Cutting Off Dealers Who Discount

Joshua J. Kaufman © 1999

One of the most contentious areas of disagreement between artists, their publishers and galleries who sell their work is the issue of deep discounting. Ads stating "40% off all works by Artist X" bring artist's and their publishers' blood to a boil. On the other hand, galleries, as do most retail operations, find that discounting certain popular items and advertising the fact brings in a great deal of traffic and hopefully sales. Artists and their publishers do not view the sale of art the same way Wal-Mart would consider the sale of a VCR. They believe that the manner in which art is sold affects both the artist and his reputation, as such much is at stake. They believe that the deep discounting of artworks, while it might bring short term benefits to a gallery, in the long run damages an artist, his reputation, and the many collectors of an artist. Certain galleries attempt to circumvent the issue of discounting and an artist's work by running ads which would read "80% off Framing of All Prints by Artist X" Then, with a straight face, when the artist or publisher complains, they simply say "we weren't discounting the prints, we were only discounting the framing." This line of reasoning generally does not ameliorate any of the concerns of the artist or his publishers. The forms of retribution that artist will visit upon the discounting gallery can take many forms; Artists will not make personal appearances at the gallery nor pay for co-op ads. In response to continued discounting, one often finds that artists and/or their publishers simply cut off the galleries. If someone discounts, he is simply not shipped future product.

When confronted with a retaliatory action, the galleries claim foul. The legal issue which arises is whether or not an artist or publisher can in fact cut off a gallery for discounting. The short answer is yes. However, the more complete answer is that there are circumstances in which it would not be alright and not permissible unless it is done in a very specific manner. If the artist and publisher do not know the nuances of the law, dot their I's and cross their T's, they can run afoul of both state and federal laws.

The area of law that this issue falls under is surprisingly antitrust law. One would hardly expect the buying and selling of art to be subject to the Federal Sherman Antitrust Act, but it is. The specific area of antitrust law is known as "retail price maintenance." Where we come across this in the more normal commercial setting is in a situation where Sony cannot tell Wal-Mart at what price it may or may not sell its VCRs. However, you might notice that in certain ads there are no prices for Sony VCRs. This is because Sony does have the right to tell Wal-Mart that "we will pay for part of the advertising (co-op ads), but only if the prices are listed in a certain manner." There is much case law or retail price maintenance on the books, but the leading art law case in the field is a reported case out of Florida in which Edna Hibel cut off a gallery for discounting her works. The court in that case allowed her to do so and set up the appropriate parameters under which an artist can terminate her relationship with the gallery who discounts her work. The basic facts in the Edna Hibel case help illustrate the point ( for those of you who do not know, Edna Hibel is a successful artist who sells her works through various forms, such as lithographs and collector plates.) At the time of the case, she sold through a network of non-exclusive dealership that were terminable at will. Back in the 1970's, Sol Winn and Elegante shops were competing Hibel dealerships in Monticello, NY. It appears that Elegante complained to Hibel that Winn sold her works below the suggested retail prices. Hibel contacted Winn and asked them to stop discounting in order to maintain Hibel's image. As Hibel created collector items she discouraged price cutting so not to downgrade the market for her artwork. Not withstanding Hibel's requests (or demands) Winn continued to sell at a discount. In 1985 Hibel stopped filling Winn's orders. Winn filed suit alleging a violation of the federal antitrust act, claiming that the termination of their dealership was in combination with Elegante and was to protect Elegante from price competition and to maintain retail prices for Hibel on her artworks. The court granted Hibel a directed verdict based on the legal premise that Winn failed to exclude the possibility that Hibel acted independently and not in concert with Elegante and that also the dealer failed to prove economic lost. A court of appeals affirmed the lower court and set a two part test for "vertical price fixing cases"; (1) the plaintiff must show that the conspiracy is economically reasonable; and (2) the plaintiff must present evidence tending to exclude the possibility that the manufacturer and the non-terminated distributor acted independently. Specifically, the court decided that Hibel acted reasonable in fixing her prices and stated "art works such as that created by Hibel is a unique product whose market is based in individual taste and perceived in investment value rather than competitive market condition. Thus, retail price maintenance is not easily subject to outside competition, and could in fact enhance the product's investment value." The court also found that there was no proof that Hibel did not act independently. The mere fact that Elegante initiated the process by complaining did not in it of its self prove the necessary conspiracy. The court went onto say that, "Much of the value of Hibel's products stemmed from the presumed investment value. Discounting by Winn served to cheapen their image in the eyes of the investing public and therefore undermined their attractiveness to potential customers as well as their value to those already owning them."

In many areas of antitrust law, when competitors get together and form a unified voice (this is known as "price fixing"), problems can occur. This is true in the art publishing area as well if an artist and publisher try to act in concert with other dealers to maintain the price, the activity may be illegal. The act triggering the cutting off a discounting dealer is often an irate call from full retail price gallery. However, the mere fact that a gallery complains to an artist or publisher about the discounting activities of a competitive gallery, and the artist takes remedial action, will generally not be deemed to be an antitrust violation. As the court said in the Hibel case, "a manufacturer may legitimately respond to pressure from a dealer in order to avoid losing a particular dealers business. The method by which an artist and publisher can appropriately set up their dealer network so that they can eliminate discounting is technical and filled with potential land mines which can be easily set off. For example, it is forbidden to tell a dealer at which price they most sell an artwork( suggested price). However, it is permissible to cut them off if they do not sell at a suggested price. How you cut them off, what words you use, what method you use, how you respond to their angry phone calls or pleas to be reinstated, all have great significance and must be done in a specific manner. As such, it would be inappropriate to try to provide a simplified overview of how it's done in this article. The expression "a little knowledge is a dangerous thing," if it ever applied, applies here. Each situation calls for a distinct plan one that is drafted to cover the specific set of circumstances. Therefore, for an artist or publisher who seeks to cut off discounting dealers, or dealers who feel they have been inappropriately cut off, I would suggest you seek counsel from an attorney who understood both the antitrust and art law issue at hand in order to assist you.

Even discounting programs that are properly set up must be assiduously policed. A publisher or artist can set up a proper mechanism for dealing with discount dealers, however, one then finds that employees or sales people of the artist/publisher make certain comments which undermine the entire process and turn what might have been a legal policing program into a series of illegal activities. It is therefore very important that any artist or publisher who does seek to limit the discounting of their works by dealers not only set up the process appropriately, but train their staffs and, police the process so that they do not inadvertently run afoul of the law based on the misconduct or ignorance of their employees.