Carolina Herrera
May is one of the most important months in the year for the art world, as it is when the major auction houses—Sotheby’s, Christie’s, and Phillips—have their New York spring marquee sales for contemporary and impressionist works of art. Last year, in the midst of the chaos and excitement of spring sales, New York City quietly repealed regulations governing the licensing of auction houses and specific conduct governing auctions.[1]
The regulations were enacted in the 1980s in an effort to increase oversight in an industry long viewed as opaque.[2] The now repealed rules were established to protect clients and ensure certain information was disclosed ahead of the sale, specifically when an auction house had a financial stake in the item.[3] The regulations required auction houses to retain records of auctions for at least six years in the event questions of attribution and title arose. They also required written contracts with consignors to disclose all fees and, to the benefit of buyers, affirm that the consignor warrants title to the ultimate purchaser.[4]
The deregulatory moves, which went into effect on April 10 and June 15, 2022, included eliminating requirements for auction houses to be licensed by the city, obligations for the auctioneer to disclose guarantees on works provided by the auction house or third-party guarantees, also known as “irrevocable bids,” and rules surrounding “chandelier bidding,” a process where auctioneers invent fictitious bids as a way of creating the appearance of demand until the reserve price is met.[5] The roll back of these rules were part of the City Council's broader scheme to improve conditions of business still rebounding from the pandemic, such as: laundries, sidewalk cafes, car rental agencies, and video arcades.[6] However, unlike most of the other industries impacted by the changes, New York auction houses generate billions of dollars of revenue annually.
The auction system, as Thomas C. Danziger, a prominent art lawyer and partner in the Manhattan law firm Danziger, Danziger & Muro, remarked, “rests on confidence by buyers and sellers that the auction houses are playing by the rules . . . Without regulations in place, people may lose confidence in the integrity of the New York auction market.”[7] This is especially true in a market that is mostly unregulated and where few disclosures are necessary. Furthermore, Sotheby’s, Christie’s, and Phillips are all privately owned, adding another layer of “secrecy.” Nevertheless, representatives from these auction houses have said that they intended to continue operation as if the regulations were still in place. Michael McCullough, a partner in the Manhattan law firm Pearlstein & McCullough, does not think practices will change and stated that “[t]he bidding process and the way an auctioneer conducts an auction has been standardized.”[8] Other art market experts are confident that New York’s Uniform Commercial Code, New York State’s Arts and Cultural Affairs Law, and other general business laws will continue to offer protection for buyers and sellers. However, they could fall short because these laws are not narrowly tailored to the auction industry and do not specifically define the prohibited conduct and necessary information disclosure at auctions.[9]
Now, over a year later, what has changed? Because of the lack of transparency in the art world, it is difficult to know if anything has changed unless you are directly transacting with or an employee at one of the auction houses. However, after browsing the Sotheby’s, Christie’s, and Phillips websites for their November marquee sales, they still are disclosing the works of art that are subject to guarantees or third-party guarantees/irrevocable bids. It appears Michael McCullough was correct about how these practices have become standardized. It will be interesting to see what happens in the coming years. The sales from May’s auctions in New York were down 42% on the previous spring’s season, underscoring that the art market is still vulnerable to economic dips.[10] As with anything, the art world is subject to cycles, and there will possibly come a time when these regulations will reappear. But for now, we must wait and see.
[1] Daniel Grant, What Does New York's Sudden Winding Back of Auction House Regulations Mean for the Art Market?, Art Newspaper (May 31, 2022), https://www.theartnewspaper.com/2022/05/31/what-does-new-yorks-sudden-winding-back-of-auction-house-regulations-mean-for-the-art-market [https://perma.cc/2YTD-RU3E] [https://web.archive.org/web/20231113205135/https://www.theartnewspaper.com/2022/05/31/what-does-new-yorks-sudden-winding-back-of-auction-house-regulations-mean-for-the-art-market].
[2] Graham Bowley & Robin Pogrebin, New York City Revises Auction House Regulations Amidst Controversy, N.Y. Times (May 3, 2022), https://www.nytimes.com/2022/05/03/arts/design/nyc-auction-rules-sothebys-christies.html [https://perma.cc/C8K4-JNTQ] [https://web.archive.org/web/20231113210152/https://www.nytimes.com/2022/05/03/arts/design/nyc-auction-rules-sothebys-christies.html].
[3] Anny Shaw, New York City Removes Rules Governing Auction Houses in Bid To Stimulate Business, Art Newspaper (May 4, 2022), https://www.theartnewspaper.com/2022/05/04/new-york-city-removes-rules-governing-auction-houses-in-bid-to-stimulate-business [https://perma.cc/KB2V-6S5N] [https://web.archive.org/web/20231113211702/https://www.theartnewspaper.com/2022/05/04/new-york-city-removes-rules-governing-auction-houses-in-bid-to-stimulate-business].
[4] Grant, supra note 1.
[5] Daniel Grant, Experts Fear New York City Slashing Auction House Regulations Could Erode Collector Trust and Confidence, Art Newspaper (May 17, 2022), https://www.theartnewspaper.com/2022/05/18/new-york-city-auction-deregulation-trust-collectors-art-law [https://perma.cc/7QDW-U9JT] [https://web.archive.org/web/20231113210948/https://www.theartnewspaper.com/2022/05/18/new-york-city-auction-deregulation-trust-collectors-art-law].
[6] Id.
[7] Grant, supra note 1.
[8] Id.
[9] Bowley & Pogrebin, supra note 2.
[10] Melanie Gerlis, Auction Houses Use Lucrative Tools To Prop Up the Art Market—Could They Become Victims of Their Own Success?, Art Newspaper (Oct. 23, 2023), https://www.theartnewspaper.com/2023/10/23/could-auction-houses-become-victims-of-their-own-success-in-propping-up-the-art-market [https://perma.cc/UYZ9-MPKH] [https://web.archive.org/web/20231113211949/https://www.theartnewspaper.com/2023/10/23/could-auction-houses-become-victims-of-their-own-success-in-propping-up-the-art-market].