Competing or Complementing: Art Loss Databases Proliferate

By Mia Tomijima*

Stolen art seems to be ubiquitous and difficult to track. It is relatively easy to ship and sell around the world, and can remain easily hidden for decades. The owner faces the conflict of wanting to publicize the loss widely, while also keeping their personal lives private. The development of databases to record losses was first preceded by newsletter alerts of stolen art that proliferated in the arts community to halt sales with questionable provenance. Next, the emergence of the Internet caused law enforcement agencies, international organizations, and private companies to establish online databases of stolen art. The increased organization and transparency created by these databases helps collectors and art professionals with due diligence searches for acquisitions, loans, and insurance, which ultimately helps ward off costly title disputes. However, a database is only as useful as the breadth, accuracy, and accessibility of information it contains. New technology and the market’s demand for other potential uses of art registries, such as for collection management, could push these databases to new, uncharted territories. The usual suspects for searches include: the Art Loss Registry, the FBI’s National Stolen Art File, and Interpol’s Database, among a few others. One new company that is pushing the boundaries is the ArtClaim Database.

On March 5, 2015, the ArtClaim Database (“ArtClaim”) had its U.S. launch party at the Hirschl & Adler Gallery in New York City. Members of the art, auction, insurance and legal communities arrived if not to learn about the new company than to support its founders on the new venture. After more than one year of strategizing, ArtClaim, owned and operated by the Art Recovery Group LTD, launched their new database in January 2015. Christopher A. Marinello, CEO of Art Recovery Group, along with several former employees of the Art Loss Register (“ALR”) established a competing company that could expand the concept of these databases to new areas beyond just thefts. According to Ariane Moser, Client Relations Director of Art Recovery Group, ArtClaim holds itself as the first private database created as an “all claims and all interests” database. This means that in addition to stolen art, the database contains information regarding art encumbered by financial liens, insurance claims, museum objects on loan, possible fakes and forgeries, and collections management, among other claims. The ArtClaim Database may also be used to register work directly from artists, which would help them to, for example, keep track of consignments with galleries or resale royalties. The ArtClaim Database joins a limited group of databases that record art ownership. The two best-known government-sponsored databases are aimed at assisting law enforcement to recover art or cultural artifacts that have been involved in thefts or looting are the one maintained by Interpol and the one maintained by the FBI. Interpol, the world’s largest international police organization, first started maintaining a database of stolen art from police reports in 1947. The database is accessible by law enforcement agencies, authorized private users, and, since 2009, the general public can access limited amounts of data, including the most recently reported works, recovered works, and recovered works that remain unclaimed. The FBI maintains a similar database of stolen art and cultural property, called the National Stolen Art File (“NSAF”). Entries into the NSAF are submitted by law enforcement in the U.S. and abroad, and the general public can access limited parts of the database, but not information related to ongoing investigations. Unlike other databases, the NSAF has some qualifications for entry, including that the object must be “uniquely identifiable and have historical or artistic significance,” must be worth at least $2,000 (or less if associated with a major crime), and the request for entry must come through law enforcement. Thus, the database is limited to only those reported to them, and excludes art that is not necessarily associated with crimes. Bonnie Magness-Gardiner, who manages the FBI’s art theft program, said to the NY Times that “It is not an absolutely complete database […] We get what they choose to send us.” When a work of art is recovered, it is removed from the database. Interpol’s and the FBI’s databases are unquestionably useful, but are limited by the finite resources of time and funding that often plagues government-run agencies.

To supplement and/or overcome the limitations of government funding, privately run databases have emerged as useful alternatives. Dominating this sphere is the Art Loss Register, the oldest and most-prominently established private art database. Started in 1976 by the non-profit IFAR (International Foundation for Art Research) as a “Stolen Art Alert” to deter international art theft and sales, the ALR formed a partnership with the organization and moved its headquarters to London in 1990. According to Julian Radcliffe, Chairman of the ALR, the database sets itself apart from others in the field via its exclusive collection of 25 years of data on art that is stolen, missing, lost, fake or forged. It offers registrations for art subsequent to loss or theft (at a cost of £15/ US$25 per item for 1-5 items; for 6 – 10 items: £12.50/ US$20 per; or for 11+ items: £10/ US$18 item). Reportedly, the ALR database currently holds about 435,000 objects. There is no public access to the data held and a single search may be performed at a cost of $95 or £60. Radcliffe notes that the company performs over 400,000 paid searches every year from auction houses, galleries, and other vetting organizations.

Incidentally, the Art Loss Register is developing new subsections for its database, including for the jewelry and watch trade, to add even more volume to their database. The company has conducted trials with emerging technology such as image recognition, but found it to be no more effective than the manual searches conducted by their trained art historians. Radcliffe states that image recognition, as it currently stands, may not catch the details of art being slightly altered and resold by thieves, or three-dimensional objects like the decorative arts. The ALR is a “managed database” with every search subject to an internal audit trail to avoid criminals from using their system to avoid being caught. ALR will issue due diligence certificates, which do not make guarantees of authenticity, but may provide some greater certainty as to a possible dispute over the artwork. While understandably protecting itself from liability as well as the private information of the art elite, the lack of transparency into the search process and what information is used and how that information is accessed and organized can raise some questions as the actual effectiveness of a due diligence search using ALR’s services. The company has received criticism over questionably ethical tactics used in demanding fees for leads, potential lack of cooperation with the authorities, and not to mention the fact that the company is partly owned by the auction houses that make primary use of its services. The company, unchallenged, remained persistent in its methods and was able to do so as the only private player to offer such level of services, at least until now.

As compared to these databases, ArtClaim is attempting to set itself apart by working with new forms of technology. Moser notes that the database was built completely from scratch with the most technologically advanced tools available in mind, using a modular system that is already fully developed but expandable for data processing that will continue to develop into the future. The database uses integrated high-definition image recognition software from a company called LTU Technologies, and has an intuitive user interface with over 500 different searchable data fields. The information contained within these searchable data fields are not accessible by the general public; since security and confidentiality is of an utmost importance, only internal employees can perform searches (just like ALR). Thus, while presumably using the latest technology will increase speed, efficiency, and accuracy of individual searches, it may be difficult to tell whether these uses of technology are actually more effective than previous methods.

What is the cost of ArtClaim’s services? Records of stolen or looted art are free to register on the ArtClaim Database. Registration of art for other claims, such as for lien recordings or collections management, is not free; the price tag is negotiable depending upon the total number of registrations and status of the requester (non-profit museum, auction house, or otherwise). A search of the database for due diligence purposes is permitted, however as noted earlier, users are expected to submit a search request to the company, whose staff performs the search. The ARTCLAIM issues a certificate if it finds that there is no disputed claim to the art as of the date of issue of the certificate. A single search costs £60 plus VAT (or US dollar equivalent), with multiple searches costing less per depending on the number and status of the requester. According to Moser, the ArtClaim Database has several hundred thousand records that are currently being digitized onto the system.

After registration within ArtClaim, a person can pursue recovery independently, or use the dispute resolution and recovery services offered by separate division Art Recovery International (“ARI”) for a fee. ARI is already working with law enforcement agencies around the world to investigate and recover works of art: it helped recover a Matisse painting taken from the Rosenberg Family during the Nazi occupation of France; identified several paintings including works by Marc Chagall and Diego Rivera stolen from a home in Encino, California; and recently recovered sculptures by Paul Manship and Paolo Troubetzkoy for the Hirschl & Adler Gallery from whom they were stolen over 32 years ago.

Finally, ArtClaim and other databases may overlap with databases that focus on art reportedly looted by the Nazis during World War II. For example, the Lost Art Database is run by the Koordierungsstelle Magdeburg, Germany’s central office for documenting lost cultural property, which was established to register cultural objects that were relocated, moved or seized as a result of Nazi dictatorship and persecution. Database of Art Objects at the Jeu de Paume is a database of searchable illustrations compiled by the ERR (Einsatzstab Reichsleiter Rosenberg) of more than 20,000 art objects taken from Jews in German-occupied France and Belgium. The general public can search this database by individual objects or by the owners from whom the object was taken. Another useful resource, the Central Registry of Information of Looted Cultural Property 1933-1945 is set up as a central repository of information on Nazi looting, including not only information on stolen objects, but also pending legal cases, laws, and reports on the fates of families. Working with the Oxford Centre for Hebrew and Jewish Studies, the database contains 25,000 artworks from over 12 countries, and is fully searchable by artist, owner, or provenance. The specificity in time and ownership from Nazi-looted art claims has lent itself well to the creation and maintenance of art loss databases, which will hopefully aid in due diligence searches and the recovery of art to their rightful owners or heirs.

In light of the fact that title disputes are expensive, time consuming, and oftentimes fraught with emotion, making sure that the art one is acquiring is not stolen is sound business advice as well as an ethical act. As with any piece of property, there is a great need to perform thorough due diligence prior to the purchase to check that the provenance is as claimed to be, and to protect stolen art from resale. Information about artworks that were stolen, lost, or looted is perennially valuable and should be widely accessible, however there are many barriers to the accessibility of this information, chief among them being cost and privacy. The availability of multiple databases with different tools, services, and information may create confusion for collectors and the art industry as to which database to use for their individual purposes and how to feasibly conduct a proper due diligence search. Greater competition in a marketplace generally drives the industry forward, with participants offering competitively priced services and greater innovation in order to stay relevant with their customers. The launch of the ArtClaim Database and formation of the Art Recovery Group are ambitious and risky, as well as promising, and time will tell whether they are what the art market needs.

Select Sources:

ArtClaim, http://artclaim.com/ (last visited Apr. 22, 2015).

Works of Art Database, Interpol, http://www.interpol.int/Crime-areas/Works-of-art/Database

Art Theft, The Federal Bureau of Investigation, http://www.fbi.gov/about-us/investigate/vc_majorthefts/arttheft/arttheft

The Art Loss Register, http://www.artloss.com/en

Lost Art Internet Database, Koordinierungsstelle Magdeburg, http://www.lostart.de/Webs/EN/Start/Index.html

Cultural Plunder by the Einsatzstab Reichsleiter Rosenberg: Database of Art Objects at the Jeu de Paume, United States Holocaust Memorial Museum, http://www.errproject.org/jeudepaume/

Central Registry of Information of Looted Cultural Property 1933-1945, Oxford Centre for Hebrew and Jewish Studies, http://www.lootedart.com/

Kate Taylor and Lorne Manly, Tracking Stolen Art, for Profit, and Blurring a Few Lines, NY Times, Sept. 20, 2013, http://www.nytimes.com/2013/09/21/arts/design/tracking-stolen-art-for-profit-and-blurring-a-few-lines.html?pagewanted=all&_r=0

Matt Hamilton, Paintings in $10-million Encino heist recovered, LA Times, Dec. 18, 2014, http://www.latimes.com/local/california/la-me-art-heist-20141218-story.html

Henri Neuendorf, Rosenberg Heirs’ Claim to Gurlitt Matisse Stalled, artnet news, Feb. 25, 2015, http://news.artnet.com/in-brief/rosenberg-heirs-claim-to-gurlitt-matisse-stalled-updated-264866

Alanna Martinez, Stolen Bronze Sculpture Recovered After 32 years to Display at ADAA’s Art Show, Observer, Mar. 2, 2015, http://observer.com/2015/03/bronze-sculpture-recovered-after-32-years-to-display-at-adaas-art-show/

*About the Author: Mia Tomijima is a recent graduate of Brooklyn Law School, where she received a certificate in intellectual property and served as Chair of the Art Law Association. She received a bachelor’s degree in art history from UCLA, and has worked with museums, auction houses, and law firms on both coasts. Mia is a post-graduate fellow with Center for Art Law. 

The author would like to thank Ariane Moser and Julian Radcliffe for their time and input in this article.

Disclaimer: This article is intended as general information, not legal advice. Any opinions contained herein are of the author’s alone and are not an endorsement for a particular service.

WYWH: Review of “The New Cuba: What You Need to Know About the Cuban Art Market”

American and Cuban Presidents Obama and Castro shaking hands in Panama in early April 2015. (Source)

by Dennis C. Abrams

On the evening of April 12, less than a week after Presidents Barack Obama and Raúl Castro historically shook hands at the seventh Summit of the Americas, Herrick, Feinstein LLP and Akerman LLP co-sponsored a discussion entitled “The New Cuba: What You Need to Know About the Cuban Art Market” at Herrick’s offices in Midtown Manhattan. The seminar, featuring several distinguished speakers, explored the finer points and risks of buying, selling and collecting Cuban art in light of the President Obama’s recent decision to normalize diplomatic relations with Cuba.

The two panels explored the following discussion topics:

  • How recent U.S. regulatory changes will affect Americans’ ability to buy Cuban artwork;
  • Techniques for U.S. collectors to legally pay for new acquisitions and import their purchases into the United States;
  • The history of art nationalization in Cuba and how to avoid legal exposure by engaging in provenance- related due diligence.

Panel I

Introduced by Howard Spiegler, Partner at Herrick, the speakers on this first panel were Carlos Méndez-Peñate, a Partner and Co-Chair of the Latin America & the Caribbean Practice at Akerman LLP, Augusto E. Maxwell, a Partner and Chair of Akerman’s Cuba Practice and Alberto Magnan, the Cuban-born Gallery Principal at Magnan Metz Gallery.

Mr. Méndez-Peñate began by addressing the current state of the law regarding relations between the United States and Cuba, focusing on the Cuban Assets Control Regulations (CACR) which have been responsible for the American embargo on Cuba since being enacted by Congress in 1963. The CACR (which Lesley Sotolongo previously discussed for Center for Art Law) prohibit most forms of trade with Cuba but § 515.206(a) of the regulations explicitly exempts several different types of transactions from the ban including, most pertinently to this discussion, information and informational materials. The definition of “information and informational materials” specifically includes “artwork” and names several different types of media including films, posters and CD ROMs. However, as Méndez-Peñate pointed out, the item that is the subject of the transaction must be bought as is – meaning that, while Americans may buy completed artworks, they cannot commission a Cuban artist to create a new artwork nor hire a Cuban artist to alter or put the finishing touches on a preexisting project. Méndez-Peñate also mentioned that, because the embargo is embodied in statutory law, it will ultimately require an act of Congress to repeal and, until that time, any progress perceived to have been made by President Obama can easily be undone by the successive administration in 2017.

Mr. Maxwell then spoke about the specifics of traveling to and buying art in Cuba. He explained that the Office of Foreign Assets Control had recently relaxed its rules by issuing general licenses allowing travel to and transactions in Cuba for non-specific purposes and lifting the per diem limitation on expenses (which previously limited spending to $188 per day in Havana). Maxwell also discussed a roadblock for visitors to Cuba which may soon be resolved – because of Cuba’s status on the State Department’s list of State Sponsors of Terrorism, many banks refuse to do business in or with the island nation and, as a result, Americans’ credit and debit cards have long been nonoperational within its borders. Given President Obama’s recent endorsement of removing Cuba from that list, however, Americans may be able to buy art in Cuba using their credit cards before long. Finally, keeping in mind the sociopolitical sensitivity underscoring all interactions with Cuba, Maxwell outlined three things for buyers to beware of when shopping the Cuban art market: (1) artwork previously confiscated by the Cuban government, as rightful ownership and legal title may be subject to challenge, (2) purchasing works created by artists who have close ties to the Cuban government, as patronizing such artists may cause reputational damage to the buyer in anti-Castro circles, and (3) the danger of buying fakes in light of widespread forgeries in Cuba.

Lastly, Mr. Magnan discussed the history of art in Cuba since the 1980s and the current state of the nation’s art community. He lamented the fate of Cuba’s national art museum, the Museo Nacional de Bellas Artes de La Habana, which has suffered under the embargo as it would surely benefit from using American building materials for structural maintenance. At present, the museum relies largely on mid-20th century American air conditioners to control its climate and preserve its artworks. Magnan has contributed to the Cuban art community by exhibiting their work at his Manhattan gallery and curating shows in Cuba.

Shortly after the end of the Cuban Revolution, rebel Camilo Cienfuegos stands on a portrait of Marta Fernández de Batista which has been torn from its frame in the Presidential Palace. (Source)

Panel II          

The second panel addressed the subject of the nationalization of art by the Cuban government and the resulting legal risks in transacting in Cuban art. This discussion was covered by Mari-Claudi Jiménez, a partner in Herrick, Feinstein’s Art Law practice group, Monica Dugot, Senior Vice President and International Director of Restitution at Christie’s International and Lucian Simmons, a Senior Vice President at Sotheby’s New York and head of their Worldwide Restitution team.

The Cuban Revolution was fought from 1953 to 1959 and resulted in the establishment of Fidel Castro’s communist government which remains in power today. After Castro assumed office, art was among the many valuable resources confiscated from private citizens and redistributed. Most of that immeasurable hoard of art wound up in museums, in the homes of government officials or sold abroad at auctions. However, while the identification and restitution of art confiscated under similar circumstances in other countries has long been a major cause for concern in the art market, the status of art looted during the Cuban Revolution has become a topic of interest only recently according to Ms. Jiménez, who recently spoke on this topic at the annual American Society of International Law Annual Meeting in Washington, D.C. According to her, part of the reason that awareness for this issue has lagged so far behind is due to the insular nature of the nation and that Cuban families often lack the resources to identify, locate and secure the return of their missing heirlooms. While it would be reasonable to assume that a framework for restitution could be instituted similar to the one which has facilitated the return of so many Nazi-looted artworks, there is an operative difference between the two regimes, which makes such a proposition inapposite. The key difference is that the United Nations’ London Declaration of 1943 invalidated all transfers of property made by the Nazi regime, thereby giving rightful title of any artwork taken by the Nazis to the owner from whom it was taken. Conversely, the nationalization of previously privately owned artwork by the Cuban government is given full legal effect, leaving original owners without any clear legal recourse. Therefore, for most Cuban victims of art confiscation, restitution is not so much a goal as it is a hope.

According to Ms. Dugot and Mr. Simmons, neither Christie’s nor Sotheby’s has yet had occasion to return much, if any, artwork looted or nationalized during or after the Cuban Revolution. However, both institutions do have agreements with specific families who had significant collections confiscated to be on the lookout for and notify them of any works that may have previously belonged to their families. Dugot also mentioned that, in addition to returning Nazi-looted artwork, Christie’s has been able to return pieces nationalized by the Soviet, Cambodian and Egyptian governments. Given that due diligence can often only be as thorough as the resources consulted, Dugot implored victims to register their missing art in stolen art databases whenever possible.

“The New Cuba” left attendees with mixed feelings as to the future of the Cuban art market. While America’s relaxation of its sanctions against Cuba seems likely to facilitate relatively free trade between Cuban artists and American buyers, there is no guarantee that the market will not be replete with artwork taken from their original owners by the Castro regime. Although Cuban nationalization of property is given legal effect in the U.S. and Cuba and the original owner of such a work therefore may not have superior title to the work, the stigma of forceful takings runs counter to the values and standards of the present day art community. This creates a moral dilemma for subsequent purchasers of the work. And, as Lucian Simmons said, good “moral title” is often just as important as valid legal title.

About the Author: Dennis C. Abrams, Legal Intern with Center for Art Law, is a 3rd year student at Benjamin N. Cardozo School of Law, with an interest in intellectual property, media, art, entertainment, and sports law. He can be reached by e-mail.

Gold or Not? Scenery or Forgery? Art Reproductions Created for Film

by Mia Tomijima*

Screen shot 2015-03-24 at 5.07.04 PM“Woman in Gold” (2015) adapts for the big screen the story of Maria Altmann (1916-2011) and her legal battle against the Government of Austria to return five Gustav Klimt masterpieces on display in Vienna’s Belvedere Museum, which were taken from her family by the Nazis during World War II. Austria shipped the paintings to the U.S. in 2006, where they were first put on display in Los Angeles and then sold at auction, with the “Portrait of Adele Bloch-Bauer I” (1907) being purchased by Ronald Lauder to be put on display at the Neue Galerie in New York City.

This and other films featuring priceless works of art begs the question, what does a film company do when it wants to include works of art in movies. In making “Woman in Gold” what did the director, Simon Curtis, have to do recreate scenes of the paintings as they were in Austria? Did he borrow the artworks that were filmed? After all, even if the current location of an artwork is known, it is simply too costly to move a multimillion-dollar work of art around the world just for filming purposes. Its movie magic of course! The art reproduced for this and other films is meant to fool the eyes of millions of moviegoers, and looks so real that, if released into the general public, it could potentially pass as a forgery. While the reproductions in this instance will likely be kept under lock and key in storage after the film wraps, other artists and foundations have gone to greater lengths to protect their copyrights when their works are depicted on film.

As an example, the 1996 film “Basquiat” depicted the work of many famous artists including Picasso and Warhol. Director Julian Schnabel, a painter himself who had close friendships with Jean-Michel Basquiat and Andy Warhol, wanted the art in the film to be as true to life as possible. Unfortunately, the Basquiat estate refused to give reproduction permission, instead demanding an exorbitant fee that would have made the film impossible. As a result, all of the paintings shown in the movie were created “in the style of” Basquiat, with an attorney for the estate verifying each piece as acceptable. Schnabel also convinced Picasso’s estate to allow him to create a reproduction of “Guernica” (1937) for the movie, but in exchange agreed to destroy the work immediately after and send video proof of destruction. The story of the making of the “Basquiat” film shows how artists and estates may protect their interests while still allowing some flexibility for allowing inclusion of art in the medium of film.

The film industry has a long history of creating reproductions of art for set backgrounds. Films featuring fine art have grown more and more prevalent in the past two decades. As this trend has grown, so have increased the copyright lawsuits over artists’ rights and complicated rights clearance processes with staggering monetary demands and unique instructions for the creation and destruction of the art.

Lawsuits over art depicted in two films in the 1990’s caused film companies to change their policies over rights and permissions forever. Artist Frederick E. Hart brought suit against Warner Brothers for showing a sculpture in a final scene of the movie “Devil’s Advocate” (1997), which was strikingly similar to his “Ex Nihilo” (1982), which is displayed at the Washington National Cathedral. The movie not only allegedly infringed his copyright, but also distorted the artist’s intent of portraying God’s beautiful creation of humans, not, as it was in the film, coming to life in a demonic scene of lust. After a federal judge found that Hart was likely to succeed, Warner Brothers reached a settlement, agreeing to cut and change the ending of the film before video release and also add a sticker to the 475,000 unedited versions of the film already released that disclaimed any affiliation to the artist’s sculpture, a likely difficult but necessary end to the case.

Similarly, artist Lebbeus Woods sued Universal Studios, Atlas Entertainment, director Terry Gilliam, and production designer Jeffrey Beecroft, alleging that the film “12 Monkeys” (1995) ripped off his drawing entitled “Neomechanical Tower” (1987). Woods was upset about the violation of his copyright and also the distortion of his artistic intent. In granting a preliminary injunction, the Court asked Universal to pull all copies of the already released film (an enormous expense) but Universal instead agreed to settle for a six figure sum to keep it in. These costly legal battles and settlements changed the way that production companies handle art used in films to be more cautious and to seek permission from copyright holders up front.

These cases, among others, raise issues of how to truthfully depict the past in film while still respecting the rights of artists over their creative works. Media companies, now more than ever, must check with their art departments and ensure that rights clearances are obtained for any concepts or images that may be sourced from outside. Solutions as creative as the art depicted must be sought to permit audience enjoyment on all levels. As for the reproductions in “Woman in Gold,” created by scenic artist Steven Mitchell, under the production design of Jim Clay, no information is available at present as to their fate.

* * *

Screen shot 2015-04-17 at 2.41.44 PMNote from the editors:

On April 13th, Center for Art Law continued its film-viewing series “You’ve Been Served” with “Woman In Gold.” While attendees did comment on the casting choices (unforgettable Helen Mirren as Maria Altmann and debonair Ryan Reynolds as Randol Schoenberg), nobody objected to the quality or mere fact of art reproductions. In addition to the Klimt paintings, the film features many other artworks that were or might have been a part of the Altmann’s family collection, including for example Ferdinand Georg Waldmüller’sPrinzen Esterhazy mit weißem Kaninchen in einer Landschaft” (1827), which was taken from the Bloch-Bauer’s that Hitler intended to hang in his Führermuseum. The film was well received and praised for its ability to explain the value of restitution that transcends the art market value and aims to fix some of the tragic losses suffered by families and nations during under the Nazi rule and World War II.

Select Sources:

*About the Author: Mia Tomijima is a recent graduate of Brooklyn Law School, where she received a certificate in intellectual property and served as Chair of the Art Law Association. She received a bachelor’s degree in art history from UCLA, and has worked with museums, auction houses, and other arts non-profits. Mia is a post-graduate fellow with Center for Art Law.

Disclaimer: This article is intended as general information, not legal advice. Any opinions contained herein are of the author’s alone and are not a substitute for seeking outside legal representation.

Donating Art – Not as easy as you may think…

By Aaron M. Milrad, first published on the Dentons website on 2 April 2015.

Owner

In advising potential art donors I find my clients are surprised when I ask “Are you the owner of the art?” At times there is no quick or obvious answer. Who was the buyer of the art? Who was listed on the Bill of Sale? Is it you, your spouse or your corporation? What if you and your spouse are no longer married and living together, but the Bill of Sale shows that the artwork was sold to Mr. and Mrs. X? Who can donate it? Keeping the original Bill of Sale is an important aspect of donating art as a museum or art institution will ask you to sign a Deed of Gift confirming that you are the owner of the art and have authority to donate it.

The deed of gift

The Deed of Gift will also ask you to warrant that the artwork is free and clear of any encumbrances; that is, that you have not pledged it to the bank for a loan or an ongoing loan agreement and that no creditor has filed any claim against your assets, including the artwork.

It is also common for the Deed of Gift to ask, and have you confirm, that the artwork has not been imported into Canada in contravention of any cultural property laws of the country of origin of the artwork (a Mexican object, as an example) or in contravention of Canadian law.

Canada is a signatory to UNESCO Convention dealing with the rules for importing and exporting of cultural property from member states.

Where to donate?

Mandates of collecting differ significantly from one institution to another. Selecting the right institution is important as the donor does not wish to be embarrassed by having an institution refuse the work as being outside its mandate. For example, the George Gardiner Museum of Ceramic Art collects only ceramics and related material. Other museums may collect only Canadian art or military art – or may not collect at all and may only exhibit art on loan.

Institutions will consider other factors:

  1. How important is the artwork;
  2. How the work fits into its collection;
  3. The size of the work;
  4. Whether it can be easily accommodated in storage; and
  5. How often the institution will want to show the work to the public (that is, its importance as art).

Your personal appreciation of the work in question does not necessarily make it an important work for an institution to receive as a donation. There must be a value and a relationship to the institution’s existing collection to warrant its acceptance of the work. You should ask the institution in advance as to its mandate and what the institution may be looking for in the way of art donations.

Donation of money

It is not unusual for an institution to tie its acceptance of the art donation to a requirement that the donor also contribute money to help cover the cost of “the care and feeding of the artwork”, and/or the cost of independent appraisals by professional appraisers to establish the fair market value of the art donation that will be reflected on the donor’s tax receipt. Often times, such a monetary contribution can be made to the institution for its general purposes. Care has to be taken to avoid direct or directed payment to the appraisers, as this may not qualify as a donation for income tax purposes.

Fair market value

If a tax receipt is requested or required, the artwork must be valued by independent appraisers at or near the time of the donation. Sometimes the curator of the institution itself may appraise the work. If the artwork has an original cost and a current value less than $1,000, there is no tax ramification for a capital gain under the Income Tax Act.

“Fair market value” is not defined in the Income Tax Act. However, it has been established by various court decisions as being the highest price an artwork is expected to bring in the context of willing buyers and willing sellers in the appropriate “sales market” applicable to that artwork, and under no compunction to transact. Often times, in seeking to quantify the artwork’s value, the tax authorities will look at the original price paid by the donor as the starting point, as well as the qualifications of the independent appraisers who valued the artwork.

Acceptance

Many institutions will require that the donation of the artwork be approved not only by the relevant curator, but also by an acquisition committee or even by the institution’s board of trustees. This is not a quick process. Usually, acquisition committees sit only three or four times a year. If timing of acceptance of a donation of artwork is important for tax reasons (i.e. the receipt is required for a particular tax year), sufficient time has to be given to the institution to process the artwork for donation in accordance with the rules of the institution and the tax authorities.

The institution must be a ‘charitable organization’ in order to issue tax receipts. It will not wish to put its status in jeopardy for having a faulty donation acceptance program.

Certified cultural property

A donation may be made by a collector to an institution under normal donation rules for a tax receipt for fair market value of the artwork. However this process will result in a taxable capital gain to the donor based on the increased value of the work from the time of purchase to the time of donation. There may be different tax issues for an art donation made by an art dealer, or artists donating their own artworks, but that is outside the purview of this article. However, an art donation made under Canada’s Cultural Property Export Import Act may qualify for a special benefit given to the donor.

Case Review: Rybolovlev v. Bouvier

By Chris Michaels*

Amadeo Modigliani, Nu Couche au Coussin Bleu (1916)

Amedeo Modigliani, Nu Couche au Coussin Bleu (1916)

A criminal complaint filed in the principality of Monaco on January 12, 2015 sent shockwaves through the international art market. In it, Russian oligarch Dmitry Rybolovlev, businessman and owner of the AS Monaco football club, reportedly alleged fraud and money laundering against Yves Bouvier, a Swiss art dealer and president of Natural Le Coultre S.A., a storage business operating freeports in Geneva, Luxembourg, and Singapore. Bouvier was detained in Monaco in February and his assets were frozen by a Singapore court in March.

The dispute erupted following a pre-New-Years-eve conversation between Rybolovlev and Sandy Heller, Steven Cohen’s art advisor. During their conversation, Heller informed Rybolovlev that Cohen, a billionaire hedge fund manager, sold a Modigliani from his collection to an anonymous buyer for $93.5 million. Unbeknownst to Heller, Rybolovlev had recently purchased the Modigliani from Bouvier for $118 million, which represented a markup of more than $24 million that went to Bouvier.

This case not only highlights the tax implications surrounding freeports, which allow for luxury goods to be stored and sold tax-free, but also emphasizes the need for greater transparency in private sales. Commonly, private sales of art, especially those of high value, are shrouded in secrecy. Confidential components of private sales typically include identity of the parties, purchase price, as well as commissions collected by dealers. A problem for collectors arises when collectors and dealers enter into an agreement whereby a net return price is set, which guarantees the amount that the selling collector will receive for the art. The issue here is that the seller may never know the actual final selling price for the art and/or the amount of the commission received by the dealer. In Rybolovlev’s case, this situation was reversed, as he, the buyer, found out the “real” final selling price post-sale. As an aside, it would be interesting to know if Steven Cohen was aware of either the price Rybolovlev paid for the Modigliani or the commission paid to Bouvier. I would speculate that he did not.

To solve the problem of unreasonably inflated commissions, transparency is paramount in private art sales. When collectors and dealers enter into consignment agreements, it is imperative that the agreement include terms that specifically outline the total commission to be collected by the dealer OR that the selling collector agrees to the net return price and also agrees that the dealer may collect any commission that is above the net return price. Handling the issue of commissions in private sales will alleviate any concerns of dealer impropriety that may arise after a sale.

According to the April issue of The Art Newspaper, a temporary order against Bouvier disallows sales of personal assets worth up to $550m and asks Bouvier to surrender Mark Rothko’s No 6 (1951) as a collateral to his would-be-debt to Rybolovlev if the court finds that the transaction was unconscionable.

Sources:

About: Chris Michaels is a litigation attorney in the Philadelphia office of the Atlanta, GA-based law firm, Cruser & Mitchell, LLP, where he actively pursues his interest in the field of art law. He may be reached at (267) 888-2842, cmichaels@cmlawfirm.com, or on Twitter @CMichaelsartlaw.

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

Artists, Not Judges, Should Decide Fair Use: Select Implications of the Cariou-Sconnie Nation Deviation

by Sekou Campbell, Esq.*

This piece will focus on two implications of the Cariou and Sconnie Nation analyses: (1) the inherently factual nature of “fair use” analysis and (2) fair use as an affirmative defense. “Fair use” started as a judge-made remedy to technically correct legal conclusions that led to absurd results, a practice commonly known as “equity.” Generally, and in the case of “fair use,” equity requires a court to make a significant factual investigation so as to demonstrate why the technical law should not apply. “Fair use,” however, is odd because despite its equity origins, it has been codified as a technical law for the last forty years in the U.S. Copyright Act. Moreover, “fair use” can only be found if (a) a defendant has been found to infringe a plaintiff’s copyright, and (b) a defendant proves that “fair use” should be applied. Although the burden of proof is traditionally on a plaintiff, “fair use” is an affirmative defense, meaning the defendant must prove each element. Courts frequently delve into their analyses without acknowledging the significance of the fact that they are making equitable, not technical, decisions that the defendant, not the plaintiff-creator, must fully prove. Sconnie Nation serves as a good reminder of the pitfalls to treating equity like a technical law and ignoring that the defendant bears the burden to prove “fair use.”

Over the last two decades, a single doctrine has garnered much of the attention of “fair use” case law: “transformativeness.” “Transformativeness,” first introduced by Southern District of New York District Judge Pierre N. Leval, suggests that when a subsequent user “adds value” to an original piece of artwork by using that original as “raw material,” rather than “repackaging” or “republishing” the original, that subsequent use deserves protection under the “fair use” statute.[1] As more and more artists “quote” other artists and artwork, “transformativeness” has become more and more central to the “fair use” decisional law. Indeed, it can be argued that Cariou, the 2013 Second Circuit decision, held that transformativeness is a dispositive “fair use” factor.

The case law generally ignores the equity origins of “fair use” and by necessary implication “transformativeness,” and jumps right into a “legal analysis” by comparing the plaintiff-creator’s work to the defendant-second user’s work. Focusing the analysis on which facts best show “fair use” by relying on art experts and fact testimony and documents from artists rather than other judges will result in two favorable outcomes: (1) fewer judges acting like art critics and (2) more private negotiations between artists about the use of each other’s work.

It seems that thee Seventh Circuit’s criticism of Cariou, in Sconnie Nation, highlights the shortcomings of relying too heavily on works that are technically “transformative” in order to conclude that a defendant has proven “fair use.” Specifically, Judge Easterbrook reasoned that “transformativeness” is actually codified as a protected right in 17 U.S.C. § 106(2), the statute that establishes what uses constitute “copyright infringement.” That statute protects “derivative works,” which is defined to include a “transformed work.” Therefore, as Sconnie Nation points out, an expanding “transformative use” doctrine threatens to extinguish the derivative work right. But, as will be discussed below, a more nuanced and fact-intensive inquiry can save both the transformativeness doctrine and the derivative work statute.

Tale of Two Circuits: 2nd and 7th

Cariou and Sconnie Nation both purportedly involved “appropriation art,” whereby the defendant-second users copied or otherwise used the plaintiff-creator’s copyrightable artwork as “raw material.”[2] In Cariou, the “raw material” came from Patrick Cariou, a professional photographer who lived in Jamaica for six years. During that time, Mr. Cariou developed a relationship with Rastafarians that allowed him to take “extreme classical” and not “pop culture” photographs. In Sconnie Nation, Michael Kienitz photographed Madison, Wisconsin mayor Paul Soglin during his inauguration. In both cases, the defendant-second users (Richard Prince in Cariou and Sconnie Nation in Sconnie Nation) modified the original, taking elements away and adding others to them. Thus, both defendants admitted to “appropriating” or infringing upon their adversary’s work. Both parties also asserted “fair use” defenses by incorporating a “transformativeness” argument.

Cariou

cariou-princeCariou represents a tension between the “reasonable observer” test, on the one hand, and the oft-quoted dictum that “it would be a dangerous undertaking for persons trained only to the law to constitute themselves final judges of the worth of [a work],” on the other.[3] The “reasonable observer” test requires the Court to “examine how the artworks may ‘reasonably be perceived’ in order to assess their transformative nature.”[4] Without a fully developed factual record, however, judges serve as rather inept observers because they generally do not “assess transformativeness from multiple perspectives, with attention to what different audiences might see in a work and in an allegedly transformative remix of that work.”[5] The dissent in Cariou takes a similar position.[6] Thus, to resolve the tension between the “reasonable observer” test and the judge-as-art-critic problem, appellate courts, like the Cariou dissent, should defer more to lower courts, pushing litigants to trial and not merely dispositive motion practice.

This adjustment will lead to two developments. First, the higher courts will have more facts on appeal. Specifically, they will have experts’ testimony, actual professional art critics, upon which to base their opinion. Second, more settlements will occur, encouraging artists to resolve these disputes on their own. In either case, an artist or art professional gets a much more prominent voice in decisions affecting artwork, a welcomed development.

Sconnie Nation

Screen shot 2015-04-02 at 10.41.13 AMJudge Easterbrook points out that “[f]air use is a statutory defense to infringement.”[7] This is almost correct.[8] It highlights, without saying it, the fact that a defendant has the burden to prove fair use. Judge Easterbrook stated that transformativeness cannot be a significant factor when considering a “derivative work” protected by 17 U.S.C. §106(2). This statement, taken together with the fact that fair use is an affirmative defense, suggests that “transformativeness” cannot do much work in a fair use analysis because a “transformed work” is defined as a “derivative work” in the Copyright Act.[9] Therefore, if a plaintiff argues that its derivative work copyright has been violated, it may also be conceding fair use, rendering 17 U.S.C. § 106(2) useless. Sconnie Nation solves this problem by largely ignoring the “transformativeness” analysis. However, another solution exists; require the defendant to distinguish between an infringing transformation (e.g. translation or summary) and fair transformation (e.g. parody and satire).

Of course, such a distinction requires a court, preferably the U.S. Supreme Court, to provide a principled rule of law. However, this could also be a factual inquiry, governed by some basic principles that mirror current copyright law, like a modicum of creativity and originality, an effect on the commercial market of the plaintiff-creator and the amount and substantiality of the transformation (e.g. is the change subtle or bold). Ultimately, when courts require defendants to prove more, they may also help artists to fashion more developed arguments that lead to better rules that guide the fact finders below.

Conclusion

Judge Easterbrook seems to have done a good job stoking the flames of controversy over fair use and hopefully triggering Supreme Court analysis in Sconnie Nation. This piece hopefully highlights some additional considerations that will make the doctrine more clear.

 

Select Sources:

About the Author: Sekou Campbell is an attorney in private practice in Philadelphia, Pennsylvania, where he litigates commercial matters in state and federal courts throughout the country.

  1. The Cariou Court adopted the Tate Gallery’s definition of appropriation art as “the more or less direct taking over into a work of art a real object or even an existing work of art.” Cariou, 714 F.3d at 699.
  2. Cariou, 714 F.3d at 714 (quoting Bleistein v. Donaldson Lithographing Co., 188 U.S. 239, 251 (1903)).
  3. Cariou, 714 F.3d at 714 (“because the district court takes the primary role in determining the facts and applying the law to the facts in fair use cases, after which we exercise our appellate review if called upon to do so, I conclude that as to each painting, the district court is best situated to determine, in the first instance, ‘whether Prince is entitled to a fair use defense in light of the correct legal standard.’”).
  4. Sconnie Nation, 766 F.3d at 758.
  5. Fair use is derived from equity and merely codified in the 1976 Copyright Act. See Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 448 (1984).
  6. A ‘derivative work’ is a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, elaborations, or other modifications which, as a whole, represent an original work of authorship, is a ‘derivative work.’
  7. 17 U.S.C. § 101.

Help Wanted: Miami’s Alarming Number of Directorship Successions

FL MUSEUMS COLLAGE

by Emily Behzadi*

With the musical chairs of museum and auction house directors moving from one institution to another, series of announcements about Miami art museums losing their directors in quick succession seems distressing. How important is it to have a director and how long can an institution survive with an interim leader at the helm?

A growing trend in museum management shows the likelihood of directors moving from one institution to another. However, this is particularly alarming as a large number of museums in Miami, one of the art world’s most prominent cities, have or will have concurrent current vacancies in 2015.

Over the past decade, Miami has become one of the premier destinations for contemporary art. Miami boasts several museums in its orbit, which cover a broad range of interests. However, four of Miami’s museums experienced directorship successions in the past year. On February 11, 2015, Suzanne Weaver, former-interim director of The Institute of Contemporary Art (ICA), stepped down just over four months after her arrival. The reason for her departure is a mystery. The Pérez Art Museum Miami (PAMM) has been without a director since March of 2014. Its past director, Thom Collins, stepped down last March to become executive director and president of the Barnes Foundation in Philadelphia. Furthermore, Cathy Leff, the former director of Florida International University’s Wolfsonian Museum, has been absent for nearly a year. Lastly, the Cisneros Fontanals Art Foundation (CIFO), is absent a director after Jesús Fuenmayor, who led the organization for less than three years, left.

With this news, a formidable question to answer is how important is it to have a director and how long an institution can survive with an interim leader at the helm. A director must wear many hats. He or she must be a shrewd business person, an art scholar, a teacher, a publicist and fundraiser. In today’s wavering financial climate, museum leaders are moving more to fields of business or administration than to the arts. A reason for this may be that museums are conspicuously trying to employ strategies to raise funds and widen their audiences.

The management’s knowledge and skill can be beneficial or detrimental to the health and survival of the museum. For example, the Corcoran museum faced a plethora of legal difficulties due to “peculiar and egregious mismanagement,” according to the Save the Corcoran (STC) coalition.  Some of Corcoran’s officers, such as the former chief operating officer, Lauren Garcia, were not trained and educated in the arts or museum management. Perhaps this is one of the many reasons the museum faced years of financial and management troubles before ultimately closing in 2014.

Furthermore, although many of the responsibilities of a director, such as overseeing the museum’s policies and assets, are shared with an institution’s trustees, the director has its own responsibilities. A director’s role varies according to the mission of the museum. The museum director’s role is not limited to the programming of the institution. The director has its hands in many aspects of a museum’s day-to-day operations. Although the board of trustees is important in evaluating a museum’s acquisitions and dispositions, a director acts as the figurehead and the chief administrative officer of the institution.

The director must not only see that the institution’s operations are running smoothly, but also must manage the trustees’ expectations and demands. Without a director at the helm to run the museum, the future of an institution is uncertain. This is evident in the case of CIFO, which is an institution that does not have a board of trustees or an endowment and relies solely on the management of a board of directors and the president.

Most notably, the director is in charge of fundraising. The director’s fundraising practices must be in compliance with the professional standards articulated by the Association of Art Museum Directors (AAMD). This includes avoiding any fundraising practices that could damage the public’s trust. The director serves as a figurehead at donor fundraising events and represents the museum to potential donors. Successful directors must be able to secure private funding in order to keep an endowment, which ultimately ensures the survival of the museum.

For example, PAMM’s absence of a director comes at an especially precarious time as its endowment is currently at $14 million, which is well below its announced target of $70 million. This is difficult because PAMM now must struggle to compete with ICA and Miami’s other institutions. Likewise, a vacancy at ICA is problematic because the institution needs a mouthpiece to obtain funding for its new facilities, which the museum purports will be ready by Art Basel 2016.

As briefly mentioned above, directors and the museums they govern must abide by a set of codes of ethics, policy statements and guidelines of the American Association of Museums (AAM) and the AAMD. The director is responsible for staff appointments, in which the AAMD emphasizes a director “should build and sustain a high level of morale and productivity.” If a director does not “[uphold] the highest standards of professional practice and ethical conduct,” he or she is subject to censure and or a sanction by the AAMD. For example, the former director of the Wolfsonian, Cathy Leff, was rumored to have left in April 2014 due to complaints of her creating a “hostile work environment” and inappropriate behavior towards her employees. If true, she and the museum may be subject to censure and/or sanctions by the AAMD.

Additionally, the AAMD holds the director responsible for the “daily monitoring of the institution’s compliance with laws and regulations. Legal matters that arise in the operation of the museum include those concerning the collections, exhibitions, personnel and labor relations, contracts, governance, finances, facilities, taxes, rights and reproductions, and events. The museum also has legal counsel, who is available to advise on general and specific matters. According to the AAMD, the board, the director, and general counsel all work together “to share current information about legal issues and legislation relevant to the institution and museum standards.”

A museum can face legal troubles if its management is not run correctly. The management of a museum relies on a director, a board of trustees and a curatorial staff. Museum trustees and some directors owe fiduciary duties to the museum in order to further its enumerated nonprofit and charitable purposes. These duties are divided into two categories: the duty of care and the duty of loyalty. A fiduciary’s duty of loyalty entails the obligation “to remain loyal to the purpose of the charitable or nonprofit organization.” Thus, the fiduciary must give to the public the benefit to which the entity earned its tax-advantaged status, i.e. the educational value of a museum. These purposes should be articulated in the organization’s incorporation documents and bylaws which the fiduciary must work to carry out.

The fiduciaries also have an obligation to exercise reasonable care and diligence in the management of the museum and its assets. If the fiduciaries fail to do this, they may be liable for negligence to the beneficiaries of the trust or for financial losses due to the mismanagement. This duty may be comprised of many aspects including the duty to take possession of and to protect the trust property, the duty to make the trust property productive through prudent investment, and in some cases, to sell trust assets to render the trust more profitable. For example, the Delaware Art Museum in March 2014 decided to sell up to four works from its collection, “to right its finances and save the museum from closing.” This is a particularly contentious issue because it is acceptable for museums to sell works of art in order to buy other works, however, selling works to pay for operations is regarded as an ethical violation. Issues may also arise in regards to the proper investment of institutional funds and accounting.

In the absence of a director, the board of trustees is responsible for operating the museum in a fashion that complies with its mission and incorporating documents. This may be especially hard to do if the director is in charge of the day-to-day tasks of an institution. The trustees may not be equipped to adequately complete these tasks. This is because although the trustees and the director share some of the same tasks and responsibilities, the trustees are only present intermittently. For example, the board carries full responsibility of investment policies, however, the director prepares the budget of the museum with the hands on knowledge of the museums daily expenditures. Thus, the fiduciary duties to the public could be breached in the absence of a director, putting the management of a museum into peril.

Sebastian Smee, Pulitzer Prize-winning art critic for The Boston Globe, claimed in an interview with Radio Boston, that directors cannot just be art lovers and scholars; they have to be visionaries and fundraisers. In the end, it is easy to conclude that directors are massively important to the management of a museum. Although they share responsibilities with the trustees and curators, they contribute to the funding and programming of an institution, which are two of the most important aspects of running a successful museum. The museum industry is self-regulated through its own membership in professional membership programs such as the AAM and the AAMD. Museums are self-regulatory in function; as such they have the discretion to determine whether in the absence of a director, they are complying with their individual organizations’ mission and purpose. The absence of a director may impact the prosperity of the museum and raise doubts among those benefiting from the public trust.  Again, this also depends on the contractual duties the board entrusted upon the director’s position.

Legal issues in Museum Administration are varied and few, if any, are specifically art related. The director’s duties are just one of many issues that lawyers in the field of art law will need to know to diligently represent potential clients in the museum administration profession. The annual conference on the subject of “Legal Issues in Museum Administration” (scheduled for DC in Spring 2015) will cover employee diversity, visitor access, fair use developments and trends, copyright (global and virtual), managing collections and financial challenges, social media and technology, authentication, museum mergers, tax and legislation updates, federal grants updates and strategies for gift agreements.

As for the museums currently without directors or with interim directors, best of luck with the interviews.

Select Sources:

About the Author: Emily Behzadi is a 3L at Georgetown University Law Center.

Online Art Auction: New Rules of the Old Game

Online Auctions Apr 1

By Melissa (YoungJae) Koo*

Name of the Game

There are no federal rules governing auctions in the United States. Regulations governing conduct of auctioneers, as well as licensing and bonding requirements are reserved to individual states and municipalities. While some states do not require licenses, states like Georgia, Texas, Virginia, have statewide auction laws that require continuing education courses to auctioneers. On the other hand, while states like New York and Oklahoma do not have state laws governing auction licensing, they have cities that promulgated licensing requirements. For example, in New York City, to conduct a public auction, auctioneer must be licensed and backed with a surety bond. License fee is $400 for a two year period. With the emergence of online auctions, the traditional methods of conducting and regulating public auctions are in transition.

Still in their early stages of adoption and overshadowed by traditional auctions at physical auction rooms, online art auctions have been steadily growing in popularity and generating a more substantial portion of overall art sales. Notably, leading brick-and-mortar auction houses have already taken part in online ventures and observed an increase in numbers of online bidders. After the abandonment of the short-lived online auction partnership with eBay in early 2000s, Sotheby’s and eBay signed a new agreement in July 2014 to stream online Sotheby’s auctions on eBay. Sotheby’s and eBay’s first scheduled sales were to start April 1, 2015. Reportedly, even earlier Sotheby’s has seen a 20% surge in number of new online bidders in 2014, and ten lots sold for more than $500,000 to online bidders. As reported in the Wall Street Journal, Christie’s sold $35 million of art online in 2014, which is up 60% from 2013. Chairman and CEO of Phillip’s, another major auction house, hinted at the possibility of Phillip’s expanding into online sales as well.

New Players

With traditional auction houses giving some attention to online art auctions, young businesses of online-only auctioneers have been forging a strong presence online. Since their launch, businesses like Paddle8, Artnet, and Auctionata have been attracting art buyers to buy and sell artworks online. For example, Paddle8, launched in 2011 in response to the “increasing thirst for access to contemporary art,” has been funded by a consortium of big-name investors, both private investment firms and individual investors of the art world. Paddle8 had four founding members, each with finance, auction house, business and curatorial background. Artnet, a publicly traded corporation listed in the Prime Standard of the Frankfurt Stock Exchange, was originally founded in 1989 and had been migrated to online since 1995, providing various resources for the international art market such as the Price Database, Analytics Reports, and artnet News. It established artnet Auctions in 2008 as the world’s first online auctions platform for the sale of modern and contemporary artworks. Auctionata was founded in 2012 in Germany with investment capital funded by investment firms, and held the first live auction in the history of the internet in December of 2012. Recently, on March 30, 2015, Auctionata announced that it has raised $45 million from venture capital, making the total capital raised close to $100 million. Unlike online auction competitors which focus mainly upon on works of fine art, Auctionata also holds auctions for memorabilia, wine, jewelry, and watches.

One of the main differentiating factors between the traditional auction houses and online art auctions is some limitations in the highest prices realized. In 2013, the European Fine Art Foundation’s Art Market Report indicated that online art sales accounted for only a small segment of total revenue of the art market, generating about 2.5 billion euros compared to the total 47.4 billion euros in the whole art market. Online art market has been known to focus on the mid market range of art prices, from a few hundred dollars to a little over $100,000. This tendency is in part due to the buyers’ concerns about provenance and authenticity of the items consigned and may account for online buyers’ aversion to bid on or buy art priced over $100,000 with confidence. Also, traditionally, collectors want to experience an artwork’s scale and texture first-hand, as the “spectre of forgery makes [buyers] wary of dealing with virtual vendors” in the secondary market. Steve Lazarides, a specialist who runs both physically gallery and an online shop, has been reported as stating that a relationship is formed between a buyer and a seller when the price of an artwork tops $8,000. In addition, discussing buyers’ need for trust when bidding over $10,000 for an artwork online, Ben Hartley, International Managing Director of Auctionata, stated that art collectors are less comfortable buying emerging contemporary artists’ works than works of well-known artists which have established provenance and have already been sold at auction houses or reputable galleries in the past.

Numbers Game

Despite the limitations sprouting from buyers’ concern about provenance and authenticity, the “ceiling is gradually lifting upwards,” as the prices buyers are willing to pay online are climbing. The prices and number of sales of online art auctions has been getting close to ceiling-shattering, with some online art sales getting close to or surpassing the million dollar range. Artnet broke the $1 million ceiling once in 2011 with the sale of “Flowers” (1978) by Andy Warhol for $1.3 million, the record that has not been broken yet. Later, Auctionata sold Egon Schiele’s “Reclining Woman” (1916) for $2.3 million at a streamed auction in Berlin to an online buyer, who had sent an art expert to inspect the painting first. With the ceiling-shattering sales in online-only art auction businesses, the prospect of further growth looks promising. Paddle8 reported total sales of $17.8 million in the first half of year 2014 with 60,000 registered members worldwide and, similarly, Auctionata has reported 163% boost in sale for 2014 with the vastly growing client base, according to a recent report from Art Market Monitor.

As the online art auction businesses grow, however, their legal implications are little-known or reported. Few cases relating to Internet art auctions have been filed and “to date none has been found at the precedential level,” according to the author of Art, Artifact, Architecture and Museum Law, Alexandra Darraby.

Spotlight: Auctionata

Center for Art Law recently sat down with the Vice President and General Counsel of Auctionata, Jonathan Illari, to discuss business and legal aspects of being in-house at an online auction house. Before joining Auctionata, Mr. Illari, a graduate of Boston University School of Law, was Associate General Counsel of another major international auction house. With his valuable experience earned at a traditional art auction house, he is an asset in the field of emerging online art auction business.

According to Illari, a career at an online art auction platform like Auctionata has two intertwined aspects of business: promotional and legal. In terms of promotional aspect, Illari pointed out the unique two-folded business model of Auctionata: live video stream auctions, filmed in a New York studio, and the “Online Shops” e-commerce marketplace with a set price, subject to counter-offer. Due to the nature of live video stream auctions, which is broadcasted by a local crew specialized in TV productions, the legal department has to make sure that the company follows all applicable auction and dealer rules and regulations in New York City such as an official auctioneer and auction house licensing rules under the New York City Administrative Code Title 20, much like with established auction houses. In addition, Illari said that the location of the business, New York City, the biggest art market in the United States where all the major art auction houses are headquartered, comes with equally most expansive codes and regulations relating to art auction such as business licenses and tax certifications. The legal department has to ensure the auctions comply with the local laws—not just those related to auctions but those related to types and quality of products being auctioned such as wine and cultural property, for example. In addition, international laws such as EU Data Protection laws are another example of issues online auction businesses should be mindful of, as there is a significant client base abroad.

Illari pointed out that one of the most common legal issues arising at the online art auction business is related to client identification and verification. Given that the business transactions occur online only, attracting many international clients all over the world, issues arise in identifying bona fide purchases and minimizing business risks and liabilities. Illari stated that buyers are vetted from Auctionata directly as well as its third party partner sites. Although admittedly verification can be an issue in an online marketplace, which always has the potential to host bad actors, Illari commented that one advantage from a fine art perspective is that when unique goods are auctioned online, people tend to bid in good faith because they want the particular item being offered, not just “any” painting, print, sculpture, etc. Despite the best efforts, the issue could still be aggravated when clients do not pay. Illari stated that when nonpayment occurs, debt collection in an international online marketplace can become a jurisdictional hindrance, as it is difficult to pursue the client and the client’s assets especially when he or she is located outside of the United States. When a buyer absolutely refuses payment, like other auction houses, Auctionata could choose to cancel the sale and offer the item to an underbidder, although the original bidder would still remain liable for any loss in revenue or costs to resell. Depending on the circumstances, a buyer can also lose all future bidding privileges. For Auctionata, in terms of jurisdiction of all legal matters arising from the business including contract disputes, New York law remains the binding law, regardless of where claimants are based.

Illari also mentioned various types of buyers of online art auctions, ranging from individual collectors to galleries, similar to traditional auction houses. The variety of goods offered on Auctionata makes the site attractive to both the casual and educated consumers, meaning that the online art auction business “must be a hybrid to be able to fully serve the needs and requests” of the full range of clients. Another unique aspect of online art auction business is the impersonal relationship with the clients, given the nature of the client base. To minimize issues arising from the lack of in-person interactions with clients, online business may offer on-site exhibition of the works being auctioned as well as free valuation services.

In summary, traditional art auction houses have reported to continuously renew the record on sales of art both offline and online, young online art auction businesses, too, have been growing in parallel. Illari stated that as online auctions are generally an emerging market, there is not much laws, regulations, or case law specifically governing the field of business, making online auction businesses to adapt to the environment they are in. As we explore the little-known or reported legal issues arising from the new promising businesses, it would be interesting to monitor how they develop in the legal realm.

**The author wants to thank Jonathan Illari for his time and kindness for the interview.

Selected Sources:

About the Author: Melissa (YoungJae) Koo, Legal Intern with Center for Art Law, is a third year student at Benjamin N. Cardozo School of Law, concentrating in Intellectual Property law, especially art and fashion law. She can be reached at youngjae.koo@law.cardozo.yu.edu.

You’ve Been Served: “Art and Craft”

by Dennis C. Abrams*

On the night of Friday, March 13 at New York University School of Law in Lower Manhattan, Center for Art Law held the most recent installment in its “You’ve Been Served” series of dinners and movies. At the event, co-hosted by NYU’s Art Law Society, a modest crowd gathered to share a catered dinner of falafel, a screening of the documentary “Art and Craft” and a presentation by James Martin, the founder and operator of Orion Analytical. The audience was composed of a healthy mix of those involved law, art and other fields – there were art students, artists, attorneys, conservators, gallerists, law students, restorers and even a computer programmer in attendance.

The film itself, “Art and Craft,” was universally enjoyed by the audience. The 2014 documentary follows Mark Landis (the subject of a Center for Art Law article in 2011), one of the single most prolific art forgers the world has ever known. What sets Landis apart from other forgers is that Landis does not seek to profit financially from his forgeries but rather donates them to museums and other institutions (mostly in the southern United States) for motives that are his own. This pseudo-philanthropic approach to fraud has allowed him to continue donating copies of valuable artworks for over thirty years for two reasons: (1) museums were unlikely to scrutinize the authenticity of artworks which they did not pay for, and (2) there seemed to be no legal consequences for fraud where the perpetrator is not unjustly enriched. Another reason the true extent of Landis’ fraud will likely never be known is that he clearly has a gift for duplicating art from diverse genres and eras ranging from the Old Masters to Picasso to Charles M. Schulz.

However, his ability to replicate art is perhaps exceeded by his compulsion to do so. Almost as soon as the viewer is introduced to Mark Landis, it becomes clear that he suffers from deep-rooted psychological problems. More than eccentric, the man is very underweight, is obsessed with his late mother, makes multiple visits to mental health professionals during the events of the film, is heavily medicated for unspecified disorders (although at one point he read off a laundry list of diagnoses he received as a young adult) and lives alone among piles of his art supplies, completed artworks and books and catalogs from which he plans to make copies. The compulsiveness with which he works and his nearly eidetic memory have allowed him to create a system for copying so efficient and effective that even journalists admitted to be impressed.

The documentary struck an interesting balance between showing, on the one hand, the effect of Landis’ fraudulent donations on the reputations of recipients and the faith of art connoisseurs and, on the other hand, Landis’ mental health struggles and the minor satisfaction which he is able to derive from his actions. Ultimately, the film left the viewers to decide for themselves whether or not to empathize with Mr. Landis and whether or not he was truly aware of the morally reprehensible nature of his actions.

The film was followed by a lecture by James Martin of Orion Analytical. As Mr. Martin explained, Orion Analytical is “a micro-niche materials analysis and consulting firm” which investigates art and other collectibles from ancient Egyptian artifacts to paintings, architectural finishes, wines, sports memorabilia and so on. Orion is hired worldwide by to examine the authenticity of artwork via top of the line technology. Mr. Martin discussed his work in the recent cases in which his lab ran tests determined paintings were in fact fakes. After his presentation, Mr. Martin fielded questions from the audience which were just as variegated as the audience’s makeup itself.

Join us for our next “You’ve Been Served” event on Monday April 13 when we screen the long-anticipated film “Woman in Gold.” “Woman in Gold,” released today in American theaters, is a dramatization of the protracted legal battle waged by Holocaust survivor Maria Altmann to recover “Portrait of Adele Bloch-Bauer I” (1907) from the Republic of Austria roughly 60 years after the Nazis seized the painting from her family during their takeover of the country. The film stars Helen Mirren as Altmann, Ryan Reynolds as her young lawyer and Daniel Brühl as Austrian journalist Hubertus Czernin. The time and location of the screening are still undetermined but once the details are finalized, it will be added to our calendar of events. Also please be careful not to spoil the current status of the painting for would-be viewers.

Wish You Were Here: Sotheby’s Institute of Art (CA) Conference, January 2015

by Jessica Newman*

On January 30 and 31, the Sotheby’s Institute of Art gathered attorneys and art professionals together in Los Angeles, California for their Art Law Conference entitled “The Practice of Law in the International Art World.” The two-day expansive agenda featured twelve modules and nearly forty speakers, including artist Shepard Fairey giving an inspired keynote speech. The Conference addressed a number of issues at the confluence of art and law, including authenticity, looting, collecting, restitution, investment, public art, the future of art, and the art market. Following is a brief write up of the most memorable topics:

1. Liability v. Leadership: Advising Arts Organizations

Melody Kanschat, Executive Director of the Getty Leadership Institute at Claremont Graduate University, chaired a panel entitled “Liability v. Leadership: Advising Arts Organizations,” which featured Stephen Clark (J. Paul Getty Trust), Fred Goldstein (Los Angeles County Museum of Art), David Galligan (Walker Art Center), and Eva Schieveld (Van Gogh Museum). As multidimensional institutions, museums face a myriad of issues that extend far beyond the world of art. The panel emphasized that general counsel should be a part of all senior management conversations and budget discussions. One common concern was the avoidance of conflicts of interest (both real and apparent), particularly when dealing with a board of trustees.

One question posed to the panel was whether a museum can invest in a company which is run by a member of the museum’s board. As with many legal questions, the answer is, “Yes, but…” Although some museums have a strict zero tolerance policy when it comes to such investments, it is possible to structure transactions in a manner that avoids direct conflicts of interest. In part, the soundness of such a transaction turns on who is making the decision. It is important to ensure that the transaction is done at arm’s length and that no one who will directly benefit is personally involved in the decision whether or not to invest. In addition, transparency and continued management play important roles in preventing conflicts from arising.

2. Restitution Panel

Jonathan Petropoulos moderated the Restitution Panel, which explored the continuing evolution of restitution claims. Although issues of restitution have been around for some time, they remain a major concern for purchasers, heirs, and museums alike. Lucian Simmons of Sotheby’s observed that investigation into potential restitution issues remains a steady part of his work even today. Accordingly, as Simon J.Frankel (Covington) reiterated, research into proper provenance is as important as ever, and several conference speakers strongly advocated title insurance. As for the future of the field, Lawrence M. Kaye (Herrick), identified Russia as the next potential hotspot for restitution claims if access to Russian archives and collections becomes a possibility.

3. Secured Transactions

The second day of the conference began with a panel on Secured Transactions, moderated by Franklin Boyd and featuring John Arena (Bank of America), Stephen D. Brodie (Feinstein), and Karen McManus (Jacqueline Silberman & Assocs. Inc.). Art as an alternative asset has become increasingly popular for wealthy investors looking to diversify their portfolios. Art can also be used as a financial tool without having to sell the works by using the art as collateral. However, this option is only open to a select number of collectors.

The target collector is one with at least $10 million in well-established works (i.e., Old Masters, Modern, etc.) which can be quickly and easily sold were such a sale to become necessary for the lender. These works are appraised and, from a collector’s perspective, title insurance is recommended. Additionally, art must be the “second way out” of the deal. In other words, the borrower must have demonstrated equity in other assets. For those who can meet these criteria, using art to finance loans can be an attractive option. The fact that the United States is the only country where owners can maintain control of their collateralized works makes this option particularly appealing.

4. Art Collecting in the Current Legal Market

“Art Collecting in the Current Legal Market,” panel which was chaired by Mary Rozell (Sotheby’s) and featured Carol Bradford (California Community Foundation), Josh Roth (United Talent Agency, formerly Glaser Weil), and Katie Tolson (Gurr Johns). Although the increasingly global and technology-driven world of art collecting makes it easier than ever to access art, it also poses a number of challenges for the contemporary collector. For instance, documents can now be forged with the push of a button. However, one area in which technology has significantly enhanced the collecting experience is in inventory management. Ensuring proper documentation of one’s inventory is vital and a number of new software options have emerged that can assist a collector in doing just that. These software programs range in price, but at a minimum it should offer the collector a means of inputting photographs, descriptions of the works and details such as collection history, exhibition history, location, and inventory number. Ms. Tolson described her firm’s custom-designed Art Collection Management Software, which offers collectors a sophisticated means of managing their collections.

Roth discussed the increasing use of Section 1031 like-kind exchanges as a tool that can be utilized to expand one’s collection. Section 1031 of the Internal Revenue Code, entitled “Nonrecognition of gain or loss from exchanges solely in like kind,” provides a means for investors to defer taxes on capital gain from the sale of a work of art. In effect, 1031 Exchanges provide a collector with an interest-free loan from the government that can be used to subsidize future acquisitions so long as certain conditions are met. First, this section does not apply to personal property, as it applies only to property used for business or investment purposes. The exact parameters for this requirement are somewhat vague, however a work purchased solely for personal display in one’s home is not likely to qualify. Defining a like-kind property in this context can be equally difficult as there is no definitive guideline as to what type of art would be of like-kind to another. For instance, it is conceivable that the IRS may determine that a sculpture is not of like-kind to a painting.

Lastly, there are strict timing and designation requirements which are intended to distinguish a 1031 Exchange from a taxable transaction in which the purchaser merely uses the proceeds from a previous sale to purchase a new property. There are several ways to structure such an exchange, though the forward, or deferred exchange is most common. Broadly speaking a forward exchange works as follows: upon the sale of a work, the collector can use a 1031 exchange to defer the gain by investing the proceeds in a like-kind replacement property (i.e. another work of art) of equal or greater value. The replacement work must be identified within 45 days of the initial sale, and the collector has 135 days to close the sale upon identification. The appeal of such exchanges is evident, and Roth expects that they will only continue to grow in popularity.

Over the course of the two days, several takeaways emerged. First, many of the traditional issues within the field of art law – looting, restitution, importing/exporting, authenticity – remain at the heart of any art law practice. Secondly, the search for new uses and new means of valuing art has produced a number of creative options for investment and exchange of art. These options, however, are complex and require thorough due diligence by all parties. Lastly, the digital age has brought with it a host of new challenges for collectors, museums, artists, and attorneys alike. At the same time, technological advances also are opening up the art world in exciting ways.

Selected Sources:

About the Author: Jessica Newman is a third year dual-degree student pursuing a Juris Doctor and a Masters in Art History at Duke University. She can be reached at Jessica.newman@lawnet.duke.edu.