Sam Francis Found. v. Christies

State regulations of wholly out of state commerce with no connection to in-state activity violate the Dormant Commerce Clause, but the violating provision may be severed from the statute as a whole, if allowed by state law, when the invalid provision is grammatically, functionally, and volitionally severable.

Artists and the estates of artists sued Christies, Inc., EBay Inc., and Sotheby’s, Inc., alleging that these companies violated the Resale Royalty Act (“RRA”) by failing to pay royalties of five percent of the sale price to the artists, if the seller lives in California, or the sale occurs in California. The district court granted the companies’ motion to dismiss, holding that the RRA impermissibly regulated wholly out of state conduct, which violated the Dormant Commerce Clause, and since the violating provision could not be severed, the whole Act was unconstitutional. On consolidated appeal, the Ninth Circuit, sitting en banc, found that the royalty requirement, as applied to out-of-state sales by California residents, violated the Dormant Commerce Clause because it facially regulated commercial transactions occurring entirely outside California. The Commerce Clause prevents state regulation of commerce that takes place completely outside the state’s borders, regardless of whether or not the commerce has effects within the regulating state. The fact that the companies are seller agents and not sellers, and that unclaimed funds eventually go into the state fine arts fund are irrelevant to the constitutional issues, as this was still a state regulating private individuals. The Court held that severability is a matter of state law. California allows for severability, and the invalid provision is grammatically, functionally, and volitionally severable, therefore there is a presumption in favor of severance of the problematic portion, “the seller resides in California or,” from the statute. While the scope of the RRA is limited to in-state sellers, the removal does not conflict with any of the RRA’s other provisions. The Court remanded the appeal to the three judge panel for consideration of additional issues. REMANDED.