Katie and Steve speak with preeminent art advisor Megan Fox Kelly about the proliferation of resale restrictions in art transactions, what problems they seek to address, who they purport to help, how effective they are, and the legal issues they raise. They discuss the overlapping cultural, social, and legal aspects of these contractual terms.
Resources
DW Properties v. Live Art Market, Inc. – Opinion and Order
Article: The right of first refusal in art sales in New York
About our guest: Megan Fox Kelly
Website: https://www.meganfoxkelly.com/
Megan’s Podcast Reading the Art World: https://urlgeni.us/applepodcast/artlawpodcast
Instagram: https://www.instagram.com/meganfoxkelly
LinkedIn: https://www.linkedin.com/company/megan-fox-kelly-art-advisory/
Katie and Steve discuss topics based on news and magazine articles and court filings and not based on original research unless specifically noted.
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 and Hochman LLP, a premier litigation and art law boutique in New York City. Hi Steve.
Steve Schindler: Hi Katie, how are you?
Katie Wilson-Milne: We’re back.
Steve Schindler: We are back.
Katie Wilson-Milne: And actually, we’re talking today about an issue that comes up all the time in our world that I think we’ve never discussed on the podcast before somehow.
Steve Schindler: I think after seven years, we’ve not discussed this topic.
Katie Wilson-Milne: And that topic is the numerous and seemingly proliferating restrictions on resale that we see in invoices and contracts and even, you know, not written down agreements of sale in the art world. And there are many different kinds of those. They pose a variety of problems legally, ethically and practically. And so we’re going to talk through those.
Steve Schindler: And we’re thrilled to have here with us to discuss this topic, Megan Fox Kelly. Megan is the principal of the Megan Fox Kelly Art Advisory, where for the past 25 years, she has built and managed collections for an international mix of individuals, museums, estates and foundations. Megan has curated private collections of post-war and contemporary art, important 19th and 20th century American and European art, and vintage and contemporary photography. In addition to advising clients on acquisitions and sales of artwork for their collections, her practice includes estate planning and execution, strategic planning and feasibility studies for museums, exhibition planning and administration, collection management and fine art appraisal services. Megan has served as the advisor to numerous artists and collector estates and foundations. And Megan is also the host of Reading the Art World, a podcast series with leading art world authors. So welcome to the podcast, Megan.
Megan Fox Kelly: Thank you. And thank you for inviting me to what I understand is your first conversation about this topic of resales. I feel very lucky to be a witness to it.
Katie Wilson-Milne: There’s nothing to compare it to.
Megan Fox Kelly: That’s great.
Katie Wilson-Milne: Alright, so, Megan, we have some experience with this as our clients from time to time expose us to this issue. But we know that these variety of resale restrictions are happening all the time when we don’t see them in small and maybe larger transactions. And we’re hoping maybe you can orient us by telling us, you know, what types of restrictions are typical or do you see the most? And, you know, if you think they’re helpful or harmful.
Megan Fox Kelly: It’s such a big question and it’s going to be interesting to dive into this with you guys. What I’m seeing first of all is that they are increasing. They really are proliferating in the market. We’re seeing them more frequently, not only at large galleries when we’re talking about purchases of works by, you know, highly sought-after artists, but we’re also starting to see it at smaller galleries with more emerging artists. That, you know, the trend is spreading throughout the market. The most typical restrictions that we’re seeing are, you know, first off that if a client chooses to sell a work of art, that they wait a certain period. And that can be anywhere. What I’m seeing is from three to five years. I’m not seeing too many, you know, contracts that are suggesting longer than that. And that if they choose to sell, that they offer the gallery right of first refusal. What’s interesting is that the few that I have seen have not specified exactly what price the gallery might have to purchase the work back for. So I think that that’s something that we should really dig into. The other thing that I’m seeing is that galleries, you know, again, both larger galleries with prominent artists, younger galleries with emerging artists, are requiring clients or collectors to purchase a work of art for themselves, and at the same time purchase a work of art and gift it to a museum. Often a museum that the gallery is suggesting that they give it to.
Steve Schindler: Right. The so-called buy one, give one, or BOGO sales contract.
Katie Wilson-Milne: So many problems with those, as we know. But yeah, but this strikes me, Megan, that these are actually very different types of restrictions.
Megan Fox Kelly: Very different.
Katie Wilson-Milne: We’ve seen occasionally that they’re all some, I mean, maybe not the buy one, get one, but that all these different types of restrictions in terms of when you can’t sell, when you can sell, when you can sell it, can you sell it at auction or not, are all thrown in together at the end of one invoice, almost as if no one’s considered how they fit together. And how well-reasoned do you think these terms are when we do find them at the end of an invoice, or how do they end up there?
Megan Fox Kelly: I think we’d have to ask the galleries how they’re ending up with that sort of language at the end of their, of their contracts, but I’m almost getting the sense that galleries see other galleries doing it, or they’ve seen other contracts that way, and so they’re using that language and deciding that it’s something that they need to do, but you bring up a really interesting point, Katie, that these are two very, very different things, the idea of how and when a collector might be able to resell a work of art if they decide not to keep it forever in their collections, and then the notion of buy one, give one. And from the galleries’ perspective, and I would say also from the artists’ perspective, this is driven not by necessarily a need for control, but as part of protecting the artists’ market from an overinflation in the marketplace with prices and then sudden downfalls, and also a motivation for building the artists’ legacy. And I think that that’s what’s driving the buy one, give one, especially for younger artists. They want their work to be in museums, and this is a way they think of making that happen.
Katie Wilson-Milne: And maybe we should just define for our audience what we mean when we say buy one, give one. What does that deal typically look like in an ideal situation?
Megan Fox Kelly: So in an ideal situation, a client selects a work of art, or identifies a work of art from an exhibition or the artist’s studio that they would like to purchase, and as a requirement for having the right to buy that, for getting, you know, to be in line to get a work by that artist, they need to agree to buy a work of art and gift it to an institution. Sometimes it’s an institution that they already support, but as I said, sometimes it’s not.
Katie Wilson-Milne: Right. Sometimes they’re being required to give a work of art where the gallery or the artist thinks it ought to go. Maybe we should talk about this for a second, Steve. We’ve seen some interesting examples of this in our own practice.
Steve Schindler: We have. I mean, it’s interesting, because for those listeners who are not steeped in the art market, this sounds crazy. It sounds nuts, right? It’s like you go into a gallery and say, I’d love to buy that work of art by this artist. I really love this artist.
Katie Wilson-Milne: I’ll pay the price.
Steve Schindler: I’ll pay the price that’s on the sticker. No negotiation, no discounts. And then, oh, but by the way, you really need to buy two and then give one away. And for a lot of people, that just sounds crazy. And the reason why galleries, dealers can impose those kinds of restrictions is the demand in the market place for certain artists, you know, who collectors really want to have. And there’s a wait list sometimes for these kinds of artists. And so galleries feel like they can dictate these kinds of terms. We have one client who bought a work by Yayoi Kusama and was then basically told to buy a second one and give it to a museum and did so, because they really wanted the Kusama. But I think, Katie, one of the things that I think you were suggesting is we also had a client who entered into an agreement to purchase a work of art by a living artist, also an artist very much in-demand. And the second work of art wasn’t even available at the time. So it was buy one, give one.
Katie Wilson-Milne: At the gallery’s demand.
Steve Schindler: At the gallery’s demand. The give part was the one that was available, and the get, the one that the buyer was going to keep for himself, was yet to be created. And so that raised a whole lot of problems. And certainly with the buyer who was, you know, thinking obviously, well, okay, what happens if I give this away, and then I never get another one, or the artist doesn’t…?
Katie Wilson-Milne: The artist just doesn’t make it.
Steve Schindler: Or I don’t like what the artist makes?
Megan Fox Kelly: I think that’s more my question. What if it isn’t what your client wanted?
Steve Schindler: I think it was something that, again, because of the keen interest in this particular artist, it was something that our client was willing to enter into before we got involved, and then there became complications. And in fact, one of the complications was also- involved the museum itself, and under what terms the museum was willing to take this work of art, because as you know, museums just don’t take any old work of art that comes along.
Katie Wilson-Milne: And they don’t want to be involved in this commercial transaction, right? The museum had no interest in the deal, you know that you give this, and then you get one for yourself. It didn’t want any part of it, but the museum almost had to be tied to it, because they needed to agree that the donation would only be complete when the client got their own work. It was a total mess. Exactly.
Megan Fox Kelly: And that becomes more complicated for museums if that collector happens to be a board member or a very high level donor for the museum, and they want to make them happy. And yet, you’re right, Steve, that museums have their own criteria for collecting works of art, and is this the one work by that artist that they wish to have, or would they perhaps like something else? So here you have the gallery making the decision about what work might be entering the museum. Sometimes we even see- and it hasn’t happened to me, it’s happened to other colleagues, art advisor colleagues at the APAA, who have been in similar situations, and the museum isn’t even interested in having the artist in their collection. So the whole driving force of the gift is entirely coming from the gallery, and that becomes problematic.
Katie Wilson-Milne: And it could never be fulfilled, because the museum doesn’t want it.
Megan Fox Kelly: Indeed.
Steve Schindler: Right. And it also raises other sort of ethical questions on the museum side about…
Katie Wilson-Milne: Conflicts of interest.
Steve Schindler: Conflicts of interest, curatorial privileges, and who is it that is driving, and as you say, building the collection. And if it’s coming from business entities with a financial interest in…
Katie Wilson-Milne: Or worse, board members with their own personal interests.
Steve Schindler: With the reputation of this particular artist, then that also presents problems. So for all of these reasons, I think to me, the buy one, give one is in some ways the most problematic.
Katie Wilson-Milne: It probably doesn’t fit neatly into the same category as the other type of resale restrictions we’re talking about, because it’s not exactly a resale restriction. It’s a requirement for sale.
Steve Schindler: Right. That’s right. It’s not a restraint on ownership in the future. It doesn’t impinge on that. It’s just, yeah, essentially, you want to pay twice for, for the thing that you want.
Katie Wilson-Milne: Yeah, and it does raise complex ethical non-profit issues that we’ve touched upon and don’t have time to dive into in great detail. But maybe we should shift then back to these, what have almost become mundane, regular sort of invoice terms that, as Megan said, and I agree, I think have a little bit as a copying exercise from whoever puts together the gallery invoice. They see these terms on other invoices, whether it’s an intern or someone in the registrar’s office and they’ve sort of been copied. And it may be that they’re quite easy to negotiate, because no one really understands or thinks they’re that important. But in some cases, they can be quite important and can be a negotiating point in a major purchase by a collector. So first, Megan, I think it would be helpful to understand why these may have come about. Like, what is the problem they were trying to solve? Because originally, someone had an idea that these restrictions would be helpful in some way.
Megan Fox Kelly: Right. And it’s the problem to solve, so what is the problem they are trying to address? And I think what they’re trying to address are the disappointment and the upset in the market that happens when a speculator purchases a work of art, holds it and flips it. And so I think before we go into the reasons why these don’t work from a legal position, I think it’s interesting to examine the three different roles that play into this, because I think that really answers the question as to where they came from. So the role of the gallerist, the gallerist’s role, their job, is to sell the artist’s work, but also to promote the artist’s legacy. That’s their job. An auction house’s role is not necessarily to promote the artist’s legacy, but their client is not the artist, is not the collector, their client is the seller, that is their primary client. Their job, if they’re given a consignment, is to get the highest price they possibly can for a work of art. They’re not doing something wrong when they get a consignment for a work of art from a speculator and they do the best to sell it. So they’re not really in the wrong, they’re just in this position by virtue of the fact of their role.
Katie Wilson-Milne: Right.
Megan Fox Kelly: Then there’s the role of the collector, and I think here is where the problem is. There are the collectors who, they love art, they want to collect art, they want to live with it forever, they want to pass it on to a museum, or whatever they want to do with it for the rest of, you know, within their estate planning. And then there are the other collectors who buy things, perhaps don’t even put them on the walls, you know, put them in storage, wait, flip. They’re there to invest.
Katie Wilson-Milne: Yeah, maybe we call those investors.
Megan Fox Kelly: Let’s call them investors instead of collectors.
Steve Schindler: Art as an asset class, isn’t that- that’s what everyone was talking about for so long, and this is the sort of culmination of it.
Megan Fox Kelly: And this is what has happened. And in fairness to the galleries and the dealers, they don’t have a way of discerning necessarily when someone is new and comes to them, seemingly with integrity and with real interest. How are they going to discern who is a speculator, investor, flipper, and who is a sincere collector? And they don’t know, and I think this is why they’re inserting these resale restrictions at the end of their sale contracts as a way of protection, because they don’t know.
Katie Wilson-Milne: As you said, Megan, we have all these different players in the art world and they have different motivations. And one of those is also the artist, right? And I think what sometimes gets lost in this conversation is that there’s this idea that the primary gallery and the artist are aligned in protecting the artist’s legacy. And that can very much be true. But it’s not always obvious how these clauses benefit the artist, right? If it’s just a right of first refusal or right for the gallery to be the marketer next time it goes on the market, or they can’t be auctioned, or how does the artist- sometimes those clauses benefit the gallery and not the artist…
Megan Fox Kelly: Financially.
Katie Wilson-Milne: Yeah, financially. And what if the artist leaves the gallery, as we see all the time? I mean, these young popular artists where there’s tons of speculation are just the types of artists that are divorcing their early galleries and moving on to the big top galleries. And, you know, what happens to those clauses that are in those invoices from that original gallery? So there’s- it’s hard to know exactly what the exact problem is and what solution can target that problem with these methods. And I think, you know, the worry, as we were starting to describe, is that the artists are very popular, they sell out their work, and all of a sudden it’s sold at auction for ten times more, at a very high price, and their popularity soars, and then it crashes, because it went up too fast.
Megan Fox Kelly: Six months later, something else comes up at auction, it doesn’t perform.
Steve Schindler: Right.
Megan Fox Kelly: Yeah.
Katie Wilson-Milne: But if that’s the problem that these clauses are trying to solve, then they have to be tailored for that, and perhaps the better solution for the galleries is to just not sell so much art, right? Or to be more careful about who they’re selling to. I think in this conversation, the theme is does the problem match the solution? Are these clauses a solution to that problem, or do they just create more noise in a market?
Steve Schindler: Yeah, I think that one of the difficulties in what you’re suggesting is that selling less, of course, is one option, but then selling less probably also creates greater demand, and almost aggravates the problem, which is the reason why buyers are so anxious to get these artists’ works is that there just aren’t enough of them in the first place.
Katie Wilson-Milne: That’s true, and the artists want to make money.
Steve Schindler: They do.
Megan Fox Kelly: They need more sales, they do.
Steve Schindler: Actually, I was on a panel once with a gallerist who- we were talking about…at the time, there was this momentum to try to bring resale royalties to the United States in general. They have them in Europe.
Katie Wilson-Milne: Which are that artists get a percentage of down market savings, even after they’ve sold it themselves.
Steve Schindler: The argument for that has always been, well, of course, the artist should share in the upside of the work that she creates later on, if it gets more valuable. And the gallerist said, I think, in opposition to that notion, well, just don’t sell as many. If you make four works, hold one or hold two. Like in other words-
Megan Fox Kelly: Oh, have the gallery hold them.
Steve Schindler: Or have the artist hold their work.
Megan Fox Kelly: Or, excuse me, the artist hold their work.
Steve Schindler: If you’re investing in the idea that your work is going to go up in the future, and you want to participate in that, then just hold back some works, and then you’ll participate in it. It was just an interesting kind of response to the proposition that an artist should share in the future profitability of the works.
Katie Wilson-Milne: And I’ve also heard the response to the idea that these investor-collectors can be damaging to artists, that when a young artist’s work gets sold at auction for a ton of money, that does increase the value of the primary market, right? That should indicate to the gallery that they can raise prices. It should indicate to collectors that, wow, this artist is valuable, and I should look at- so there’s a way in which that speculation can be beneficial. And just because market tastes can change, it’s not obvious that something selling at auction for a lot of money is bad for the artist, even though the market may change.
Megan Fox Kelly: Right.
Katie Wilson-Milne: But it may change in the other direction, too.
Megan Fox Kelly: I think it can be fickle. And, you know, Steve, to your scenario, the advice that an artist hold back their own work in a way, you know, invest in their own work by keeping things back that they can sell at a later time as their careers go up. When you look at a lot of artists’ estates, you see how many of the best of them have done that over the years. And really enjoy from that. And I do know of some artists here in this country who their arrangement with their gallery is like a resale royalty, that if the gallery gets something back, that- on the secondary market or by them, that the artist is paid a certain percentage of that. But that’s all in the contract between the artist and the gallery, and it does seem a fair one if it seems equitable for entities.
Katie Wilson-Milne: And the more powerful the estate, the more powerful the artist, the more they’re able to negotiate those types of exactly arrangements contractually, whereas maybe a young up and coming artist, A, has never been educated about how to negotiate a contract, isn’t even reading the contract. There probably isn’t a contract to begin with. There are all these problems. So I think the more sophisticated the artist or the artist’s estate, the more they’re consulting lawyers, they’re thinking about ways to protect themselves and documentation. You know, that could extend to just a resale royalty practice. If the artist is powerful enough, you could conceivably have their gallery require the buyer when they resell it to pay 10% back to the artist or the gallery. I mean, there are all kinds of ways people can build in ongoing obligations to each other.
Steve Schindler: Right, right. But again, every time you add an ongoing obligation to a current agreement.
Katie Wilson-Milne: It raises the price essentially.
Steve Schindler: It raises all of the ultimate price, if you’re going to be paying something down the road, or you’re not going to be able to sell something that easily. But of course, if you’re talking about a type of collector who is not just buying things because they love the artist and they want to have the work at home on their wall and look at it, but is just planning to flip it, then I guess all of these considerations would get factored into that economic decision.
Katie Wilson-Milne: Yeah. So should we talk a little bit, Steve, about some of the legal questions we have or that come up with these restrictions?
Steve Schindler: Sure.
Katie Wilson-Milne: As an introduction, we should just say, there’s not a lot of law on this. It doesn’t get tested, and the reason it doesn’t get tested is because nobody wants to bring these issues to court. I mean, it’s easy, as we’ve said, to throw something in at the end of an invoice or even in a contract, and a collector may not say anything about it, because either they don’t pay attention or they don’t worry about its enforceability. So, we don’t have the benefit of judges weighing in on the enforceability of these issues.
Steve Schindler: Right.
Katie Wilson-Milne: But these types of restrictions do raise the general common law distaste for restrictions on reason.
Steve Schindler: Right. Completely right that there’s very little law on this for all of those reasons that for one thing, we know that gallery owners who we represent, some of them are sometimes not anxious to spend money on legal fees.
Katie Wilson-Milne: Yeah, and they don’t want to sue their clients.
Megan Fox Kelly: Right, yeah.
Steve Schindler: And to sue their clients to go to court and pay a lot of money for an ultimate result that doesn’t really help them very much at all. I mean, you can just see that the galleries would be very hesitant to do that. So, we have just very little legal authority. We have legal speculation. So, for example, lawyers have talked about whether or not this kind of restraint of trade violates antitrust laws.
Katie Wilson-Milne: And the thinking behind that is what? That the gallery and the artist are colluding to control the artist market.
Steve Schindler: Right, conspiring to control the prices in the market, which is technically under some circumstances, a violation of state and federal antitrust laws. Now, again, that hasn’t really been the subject of litigation.
Katie Wilson-Milne: Yeah, there’s no precedent for that, just an idea. But I guess that’s sort of like a monopoly too, right?
Steve Schindler: The control of the prices in particular.
Katie Wilson-Milne: Yeah.
Steve Schindler: Then, you know, there are, I know, in the UK, there are some consumer issues-
Katie Wilson-Milne: Consumer protection laws.
Steve Schindler: Consumer protection issues that have, I think, some impact on what kinds of these clauses you can put into contracts where works are being sold to- not to merchants, but to the average consumer. We don’t really have that here. Again, this is just something lawyers talk about that we haven’t really seen. The cases that we have seen really have to do with challenging these as restraints of sale and whether or not- the ultimate question for courts is are these restraints reasonable? And if they are, they’re permissible under New York law.
Katie Wilson-Milne: And they’re reasonable if they’re proportional to the business purpose of putting them in.
Steve Schindler: That’s right. And if they’re reasonable with respect to, say, how long the restriction is. And to your point, Megan, earlier when you said, oh, you’ve seen three to five, and we’ve seen in court cases, three to five is generally a reasonable resale restriction, you know, three to five years.
Katie Wilson-Milne: In duration.
Steve Schindler: And again, I think the courts also look to the purpose of the agreement. And we have the case that we’ve talked about previously, or not on this podcast, but in conversation, there’s a case that was brought by Wildenstein and Company against the estate of Brent Wallace, who is a producer of movies and a big collector. It’s a complicated set of facts, but essentially the wife of this particular individual had gone to Wildenstein with a phony power of attorney.
Katie Wilson-Milne: It’s a movie in and of itself.
Steve Schindler: A phony power of attorney and said, I have the authority to sell these two works of art. Please sell them for me. Eventually, the estate, the husband, found this out and came back to Wildenstein and said, we want these works of art back, because she had no authority to sell them. And anyway, they negotiated back and forth. The works were returned, but in exchange for that return, the estate agreed that they would give a right of first refusal to Wildenstein for a number of works of art and also agreed to consign works of art for sale to Wildenstein.
Katie Wilson-Milne: If they wanted to sell.
Steve Schindler: If they wanted to sell, right. They weren’t forced to sell. This was a rather substantial litigation. It started in federal court, made all the way up to the highest court in New York, who basically, again, looked at these restrictions and said, this was a valid settlement agreement where the one party was giving up something, the other party was getting something. And the giving up of a resale right was totally reasonable and proportional to the contract as a whole. And again, it was also for a limited amount of time. And so the highest court in New York back in the early 90s said, essentially, if this type of resale restriction, which was a right of first refusal mostly, is reasonable and proportionate to the entire kind of agreement, it’s legal under New York law.
Katie Wilson-Milne: As we said, the background reason we even bring this up as a legal consideration is this common law rule against unreasonable restraints of trade, right? I mean, the presumption is that we do not, once something is sold, it’s sold, and the person who buys it gets to do what they want with it. That’s the presumption. And then there are exceptions that can be built onto that.
Steve Schindler: That’s right.
Katie Wilson-Milne: So, there’s always a skepticism, and we see that extend to other contexts, right? Like employment contracts, where we restrain outgoing employees on competing with a former employer or bringing on former colleagues. And those are still hotly contested, you know, legal standards about what’s gone too far and what is reasonable.
Steve Schindler: Right. Yeah, we don’t like to say to someone, you can’t work somewhere in the future, because you’ve signed some agreement with me when you’re working for me. It’s just as you say.
Katie Wilson-Milne: Or like, I’m selling you my house, but you can only do these certain things after you own it. We don’t like that.
Steve Schindler: That’s right. We don’t.
Katie Wilson-Milne: In America.
Megan Fox Kelly: We don’t, no.
Steve Schindler: In America, it’s no good.
Katie Wilson-Milne: Or in England. Or anywhere else that has taken those, those…
Megan Fox Kelly: You know, it’s an interesting case, the Wildenstein case, you know, from the 90s. And so I would have to ask you all, if I’m advising a client and they’re presented with a clause on a sale contract, how are we supposed to know what is reasonable? And I guess the bigger question that I really don’t understand, and proportional. So what does proportional mean? And how, you know, how does one weigh that, you know, besides coming to you and saying…
Steve Schindler: I’ll let Katie answer that.
Katie Wilson-Milne: Yeah, don’t ask us! You know, as with so much of the law, this is very context and fact-specific. But the idea is that the terms have to be well-defined, they have to be clear, they have to be fair, they can’t be ambiguous, you know, they can’t be too open-ended. So rather than there being a rule about exactly what’s okay and what’s not, the advice that one might give is to be as specific as possible and to be able to articulate why that restriction meets your commercial needs. And if you can’t articulate why that restriction actually matches the commercial need you have, then it’s probably not appropriate. That doesn’t mean you’re going to get dragged into court, doesn’t mean anyone’s going to do anything. It just, if you’re thinking about, you know, the worst case scenario about enforceability, the more specific, the more tied to the actual business purpose these restrictions are, the more likely they are to be enforceable. And that’s when we say proportional or not excessive, you know, those are the principles we mean. So I think what we do know is that it is possible for certainly these basic types of resale restrictions, like a window in which it can’t be sold in certain ways or right of first refusal, they absolutely can be enforceable. They can be reasonable. We know that three to five years is a market standard. That seems to be fine, especially with a right of first refusal, where the price is not dictated, right? I mean, one of the things is, is the buyer who’s agreeing to the restrictions, are they being disadvantaged, and is that fair? And if they’re getting to sell it for the fair market value, they’re just selling it through a different avenue, it’s hard to say they’re disadvantaged. And so, it’s likely that that’s reasonable, right? Because let’s say they want to sell it, they could sell it for this price, and all they have to do is sell it for this price to someone else. Hard to say they’re disadvantaged. You know, I think when you’re encountering situations that are the equivalent of lower value, right? They’re getting less back from it, whether that’s because they have to wait longer or, you know, their fees or costs or labor involved in a complicated, you know, sale relationship, then that might be seen as less reasonable.
Steve Schindler: So I have a question for you, Kate. I’m going to give you a hypothetical.
Katie Wilson-Milne: I was going to say add on if you…
Steve Schindler: Well, no, here, I’m going to give you this hypothetical. So Megan’s client ends up buying this work of art. It has resale restrictions that you can’t put it up for auction for three years, right of first refusal, etc. That buyer then sells it to buyer number two without informing buyer number two about these restrictions. Buyer number two then tries to sell the work at auction, and the original seller comes forward and says, uh-uh, you can’t sell that work at auction because I have a clause in there that says that.
Katie Wilson-Milne: Yeah, not with you, but with the one person sold it to you.
Steve Schindler: Does that sound familiar?
Katie Wilson-Milne: I’m relieved because this is an actual scenario, so I don’t have to law school exam answer this. Yeah, so this is really a different context, and actually this has come up in more than one case, although it’s unusual, where the real question is, is the restriction not being honored by the person who sells it to you a cloud on the title that you take?
Steve Schindler: Right.
Katie Wilson-Milne: And to me, that’s not obvious, but there’s one case in New York, and I’ll talk about the recent case that, Steve, you’re so precisely referring to. But there was one historic case in New York, I believe, that was about import-export violations.
Steve Schindler: The Jeanneret-Vichey case.
Katie Wilson-Milne: Yeah, and that case did seem to establish that, at least in New York, under some circumstances, if something was imported or exported incorrectly, that that could create a cloud on title that could be actionable if there had been a representation as to good title and someone bought an object. So I think that sets some precedent, although how we can extrapolate that one case is not clear. But there was a recent case in New York, very recent, this case is not done, called DW Properties versus Live [Art] Market, Inc. And this is in the Southern District of New York, so in Federal Court. And basically, the plaintiff was a Belgian company that was really controlled by a collector of contemporary art whose name was Sacha Daskal. And Daskal purchased a group of paintings from a company called Live Art. And Live Art was sort of his art advisor and consultant, and I guess also his intermediary, because they purchased art and then resold it to him. But I think they purchased the art with the intent of reselling it to him immediately. So Daskal was seeking guidance from Live Art. He bought a bunch of paintings from them. One of these paintings was a work by Cornelius Annor. And Daskal was clear with Live Art that he didn’t want to hold this work for a long time. He planned to resell it. They talked about reselling it. That was always part of the deal. He got an invoice from Live Art when he purchased this work that said it was being delivered with good title, without any restrictions. And I guess they had also discussed that. And then at some point in the not too distant future, Daskal decides to sell the work. He talks to Live Art about it. They say, I think you can break even or make a profit. He puts it up at auction at Phillips. And then I guess he gets a call from Phillips that says, we were contacted by a studio that says they created this work and sold it to Live Art, and that they sold it to Live Art with resale restrictions that would not permit this auction to go forward. And under auction house contracts, they have an out if there’s any sort of complaint like this.
Steve Schindler: Any reason to believe that there shouldn’t…
Katie Wilson-Milne: And they canceled the auction, which is obviously upsetting to Daskal. And it turns out that Live Art had purchased this work from the studio with a resale restriction, and that they had not told Daskal about the restriction, and it not passed it on to him, as was required. And so the question was, on what theory could Daskal sue Live Art for a contract to put a resale restriction on a sale that he wasn’t part of? Because he’s the second purchaser downstream. And he had two main theories, which was there’s a breach of contract with Live Art, who he had a contractual relationship and a breach of warranty. And the court found that this was on a motion to dismiss, so this is in the early stages of the case. It’s not based on discovery, that he could, in fact, sue Live Art under the theory that the warranty and explicit representation in the sale documentation that the painting was being sold with unencumbered title was not correct, because a resale restriction that was not honored could encumber the title on the painting.
Steve Schindler: Right. And even in New York, there’s an applied right of good title, which I think could also be said to be violated here.
Katie Wilson-Milne: I think the question is, is selling a work in violation of a resale restriction you didn’t agree to, does that actually cloud title or is it a contractual problem?
Steve Schindler: Right.
Katie Wilson-Milne: That some damages could fix it.
Steve Schindler: Right, and in some ways, the answer here is a little bit in the Phillips response, which is, if you can’t sell this work, because there’s this claim on it, then I think there’s some reasoning that suggests that, well, okay, if you can’t sell the work because of this claim, then there is some cloud on the title-
Katie Wilson-Milne: Theres some encumbrance.
Steve Schindler: There’s some encumbrance, it’s a sort of a little bit undefined encumbrance. But that was sort of the the Jeanneret versus Vichey case, which was also a work that was exported from Italy, seemingly without proper export licenses. And of course, from our perspective here, we don’t really care, generally, whether something’s exported with or without a license. We don’t really recognize those. But if in fact, what happens is you take the work and you try to sell it and someone does care about it-
Katie Wilson-Milne: Then, that’s encumbrance, practically.
Steve Schindler: Then it’s an encumbrance. And so, I think there’s something there to this. But as you said, the cases now will go forward, and we’ll see what the court ultimately does with it.
Katie Wilson-Milne: And it’ll be interesting to see if the court has to deal with the enforceability of the resale restriction, right? Because if the resale restriction isn’t enforceable, then there can’t really be an encumbrance.
Steve Schindler: Yes.
Katie Wilson-Milne: Even though what you’re saying is there’s a market problem, right? There’s a practical problem.
Steve Schindler: Right. It may be one of these cases where the court says one thing and the market doesn’t care. I mean, that’s a possibility too.
Katie Wilson-Milne: And in this case, looking at the decision, the restriction was the painting could not be offered at art fairs or public auctions for three years from the invoice date. And that during that period of time, it also couldn’t be offered through any private sale other than through the original studio, which is a right of first refusal. So it may be that some portion of that is enforceable and some is not or that all of it is. But I don’t know if that will get tested in this case. It may if what the defendants argue is that they can’t possibly be held liable for a breach of contract based on an unenforceable contractual clause they had no obligation to fulfill.
Steve Schindler: Right. It will be more confusion, but it will be fun to follow.
Megan Fox Kelly: But it’s interesting that we started the conversation about these resale restrictions from the perspective of protecting the artist market and protecting the legacy. And yet the implications of those resale restrictions seem to be reverberating much more in the secondary, and then even the tertiary sale levels. And that’s where we’re seeing real effect in the marketplace. So it goes away from the original intent of the restriction.
Steve Schindler: It would be ironic if this resale restriction, which was intended to protect the artist from inflationary pricing and the artist’s legacy, ended up in the secondary market to make the work unsellable.
Megan Fox Kelly: Right. And hampering the secondary market.
Steve Schindler: A strange result.
Megan Fox Kelly: Exactly. And so I was thinking, as you two were talking about these two different cases, what would you say as attorneys to collectors who are buying something on the secondary market? I mean, it’s not- I don’t know that all collectors would ask of a dealer, you know, either at an art fair or going into their gallery and looking at a work on the secondary market, whether it’s very historical or only recently created, may I have the original invoice of sale from the artist’s studio?
Katie Wilson-Milne: I don’t know. I feel like when we ask for information, we don’t get it from dealers.
Megan Fox Kelly: I think you’d get a very big no on that question.
Steve Schindler: I think you’d probably get a big no, but you raise a good point, Megan, and I think one thing you could very well do is to ask for a representation from a seller that they’re, to the best of their knowledge, or that they’ve not entered into any resale restriction on this work of art.
Katie Wilson-Milne: It’s a really good idea.
Steve Schindler: And that, I think, is a good idea. Now, I don’t think they’d give you the invoice, but if they represent that there’s nothing in their original invoice that says that, then I think you’ve got it as much as you can get.
Katie Wilson-Milne: And I think we presume, and this is one reason for a valuable piece of art, we always want to have a sales contract, which there almost never is, usually an invoice. And an invoice is not a negotiated agreement. An invoice is something the gallery sends you and you sign it. It can become a negotiated agreement. I mean, our clients who are buying high-value pieces of work and want a lawyer involved will show us an invoice with a lot of terms, and then we will turn it into a negotiated agreement and have people sign it. But it is different. And one thing you want in an agreement is these reps about good title, you know, no encumbrances, no liens. And for a long time, we thought that that would be enough because, and maybe it is, maybe having no encumbrances and clear title encompasses that there is no restriction. But it couldn’t hurt, especially with the proliferation of these issues, to be specific that there are no resale restrictions. So it’s a really good question. I think, you know, one of the big issues here is we’re saying, what’s the reason these restrictions came into being in the first place? But also, what are they actually doing? Are they actually helping artists? Are they actually serving the art market? And that’s, I think, a tough question.
Megan Fox Kelly: I think it’s really hard to answer. And I think we’d need a much bigger audience to answer that question.
Katie Wilson-Milne: We’re just going to speculate, because that’s what we do on-
Steve Schindler: Yeah, but I will-well, maybe I’m switching topics. But I think one of the things that’s also interesting to sort of wonder about is, as prices in the market go up and they go up dramatically, I guess demand is going up and so it’s in some ways easier to put these clauses into agreements that collectors will just take, because they want the works of art, because they think that they’re going up in price. If the market gets soft, as it seems to be now a little bit, and if prices are coming down, it may be that collectors are willing to sort of push back on some of these things and say, well, wait a second, now this work isn’t quite as desirable, the prices aren’t going up, and I don’t want to be saddled with all of these restrictions.
Megan Fox Kelly: And I think that that’s really true, and that’s probably what’s, you know, what may happen as this market starts to soften. And yet at the same time, there are a lot of collectors who even in the up market of the last few years, and even, you know, who are collecting, because they really want to have a work of art, not because they think it’s gonna go up in value, they just, it’s all desire. It’s, you know, pure gut desire that’s driving the acquisition. They are also pushing back even in this up market and just saying, you know, I really want this, but no.
Katie Wilson-Milne: One thing we’ve seen, I mean, I guess there’s a distinction between collectors who come to a lawyer, you know, and collectors who are just looking at it themselves and are making maybe a rational risk calculus about not caring what the contract terms say, because they think it’s never going to be an issue. But if someone comes to us, you know, we will always point this out and say it should come out. Now, that may mean they won’t get the object, and then they make a business decision, you know, about what risks they want to take, but we always want these provisions to come out. And one thing that’s been interesting to me is sometimes the gallery will negotiate this, which indicates to me that it’s been seriously considered. It’s something the artist themselves wants, and they’re not at liberty to just take it out. But in a few cases, with quite big galleries, you know, we’re sent an invoice with some often not quite clear resale restrictions, and, you know, we’ll send back a contract of sale and send and say, no, this is a big enough purchase. This is what our client wants, and that’ll be fine. They’ll just sign it. They’ll take out the resale restrictions-
Megan Fox Kelly: Right.
Katie Wilson-Milne: As if they weren’t that serious of a request to begin with. So it’s hard to know.
Steve Schindler: Right. I mean, it always depends on any negotiation who has the superior bargaining power, but…
Katie Wilson-Milne: But also that the gallery may not even care that much.
Megan Fox Kelly: But they want to make the sale and they want to, you know, have that collector relationship, and so they’re willing to wait.
Steve Schindler: Yeah, which is as important sometimes as, you know, the sale itself is having the collector that they want.
Megan Fox Kelly: The ongoing collector relationship.
Steve Schindler: That’s, I mean, that itself is something that I think many people who are not immersed in this world also don’t really understand that you can go into an art fair, go into a gallery and say, I really like that work on the wall.
Katie Wilson-Milne: I take it.
Steve Schindler: I have, you know, I can wire you the money, you know, right now. And they say, well, I don’t know. I have to think about it. I have to look at you a little bit. I have to sort of find out a little bit more about you, because I would really like to sell this work of art to someone who is, you know, a serious collector- someone who will enhance the reputation of the art.
Katie Wilson-Milne: And will come back to me.
Steve Schindler: And this is just a kind of a strangeness. You know, usually when you’re in the business of selling things, if someone comes in and they can write a check, you just sell it. But in the art market, it’s not quite that way.
Megan Fox Kelly: And new collectors, trust me, cannot believe this.
Steve Schindler: No, I know.
Katie Wilson-Milne: It feels rude.
Megan Fox Kelly: It does, it does, because, you know, they may be people who, you know, in other aspects of their life-
Katie Wilson-Milne: Can buy anything.
Megan Fox Kelly: -can have anything that they want.
Steve Schindler: Right. No, I’ve actually been to- even at an art fair- gone into a gallery booth and sort of half expressed an interest on- everything is sold. You know, the initial reaction is everything is sold, but, you know, then we can sort of see.
Katie Wilson-Milne: Yeah, see if maybe the something would become available.
Steve Schindler: Yeah, maybe something will become available, but that’s-
Katie Wilson-Milne: Only after you submit your CV.
Steve Schindler: -because they don’t know who you are. Right. We want to have a rigorous look at who you are, and then we’ll sort of think about it.
Katie Wilson-Milne: And I think what’s the point with the gallery also raises this, there is this tension, the gallery, you know, theoretically represents the artist, but they really sit in the middle between two competing obligations or commitments, which is to their clients who are buying the art from them and to the artists they represent, who they’re fiduciaries of. And if these resale restrictions are intended, you can see how it’s problematic if the galleries are the ones putting these resale restrictions into commerce. You know, it could be confusing if they’re benefiting the gallery or they’re benefiting the artist and when they’re waved and when they’re not. And again, the artist may not even be with them when they could enforce the restriction down the road.
Steve Schindler: Right.
Katie Wilson-Milne: So I think the practical use of them is unclear a lot of the time.
Steve Schindler: Right, and think about it too from the point of view of the gallery. So the gallery sells a work of art and in a normal kind of relationship, 50% of the sale, the proceeds would go to the artist, and 50% would be a commission for the gallery. But they have a right of first refusal. So then a couple of years later, the buyer wants to sell, they come back to the gallery and they somehow, if the gallery wants to kind of honor the commitment to protect the artist here, the gallery then has to come up with not just its revenue for the picture, but the money that went back to the artist. So in fact, it’s costing the gallery, it would cost the gallery twice as much just to buy it at the same price.
Megan Fox Kelly: It can be very difficult for them to fulfill that demand.
Katie Wilson-Milne: So why put in a restriction that you’re never going to enforce?
Steve Schindler: Right, from the gallery’s point of view, unless they’re just trying, again, they’re trying to keep the artist, the artist is talking to their friends and maybe the artist wants to see this in the agreement as well, even though the artist is not the one who’s going to be ponying up the money probably to purchase the work.
Katie Wilson-Milne: I think this raises an important point, which is a response that we’ve gotten. And sometimes these clauses, the people, the artist, the gallery, they may know they’re never going to enforce it, but it’s aspirational. And actually, there is true value in having a meeting of the minds, even if later it’s broken and you’re not going to enforce it. But to have in writing what you and the collector understand at that time, and to make clear what your expectation is to the collector about how they’re going to own this work, there can be commercial value in that even if it’s not legally enforceable.
Steve Schindler: Sure, and- and I think what we prefer to see, and I think this would be fine under the law, is to then phrase it in an aspirational way, which is to say, it is our expectation or it is our strong desire or we’ve discussed. Those things, there’s no question of enforceability, because it’s not a true contractual provision. But it does express the artist and the gallery’s expectation of behavior on the part of the collector, and there could be value just in that.
Megan Fox Kelly: I think part of the value in what you just described, Katie, is the idea of not having the sale be a simple sale transaction, but be part of a relationship between the gallery then, and the collector going forward. And the artist. And the artist, exactly.
Steve Schindler: Right. It’s an educational opportunity to just also, again, have a conversation. I think that’s aspirationally a great idea. You know, because putting it in contractual terms that are just not going to be enforced, or just doesn’t seem right to me.
Megan Fox Kelly: It’s adversarial in a way.
Katie Wilson-Milne: And then, I think a collector, it just creates a more gracious environment for everyone, where they can say, yes, we’re building this relationship, and they don’t have to, you know, worry about how this could be enforced against me, and, you know, whether this is specific enough, it can just be that sort of relationship moment. Now, that means the gallery and the artists have to understand that they’re not going to enforce it, but it serves some purpose.
Megan Fox Kelly: And as you said, they may not enforce it anyway.
Katie Wilson-Milne: They wouldn’t enforce it anyway. Probably not.
Megan Fox Kelly: You know, it is a much more, you know, gracious and sort of elegant solution. I wonder, how often are galleries coming to you and asking you to craft these kinds of things? Or are you more working on the client side than the gallery side?
Katie Wilson-Milne: We work on both.
Steve Schindler: We work on both, but, you know, normally, I mean, sometimes we’re looking at contracts on behalf of the gallery, but often some of these things, we said, just work their way into invoices, you know, and they’re put in there by interns or whoever. It’s not necessarily coherent.
Katie Wilson-Milne: And we would never, I mean.
Steve Schindler: They wouldn’t come to us that way.
Katie Wilson-Milne: We love to have a gallery hires to look at every sale transaction. That’s never happened. So what usually happens is we’ll review either an unusually important sale where the gallery has been sent to a complicated contract by the buyer, or we’ll do a one-time review of their sale contracts or invoices and comment on those. But then they will supplement and put stuff in and we’ll have no idea. But I do recall one, so we have worked on a few of these. The one of the more interesting ones-
Steve Schindler: I was waiting for you to bring this up. I know what it is.
Katie Wilson-Milne: Was a gallery client that we work with. One of their artists, as part of her artistic practice, wanted to include a quite complex contract of resale restrictions and future behavior in every invoice of her work, which took us, you know, we’re lawyers, my brain is rigid in a lot of ways. So I was trying to understand how this would work and how it made sense. And she graciously explained that it was part of her artistic practice and not that she thought it was legally enforceable, but that this is just how she wanted to present her work in the world and relate to the collectors. And so we said, okay, fine, we’ll work on this document that we all agree is never going to be enforced, probably not, may not be enforceable, but, you know, is something that you want us to help put together, as part of how you want to present yourself in the world. So that is a good example of someone who, I guess, had a larger view.
Steve Schindler: And you had a gallerist who was willing to, in a sense, pay for honoring that person’s practice, because they’re willing to pay us to do what was, in some senses, not entirely legal work, but working with the artist in a more amorphous way.
Katie Wilson-Milne: Yeah. Thank you so much, Megan, for joining us on the podcast.
Steve Schindler: Yes, thank you, Megan. It was a pleasure.
Megan Fox Kelly: Thank you for inviting me.
Steve Schindler: 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.