Bench & Bar

MAR 2018

The Bench & Bar magazine is published to provide members of the KBA with information that will increase their knowledge of the law, improve the practice of law, and assist in improving the quality of legal services for the citizenry.

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| MARCH/APRIL 2018 10 art market is confidentiality. Handshake deals are the norm. Written agreements are rare, and rarely enforced. Transactions are uniformly private and secret, unless the buyer wants to make them public. And even then, only limited information is disclosed. Accordingly, it is impossible even to esti- mate the size of the primary art market with any degree of accuracy. And that is precisely the way participants in the pri- mary market want it to stay. B. THE SECONDARY MARKET e secondary market is the resale market for art, consisting primarily of public and private auctions, and private sales. More information is available about the sec- ondary market than the primary market, because the results of public auctions are publicly available. However, much of the secondary market remains opaque, as results of private auctions sales are rarely disclosed. Only a tiny fraction of works sold on the primary market have any meaningful value on the secondary market. And of that tiny fraction, the overwhelming majority are works initially sold by market maker gal- leries. But for everyone other than primary market insiders, investing in art on the pri- mary market is tantamount to investing in lottery tickets. A vanishingly small number of people do it successfully, but owe their success to luck, and little more. Of course, the tiny fraction of works that have a secondary market are often fantas- tically valuable. And some collectors have invested in art on the secondary market very successfully. Just like in any other market, the key to success is information and access. Both are at a premium. C. ART INVESTMENT FUNDS An art investment fund is simply a fund intended to generate a profit by investing in art. e idea has existed since the emer- gence of the modern art market at the end of the 19th century. e first art fund was La Peau de l 'Ours, a syndicate created in 1904 by André Level, a Parisian art collec- tor. In the 1970s, the British Rail Pension Fund invested £40 million in art. And since 2000, a number of art funds have solicited investors. e premise of an art fund is simple: buy low and sell high. e rationale is that the art market is uncorrelated with other mar- kets, so investors can use art investments to hedge against risk. And the advantage is that investors can make a relatively small investment in a diversified portfolio of high-value works, and avoid the costs associated with actual ownership. Unfortunately, it is not clear that the art market is actually uncorrelated with other markets to any significant degree. And a diversification strategy may be incapable of compensating for the disadvantages of art funds relative to private investors, pri- marily access and information. Art funds typically lack insider access to the primary market, where private investors make the largest profits. Art funds typically lack insider information about which works are available and attractive. In addition, private collectors can leverage tax advantages that art funds cannot. Financial technology may enable art funds to overcome these liabili- ties, but the jury is still out. 29 THE LAW OF THE ART MUSEUM Despite vast quantities of money changing hands in these markets, the overwhelming majority of valuable works belong to art museums, which are almost uniformly charitable organizations dedicated to edu- cating the public about art and culture. Among other things, museums remove works from the private art market into the public sector. In many respects, they are natural complements. Museums enable the art market to manage supply and maintain scarcity in the face of relatively inelastic demand, and the market subsidizes muse- ums by providing them with both product and donors. Unsurprisingly, laws and norms governing art museums have developed in light of their symbiotic relationship with the art market. A. CHARITABLE CONTRIBUTIONS In the 19th and early 20th centuries art museums could acquire notable works on the primary and secondary markets. Today, it is beyond the means of most art muse- ums to purchase anything but minor works, with the exception of museums funded and controlled by autocratic governments. As a consequence, art museums typically obtain the vast majority of works in their collec- tion via donation, often as a bequest. B. DEACCESSIONING "Deaccessioning" is the polite term for an art museum selling works from its collec- tion. Art museums typically show about five percent of the works in their collection. 30 e rest languishes in storage, imposing costs without generating revenue. Normally, charitable organizations sell non-perform- ing assets. But art museums do not, at least in part because they fear the consequences. Most art museums are members of the American Alliance of Museums ("AAM"), and most art museum directors are mem- bers of the Association of Art Museum Directors ("AAMD"). e AAM and the AAMD have both adopted deaccessioning rules holding that museums can sell art only in order to buy art, and that it is "unethi- cal" for museums to sell art for any other reason. 31 But why? e AAM and AAMD claim that muse- ums cannot sell art because they hold it in the "public trust." at is both false and inconsistent with their own rules. The "public trust" doctrine provides that public entities cannot sell certain public assets to private parties. 32 But art museums are typically private charitable entities, so the art they own is not a public asset, even though museums are obligated to benefit the public, like any other charitable orga- nization. Private parties buy and sell art all the time. So can museums. Moreover, if museums hold art in the public trust, then they can't sell it for any reason. But the AAM and AAMD rules explicitly allow museums to sell art in order to buy art. Does this make sense? Either museums hold art in the public trust or they don't. How can their right to sell art depend on how they use the proceeds? Deaccessioning opponents often argue that museums own art subject to charitable trusts that limit their ability to sell it. Sometimes, they are right, especially about particular works. But usually, they are wrong. Muse- ums rarely form charitable trusts limiting their right to sell art, and rarely accept Features: See Page 22 for Convention Details THE WAIT IS OVER! ART LAW, COPYRIGHT & TRADEMARK

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