HEAR and the Guelph Treasure Recovery Efforts: Restitution in Review

By Nina Mesfin*

On June 7, 2016, the Senate Judiciary Committee heard a bipartisan-backed piece of legislation called the Holocaust Expropriated Art Recovery (HEAR) Act, S. 2763, 114th Cong. (2016). As recently reported by Center for Art Law and elsewhere, the HEAR Act aims to allow “civil claims or causes of action to recover artwork or other cultural property unlawfully lost because of the persecution during the Nazi era, or for damages for the taking or detaining of such artwork or cultural property.” In other words, the HEAR Act proposes a federal statute of limitations on restitution claims as opposed to statutes of limitation that vary by state in order to “lift unfair restrictions from heirs’ claims.” In addition to garnering support from both the Republican and Democratic parties, the HEAR Act also offers advocates outside of the political realm.

Screen Shot 2016-08-09 at 11.21.25 AMFollowing the bill’s introduction, on June 7th actress Helen Mirren testified before the Senate on behalf of the bill. Mirren’s support, in part, stems from her recent portrayal of Maria Altmann in the film Woman in Gold (released in 2015). Altmann was a Jewish woman who successfully reclaimed five Nazi-looted works by Gustav Klimt from the Austrian government in the landmark case Republic of Austria v. Altmann (03-13) 541 U.S. 677 (2004) 327 F.3d 1246, affirmed. The Altmann case set a legal precedent in which the Foreign Sovereign Immunities Act (FSIA) was applied retroactively, allowing a sovereign body to be tried in a U.S. court.

The timing of Woman in Gold, which has drawn public attention to Altmann’s success, coupled with recent congressional efforts to facilitate the restitution of Nazi-looted works, may impact the outcome of other restitution claims. One of these cases involves the Welfenschatz or Guelph Treasure– a collection of medieval art currently in the Kunstgewerbe Museum in Berlin—with an estimated value of $250 million dollars. On February 23, 2015, the heirs of the art dealers who sold the Guelph Treasure to Germany filed a civil action in a U.S. district court against Germany and the Prussian Cultural Heritage Foundation. The case of the Guelph Treasure will test further the limits of both the U.S. government’s dedication to Holocaust-era restitution claims and ability to broker restitution deals.

What is the Guelph Treasure?

The Guelph Treasure, consisting of 82 gold, silver and gem encrusted liturgical objects from the Church of St. Blaine in Brunswick, Germany, and according to art historian Christina Nielsen, it is considered to be “the greatest group of medieval objects ever offered for sale.” The objects range in date from the 8th to the 15th century and the majority are works of German craftsmanship while other notable pieces are Italian and Byzantine in origin. One of the most extraordinary characteristics of this collection is its indisputable authenticity; records indicate that prior to its auction, the Treasure has been in continuous care of the same noble German family for more than 800 years.

Subsequent Sales of the Treasure

Duke Ernst August was the last of his German ancestors to possess the Guelph Treasure. Due to economic hardship in 1928, the Duke was forced to put a price on what was considered a collection of “incalculable intrinsic value” because of “its antiquity and art-historical importance”(Nielsen, 442). To the dismay of many German citizens and the State itself, the Duke sold the Treasure to a consortium of Jewish art dealers in 1930: Julius F. Goldschmidt of Frankfurt, Berlin, and New York and Z.M. Hackenbroch and J. Rosenbaum of Frankfurt. Although the Duke intended for the collection to stay together, the consortium of art dealers, having failed to resell the collection in its entirety, began to sell off pieces of the Treasure.

After meticulously cataloging the collection, the dealers began selling, or rather attempting to sell, portions of the Guelph Treasure in Germany. As Germany frowned upon the sale of what it considered to be cultural patrimony, the new owners, a consortium of Jewish art dealers, then tried to sell the collection in the United States. The Guelph Treasure was first exhibited in New York in 1929, and by 1934, the consortium sold 40 of the Treasure’s 82 pieces to several museums in the United States, including the Cleveland Museum of Art (Nielsen 443). In 1935, the remaining 42 pieces of the Treasure were sold to the State of Prussia for 4.25 million Reich marks, or $1.7 million. High-ranking Nazi official Hermann Göring oversaw the acquisition and later gifted it to Adolf Hitler. It is the legality of the second sale in 1935 that the heirs of the consortium are disputing.

Appearing before the German Advisory CommissionScreen Shot 2016-08-09 at 11.27.45 AM

Before their U.S.-based lawsuit, the heirs of art dealers J. and S. Goldschmidt, I. Rosenbaum and Z.M. Hackenbroch appeared before the German Government Advisory, also called the Limbach Commission. The Commission is a joint initiative of the Federal Commissioner for Cultural and Media Affairs and the Länder and the National Association of Local Authorities; it invites claims concerning Nazi-looted property that public institutions in Germany currently possess. The Commission serves as a mediator between these public institutions and former owners as well as their heirs, hearing cases and offering resolution recommendations. The New York Times reported that the heirs’ lawyers cited the “climate of fear and uncertainty for the [dealers’] futures in which Jews in Germany found themselves in 1935,” arguing that these dire circumstances suggest that any “purchase by the state from Jewish businessmen must be considered as having taken place under duress.” The lawyers representing the heirs attempted to prove that the sale was, in fact, forced by explaining that the dealers sold the pieces for $4.3 million less than they had paid for it five years earlier. The panel attributed the ten percent market price decease to the economic downtown wrought by the Great Depression.

After contemplating this argument, in March of 2014 the Commission’s panel recommended that the 42 “jewel-encrusted, intricately wrought silver and gold crucifixes, altars and other relics of the Guelph Treasure should remain in the possession of the state-run foundation.” Bloomberg News noted that the Commission went on to state that “[f]ar from selling under duress, the consortium had been attempting to unload the Guelph Treasure for years,” pointing to the correspondence among consortium members celebrating the sale.” The Commission also noted that the Guelph Treasure is an exception to the Washington Conference Principles on Nazi-Confiscated Art, which all German museums have agreed to uphold. The Principles are a set of guidelines that maintain that “any art object sold by Jews for less than its fair value during this period (Jan. 30, 1933, through 1945) is a candidate for restitution,” a period that includes the Guelph Treasure.”

This ruling, in favor of the Kunstgewerbe Museum is one of many made by the Commission that has been met with criticism. As art journalist Catherine Hickley reports, the Limbach Commission has recently “come under fire for a lack of transparency, the length of time it takes, failure to appoint a Jewish member and the low number of cases it has mediated.” The Commission has only mediated thirteen cases since its founding in 2003, whereas its Dutch counterpart has issued more than 140 since 2002.** In July of 2016, Germany’s culture minister, Monika Gütters, actually announced plans to reform the Limbach Commission.

The Civil Lawsuit over the Treasure

Screen Shot 2016-08-09 at 11.32.39 AMAlmost a year after the Commission made its non legally binding recommendation, the heirs to the Guelph Treasure, filed a civil lawsuit in U.S. District Court for the District of Columbia. Philipp et al. v. Federal Republic of Germany et al., 15-cv-00266 (D. D.C.). According to a Washington Jewish Week article, the seventy-one page complaint alleges that the consortium sold the 42 pieces to the State of Prussia “via a manipulated sham transaction spearheaded by Dresden Bank, which was acting on behalf and by order of the two most notorious Nazi leaders and war criminals,” Göring and Hitler. The complaint further notes that the heirs used the fact that the alleged forced sale was made for less than 35 percent of its actual value and that the payment “was then subjected to flight taxes that were demanded so the Jewish dealers could flee Germany,” as evidence backing their claim. One of the dealers, Hackenbrock,was able to leave Germany in 1935, although died shortly thereafter in London in 1937. Details concerning the other two dealers, Rosenbaum and Goldschmidt, are unknown.

In order to justify filing this suit in a U.S. court, attorneys for the claimants invoked the Foreign Sovereign Immunities Act, which “provides jurisdiction over foreign states that conduct business in the U.S. via exhibitions and other museum-related activity.” According to O’Donnell, one of the attorneys representing the claimants, FSIA’s applicability to this case is straightforward, as “Jewish victims of persecution like the Plaintiffs’ ancestors are victims of takings in property in violation of international law.” He further explains, “[a]s a result, and because the Defendants are engaged in commercial activity in the United States, this case presents precisely the category of claims over which § 1605(a)(3) of the FSIA, the expropriation exception, creates jurisdiction.”

In March 2016, Germany and the Prussian Heritage Cultural Foundation responded by filing an eighty-five page motion to dismiss the case, contesting the jurisdiction of the U.S. courts. Within the motion, the defendants contend “that the persecution and expropriation of property from its Jewish residents were a sufficiently internal affair so as not to be a violation of international law.” O’Donnell has described this motion as “revisionist” and “troubling.” Most recently, on May 11, 2016, claimants filed an opposition to the motion to dismiss. The latest filing in the case was in June a reply to opposition to motion re motion to Dismiss the Plaintiffs’ First Amended Complaint. Now we are waiting for the court to review the filings.

Conclusion

The pending case involving ownership of the Guelph Treasure has brought two interesting issues into focus. The first is whether the blanket application of forced sales to an entire time period, in this case the years immediately preceding and spanning WWII, is legitimate, not taking into account the market or the profession of the seller, i.e. an art dealer who is almost always in the process of making a deal. The Guelph Treasure also tests the authority of advisory commissions with no binding power, as rulings made by the Limbach Commission are unenforceable. On the other hand, there are several other European arbitrating bodies whose opinions are binding, such as the Austrian Restitution Binding Commission and the Dutch Advisory Committee on the Assessment of Restitution Applications for Items of Cultural Value and the Second World War. As Hickley points out in her article “German minister promises to reform Limbach Commission after mounting criticism,” unlike the Limbach Commission, the Austrian and Dutch advisory committees do not require both parties to agree in order to mediate disputes.

In challenging the Limbach Commission’s clout, the case of the Guelph Treasure may bring a foreign body into conflict with the crux of the U.S. court system. It will be interesting to see if and how the U.S. judicial system, in its dealings with the Guelph Treasure, will impact the authority enjoyed by European advisory board’s ruling on contested art. As Elazar Barkan explains in The Guilt of Nations: Restitution and Negotiating Historical Injustices, restitution as a means of acknowledging gross historical injustices is a relatively novel phenomenon. Nowadays, it “is a large part of the growing attention being paid to human rights.” The question becomes: in which instances is restitution warranted and in which does it potentially exploit society’s overeagerness to atone for past atrocities? Furthermore, at what point, if at all, is it appropriate for a third party state to hear these claims and issue rulings? While the United States at times offers a venue to bring restitution claims, the outcome and the cost of these claims is unpredictable.

Select Sources:

**There are currently five restitution commissions: United Kingdom, Austria, France, Germany, and the Netherlands. In 2007, the United States government considered establishing its own restitution advisory commission, to no avail.

About the Author: Nina Mesfin is a Summer 2016 legal intern at Center for Art Law. She is a rising junior at Yale University majoring in Ethnicity, Race and Migration and concentrating in Art, Literature and Narratives of Race and Ethnicity. Nina is also a scholar in the Yale Multidisciplinary Academic Program in Human Rights.

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

5 Charged with Selling Non-Genuine Native Goods: A Violation of the Indian Arts and Crafts Act

*By Lillia McEnaney

Center for Art Law previously reported In Brief that, in March 2016, the U.S. Attorney’s Office in the District of Alaska charged a handful of individuals with violating the 1990 Indian Arts and Crafts Act (IACA). Following is an in depth background of the case and a discussion of relevant statutes

The Indian Arts and Crafts Act

Screen Shot 2016-08-05 at 4.07.08 PM.pngPassed in 1990, the Indian Arts and Crafts Act is a federal truth-in-advertising law that prohibits the sale of goods that incorrectly claim to be Native produced. In the United States, there are 1.9 individual Native people who are members of the 567 state and/or federally recognized tribes. If an artist or an art dealer fraudulently claims that any of their wares were produced by an individual or group of Native Americans, they are in direct violation of IACA.

The current law is based off a 1935 Act of the same name that aimed to “promote the development of Indian arts and crafts.” This original legislation also created the Indian Arts and Crafts Board (IACB). The IACB’s purpose is to enforce IACA and ensure the “genuineness and quality” of Native works on the art market. Today, the IACB has the power to refer complaints to the FBI or to the Secretary of the Interior for investigation. After reviewing the investigatory report issued by either the FBI or the Secretary of the Interior, the IACB may recommend to the Attorney General that charges be filed against individuals who violate the IACA. Additionally, the IACB can create and register trademarks that are authentically Native American or Alaskan. In 2000, Congress amended the IACA to improve its enforcement procedures.

If found guilty, an individual who violates the IACA may face up to a $250,000 fine or imprisonment for no more than five years. If found guilty of more than one charge, that person may be fined up to $1,000,000 and imprisoned for up to 15 years.

Past IACA Cases & Criticism

A 2011 Government Accountability Report showed that the IACB received approximately 650 violation complaints between 2006 and 2010. The report indicated that 150 of these complaints suggested substantial IACA violations and 117 cases needed additional investigation. After receiving a complaint, the IACB can either pass the information to the FBI, to the Secretary of the Interior, or recommend to the Attorney General that charges be filed. Despite the fact that a violation of Indian Arts and Crafts Act is a federal matter, none of these cases have ever filed in federal court.

In total, only five people in five separate cases have been found guilty of violating the IACA between 1990, the year  Congress passed the IACA, and 2010. Two of these cases were dismissed and violators in the remaining three were sentenced to either probation or up to 13 months’ jail time.

Few Indian Arts and Crafts cases result in prosecution because the IACB focuses on preventative education rather than practical enforcement of the law. Reportedly, one of the Board’s most common methods of investigation is to send a form letter to suspected offenders. The letter detailed the guidelines put forth by IACA and described the penalties of violation. 

Additionally, the U.S. Government Accountability Office (GAO) suggested that reliable and objective data on the size of the market for Indian arts and crafts is sparse. Limited market data makes it even more difficult to propose a plan to stop this practice  because it is not always easy to tell the difference between a fake and an authentic piece, even for experts. Wayne Bobrick of Wright’s Indian Art in Santa Fe has said that “[t]here are some things that are obvious, but if they do it well enough, anyone can be fooled.” Additionally, though it is most common for non-Natives to claim to be Native, it is also common for some Native Americans to buy imported goods and pass them off as their own, authentic work, according to Tony Eriacho, a Native artist and activist. Taking these factors into account, the GAO also determined that conducting a more thorough and complex study would be costly and would most likely produce similarly biased results.

One substantial criticism of the IACA is that the Act does not protect artists that do not belong to federally recognized tribes. Currently, there are approximately 250 tribes in the United States that are not recognized by the Bureau of Indian Affairs or by their respective state’s government. Artists that belong to any of these communities are not protected by the Indian Arts and Craft Act, and are not even able to market their arts and crafts as “Indian-made.” This has massive implications, as many non-federally recognized Natives are no longer able to sell their authentic wares in fear of criminal prosecution. Lack of representation here is, of course, just one of many legal disadvantages that unrecognized tribes currently face.

Case Study: Five Charged with Selling Non-Genuine Native Goods

In May 2014, a team comprised of the Department of Justice, the IACB, and the Alaska Attorney General’s Office Consumer Protection Unit began an investigation of four Alaskan business owners under the accusation of violating the Indian Arts and Crafts Act. The investigation was prompted by complaints filed by summer tourists in Alaska. The tourists were allegedly told that various bone carvings that were for sale were made by Alaskan Native peoples. This inspection, spearheaded by the DOJ, is the result of an investigation conducted by the United States Fish and Wildlife Service (USFWS) that previously found these businessmen guilty of misrepresenting their goods. An undercover USFWS agent paid $1,985 for the non-genuine pieces at the store.

The people charged include “Vinod ‘Vinny’ L. Sippy, 38, d.b.a. Diamond Island, Icy Strait, and Gemstone Heaven; Juneau resident and business operator Norma M. Carandang, 60, d.b.a. Northstar Gift Shop; Puerto Rican resident and Ketchikan business owner Gabriel T. Karim, 33, d.b.a. Alaskan Heritage; Skagway resident and business owner Rosemary V. Libert, 56, d.b.a. Lynch and Kennedy Dry Goods, Inc.; and Libert’s seasonal employee, a resident of Huntington Beach, California, Judy M. Gengler, 65.” They are charged with, according to the DOJ, “the illegal misrepresentation of bone art carvings as made by Alaska Natives or Indians, when in fact they were made by local non-native carvers.”

When brought before the court, Sippy pleaded guilty, while Carandang pleaded not guilty. Because Sippy pleaded guilty, the arraignment also served as his sentencing. He “agreed to pay a $3,500 fine, make a $3,500 donation to the IACB, distribute a public apology letter and he will serve five years of probation.”

At the time of writing, the case was pending in the U.S. District Court for the District in Alaska.

UPDATE: On September 2, 2016, Ms. Libert was found not guilty of misrepresenting Native produced art in federal court on Friday. See Libert Letter to the Editor of the Skagway News.

Conclusion

In the 21th century, enforcement of IACA and regulating markets is becoming more difficult due to the growing online economy. E-commerce websites such as Etsy and eBay have “rapidly outpaced the law.” Though IACA protective mechanisms are strong, its Board may need  to reimagine the way in which the law is enforced in today’s digital economy.

The enforcement of IACA relies heavily on the public. When purchasing Native goods, purchasers should make sure to ask their art dealer for the artist’s information and for a written certificate for authenticity. If this cannot be provided, purchasers should consider giving this information to the IACB through a formal or informal complaint. Consumer information plays a vital role in the enforcement of the IACA and in maintaining a fair market for Native communities.

Sources:

*About the Author: Lillia McEnaney is an undergraduate at Hamilton College where she is studying Archaeology and Religious Studies and was recently appointed a Casstevens Research Scholar. Lillia is a research assistant in Hamilton’s Religious Studies Department, the Blog Intern for the Council for Museum Anthropology, the Webmaster for Art/Place Gallery, a 2016 Summer Intern for the Smithsonian’s National Museum of the American Indian, and an intern for the nonprofit organization SAFE/Saving Antiquities for Everyone. Lillia may be reached at: lmcenane@hamilton.edu.

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

Realities of Fan Fiction: Paramout To Boldly Drop Lawsuit

By David Honig, Esq.*

Star_Trek_TOS_logo_(1)

In 1966 the world was introduced to the crew of the USS Enterprise NCC-1701! On September 8, 2016, 50 years will have passed since we joined that intrepid crew on its five year mission. Over the course of
a half century
Star Trek has amassed a following unlike any other. The original series, which only made it to the air because of Lucille Ball, lasted only three seasons before it was canceled. Gene Roddenberry’s tale of a future where humanity put its petty differences aside to unite and explore the stars did not end, however, when the last episode aired on June 3, 1969.

tumblr_o2awj8Rh0Z1rwjpnyo1_500After being canceled Star Trek spawned a franchise that consists of an animated television series, major motion pictures, comic books, novels, numerous spin-off shows and a Las Vegas attraction. But most importantly, Star Trek took firm root in the hearts of its fans. As a testament to their devotion, fans have learned Star Trek’s alien language Klingon, going as far as translating Hamlet, and a few other works, into their beloved alien tongue.

Like all good works of fiction, Star Trek developed a life of its own and inspired a parade of  unauthorized fan fiction. While a phenomenon like Star Trek lives and dies with the fans, it  exists as property owned not by the fans but by a major corporation. As such, Paramount and CBS have a vested interest in protecting the rights associated with their copyrights under 17 U.S.C. 106. Specifically, the copyright holder has exclusive rights to reproduce, create derivative works, distribute copies, and perform and display the work publicly.

Fan fiction regularly infringes a copyright because copyright often covers more than just the work itself. Instead, copyright has been extended to cover characters and settings as well as other literary elements, see Walt Disney Productions v. Air Pirates, 581 F.2d 751, 754-5 (2d Cir. 1978).

Fan fiction violates the exclusive rights of a copyright holder in two ways, expressly or through derivative works. A piece of fan fiction that incorporates a character or setting from the original work infringes – since, as just discussed, the character is subject to copyright protection and using the character violates the exclusive right to reproduce. Similarly, fan fiction violates the exclusive right to create derivative works even as  the fan-author creates her own story, because of familiar settings or characters derived from the original work. It is also worth noting that selling or distributing fan fiction does not change the fact that it infringes the original copyright. Commercializing a work, or more precisely the effect on the market for the original copyright, only comes in when determining whether the fair use exception applies not whether something infringes.

When deciding to prosecute copyright infringement the holder is faced with a Kobayashi Maru scenario – in the Star Trek universe, the Kobayashi Maru refers to a training exercise designed to place starfleet cadets in a no-win scenario. The copyright holder must decide whether it should allow the copyright to be infringed or enforce its rights and risk the ire of fans. The amount of money involved in fan fiction infringement is usually nominal compared to the risk of alienating fans. Additionally, because of the  uncertainty of fair use protection under 17 U.S.C. 107, fan fiction is often left alone even when the potential infringer is making money. This is a simple cost benefit analysis. However, there are instances where the holder does assert its copyright and recently some Star Trek fan fiction has fallen into that category.

Anyone who has ever been to a comic convention knows that there are people dressed up as starfleet officers, members of the United Federation of Planets or other Star Trek Characters. These fans are often wearing uniforms that they made themselves which include elements that are subject to copyright protection – such as the starfleet insignia. For various reasons Paramount and CBS will not go after these fans, the damages are de minimis

In addition to wearing costumes, many of these fans will also create their own movies, comics or other form of art – even the Internal Revenue Service is not above creating such a video. These videos are usually viewed as harmless since they have no impact on the market for the genuine article and if anything they endear fans to the source even more by allowing them to continue to engage in ways that traditional content does not allow. There is a limit, however, to what the Star Trek copyright holders will accept before they begin enforcing their rights. It seems that a fan project that raised over a million dollars and was set to be released the same year as Paramount’s next installment in the Star Trek motion picture franchise was too much.

Star Trek: Axanar, a fan film set before the original 1966 television series, raised over a million dollars on Indiegogo and Kickstarter. The film, which follows a successful short that raised over $100,000 on Kickstarter in 2014, raised its funds with some encouragement from Star Trek alum George Takei. With a mounting economic incentive, on December 29, 2015 Paramount and CBS filed a lawsuit against the producer of the film, Axanar Productions (“Axanar”), alleging copyright infringement.

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George Takei as Sulu on the set of Star Trek

Among other aspects of Star Trek such as history and characters, the complaint claimed a copyright over languages. What might have seemed to be one more violation to the copyright holder and its attorneys ended up developing a life of its own.

First Axanar, responded by filing a motion to dismiss claiming that Klingon, a language invented for Star Trek, could not be protected by copyright law under Baker v. Seldon, 101 U.S. 99 (1879), because it is an idea or system. In response, Paramount claimed that the Klingon language isn’t useful, wholly fictitious and “there are no Klingons with whom to communicate.” After Paramount responded to Axanar’s motion the Language Creation Society submitted an amicus brief in support of Axanar.

The brief begins with a curious footnote quoting Marc Okrand, author of The Klingon Dictionary and creator of the language, claiming  Okrand “has asserted that the Klingon language, tlhlngan Hol, was received by him from a captured Klingon named Maltz.” The brief thus concludes that Plaintiffs cannot claim otherwise in this litigation, citing to Arica Inst., Inc. v. Palmer, 970 F.2d 1067, 1075 (2d Cir. 1992), to support its position. The Language Creation Society does not pull any punches stating, “Feeling ownership and having ownership are not the same thing.”

The Language Creation Society’s brief is quite an enjoyable read. The brief quotes Star Trek: The Next Generation, recognizes there is a child who was raised as a native speaker of Klingon and intersperses Klingon phrases written in the Klingon alphabet throughout. What might appear as gimmicks actually make the Language Creation Society’s point stronger – Klingon is a real language spoken by real people so much so that it can be used coherently in a brief amicus curaie. If the point of filing this brief was to argue that Klingon has taken on a life of its own as a communication system then there truly is no more powerful tool to prove this postulate than by showing Klingon can indeed act as a communication system instead of just reporting on its wide use.

Alas, the issue will not be adjudicated, at least not in this case. On Friday May 20, 2016 J.J. Abrams, the director of the first two Star Trek reboot films, announced that the lawsuit against Axanar would be dropped. The announcement was made during a fan event to promote the third installment of the rebooted Star Trek franchise, which Abrams serves as a producer, Star Trek Beyond. Unfortunately, this voyage is not yet over.

Abrams merely announced that Paramount WOULD drop the lawsuit not that the lawsuit WAS dropped. In fact, four days after the announcement Axanar an answered amended complaint and filed a counterclaim to ensure it met court ordered filing deadlines. Additionally, CBS and Paramount are working on fan film guidelines and if Star Trek: Axanar, or some other fan film, does not follow those guideline then the Star Trek copyrights will most likely be enforced again. Clearly there is still work to be done before Axanar, its fans, and producers and fans of other Star Trek fan fiction can proclaim Qapla’.

About the Author: David Honig is a post graduate fellows at the Center for Art Law. He is a member of the Brooklyn Law School class of 2015. While attending law school he focused his studies on intellectual property and was a member of the Brooklyn Law Incubator & Policy (BLIP) Clinic. He is admitted to New York and New Jersey state bars. In the Fall of 2016 he will be pursuing an LL.M. in taxation from NYU Law.

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advise. Instead, readers should seek an attorney.

Parting Is Such Sweet Sorrow: Covenants Not to Compete Between Auction Houses

*By Elizabeth Weber, Esq.

Covenants not to compete (CNCs), also called non-compete clauses or simply non-competes, are commonplace in employment contracts. Generally, CNCs seek to prevent an employee from leaving his or her current employer to work for a direct competitor. CNCs typically last for a set period of time and only pertain to a specific geographic area. In specialized fields like the art market, these restrictive covenants prevent employees from moving between similar companies with the ease they would prefer. Specifically, CNCs entered into by auction house employees present unique issues to those who work in the field and seek career developments due to the limited number of major auction houses, especially within a particular geographic area.

Covenants Not to Compete

A covenant not to compete is a contractual provision in which one party, the employee, affirms that he or she will not work for a market competitor within a specified geographic area for a particular period of time after the employment period ends. CNCs are a part of  contract law and, as such, are dictated by state law. In New York,

[t]he modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test. A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.

BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388-89 (1999) (emphasis omitted). A violation of any of the three prongs may invalidate the CNC completely unless the suit arises in a state that follows the blue pencil rule. When a particular CNC provision is overbroad, courts in blue pencil states may reform or strike the offending provisions from the contract while the rest of the CNC remains intact and partially enforceable. For example, New York allows courts to reform overbroad CNCs; Florida courts follow a mandatory CNC reformation regime; and California law does not permit the use of CNCs, although the use of CNCs to protect trade secrets in California is unsettled. Beck Reed Riven LLP’s extensive state-by-state chart provides a more in-depth view of CNC law by state.

Additionally, in Reed, Roberts Assocs. v. Strauman, a 1976 case involving the enforceability of CNCs, the New York State Court of Appeals specifically focused on the fact that “our economy is premised on the competition engendered by the uninhibited flow of services, talent and ideas. Therefore, no restrictions should fetter an employee’s right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment.” Reed, Roberts Assocs. v. Strauman, 40 N.Y.2d 303, 307 (1976). Despite the Court of Appeals’ focus on an employee’s right to participate in the market economy, this right is not limitless. CNCs may be used to prevent a former employee from disclosing a company’s trade secrets or confidential client information or, alternatively, CNCs may be enforced if the former employee performed unique or extraordinary services for the former employer. Id. at 308.

Auction House CNC Case Study: Heritage Auctioneers v. Christie’s

Despite the prevalence of CNCs, few cases that involve breached covenants within the auction house world arise. One case in particular illustrates the importance of CNCs: the ongoing matter between Heritage Auctioneers & Galleries and Christie’s. Heritage Auctioneers & Galleries v. Christie’s, Sup Ct, New York County, 2014, Oing, J., index No. 651806/2014.

Heritage involves three former Heritage employees who specialized in the pre-owned luxury accessories sector (think vintage Hermès Birkin bags): Matthew Rubinger, Rachel Koffsky, and Caitlin Donovan, who worked in Heritage’s Luxury Accessories department with Rubinger serving as both Director and department head while Koffsky and Donovan held positions as Director of Operations and Director of Consignments, respectively.

According to Heritage’s complaint, Heritage hired Rubinger in 2010 to head the company’s Luxury Accessories business right out of college. The company alleges that it “invested in Rubinger’s identity” to elevate Rubinger within the auction world and brand him as the face of Heritage’s Luxury Accessories department worldwide. Complaint, Heritage Auctioneers & Galleries v. Christie’s, Sup Ct, New York County, 2014, Oing, J., index No. 651806/2014. As their Luxury Accessories business grew, Heritage hired Koffsky and Donovan in that department as well.

Four years later, in 2014, Rubinger renewed his written contract with Heritage through December 31, 2014. Rubinger’s employment contract included both CNC and non-solicitation clauses and an additional non-disclosure clause in which he affirmed that he would not disclose any of Heritage’s trade secrets. Specifically, the CNC provision in Rubinger’s contract stated that Rubinger would not work for a Heritage competitor anywhere in North America for twenty-four months after ending his employment with Heritage. Koffsky and Donovan’s employment contracts included a nondisclosure agreement only. The text of Rubinger’s CNC as shown in Heritage’s complaint is included below.

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Images found in Complaint, Heritage Auctioneers & Galleries v. Christie’s, Sup Ct, New York County, 2014, Oing, J., index No. 651806/2014.

During the week of May 12, 2014, Christie’s extended offers of employment to Rubinger, Koffsky, and Donovan. On May 16th, Rubinger accepted the offer from Christie’s Hong Kong, Ltd., which is based and conducts business in Hong Kong, China. Koffsky and Donovan accepted offers from Christie’s, Inc., which is based in the United States. The three resigned from Heritage the following Monday, May 19th.

Heritage subsequently filed suit against Christie’s, Rubinger, Koffsky, and Donovan on June 13, 2014. The complaint alleges that Christie’s engaged in unfair business practices; tortiously interfered with Heritage contracts; induced, aided, and abetted Heritage employees to violate their fiduciary duties; and misappropriated trade secrets and other proprietary information. The complaint further alleges that Rubinger, Koffsky, and Donovan all breached their fiduciary duty of loyalty to Heritage in addition to breaching their Heritage employment contracts.

In response, the defendants asserted that Christie’s Hong Kong and Rubinger specifically structured their employment arrangement to avoid breaching Rubinger’s CNC with Heritage. Defendants’ Memorandum of Law in Opposition to Plaintiff’s Motion for a Preliminary Injunction, Heritage Auctioneers & Galleries v. Christie’s, Sup Ct, New York County, 2014, Oing, J., index No. 651806/2014. By working in Hong Kong, not the United States, Christie’s and Rubinger argued that Rubinger complied with the territorial terms of his CNC. Christie’s further stated that Rubinger, Koffsky, and Donovan were instructed not to use or disclose to Christie’s or use for Christie’s benefit any information derived from their time with Heritage. The defendants also noted that Heritage failed to provide any evidence that Rubinger, Koffsky, or Donovan utilized any confidential information thus far during their employ with Christie’s.

Heritage is currently pending in the New York Supreme Court before Justice Jeffrey K. Oing, and updates regarding this case will follow.

What Does the Future Hold for Auction House CNCs?

In addition to Heritage, recent shakeups at Christie’s and Sotheby’s have reinforced how important CNCs are for auction houses. For example, after the former chairman of Christie’s Americas, Marc Porter, resigned his position with Christie’s in December 2015, The New York Times reported that “after a noncompete period of about a year, [Porter] will join Sotheby’s in a high-ranking position that has yet to be announced but is expected to involve international client development.” The fact that Porter must wait about a year before joining Sotheby’s puts both Sotheby’s and Porter at a distinct disadvantage: the company must hold Porter’s future position open during this time period while Porter awaits the expiration of the CNC period before joining Sotheby’s.

Interestingly, it appears that Sotheby’s attempted to renegotiate Porter’s CNC with Christie’s by offering to waive the CNC of a former Sotheby’s employee who planned to join Christie’s. The New York Times reported in February 2016 that Sotheby’s offered to release Guillaume Cerutti, former Sotheby’s deputy chairman in Europe and chief executive in France, from a CNC if Christie’s would respond in kind and release Marc Porter from his CNC obligation before the contracted duration of the CNC. Reportedly, Christie’s declined this offer.

CNCs in the auction house world may be an attempt by top houses to avoid any semblance of collusion. In 2000, both Christie’s and Sotheby’s settled a $512,000,000 price-fixing lawsuit “amid allegations that the two auction houses had colluded on fixing the commissions paid by buyers and sellers of art.” Accordingly, strong CNCs in auction house employment contracts may serve as preventative measures to demonstrate a complete lack of collusion on the part of either house. What is more likely, however, is that the competing businesses wish to avoid client poaching and using valuable insights learned at their former place of employment in unfair business practices that may result from well-informed individuals using the information for the benefit of a new employer.

Conclusion

While there are thousands of auction houses worldwide, the number of leading international houses is much smaller and, as such, employment opportunities at top-tier houses are limited. Either due to the corporate culture or the CNCs, changing allegiances between these top houses incite great interest in both clients and the media. The widespread use of CNCs in auction house employment contracts serves to encourage institutional loyalty and decrease lateral movement between the top houses, but the question remains–who really wins when CNCs are strictly enforced in the auction house world?

Sources:

 

*About the Author: Elizabeth Weber is a lawyer living in Brooklyn, NY. Elizabeth graduated from the University of Florida Levin College of Law where she received her certificate in Intellectual Property Law and served as an active member of the Art Law Society and the Journal of Technology Law and Policy. Elizabeth is the Spring/Summer 2016 Postgraduate Fellow with the Center for Art Law.

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advice. Instead, readers should seek an attorney with any legal questions.

 

The Latest in Nazi-Era Restitution Efforts

By Bianca Acquaviva*

Over seventy years after the end of World War II and there is still much work to be done in the restitution of Holocaust-era looted art works. Even since 1998, the signing and adoption of the Washington Principles, many of the signatories are still doing very little in terms of finding “fair and just” solutions. See our Review of “Fair and Just?” The following is a summary of the recent flurry of activity both in the US and abroad in the realm of Nazi-era looted art disputes.

IN THE UNITED STATES…

California, USA

The long awaited trial in the case of Von Saher v. Norton Simon Museum of Art at Pasadena et al is now set for September 20, 2016. The case was filed by Marei Von Saher, a Connecticut resident, seeking the return of two paintings by Lucas Cranach the Elder that were seized from her family by the Nazis in 1940. Adam and Eve, which compose a diptych, were created in 1530 and were most recently appraised in 2006 for $24 million together. Norton Simon Museum of Art (“the museum”), represented by the firm Munger Tolles & Olsen, has vehemently opposed the claim brought by the legal team of Herrick, Feinstein. The efforts have continued for over a decade and have included countless appeals, motions, and filings.

Before the war, the paintings were owned by Jacques Goudstikker, a Dutch-Jewish art dealer. They were stolen by Nazi henchman Hermann Goering in a forced sale after Goudstikker fled the Netherlands and died on board a ship sailing for the US. Following World War II, the paintings passed through two sets of hands before the museum obtained the paintings. Confusion as to the rightful ownership of the diptych was created by George Stroganoff-Scherbatoff, who alleged in 1961 that the Soviet government had seized Adam and Eve from his family in the 1920s. Indeed, the paintings were auctioned with permission from the Soviet authorities, and Goudstikker was the highest bidder at the 1931 auction. After the war, the paintings were discovered by the Allied forces and transferred to the Dutch authorities to find the rightful owners, who transferred these paintings to Stroganoff-Scherbatoff. In 1971, Stroganoff-Scherbatoff sold the paintings to Norton Simon, founder of the Norton Simon Museum of Art. The museum argues that returning the artworks to private hands when there are legal grounds for it keeping them is contrary to its desire to keep works of art available for public view. However, supporters of restitution efforts argue that the Museum should not be allowed to keep works that were stolen from a family seeking to reclaim them.

It is unlikely that the case will settle before the opening statements, which will allow jurors to hear the astonishing details of the paintings’ journey after the war. When U.S. forces discovered Goering’s collection of stolen art, they sent the works back to the countries the works originated from, and those countries decided how to settle claims to the works. Thus, after the war, two paintings were returned to the Netherlands. Ms. Von Saher claims that when her mother-in-law, Jacques Goustikker’s wife Desi, went to claim the paintings, the Netherlands effectively slammed the legal door in her face, but she never gave up the right to bring a claim against authorities for the painting. In its defense, the museum counters that Desi Goudstikker had a chance to lay claim to the paintings with the Dutch government and failed to do so. Needless to say, the case has been further complicated by the Stroganoff’s claim and recently passed California legislation. The trial has been much-anticipated, akin to the litigation surrounding Egon Schiele’s Portrait of Wally against the Austrian Leopold Museum that was settled in 2010. Observers are eager to witness how the public and private interests are balanced and what the fair and just solutions are in this case.

In California, the statute of limitations for the recovery of stolen property is three years. However, aware of the unique circumstances surrounding many claims arising from looting during the Holocaust, the California legislature passed California Code of Civil Procedure §354.3 in August 2002. The law eliminated the statute of limitations for claims to recover Holocaust-era artwork as long as the action was commenced on or before December 31, 2010. The district court found the statute to be unconstitutional on the basis of field preemption, finding it in conflict with federal foreign affairs powers. The Ninth Circuit Court of Appeals affirmed this decision. Six weeks later, the California legislature amended California Code of Civil Procedure §338(c) to extend the statute of limitations from three to six years for claims concerning the recovery of fine art from a museum, gallery, auctioneer or dealer. The law was made explicitly retroactive and the statute of limitations did not commence until actual discovery of both the identity and location of the work.

 

Oklahoma, USA

 

On February 23rd, the University of Oklahoma agreed to return a painting by Camille Pissarro to French Holocaust survivor Léon Meyer, whose father owned the painting when it was stolen in 1941 during the Nazi occupation of Paris. The painting, La Bergère Rentrant des Moutons/Shepherdess Bringing in Sheep, was created in 1886 and was estimated to be worth $1.5 million in 2008. In 2000, the University received the painting as a donation from the Weitzenhoffer family, who purchased it from a New York gallery in 1956.

The case was originally filed in the Southern District of New York in 2013 and then transferred to Oklahoma in 2015. The grassroots and legislative efforts to convince the University to conduct a thorough investigation into the true ownership of the work, ultimately lead to the parties negotiating a settlement. “Léone Meyer has agreed that, rather than getting the painting back for her own living room, to continue the public display of the painting for the public,” Meyer’s attorney, Pierre Ciric, said.

Under the terms of the settlement, the painting will still be accessible in Oklahoma and available for education purposes until it is transferred to France. In a few months, the painting will be moved to France, where it will remain in a museum for five years. After that period ends, the Pissarro will rotate in three year intervals between the University’s art museum in Oklahoma and a yet-to-be-determined museum in France. A label stating the painting’s history, its seizure by the Nazis, and its restitution will accompany the work.

The university never denied that the painting was looted by the Nazis. Instead, it resisted its return based on procedural rules and the statute of limitations. They argued that the donor had purchased the work in good faith, and that Ms. Meyer brought her case in New York instead of Oklahoma to avoid a more stringent statute of limitations. This settlement ends a three-year dispute between the parties.

IN THE INTERNATIONAL SPHERE…

Germany: Gurlitt Saga (See our previous coverage)

In January, the Gurlitt task force appointed by Ms. Grütters released the results of their two-year, almost $2 million investigation. They found the rightful owners of just five of the 1500 works in the Gurlitt collection, a conclusion that disappointed many. Of the works in the collection, about 30 to 50 are “of superior quality.” While Ms. Grütters has admitted her own disappointment, she seems to be taking the slow and steady approach, so as to ensure that the provenance of the works is correct and avoid “a second seizure” of the art, which would result if the works are improperly awarded. The collection is to be exhibited in Germany later this year.

In late February, Germany announced that it will pay for at least another year of research and hire additional people to assist in establishing the provenance of works in the Gurlitt collection. The German culture minister, Monika Grütters, reaffirmed Germany’s pledge to return any looted art to its rightful owners or their descendants and set the provenance research budget at 6 million euros, which is approximately $6.5 million.

Additionally, Ms. Grütters stated that she was discussing a law that would encourage individuals to return looted art with the German justice minister. She has also been encouraged by the German Jewish community to appoint a Jewish individual to the Limbach Commission, but stated that she would not do so because that individual “would be the only voice who would be prejudiced.” After receiving backlash and criticism for this comment, Grutters announced that 90 year old Michael Blumenthal, former director of the Jewish Museum in Berlin and United States Secretary of the Treasury, would be nominated to the Limbach Commission. Currently, the Limbach Commission is the only board that mediates restitution cases, and something else must be done seeing as how the board has been rife with controversy.

 

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Juan Gris, Violon en encrier (1913). Source: AlfredFlechtheim.com

Mediation with the Limbach Commission:

 

The heirs of persecuted Jewish art dealer Alfred Flechtheim have officially withdrawn from the state-run non-binding mediation process concerning Violon en encrier (1913) by Juan Gris, currently housed in the Stiftung Kunstsammlung Nordrhein Westfalen (Art Collections Foundation of Northern Rhineland/Westphalia) in Düsseldorf. The painting was sold in 1934 in London, and Flechtheim’s heirs have argued that this sale was the result of his persecution, which began even before the Nazis took power. The museum bought the work on the international market in 1964.

Flechtheim’s great-nephew, Dr. Michael Hulton of San Francisco, requested that his attorneys suspend the Limbach Commission due to concerns about the fairness of the proceedings and requested that the Commission not make any recommendations about the painting until these concerns are addressed. Dr. Hulton and the Düsseldorf museum agreed in 2014 to submit the matter to the Advisory Commission. This is not the first time that the German Advisory Commission considered a work originating from Flechtheim. In 2013, the Advisory Commission considered Portrait of Tilla Durieux, a painting by Oskar Kokoschka which was housed in the Museum Ludwig in Köln. The Advisory Commission affirmed the Nazi-persecuted loss of the painting absent any evidence to dispute that Alfred Flechtheim abandoned the painting because of his persecution. This put the burden on the museum to provide evidence as to the legitimacy of the museum’s possession of the painting.

Three years later, this is apparently no longer the case. In the Gris matter, only half of the panel was in attendance at the first hearing. After the hearing, Dr. Hulton’s attorneys told the Advisory Commission that they would be submitting a letter to the entire panel on the evidentiary matters discussed at the hearing. The letter was submitted three days later, but when they followed up with the Advisory Commission, they were told that the letter was not circulated to the panel and the panel was already deliberating its recommendation. Upon officially withdrawing from the process, Dr. Hulton released a statement detailing the procedural irregularities. In addition to the panel not receiving Dr. Hulton’s letter, half of the commission’s members, including its chairperson, not being present, a member left mid-hearing. As a result, Dr. Hulton halted the mediation process.

This comes soon after the 2015 filing of a civil action, Philipp et al v. Federal Republic of Germany et al,  against Germany and the Stiftung Preussischer Kulturbesitz (the SPK, which is responsible the administration of the Berlin museums, among other things) in U.S. District Court in Washington, D.C. after the Limbach Commission refused to recommend restitution of the Guelph Treasure to Alan Philipp and Gerald Stiebel. Mr. Philipp and Mr. Stiebel are blood relatives and successors of a group of Jewish art dealers who were threatened and forced to sell the Guelph Treasure for a fraction of its value in 1935. The plaintiffs seek the immediate return of the Guelph Treasure to their possession.

The Advisory Commission has received immense criticism, which will only continue unless they reform their procedures. On March 9, 2016, a group of lawyers from the United States and Europe sent an open letter to members of the German government asking for a reform of the Limbach Commission and advocating an international binding arbitration, stating, “[i]n its current form, the ‘Limbach Commission’ … is not a suitable forum to meet the demands of the victims. The lack of fairness, transparency and justice is evident.”

Switzerland:

There has been an increase in pressure on Swiss museums to recognize that works of art sold by Jewish refugees to help them escape from the Nazis were forced sales and should be returned to their heirs. Ronald Lauder, the president of the World Jewish Congress, has released a plan for the Swiss government to deal with claims resulting from forced sales, which, he advocates, should be treated the same as claims for looted art. Lauder is also calling for the establishment of a Swiss commission that can review art claims, as no such body exists. The Swiss have been generally unwilling to recognize fluchtgut cases––those arising from forced sales.

Last year, Isabelle Chassot, the Swiss culture minister, recognized that Switzerland is the only country that draws a distinction between fluchtgut cases and art that was lost due to Nazi persecution, and called for the latter term to be applied. However, the Swiss art community has strongly opposed this proposition. They argue that sales of art by Jewish refugees are different from those in Germany and Austria because Switzerland was a free country and sellers had full access to the proceeds. Good faith, Lauder states, does not make art clean, and Switzerland is behind the rest of the world in terms of provenance research. Switzerland has announced that 2 million Swiss francs will be available for provenance research, but Lauder believes the Swiss must also develop “a decent database and an independent commission which supervises this thing.” Switzerland is just beginning to take steps in the right direction.

Incidentally, the aforementioned Gurlitt collection has been accepted by a museum in Switzerland, the Kunstmuseum Bern.

Latvia:

Looting and cultural losses that occurred before and during World War II on the eastern front have been increasingly difficult to ascertain and remedy the further east the claims extend. Therefore the recent decision by the Latvian parliament to address the legacy of the Holocaust is very important. On February 25, 2016, Saeima, the parliament of Latvia, passed legislation to restitute five formerly Jewish-owned properties to the Council of Jewish Communities of Latvia. The legislation, which was supported by the World Jewish Restitution Organization and the U.S. government through Special Envoy for Holocaust Issues Nicholas Dean, will now go to the Latvian president for his signature. The five properties, owned by the Jewish community until World War II, are: a former Jewish school in Riga, a former Jewish religious school also in Riga, a former Jewish nursing home in Riga, and two former synagogues in Jurmala and Kandava. Though the restitution of these five properties is certainly a fantastic accomplishment, there are about 270 former Jewish communal properties that have yet to be returned to the Latvian Jewish community.

Property owned by private interests and individuals are not addressed by the new legislation. Elie Valk, chairman of the Association of Latvian and Estonian Jews in Israel, stated that the restitution of additional properties would “help the Latvian Jewish community sustain and revitalize itself as well as provide urgently needed assistance to Holocaust survivors from Latvia.”

Poland: 

Please see Center for Art Law recently published summary of restitution efforts in Poland, which can be found here.

* * *

As with most government efforts, funding is the perennial problem. The research and recovery of art works is sometimes prohibitively expensive, as some of the items that may have been identified as looted are worth a fraction of the costs that would be necessary to facilitate their return. Individuals, museums, governments, and nongovernment agencies must take a more active role in solving these problems. As we have seen throughout the Gurlitt investigation, which took two years and nearly $2 million, millions upon millions of dollars can be spent without very many results. Recently, more emphasis has been put on provenance through initiatives such as the Smithsonian Provenance Research Institute and the creation of the German Lost Art Foundation (Deutshes Zentrum Kulturgutverluste). It is the collective responsibility of the public to ensure that pressure is put on museums and governments so that the stolen property of Holocaust victims may be rightfully restored to their families.

Select Sources:

* About the Author: Bianca Acquaviva is a legal intern with Center for Art Law and a second year law student at the Benjamin N. Cardozo School of Law, where she serves as a staff editor on Cardozo’s Arts and Entertainment Law Journal. She may be reached via e-mail at acquaviv@law.cardozo.yu.edu.

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

Case Review: Christie’s v. Jombihis

By David Honig, Esq.*

TheFieldNexttotheOtherRoad

What happens when you place a multi-million dollar winning bid on a Jean-Michel Basquiat painting on behalf of a client, and your principle (a.k.a. the client) has a change of heart about purchasing the work? This is the situation in which famed New York art dealer Jose Mugrabi recently found himself. At a May 15, 2015 sale at Christie’s in New York, Mugrabi’s company Jombihis placed the winning bid of $37,125,000.00 on Basquiat’s “The Field Next to the Other Road” on behalf of a client. On November 9, 2015 Jombihis signed a promissory note to pay Christie’s the $37,125,000.00 plus interest in three instalments with $5 million to be  paid upon signing. Additionally, Mugrabi signed the promissory note as a personal guarantee.

Art dealers who operate as a middleman between sellers and buyers are taking significant personal risks when they purchase works in their own name on behalf of clients.  While the art market is notorious for controlling the narrative and keeping transactions confidential, when news break about record setting deals or transactions gone wrong in the art market, they tend to spread like the wild fire.  

According to the Baer Faxt newsletter, a paid service that scops art market news, the client who authorized Mugrabi to bid on his behalf decided to back out of the deal after sending the initial $5 million. As a result of the client backing out, Jombihis failed to send Christie’s the second installment due on January 4, 2016, in the amount of $13,562,500.00. Christie’s followed up with Mugrabi about the delinquent payment three times, the first follow-up was conducted in person at Mugrabi’s office. During the third exchange Christie’s told Mugrabi that he or anyone else acting on or behalf of Jombihis would be forbidden from participating at any of Christie’s upcoming auctions in London. The final payment of $18,562,500.00, due on February 15, 2016, also went unpaid.

As a result of the breach of contract, Christie’s filed a motion for summary judgment in lieu of complaint in New York Supreme Court, New York County on February 29, 2016. New York Civil Practice Law and Rules §3213 allows a plaintiff to file a notice of motion and motion for summary judgment in lieu of a complaint if the “action is based upon an instrument for the payment of money only or upon any judgment.”

Four days after Christie’s filed its motion for summary judgment a joint statement was released by Christie’s and Jombihis stating that an agreement had been made in “principle,” so far no details of the settlement have been disclosed except The Wall Street Journal reports that Mugrabi “will pay his bill in full.” It is not clear from this statement whether Christie’s will be paid interest and attorney’s fees or just the outstanding $32,125,000.00 owed for the painting.

Christie’s motion can be read in its entirety via Scribd. Public dispute resolution through litigation in cases involving major art market players is as rare as a complaint date-stamped “February 29.” The precipitous ‘amicable’ resolution that followed the filing also raise questions about the need to turn to the court system to enforce contractual obligations.

A walk down memory lane: While conducting research on the settlement I noticed something peculiar, all sources seemed to have the same information regarding Murgabi’s statements about the client who decided not to go through with the sale and settlement but when I looked for a press release or statement I couldn’t find one. . According to artnet news Mugrabi made these statements about the painting and settlement to Baer Faxt. No other article that I came across, including the Wall Street Journal, mentioned Baer Faxt yet they all had the same information. The reason for this appears to be that The Wall Street Journal’s source was Mugrabi’s son but this scenario leads one to wonder if The Wall Street Journal had used Bear Faxt as its source would it be in violation of the “hot news” doctrine from International News Service v. Associated Press, 248 U.S. 215 (1918). The hot news doctrine created a “quasi-property right” in news allowing an exclusive period of reporting on news collected by one agency. Meaning one news agency would not be able to read another’s paper or “bulletin” and report news it did not investigate and uncover the facts itself. Of course this is just a journey down the academic rabbit hole since in the almost century since International News Service v. Associated Press was decided, the hot news doctrine has been largely done away with first through subsequent cases such as Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), which put an end to federal common law, and more recently by the passage of the 1976 Copyright Act which preempted state law on copyright issues.

Sources:

About the Author: David Honig is a post graduate fellows at the Center for Art Law. He is a member of the Brooklyn Law School class of 2015. While attending law school he focused his studies on intellectual property and was a member of the Brooklyn Law Incubator & Policy (BLIP) Clinic. He is admitted to New York and New Jersey state bars.

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advise. Instead, readers should seek an attorney.

Is it a Crime? The Empty Defendant’s Chair at the Knoedler Civil Trial

By Jessica Preis*

On February 10, 2016, the highly watched case, De Sole v. Knoedler Gallery, LLC, settled out of court. The events leading to the settlement date back either to 2004 when Eleanore and Domenico De Sole purchased a forged painting attributed to Mark Rothko from Knoedler Gallery (the “Gallery”), or to 1990s when Glafira Rosales, a Long Island-based art dealer walked into the Knoedler Gallery with a story that she knew a son of a collector who had some paintings he wanted to sell. At the time, Ann Freedman was the long-standing President of Knoedler Gallery; she has been quoted as “believing in” Rosales’ paintings. Freedman and Knoedler proceeded to sell dozens of paintings either consigned by or sold by Rosales. After the story broke that these works were fake and the gallery closed, the De Soles and other buyers sought restitution for the the fakes they purchased for millions of dollars. Additionally, the U.S. Attorney began a criminal investigation to punish the wrongdoers. One particular claim that could be raised in both the civil and criminal contexts is fraud.

Background of Law:

Fraud is defined and handled differently in civil and criminal cases. In the civil context, fraud is defined more broadly and is oftentimes based in tort and contract law. The Restatement of Restitution delineates that fraud entails misrepresentation, concealment, or nondisclosure by individuals intending to cause others to make a mistake. Thereby, the defrauders induce their victims to refrain from or enter into particular transactions. In the civil realm, the plaintiff has the burden to prove by clear and convincing evidence that the defendant committed fraud. Penalties include restitution by paying back the victims and payment of fines.

In criminal law, there is no universally established statute addressing or defining  fraud. However there is consensus by scholars and lawyers  that criminal fraud involves an element of deceit. According to United States District Judge Edward J. Devitt, fraud is “the intentional or deliberate misrepresentation of the truth for the purpose of inducing another, in reliance on it, to part with a thing of value or to surrender a legal right.” Therefore, fraud is deceit which can be committed by words, conduct, or an omission such as silence, with the intention of someone else acting upon it and incurring an injury. In order to obtain a guilty verdict, the government has the burden to prove someone committed fraud “beyond a reasonable doubt” in the criminal context. Individuals who are convicted of committing criminal fraud face penalties such as imprisonment, probation, fines, and restitution.

IMG_20160223_194309

What did the artist see? Elizabeth Williams (above) drew court sketches at both criminal and civil trials involving Rosales, Knoedler Gallery, Ann Freedman and others. Show with William’s works, entitled “Knoedler Trial Courtroom Illustrations” is currently on display.

History of Litigation:

Defendants in the civil cases have included, with some variation, the Gallery, Ann Freedman, and Rosales. During the De Sole trial, however, only attorneys for the Gallery and its former Director were present. Auspiciously, Glafira Rosales, the other major player in the legal fiasco, was absent from the recent De Sole civil proceeding. The Gallery was originally subpoenaed by the Grand Jury on September 14, 2009. Thereafter, it paid the firm Herrick Feinstein $700,000 to assist with the subpoena. The De Soles argued that Freedman must have known Rosales was selling the Gallery fakes because she was selling the paintings far below market value.

Some may wonder why Ann Freedman was the only named individual defendant in the De Sole case (in other instances civil plaintiffs have also named art advisors among the culpable parties). Especially since on September 16, 2013, Rosales pled guilty in a Manhattan federal court to conspiracy to sell fake works of art, conspiracy to commit money laundering, and various other fraud and tax-related crimes arising out of the forgery scheme. After all, Rosales’s ultimate targets paid over $80 million for the artwork she delivered to Knoedler for sale. The case against her was named USA v. Rosales. According to the New York Times, Rosales cooperated with federal prosecutors, probably in hopes that she would receive a reduced prison sentence by assisting in additional arrests. Preet Bharara, United States Attorney for the Southern District of New York, reported that Rosales agreed to forfeit $33.2 million and her home in Sands Point, New York to pay restitution to the victims of her crimes. Interestingly, it seems Rosales changed residence. In 2005 she  lived at 10 Station Road, Great Neck, New York. In 2008, she was listed as residing at 21 Elm Court, Sandy Point, New York.  

There are some practical reasons not to name Rosales as a defendant: it is unlikely that she would have maintained sufficient funds to pay the De Soles back. The De Soles likely brought the lawsuit against Knoedler Gallery because they wanted monetary compensation for the forged Rothko that cost them nearly $8.5 million. According to an assistant U.S. Attorney, Rosales was sued civilly along with Freedman and Knoedler, however her case did not progress because she was arrested on May 21, 2013. She asserted her Fifth Amendment right not to incriminate herself. After pleading guilty and paying nearly $4 million to the government, there would be no sense to admit to the crime. Additionally, the money paid out would ultimately be given to the injured plaintiffs.

Sentencing in criminal proceedings:

There is a question as to why Rosales has not actually been sentenced despite pleading guilty in the criminal proceedings. Generally, in a plea bargain, the prosecutors in the case negotiate charges and possible sentencing with the defendant. The government may make certain concessions to induce the defendant to agree to a specific lesser guilty charge in place of a lengthy and expensive trial where the defendant could ultimately be charged with a more severe crime. In this case, Art Newspaper reported that Rosales cooperated with the U.S Attorney’s office to help build cases against others, as mentioned before, which may include Ann Freedman. In 2013, the government requested a stay in the civil litigation due to the ongoing criminal investigations against Rosales. Specifically, the government was concerned that the civil suit would undermine the criminal investigation.

Speculations:

The federal prosecutors may have made a deal with Rosales so that she could help strengthen the case against the worst perpetrators in the crime scheme, who in their mind would most likely be Ann Freedman and Knoedler Gallery as an entity. In such a scenario, Rosales would have made a deal to testify against individuals like Freedman.

Inquiring minds may want to know as to whether the government may have a criminal case against Freedman and Knoedler Gallery. If so, why has the government not filed those suits and is there a statute of limitations to do so? Typically, the statute of limitations begins to toll once the particular crime is completed.  According to federal law, depending on the specific type of fraud committed (i.e. tax offenses or major frauds against the United States), the statute of limitations vary anywhere between three and seven years. The U.S. Attorney may not have charged Freedman in a criminal case during the civil litigation for cautious and strategic reasons. It is possible that the U.S. Attorney wanted to wait out the civil proceedings in order to strengthen the criminal case against Freedman. Before the civil litigation, the prosecutors’ investigators may not have had knowledge of or access to all the same witnesses. Without such witnesses, the federal prosecutor’s case may be seriously weakened due to a lack of probable cause. Now, there is a full record that will ultimately help the U.S. Attorney with its potential case. Moreover, if the civil case failed, it would be very unlikely for a criminal case to succeed with the higher burden of proof, guilt beyond a reasonable doubt.

Recently there has been some progress in the criminal arena that will making this continuing forgery saga even more interesting. On February 16, 2016, Spain’s National Court came to a ruling that Jesus Angel Bergantinos Diaz, a businessman involved in the commissioning of the forged art can be extradited to the United States to face criminal charges in New York federal court. This process will be time consuming because Diaz will most likely appeal the extradition.

Other individuals charged include Diaz’s brother, Jose Bergantinos Diaz, and Pei Shen Qian, the Chinese artist responsible for creating all the forgeries. Pei Shen Qian, like both Diaz brothers fled the United States. In his case, he travelled back home to China.

The civil proceedings relating to the Gallery forgery scandal have proven very momentous and dynamic. It begs the question whether there will be similar litigation in the criminal realm against individuals like Rosales. We must wait and see!

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*About the Author: Jessica Preis is a 3L at Benjamin N. Cardozo School of Law and is working with Center for Art Law through Cardozo School of Law Art Law Field Clinic. She was a staffer on the Arts and Entertainment Law Journal and is fascinated by Art Law and Criminal Law.

Case Review: Rauschenberg Estate Saga of Trust and Fees Explained, Again

 

By Samantha Elie*

As the Center for Art Law already reported in Rauschenberg Estate Saga of Trust and Fees Explained, the three trustees of a revocable trust that named the Rauschenberg Foundation as the sole remainder beneficiary became entangled in litigation with the Foundation. Following a Petition by the Foundation to determine trustee’s fees on June 21, 2011, litigation arose when the trustees claimed that they were entitled to a mere $60 million in fees, in clear opposition with the Foundation’s belief that they were only entitled to a total of $375,000. On January 6, 2016, Florida’s Second District Court of Appeals unanimously upheld Circuit Judge Jay Rosman’s decision to award $24,600,000 to be split evenly among the three trustees.

Prior to his death, iconic artist and philanthropist Robert Rauschenberg (1925-2008) established a revocable trust whose sole remainder beneficiary was the Robert Rauschenberg Foundation. The Foundation is an organization he had established to further his philanthropic and educational initiatives, and to support artists and art related issues. The trustees were three of Rauschenberg’s long time friends and business associates: Darryl Pottorf, the artist’s business partner and companion of over twenty-five years; Bennet Gruntman, his accountant for over eighteen years; and Bill Goldston, a trusted associate. During their four years as trustees, the value of the assets in the trust, comprised mainly of high-value works of art created by Rauschenberg, increased from $605 million to over $2 billion. This increase was due at least partially, to the trustees’ “strategic plan to withdraw Rauschenberg’s art from the market, in order to prevent a decline in value from speculators or collectors flooding the market with his art,” a fate that other famous artists’ estates, such as Andy Warhol’s estate, were not as lucky to avoid. In Re Estate of Rauschenberg, Circuit Court of Florida, 20th Judicial Circuit (Lee County), File No. 08-CP-2479 (Aug. 15, 2014). The trustees maintained a hands-on approach to the job throughout their tenure, and the trial court noted that “Rauschenberg’s artistry was recognized in the marketplace, and some of that recognition is attributable to the Trustee’s management of his ‘brand,’” though the artist’s talent and favorable market conditions at the time after his death should also be mentioned. Id.

The written instrument outlining the parameters of the Trust did not contain a provision addressing the methodology to be used in determining trustee’s fees, and the difference between what the parties thought the fees should be, or $59.625 Million, would prove impossible to settle. So the parties looked to the Florida statute addressing trustee fees. Unfortunately, the statute provides only that the award be “reasonable under the circumstances” without providing any criteria, methodology, or further explanation. § 736.0708(1), Fla. Stat. (2007).

At trial, both sides brought in experts and utilized case law to explain their differing world views. The Foundation focused on the amount of time that the trustees worked and sought to set a reasonable hourly rate. The Foundation thus calculated trustee fees using the “lodestar” method, set forth in Florida Patient’s Compensation Fund v. Rowe, 472 So. 2d 1145 (Fla. 1985), by multiplying the number of hours reasonably expended by a reasonable hourly rate. This method is typically used to determine attorney’s fees but was expanded to determine reasonable fees for guardians or personal representatives in In re Estate of Platt, 596 So. 2d 328 (Fla. 1991). The Foundation sought to expand the doctrine and apply this method to trustee fees.

The trustees, on the other hand, focused on the work rendered and value created for the trust. They argued that the court should use the criteria set forth in West Coast Hospital Ass’n v. Florida Nat’l Bank of Jacksonville, 100 So. 2d 807 (Fla. 1958), a case in which trustee fees were actually being contested. The eleven factors to be considered are:

  1. The amount of capital and income received and disbursed by the trustee;
  2. The wages or salary customarily granted to agents or servants for performing like work in the community;
  3. The success or failure of the administration of the trustee;
  4. Any unusual skill or experience which the trustee in question may have brought to his work;
  5. The fidelity or disloyalty displayed by the trustee;
  6. The amount of risk and responsibility assumed;
  7. The time consumed in carrying out the trust;
  8. The custom in the community as to allowances to trustees by settlors or courts and as to charges exacted by trust companies and banks;
  9. The character of the work done in the course of administration, whether routine or involving skill and judgment;
  10. Any estimate which the trustee has given of the value of his own services; and
  11. Payments made by the cestuis to the trustee and intended to be applied toward his compensation.

After hearing from 21 witnesses and seeing over 300 exhibits, the Circuit Court found “that there is no precedent for use of the lodestar analysis to determine a reasonable fee for trustees, and further [found] that the use of the lodestar analysis would be unreasonable under the particular facts and circumstances of this case.” In Re The Estate of Rauschenberg. While the trial court applied the West factors recommended by the trustees, it found that they were still asking for more than was appropriate. Using the same factors as the trustees, the court awarded trustee’s fees in the amount of $24,600,000, approximately half of $55,000,000 requested at trial. (For an analysis on how the court weighed the factors and came to this conclusion, please see Rauschenberg Estate Saga of Trust and Fees Explained). Despite the trial court reducing the award and splitting the difference, the Foundation appealed, believing that the judgment frustrated the testator’s intent and hoping to persuade the Court of Appeals that the lodestar method was really the correct way to calculate trustee fees.

On appeal, Circuit Court Judge Silberman, writing for a unanimous court, upheld the trial court’s decision and wrote “only to explain why the trial court correctly refused to calculate fees using the lodestar method.” The opinion focused on the history of applying the lodestar method, emphasizing that it was to proper in determining attorney fees, but there were no cases on point in which the lodestar method was used to determine trustee fees. Since the Florida Statute discussing trustee fees, Fla. Stat. § 736.0708(1) (2007), merely explains that trustees should receive reasonable compensation, the Court of Appeals looked to the statute’s legislative history. The decision relied heavily on the Senate Staff Analyses in support of the bill, which explained “[o]n the factors to be taken into account in determining a reasonable compensation, see West Coast Hospital Association v. Florida Nat’l Bank of Jacksonville.” Therefore, while attorneys will continue to be paid following an hourly rate, trustees fees must be calculated based on the particular trust over which they have control and how well they’ve maintained the trust assets.

The three trustees were represented by Michael Gay, Partner at Foley & Lardner LLP in Orlando Florida, and the Robert Rauschenberg Foundation was represented by Robert W. Goldman, attorney at Goldman Felcoski & Stone P.A. law firm.

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About the Author: Samantha Elie (JD Candidate 2017) is a legal intern with Center for Art Law and a student at the Benjamin N. Cardozo School of Law. She may be reached at selie@law.cardozo.yu.edu.

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

Hold your Horses: Art Authenticators Not Protected Yet

By Irina Tarsis, Esq.*

Screen Shot 2015-06-01 at 3.01.42 PMOn June 15, 2015, New York State Senate passed a revised version of the Bill S01229A intended to amend the New York Arts and Cultural Affairs Law  by adding a provision intended to encourage art historians to offer their opinions concerning authenticity, attribution and authorship of works of fine art.

The proposed amendment is intended to protect art authenticators in the visual arts community from the risk of civil action suits. Why is this group in need of special protection? It is because the risk is real: those who opine on authenticity of artworks are increasingly threatened with legal action by the outraged/indignant collectors whose dreams of owning (and selling a masterwork) are dashed by the professional and expert opinions of authenticators.

Screen shot 2015-07-01 at 10.19.32 AMWe and others have reported on the plight of art authentication committees previously and together we are waiting to see our Google Alerts announce the passage of the New York State proposed law that would grant protection to the authenticators. This Bill has been in the works for years, a more robust version having been introduced without success back in 2013. Despite all the anticipation, as of July 1, 2015 the law has not passed yet, though some headlines have been suggesting or hinting otherwise. See for example “Art Authenticators Harassed by Lawsuits and Death Threats Get New Legal Protection” and “New York Senate Passes Bill to Protect Art Authenticators.”

Having some version of the Bill pass the New York Senate is a promising first step, but the battle is far from over. The New York Assembly has to vote in favor of the Bill as well. As of June 26, 2015, the first half of the 2015-2016 Session of the New York State Legislature is in recess. It is unclear at this time why the amendment was not brought up for a vote in the Assembly between the 15th of June and the 26th of June last month. However, unless the Speaker of the New York State Assembly, Carl E. Heastie, calls for a special session, the New York Assembly members will not return to vote on any of the pending bills until sometime in 2016. While the Assembly version of the Bill, A01018A, will not need to be reintroduced at that time (the Bill number remains unchanged for the entire two-year cycle), the Bill sponsors will have to bring it for a vote. If and when the Bill passes both houses, it will be presented to the Governor, Andrew Mark Cuomo, to either sign or reject. In the case of latter, sponsors of the Bill would need to go through yet another round of edits, introductions, lobbying, etc., etc.

The earliest the current Bill could be enacted in New York, if it is approved in the 2015-2016 Session and promptly endorsed by the Governor, is “the sixtieth day after it shall have become a law.” Then and only then, will “all [good faith] opinions as to the authenticity, attribution or authorship of a work of fine art provided to someone other than the authenticator” will be afforded protections “to ensure that only valid, verifiable claims against authenticators are allowed to proceed in civil court.” (See the full text of the proposed bill for details.)

Indeed, the law is anticipated to have an extraterritorial reach for art authenticators. For example, individuals outside of New York State would be able to contract for New York State law to govern any disputes arising from the agreement to review authenticity of an artwork. However, for now, and until January 2016, there is no change in circumstances and art authenticators remain exposed to litigation and to the ire of art holders seeking affirmation that they struck gold and not pyrite.

* * *

The full text of the proposed bill is available here. Following are some of the sections from the Bill (with our editorial underlining) and excerpts from the Legislative Memo justifying the passage of the law:

Act to Amend New York Arts & Cultural Affairs Law:

IN ANY CIVIL ACTION BROUGHT AGAINST AN AUTHENTICATOR, … , THAT ARISES FROM OR RELATES TO THE AUTHENICATOR’S [SIC] OPINION OR INFORMATION CONCERNING A VISUAL ART MULTIPLE OR WORK OF FINE ART, THE CLAIMANT SHALL SPECIFY WITH PARTICULARITY IN THE COMPLAINT FACTS SUFFICIENT TO SUPPORT EACH ELEMENT OF THE CLAIM OR CLAIMS ASSERTED. (NY Arts and Cultural Affairs Law Section 15.12).

IN ANY CIVIL ACTION BROUGHT AGAINST AN AUTHENTICATOR … THAT ARISES FROM OR RELATES TO THE AUTHENTICATOR’S OPINION OR INFORMATION CONCERNING A VISUAL ART MULTIPLE OR WORK OF FINE ART, THE COURT MAY ALLOW THE PREVAILING AUTHENTICATOR THE COSTS OF THE ACTION TOGETHER WITH REASONABLE ATTORNEYS’ AND EXPERT WITNESSES’ FEES, PROVIDED, HOWEVER, THAT NO SUCH COSTS OR FEES SHALL BE MADE PURSUANT TO THIS SECTION EXCEPT UPON A WRITTEN FINDING OF GOOD AND JUST CAUSE, WHICH SHALL SPECIFY THE GROUNDS THEREOF. (NY Arts and Cultural Affairs Law Sec. 15.15 (4)B).

Justification:

In general, artwork is authenticated by a trained person through documentation, stylistic inquiry, and/or scientific verification. No one method is perfect as oftentimes authenticity is difficult to determine. While each authentication method has its own drawbacks, the role of authenticators as drivers of the art market cannot be overstated. Art authenticators reduce the risk of counterfeits and imitations flooding the art market that could potentially devalue the work of millions of artists.

In recent years, the work of authenticators has come under pressure from meritless lawsuits against those who render opinions in good faith. Such defense of expensive and frivolous lawsuits have left many in the industry reluctant to lend their expertise in authenticating art works.

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About the Author: This editorial is by Irina Tarsis, art lawyer and Founder and Director of Center for Art Law.

Case Review: Red Rothko Suit, a.k.a. Hoffman v. L&M Arts (TX)

Mark Rothko, Untitled (1961)

Mark Rothko, Untitled (1961). Source: http://www.wikiart.org.

By Chris Michaels, Esq.*

A private art sale involving a Rothko painting is the subject of a bitter lawsuit in the Northern District of Texas. Inadvertently, the dispute sheds light on the often hidden intricacies and nuance of confidential deals. Hoffman v. L&M Arts, et al, deals with an alleged breach of contract relating to a confidentiality provision of a Letter Agreement that provided for a private sale of artwork. The lessons to be learned from this controversy may protect future sellers and buyers who may wish to enter into private sale agreements.

The painting at the heart of the sale is a 1961 Mark Rothko oil, Untitled, executed in bold red and orange (hereinafter the “Red Rothko”), which was owned by the Plaintiff, Marguerite Hoffman, a prominent art collector from Dallas. Plaintiff and her late husband pledged to donate their collection to the Dallas Museum of Art upon their death, although they retained the option to sell paintings during the lifetime. The Red Rothko was on loan to the Dallas Museum of Art, of which Ms. Hoffman is a trustee, prior to the sale, and Hoffman made a conscious decision to use a private sale option to safeguard from the public her decision to dispose of the work instead of donating it to the museum. In April of 2007, Hoffman sold the painting under the terms of a Letter Agreement, which served as an agreement between the Greenberg Van Doren Gallery acting for Hoffman and L&M Arts, a California gallery that has since closed, acting on behalf of the buyer. Principals for the Van Doren Gallery and L&M Arts signed the letter, which contained the following confidentiality provision: “[a]ll parties agree to make maximum effort to keep all aspects of this transaction confidential indefinitely. In addition, the buyer agrees not to hang or display the work for six months following receipt of the painting.” Contractual agreements between Hoffman and Van Doren Gallery and between L&M Arts and the buyer, David Martinez are still confidential. But for the resulting controversy, the terms of the sale as well as the sale itself would have remained hidden from the public.

According to the complaint filed by Hoffman in May of 2010, the private April 2007 sale was finalized for a total price of $17.6 million. Subsequently, L&M invoiced David Martinez and Studio Capital, Inc. (also defendants in this case) for the painting. Studio Capital thereafter took possession of the painting and put it in storage. Three years later, the painting was consigned to Sotheby’s for sale, and on 12 May 2010, the painting was sold at auction with great publicity for $31,442,500. The Hammer price exceeded Hoffman’s earnings from the private sale by $13,842,500. As a result of the sale at auction, Hoffman brought suit against L&M, Martinez, Studio Capital, and others, alleging, among other things, that the defendants breached the confidentiality clause of the Letter Agreement and that subsequently Hoffman suffered damages because, “when she sold the Rothko painting privately, she did so at a substantial discount in exchange for the promise of strict confidentiality, forfeiting the additional millions of dollars the painting would have brought if sold at public auction.” The great chagrin and displeasure of Hoffman is easy to understand but whether her position has legal basis was left to the courts to decide.

In the December 2013 trial that followed, the jury found that the defendants did, in fact, breach the contract and awarded damages of $1.2 million to Hoffman. (The damages award itself presents a thorny procedural issue that will not be explored here). After the award was entered on behalf of Hoffman, all defendants moved for judgment as a matter of law, meaning that defendants were of the opinion that no reasonable jury could have found for the Plaintiff based on the available evidence. Of particular note for the purposes of this article, Martinez and Studio Capital, the buyers in the private sale, moved for judgment on the ground that a reasonable jury could not have found that L&M was either acting as their agent or that they were bound by the Letter Agreement. Essentially, Martinez and Studio Capital argued that they could not breach the confidentiality provision of the Letter Agreement because they were not bound by the Agreement in the first place, or were even aware of its existence.

In reviewing the Martinez and Studio Capital motions, the U.S. District Court for the Northern District of Texas, Dallas Division was faced with two issues: 1) whether there was legally sufficient evidence for a reasonable jury to have found that Martinez and Studio Capital conferred actual authority on L&M to enter into the Letter Agreement on their behalf; and 2) whether there was legally sufficient evidence for a reasonable jury to have found that L&M had apparent authority to enter into the Letter Agreement on behalf of Martinez and Studio Capital.

The Court, analyzing Texas law on actual authority, noted that “[a]n agent’s authority to act on behalf of a principal depends on some communication by the principal either to the agent (actual or express authority) or to the third party (apparent or implied authority).” (Emphasis added). With respect to apparent authority, the Court noted that “one seeking to charge the principal through apparent authority of an agent must establish conduct by the principal that would lead a reasonably prudent person to believe that the agent has the authority that he purports to exercise.” (Emphasis added).

Martinez and Studio Capital argued that L&M had neither actual nor apparent authority to enter into the Letter Agreement on their behalf. Regarding actual authority, the defendants maintained that L&M acted merely as an intermediary in purchasing the painting. Testimony by Martinez and the Principals of L&M backed up the argument that L&M was never authorized to sign the Letter Agreement on behalf of Martinez or Studio Capital. Hoffman presented several arguments in favor of finding that L&M had actual authority to act as the agent of Martinez and Studio Capital, including that the Letter Agreement itself stated that L&M was acting “on behalf of the buyer.”

On the issue of actual authority, the Court found in favor of Martinez and Studio Capital. Simply put, the Court reasoned that there was no evidence that Martinez or Studio Capital directly communicated to L&M that it had authority to enter into an agreement with Hoffman that would be binding on either Martinez or Studio Capital. Additionally, the Court agreed with testimony of one of the Principals of L&M, who maintained that for private sales such as these, there are typically two transactions taking place; one between the seller and the intermediary and one between the intermediary and the buyer. The Court held that a reasonable jury could not find that either Martinez or Studio Capital communicated to L&M or otherwise implied through its conduct that L&M was authorized to enter into a contract with Hoffman that would be binding on the defendants in perpetuity and impose limits on their rights to alienate their property.

On the issue of apparent authority, the Court ruled that, in order to be liable, Martinez and Studio Capital must have engaged in conduct that reasonably led Hoffman to believe that L&M had this authority. The Court further noted that because neither Martinez nor Studio Capital had any direct interaction with Hoffman or her agent, among other reasons, the evidence did not permit the jury to have found that the defendants held L&M out as their agent. As such, the Court granted the motions of Studio Capital and Martinez and dismissed Hoffman’s claims against them with prejudice.

As of 2 February 2015, the case is still active given that Attorneys for Hoffman appealed the latest ruling dismissing Hoffman’s claims against the purchasers of the Red Rothko. There are, however, already a few important takeaways of which buyers, sellers, and dealers should be aware. One is that sophisticated buyers should be very clear with their dealers and intermediaries who purchase artwork as part of a private sale. An agreement in writing with respect to what the dealer is authorized to do, or not do on behalf of the buyer would, in light of the above case, be prudent. Additionally, buyers should be considerate of what they communicate or promise to a seller in private sales.

Hoffman is represented by Willkie Farr & Gallagher LLP, L&M Arts is represented by Susman Godfrey LLP, and Studio Capital is represented by Cleary Gottlieb Steen & Hamilton LLP.

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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 (518) 421-7238, chriswmichaels@gmail.com, or on Twitter @CMichaelsartlaw.

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