basically avoid the sale. So there’s a little bit of consumer-facing regulation in the UCC. And then we also have state and city Consumer Protection Laws, which to our knowledge don’t explicitly apply to either the art world or the auction market, but could be in certain situations applied to the art world, if there are found to be unfair consumer practices or deceptive practices that impact consumers in violation of these laws. And then of course we have the much-lauded New York statute, the Arts and Cultural Affairs Law, which also regulates the sale of art by art merchants and does have some consumer protection provisions in there as well. And of course there are warranties. Under the UCC, there are warranties that are implied with respect to title and, depending on materials provided in the sale, authenticity. So there’s a host of sort of legal things out there that can protect the consumer, but nothing this explicit or targeted. Do you agree with that, Steve?
Steve Schindler: Yeah, I do. Katie. Obviously the UCC provisions that you mentioned do set the sort of contractual framework to some extent of how auctions work and how a contract is formed in an auction setting. And of course the warranties of authenticity. both under the UCC and the Arts and Cultural Affairs Law, are very important. I think what’s missing when you eliminate— these regulations really kind of go to, really, the transparency of the auction. And I think just taking an informal poll of a couple of people in the business, I think there’s some sense that the auction houses will voluntarily maintain some of these practices that a lot of people who attend and bid at auctions have gotten used to.
I don’t think it’s clear yet. I know the New York Times article indicated that Phillips and Christie’s had said that they would continue to abide by at least some of the important regulations that I’ve just described. And Sotheby’s had said that they were thinking about it. But I think they do want to project transparency. And that will in turn, I think as a business, invite people to participate more than they would if they think that somehow the process is rigged or that there’s some secret knowledge that they’re not privy to.
Katie Wilson-Milne: Right, which was the whole purpose of these laws. And honestly why the auction houses obeyed them and incorporated them without much of a fuss for many, many years. And I think one of the amusing things from our perspectives, is this is like the rare regulatory incident where the stakeholders, namely the auctioneers, weren’t lobbying for this to be overturned or repealed. They weren’t upset about it. It had completely been incorporated into their business practices and their contracts and how everyone understood the auctions to go. By all accounts, the high-end auction market is doing just fine. It doesn’t seem to have affected anyone’s desire to sell or buy.
Steve Schindler: Yeah, it’s doing better than ever.
Katie Wilson-Milne: So it was this little surprise in this package of business stimulation legislation from the city, but there’s absolutely no evidence that it had any impact on business. And none of the players who would be the most sensitive to that impact cared at all about repealing these laws. And in fact, as you just said, Steve, some of them might just continue to follow them anyway, because they think it’s a good business practice. So it’s really just a very peculiar, unusual kind of regulatory moment, even for those listeners who aren’t so focused on the art world. I think it’s a very surprising example of legislation. We’ll obviously keep our listeners updated if there are any further developments in this field, and we’ll see how the auction houses respond.
Steve Schindler: Any hints on what’s coming next for the Art Law Podcast?
Katie Wilson-Milne: Oh, I think we’ll have some per usual— we’ll have a little sprinkling of money laundering and sanctions, which is hard to avoid these days. We hope to talk about some more cultural property issues in light of all of the debates going on in museums around the world about return to countries of origin. And another perennial favorite is art-meets-finance, so we’ll see how the securitization of art project is progressing in some companies now.
Steve Schindler: Alright, sounds good. And that’s it for today’s podcast. Please subscribe to us wherever you get your podcasts, and send us feedback at podcast@schlaw.com. And if you like what you hear, give us a five-star rating. We are also featuring the original music of Chris Thompson. And finally, we want to thank our fabulous producer, Jackie Santos, for making us sound so good.
Katie Wilson-Milne: Until next time, I’m Katie Wilson-Milne.
Steve Schindler: And I’m Steve Schindler bringing you the Art Law Podcast, a podcast exploring the places where art intersects with and interferes with the law.
Katie Wilson-Milne: The information provided in this podcast is not intended to be a source of legal advice. You should not consider the information provided to be an invitation for an attorney-client relationship, should not rely on the information as legal advice for any purpose, and should always seek the legal advice of competent counsel in the relevant jurisdiction.
Music by Chris Thompson. Produced by Jackie Santos.