April 2006

The rewards for being an artist have just got better. Not only does an artist get a lump sum when he (or she) first sells his work, the artist now also gets royalties whenever that work is resold. This is a fundamental, and controversial, change in the way artistic creativity is rewarded in the UK.

Background to the Regulations

Also known as a “droit de suite”, an artist’s right to receive royalties on the resale of his work was first introduced in France in the 1920s due to public concern about the hardship suffered by families of dead artists, and the injustice of this when the artist’s work had significantly increased in value after the artist’s death.

At the time, in March 1996, when a European Directive to provide such a right was first proposed 11 Member States and 3 EEA states had such a right, although the way it was implemented differed greatly. Notable exceptions were Austria, the Netherlands and the UK. Despite sustained opposition by the UK, which was concerned that the extra tax would affect its thriving art market and drive sales to its main competitor markets in the US and Switzerland, the “European Directive on the resale right for the benefit of the author of an original work of art, Directive 2001/84/EC” was adopted on 27 September 2001.

The rationale behind the Directive was to allow authors of original artistic works to share in the economic success of their works and redress the perceived imbalance between the economic situation of such authors and that of other creators, who benefit from successive exploitation of their work. The reasoning is rather suspect given that other works do not show such a large appreciation in value and given that authors of artistic works are equally able to authorise, and demand royalties for, further reproductions of their work. Another driving factor was to prevent distortion of the internal market and competition due to the variations in the way the resale right was applied, if it existed at all, between Member States.

Consequently, the UK Patent Office and Department for Trade and Industry, which were responsible for implementing the Directive, have undertaken extensive consultations (including commissioning independent research) on how to implement the Directive in a way that minimises the risk of damage to the UK art market. They have been keen to emphasise that they have taken full advantage of the exceptions and derogations permitted by the Directive and have followed the wording of the Directive as closely as possible to avoid “gold-plating”. The result is the Artist’s Resale Right Regulations 2006, which came into force on 14th February 2006 after a whirlwind passage through parliament, the proposed form of the Regulations only having been issued two weeks before the 1st January deadline for implementing the Directive.

Substance of the Regulations

The regulations create a new type of intellectual property right: the right for an author of an original work of art and, from 1st January 2010 (a derogation permitted by the Directive and adopted in order to give the UK art market time to adjust), his heirs to receive a royalty on resale of that work. “Resale” means any sale of the work following the first transfer of ownership of that work by the author, regardless of whether that first transfer is for monetary consideration. The effect of this is that the right does not apply to employee-created works, as ownership of these works automatically vests in the employer so there can be no first transfer by the author. The right subsists so long as the work continues to be protected by copyright.

The right attaches not only to works created after 14th February 2006, but also to existing works sold after that date. The Regulations have specific provisions dealing with ownership where the author has died before 14th February 2006. The right extends to any work of a graphic or plastic art, such as paintings, photographs, sculptures, tapestry, items of glassware or ceramics, and even extends to copies of such works where the copy is one of a limited number made by the author or with his authority. However, the owner of the right may only benefit from it where he is a national of an EEA state or a Berne Country that provides an equivalent right. Thus US artists will not benefit.

The right to royalties only applies where the buyer or the seller (or an agent of the buyer or seller) is acting in the course of a business of dealing in works of art and the sales price is more than €1,000. The right does not apply where the seller previously acquired the work directly from the author less than three years before the sale in question and the sale price of the later sale does not exceed €10,000. On the Patent Office’s estimation, less than 10% of all sales by value will be subject to the resale right once this is applied to works by both living and dead authors, although the Office itself acknowledges the difficulty of predicting how many sales will be caught in practice.

The royalty to which the author is entitled is set by the Regulations and calculated as a percentage of the sale price of the work converted into euros net of tax. For sales prices between €1000 and €50,000 the rate is 4%, the minimum allowed by the Directive and chosen to minimise the risk of diversion of sales. For the same reason, the maximum total royalty payable is capped at €12,500. Lower royalty rates are payable on the portion of the sales price which exceeds specified thresholds. This gives the seeming paradoxical result that the less well-known the artist, i.e. the lower price commanded, the more, proportionally, the artist receives. However, this is consistent with one of the aims of the Directive, which is to assist aspiring artists.

The seller and its agent (or where there is no such agent, the agent of the buyer; or failing this the buyer) are jointly and severally liable to pay the royalty on completion of the sale, although payment of the royalty may be withheld until evidence of entitlement to the royalty is produced. The author has the right to request information from the person liable to pay the royalty within three years of the sale in order to ascertain and secure payment.

The ways in which an author may deal with the right are very limited. An author may transfer the right by will, into a trust of which he is a beneficiary or to a charity that has its central administration in the EEA or reciprocating Berne country. An author is unable to waive his right and any agreements to share or repay the royalty are void.

The Effect of the Regulations

The Regulations go beyond the minimum required by the Directive in only two respects. The first is the imposition of a minimum threshold of €1000 for a sale to be liable to royalties rather than €3000, the maximum allowed by the Directive. The second is the provision for joint liability. Before the Regulations came into force there was much disquiet over the first of these two respects. One concern was that the administrative costs in collecting and distributing the royalties might exceed the royalty itself, and constituted an unnecessary burden on low value transactions.

The Patent Office justified this threshold on the basis that it would benefit less successful artists, the group the Directive is primarily intended to assist. Apparently, 85% of works by sold in the UK in this price range are by British artists. In addition, a higher threshold would effectively exclude certain categories of work. For example, photographs are rarely sold for more than €3000.

In an attempt to minimise administration costs the Regulations stipulate that artists may only exercise their right through collecting societies (which in the UK is the Design and Artists Collecting Society). It is hoped that the involvement of collecting societies will maximise compliance with the Regulations and reduce any legal challenges that might increase the burden on businesses. There is also the, perhaps rather optimistic, hope that administration costs will reduce over time.

It remains debatable whether the resale right will provide significant benefit to the artist or whether it will be the artist’s heirs who will primarily benefit. As to the effects on the art market, it is hoped that the options and derogations that the government has taken advantage of, in particular the delay in the application of the rights to the works of deceased artists, and the costs involved in exporting a work in order to sell it outside the EEA, such as the insurance, transportation costs and export VAT, will mitigate the risk of diversion of business. However, in the end only time will tell.

Published in World Intellectual Property Report, April 2006