Picture This: You Bought it, but you can’t sell it (Resale Restrictions on Art)

UCC 2-401 generally states that title passes from the buyer to seller at the time and place at which the seller completes performance and that any reservation of title by the seller is limited to a security interest. Since every state has adopted a form of the UCC, will any restriction on the resale of art only amount to a security interest? Not exactly.

The seminal case of restrictions on the resale of art is Wildenstein & Co. v. Wallis, 79 N.Y.2d 641, 595 N.E.2d 828, 584 N.Y.S.2d 753 (1992). In Wildenstein, Wildenstein sued to enforce contractual rights of first refusal and rights of consignment of paintings that were sold by the estate of Wallis. Id. at 646 . One of the reasons the Court declined to apply the rule against perpetuities (the version codified in New York) to invalidate the restrictions on resale of the paintings because the agreement between Wallis and Wildenstein to restrict the resale of the paintings was more of a commercial (as opposed to a familial) transaction and they served commercial interests by “ facilitating broader marketing of world-renowned art treasures while posing, at the most, only a minimal limitation on the alienability of the works”. Id. at 650, 651. Next, the Court found that the restrictions were valid under the common law rule against against unreasonable restraints on alienation. Id. at 651. The Court reasoned that the right of first refusal and requirement that Wildenstein meet the offer of a third party made them reasonable and thus not an unreasonable (emphasis added) restraint on alienation. Id. at 652.

Another interesting case on restriction on the resale of artwork is Hoffman v. L & M Arts, 838 F.3d 568 (5th Cir. 2016). Hoffman centered around a provision in a sale agreement which stated “All parties agree to make maximum efforts to keep all aspects of this transaction confidential indefinitely." Id. at 574. Hoffman sued the defendants because they advertised the sale of painting at auction and thus, did not keep the sale of the painting them confidential. Id. The Court rejected Hoffman’s interpretation of the “confidential” clause as a permanent restriction on sale because it would have constituted an indirect promissory restraint on alienation and accordingly would be void if unreasonable. Id.

What should artists and collectors take away from Wildenstein and Hoffman? Restraints on resale are governed by state law and will turn out differently in different states. A restraint on resale will likely be invalided if it unlimited in duration or requires an unreasonable price to be paid.