LEGAL ISSUES IN ART AUTHENTICATION & VALUATION

Cynda C. Ottaway Shareholder - Crowe & Dunlevy

Leslie Wright Vice President - Trust & Estates - Bonhams

Table of Contents

I. The Legal Arena ……………………………………………………………………… 1

II. Authentication - What is Authentication ………………………………………… 1

III. The Experts …………………………………………………………………………… 3

IV. Causes of Action …………………………………………………………………….. 4

V. Important Cases ……………………………………………………………………... 6

VI. Possible Solutions ………………………………………………………………….. 7

VII. Impact of Controversies …………………………………………………………… 8

Addendum

1

I. The Legal Arena

The art business is big business and continues to grow. In 2015, over $27.3

billion was spent on purchases of art in the United States alone. The lack of inventory combined with the sharp rise in prices created an environment encouraging the production of fakes. For reputable participants, there is a need for dependable methods of authentication. For art collectors and the businesses that sell art to the collectors, the lack of a system to guarantee authenticity impedes the flow of commerce in the art business. If you are a legal advisor to either collectors or art businesses, the legal problems that can arise is increasing exponentially.

The loss of value of art pieces is reflected in many litigated cases. In a case involving the Andy Warhol Foundation, the plaintiff alleged that the refusal of the Warhol Foundation to authenticate a certain work effectively destroyed its value. “Without sound and absolute provenance, prior ownership and authenticity, work is virtually unsellable at its full price.” See Simon-Whelan v. Andy Warhol Found. for the Visual Arts, Inc., No. 07 CIV. 6423 (LTS), 2009 WL 1457177, at *3 (S.D.N.Y. May 26, 2009).

Lawsuits have caused many authenticating entities to require owners to sign statements promising not to sue. The threat of a lawsuit can also have a chilling effect on the opinion of experts. The contentious nature of the litigation fuels the fire that leads to an extraordinary cost of litigation which may not result in a definitive result. “Conflicting expert opinion and methods of evaluation are a source of confusion in courts.” See Greenberg Gallery, Inc. v. Bauman, 817 F. Supp. 167, 174 (D.D.C. 1993), aff’d, 36 F.3d 127 (D.C. Cir. 1994).

Knoedler Forgeries Saga: A very prominent and well-known gallery, the Knoedler Gallery, was forced to close in 2011 due to allegations of fraud in connection with the sale of counterfeit art. Summaries of the litigation are included among case briefs included in the Addendum to this paper.

II. Authentication - What is Authenticity

Certainly a work that has been created entirely by the artist’s hand would satisfy the expectation that it is authentic. There are situations in which the predominant part of the work was done by the artist’s hand, but he may have had assistants or students assist in its completion. If the artist authorizes the piece and claims it as his own, this alone may satisfy the test of authenticity.

There are three ways of protecting the integrity of the work: (i) third parties who are recognized experts and authorities may render an opinion about authenticity, and these experts may be the artist, their family, scholars, curators, dealers, and auction houses; (ii) some artists have an authentication board; and (iii) a resource known as the Catalogue Raisonné traditionally has been prepared by either an authentication board or a recognized expert of a particular artist’s works.

2

Authentication boards are developed by foundations or other organizations to establish authentication standards for a given artist’s works. Originally, the authentication boards were set up at the request of an artist or his heirs to protect the works upon his or her death. Ideally, they would provide accurate and timely opinions to potential buyers and sellers. This would provide stability for the art market and discourage the production of fraudulent pieces of the artist’s work. Some examples of foundations are ones that were created for Pollock, Warhol, Motherwell, Giacometti, Calder, Basquiat, Lichtenstein, Margritte, Picasso and Mapplethorpe.

The cost of lawsuits has caused certain foundations (e.g., Warhol Authentication Board) to disband because the foundation did not want to incur the cost of litigation or cost of insuring against the expense of litigation. Foundations are also refusing to create new catalogue raisonné or include updated supplements to already published catalogues. Some are moving to online catalogues if they are going to continue them at all.

These recent trends raise questions about what, if any, responsibility the foundations have to the current owners of the artist’s works. There is also a need for the experts to be able to express their opinions without the fear of being sued. Recent quotes from various foundations show the differing views:

“The authentication board only gets a work if an owner wants to sell it, while the catalogue raisonné is an ongoing project on which we spend more than a Million dollars a year in research, so it's a very different process, one that is completely focused on scholarship as opposed to the market. We're not here to serve any collectors’ financial interests.” Joel Wachs, President of Andy Warhol Foundation, http://www.artlyst.com/articles/andy-warhols-pop-empire-a-legacy-of-greed-and-mismanagement

“I believe that any foundation, part of whose purpose is compiling a catalogue raisonné, should be taking an active role. It is important to distinguish real versus fake. Fakes undermine the integrity of an artist’s work.” Jack Flam, President of Dedalus Foundation, http://www.artnews.com/2012/02/28/a-matter-of-opinion/

“When it came time to renew our very large insurance premium, we began to ask ourselves, ‘Is this a wise use of assets to protect the core purpose of the foundation?’” Jack Cowart, Executive Director of Roy Lichtenstein Foundation, http://www.artnews.com/2012/02/28/a-matter-of-opinion/

Catalogues Raisonnés

A catalogue raisonné is a compilation of the works created by given artists. It should be a complete listing of the artist’s works with nothing omitted. The collector or owner of a work of an artist submits the work to the catalogue committee who studies it

3

and reviews it before deciding whether to include or reject. Factors that are considered by a catalogue committee are:

(a) Connoisseurship, the close visual analysis to determine whether the work looks and “feels” like a work by the subject artist;

(b) Provenance, which is the ownership and possession history since leaving the artist’s studio;

(c) Historical Context or how the work fits in with other works done by the artist around the supposed time of creation;

(d) Forensic Analysis to determine the history of the work.

Catalogues provide valuable resources for scholars, collectors, and art dealers.

III. The Experts

There is an ongoing dispute about the First Amendment rights of the experts.

“[T]he art community should work with the state’s legislature to find a way to strengthen [free speech] laws,” . . . so that “experts and scholars can express their opinions without being intimidated or even silenced by the threat of litigation.” Jack Flam, President of Dedalus Foundation, http://www.artnews.com/2012/02/28/a-matter-of-opinion/

“[E]xperts should make a reasonably full recitation of the facts upon which their opinion is based.” Ronald D. Spencer, Protection from Legal Claims for Opinions About the Authenticity of Art, Spencer’s Law Art Journal, May 21, 2013.

The laws on authenticity are different in different countries. In the United States, no one has a legal right to decide whether work is authentic or not. In the European Union, experts are designated by courts as holders of the moral right (“droit moral”) of control over works, including the right to challenge authenticity.

Among the more common claims that are made against experts who have expressed an opinion about authenticity are:

Failure to exercise reasonable care Product disparagement or defamation Negligent misrepresentation False advertising Tortuous interference with prospective business advantage Breach of contract

4

Antitrust

For anyone who does undertake to provide expert opinion or appraise, they

should be careful to describe what they are providing and disclaim what they are not.

“Appraisers should be clear to their clients about what they are undertaking to do . . . but they should be equally clear about what they are not undertaking to do. Typically, that means making plain that the appraiser is not providing opinions . . . on such matters as authenticity, title, condition, and other such issues even though they may affect value . . . . [T]he appraiser should take those factors into account.” New York City Bar Association, Understanding Due Diligence, Including Matters of Authenticity, Art Law 101: The Basics, October 25, 2012.

This is a very fine line to walk between taking authenticity into account in determining value versus giving an opinion about authenticity.

IV. Causes of Action

Failure to Exercise Reasonable Care

What can an expert do to protect himself or herself from liability? A Black letter law definition of reasonable care is:

“As a test of liability for negligence, the degree of care that a prudent and competent person engaged in the same line of business or endeavor would exercise under similar circumstances. Generally, reasonable care is the application of whatever intelligence and attention one possesses for the satisfaction of one's needs. The term is always relative, depending on the particular circumstances. What is reasonable care in one case (for example, involving an adult) might be gross negligence in another (for example, involving an infant).” -CARE, Black's Law Dictionary (10th ed. 2014)

In a tort negligence lawsuit, the court will first look to see if there is a duty and did the defendant breach that duty. If a breach of duty has occurred, then the court determines the extent of the injury and whether breach was the proximate cause of the injury?

Other torts that might be claimed are:

(a) Product Disparagement: “False and injurious statement that discredits or detracts from the reputation of another’s property, product or business.” - Black’s Law Dictionary (10th ed. 2014);

(b) Defamation: “1. Malicious or groundless harm to the reputation or good name of another by the making of a false statement to a third person. If the alleged

5

defamation involves a matter of public concern, the plaintiff is constitutionally required to prove both the statement's falsity and the defendant's fault. 2. A false written or oral statement that damages another's reputation.” Black's Law Dictionary (10th ed. 2014);

(c) Misrepresentation: “Any statement by words or other conduct that, under the circumstances, amounts to an assertion that is false or erroneous, i.e., not in accordance with the facts.” Black’s Law Dictionary (10th ed. 2014);

(d) Negligent Misrepresentation: “The act or an instance of making a false or misleading assertion about something, usu. with the intent to deceive. The word denotes not just written or spoken words but also any other conduct that amounts to a false assertion. 2. The assertion so made; an incorrect, unfair, or false statement; an assertion that does not accord with the facts.” Black's Law Dictionary (10th ed. 2014);

(e) False Advertising: “[I]n commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities.” The Lanham Act, 15 USCA 1125(a)(1)(B);

(f) Tortious Interference: Occurs when a person intentionally damages the plaintiff’s existing or prospective contractual or other business relationships;

(1) Tort: two categories specific to: (A) Contractual relationships, irrespective of whether they involve business; (B) Business relationships, irrespective of whether they involve a contract; (i) Determine if the tortfeasor acts to prevent the plaintiff from successfully establishing or maintaining business relationships; (2) Elements: (A) Existence of valid business relationship, or plaintiff’s reasonable expectancy of entering into a business relationship; (B) Defendant’s knowledge of relationship, or of expectancy of entering into relationship; (C) Intentional interference by defendant, inducing termination of relationship, or preventing expectancy of entering into relationship; (D) Damage to plaintiff as a result of the interference; (g) Breach of Contract: “A violation or infraction of a law, obligation, or agreement, esp. of an official duty or a legal obligation, whether by neglect, refusal, resistance, or inaction.” Black's Law Dictionary (10th ed. 2014);

6

(h) Breach of Warranty: A failure of a statement or agreement by a seller of property which is a part of the contract of sale, when the truth of the statement is necessary to the validity of the contract; (1) Includes express and implied warranties; and (2) Predominant challenge: the art is inauthentic; (i) Antitrust law: “Law intended to promote free competition in the market place by outlawing monopolies.” Antitrust law seeks to make enterprises compete fairly. (1) Antitrust claim: Authentication boards have the power, through determinations of authenticity, to manipulate supply and the market for a given artist = monopolization. (2) Elements:

(A) Presence of monopolistic practice;

(B) Person injured in his business or property;

but see Gilbert v. Indiana, S.D.N.Y., March 2, 2012.

V. Important Cases – See Addendum Warranty: see Greenwood v. Koven, 92 Civ. 2574 (CSH), 1993 U.S. Dist. LEXIS 18272 (S.D.N.Y. Dec. 29, 1993); on reconsideration, 880 F. Supp. 186 (S.D.N.Y. 1995) Breach of Contract: see Greenberg Gallery Inc. v. Bauman, 817 F. Supp. 167 (D.D.C. 1993), aff’d without opinion, 36 F.3d 127 (D.C. Cir. 1994); Liability of Authentication Committees: see Thome v. The Alexander & Louisa Calder Foundation et al., 890 N.Y.S. 2d 16 (First Dept. 2009); see Simon-Whelan v. The Andy Warhol Foundation for the Visual Arts, Inc., No. 07 Civ. 6432, 2009-1 (S.D.N.Y. 2009) - Dismissed in 2010; see Killala Fine Art, Ltd. v. Julian Weissman et al., No. 11-cv-0702 (S.D.N.Y., filed Feb. 1, 2011); see Vitale v. Marlborough Gallery, The Pollock-Krasner Foundation et al., 32 U.S.P.Q. 2d 1283 (S.D.N.Y. May 7, 1994); Liability of Sellers: see Tony Shafrazi Gallery Inc. v Christie’s Inc., No. 112192/2007 (N.Y. Sup. Ct. Nov. 17, 2008); on reconsideration, 2009 N.Y. Misc. Lexis 2428 (N.Y. Sup. Ct. 2009); summary judgment granted, 2011 N.Y. Misc. LEXIS 5578 (N.Y. Sup. Ct. 2011).

7

VI. Possible Solutions

In the United States, federal law is designed to protect an artist in claiming that the artist created the work and also to prevent the use of the artist's name on any work that he or she did not create.

Visual Artists Rights Act of 1990 (VARA), 17 U.S.C. §106A: “(a) Rights of attribution and integrity. Subject to section 107 and independent of the exclusive rights provided in section 106, the author of a work of visual art--

(1) shall have the right-- (A) to claim authorship of that work, and

(B) to prevent the use of his or her name as the author of any work of visual art which he or she did not create . . .

(b) Scope and exercise of rights.--Only the author of a work of visual art has the rights conferred by subsection (a) in that work, whether or not the author is the copyright owner. The authors of a joint work of visual art are co-owners of the rights conferred by subsection (a) in that work.” 17 U.S.C.A. § 106A (West).

VARA is the first and only federal legislation giving certain "moral rights" to artists

regardless of who owns the physical artwork. This legislation was enacted to bring the United States into compliance with the Bern Convention regarding international copyright protection. Moral rights are more common and extensive in Europe.

Some key facts about VARA:

VARA only applies to visual art, i.e., paintings, drawings, prints, sculptures, still photographic images produced for exhibition. Any “work made for hire” is excluded. The theory is that the party that commissions the work (not the artist) is the creator.

VARA encompasses two basic rights: (1) the right of attribution and (2) the right of integrity.

Right of Attribution: Artists have the right to claim ownership of their work and to disclaim ownership of a work if it is distorted, mutilated or otherwise modified such that it would prejudice the artist's reputation.

Right of Integrity: Artists have the right to prevent or claim damages for any intentional distortion, mutilation or other modification of their work that would be prejudicial to the artist's reputation and any intentional or grossly negligent destruction of the work of recognized stature.

VARA rights can be waived by artists in writing. In Europe, artists cannot waive their rights.

8

VARA rights only exist for the lifetime of the artist. If a work is created by more than one artist, the rights are extinguished upon the death of the last surviving artist.

VARA applies irrespective of who holds the copyright to the work.

There have been only a handful of cases arising after the passage of VARA. The Act has come into play most often for commissioned public sculptures. The best-known case is Carter v. Helmsley-Spear, 71 F.3d 77 (1995) which held that two sculptures created in the lobby of a building were created as a "work for hire" and thus did not qualify for VARA protection. Some individual states, such as California and Massachusetts, have their own moral rights laws. There has been no determination yet of whether the federal VARA law preempts these state laws.

Federal law also provides relief in the form of a claim of false advertising. "Any person who . . . [i]n commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities shall be liable in a civil action . . ..”. Lanham Act, 15 U.S.C.A. § 1125(a)(1).

Proposed legislation may also provide some guidance. There is a proposed amendment to the New York Arts and Cultural Affairs Law which protects an expert who renders an opinion of authenticity in good faith (the expert is defined in the statute as an "Authenticator"). The Authenticator may not have any personal financial interest in the artwork other than a fee for services. Any civil action brought against the expert must claim with specificity the facts sufficient to support the claim asserted and must then prove elements of the claim by clear and convincing evidence. This legislation was passed by the Senate in New York State on April 11, 2016, but is still awaiting action by the Assembly in New York State.

VII. Impact of Controversies

In 2005, the Lichtenstein Foundation bought $5 Million of liability insurance.

“Why should we go stand in front of a speeding car? We decided it’s not the role of the Roy Lichtenstein Foundation to deal with the art market’s authenticity issues.” Jack Cowart, Executive Director of Roy Lichtenstein Foundation.

Even silence by experts can result in a lawsuit. The owner of Basquiat’s Fuego Flores, 1983, sued the authentication board demanding an opinion or payment of $5 Million in damages. The work was later ruled as authentic and sold at auction for $1,565,000 in 2009. See Gerard De Geer, et al. v. Authentication Committee, et al., (N.Y. Sup. Ct. 2008).

Some foundations and museums that have maintained traditional catalogues raisonnés are now choosing to provide only online catalogues if they continue to provide

9

at all. Museums are including disclaimers such as the following from Noguche Museum:

"What we are presenting is a combination of completed research and research pending . . . We are very clear that 'research pending' does not guarantee inclusion in the final catalogue raisonné and that we have the ability to remove artworks if new information comes to light."

There are few solutions to the problems of proving authenticity. A consideration you may think about exploring is to purchase title insurance on any new artwork purchase. Until better answers are found or legislation is developed and enacted, art collectors and their legal advisors should continue to pay attention to authentication issues, and "caveat emptor" is still alive and well.

1

ADDENDUM SUMMARY BRIEFS OF IMPORTANT CASES

De Sole v. Knoedler Gallery, L.L.C., 974 F.Supp.2d 274 (S.D.N.Y. 2013)

Facts

Knoedler Gallery (“Knoedler”) obtained art from Glafira Rosales, an art dealer who claimed to have access to a collection of “masterworks” from a collector she referred to only as “Mr. X.” Amy Freedman was president and director of 8-31 Holdings, Inc., Knoedler’s sole member. Knoedler sold paintings purchased from Rosales to several customers, including works supposedly created by Jackson Pollock, Mark Rothko, William de Kooning, and Robert Motherwell. Knoedler sold almost 40 works from Rosales for approximately $60 Million.

One customer, Jack Levy, bought a painting supposedly created by Jackson Pollock from Knoedler for $2 Million in 2001. However, the sale was conditioned on obtaining a review verifying its authenticity from the International Foundation for Art Research (“IFAR”). The report stated it could not positively attribute the work to Pollock and that the provenance of the work was questionable. Knoedler cancelled Levy’s sale and refunded his price, but never again submitted a work obtained from Rosales to IFAR.

In 2008, the Dedalus Foundation, responsible for the Robert Motherwell catalogue raisonné, asserted its belief that seven works brought by Rosales to Knoedler were forgeries. Knoedler requested details from Rosales about the original collector of the works, which Rosales refused. Knoedler completed forensics tests on two of the works, which concluded they were inauthentic (“the Orion report”). After meeting with Rosales, Knoedler dismissed the Orion report as conjecture.

A grand jury subpoenaed Freedman and Knoedler in 2009 and Freedman was fired. Knoedler stopped selling Rosales’s works and became unprofitable, eventually closing.

Plaintiffs Domenico De Sole and Elenaore De Sole bought a supposed Rothko painting from Knoedler in December 2004 for $8.3 Million. Rosales had provided the “Rothko.” After reading a news article about Knoedler’s closing, the De Soles had their “Rothko” tested, which proved it was a fake. De Soles filed suit against Knoedler, Freedman, Rosales, and Jaime Andrade (the employee who introduced Rosales to Knoedler), alleging fraud, violations of the Racketeer Influence and Corrupt Organizations Act (RICO), aiding and abetting fraud, and fraud conspiracy. All defendants move to dismiss.

Issue

Whether the De Soles, as purchasers of a forged Rothko painting for $8.3 Million from Knoedler, have adequately alleged their various fraud and RICO claims?

2

Holding

Yes. The De Soles have sufficiently pleaded violations of RICO, a RICO conspiracy, fraud, fraudulent concealment, and aiding and abetting fraud. Only the conspiracy to commit fraud claim will be dismissed as duplicative.

Discussion

Plaintiffs’ fraud claims are not time-barred by their 2004 purchase of the “Rothko” because they had no reason to think their painting was not authentic at that time. Freedman unequivocally assured the plaintiffs the “Rothko” was authentic and the plaintiffs were not put on inquiry notice.

RICO Claims

Plaintiffs’ allegations are sufficient to allege the existence of a RICO enterprise and that Freedman, and by extension, Knoedler, participated or directed the alleged racketeering enterprise. The allegations plead facts that demonstrate Freedman probably knew she was making false statements (for example, by asserting details about Rosales’ source of the artwork). Plaintiffs’ allegations against Rosales and Andrade are also sufficient to demonstrate their participation in the alleged racketeering enterprise.

The alleged acts of wiring money to Knoedler by consumers including the De Soles, Howard, and Lagrange to purchase the forged art constitute predicate acts of “closed-ended continuity” and thus plaintiffs sufficiently plead racketeering activity. Moreover, plaintiffs satisfy the injury requirement by purchasing art that later turned out to be forged.

Further, the De Soles’ claim for RICO conspiracy as to Knoedler, Freedman, Rosales, and Andrade is sufficient to show they conspired to sell forged art and knew of the general nature of the conspiracy.

Fraud

Plaintiffs’ fraud claims against Freedman and Knoedler are sufficient. Fraud requires “reasonable reliance” upon a misrepresentation made by a defendant. Defendants’ argue that failure to investigate the art prior to purchase defeats reasonable reliance, but this argument is invalid because this not a matter of law that can be resolved at this stage. Additionally, because plaintiffs’ conspiracy to commit fraud claim is duplicative of their fraud claim as to Freedman and Rosales, it will be dismissed. However, the conspiracy claim as to Andrade and Rosales will continue.

Fraudulent Concealment

Plaintiffs’ allegations are sufficient under either theory that defendants made an ambiguous statement or acted knowing the other had mistaken knowledge.

3

Aiding and Abetting Fraud

Plaintiffs’ allegations are sufficient to show the critical role Andrade and Rosales played in the fraud, because (1) Andrade introduced Rosales to Freedman and helped create a false provenance story regarding the art, and (2) Rosales provided the counterfeit art.

Warranty

Greenwood v. Koven, 880 F.Supp. 186 (S.D.N.Y 1995)

Facts:

Jane Koven purchased a pastel purportedly created by Georges Braque, a French painter, from A.P. Rosenberg & Co. in 1948. In December 1989, Koven entered into a Consignment Agreement with Christie’s to sell the work. Christie’s internal inspectors verified the pastel was authentic. After an auction in May 1990, Diamonstein bought the pastel at an auction. Christie’s assured Diamonstein of the pastel’s authenticity, but Diamonstein demanded additional verification by a scholar.

Christie’s sent the pastel to Quentin Laurens, son of Claude Laurens, the designee who held the droit moral for Braque. In January 1991, Quentin Laurens rejected the pastel’s authenticity.

Christie’s rescinded the sale of the pastel to Diamonstein, refunded the price, and sought the proceeds from Koven. Koven refused.

As subrogees, the Underwriters (Christie’s insurer) sued Koven, claiming she breached the Consignment Agreement by refusing to refund Christie’s after the sale’s rescission. Koven filed a third-party complaint, claiming Christie’s had breached the Consignment Agreement and its fiduciary duty of undivided loyalty towards Koven by rescinding the sale and seeking Laurens’ advice.

The court denied the summary judgment motions made by the Underwriters and Christie’s in December 1993. The Court held Christie’s actions in investigating the authenticity of the pastel were to be measured by a standard of objective reasonableness.

Third-party defendant Christie’s filed motion for reconsideration of the court’s denial of Christie’s motion for summary judgment. The Underwriters and Christie’s argue that the Consignment and Limited Warranty Agreements governed Christie’s actions and thus Christie’s owed no fiduciary duty to Koven.

Issues:

(1) Whether Christie’s breached a fiduciary duty to Koven by seeking verification of the pastel’s authenticity, per Diamonstein’s request?

4

(2) Whether Christie’s action and rescission of the sale to Diamonstein violate Christie’s obligations to Koven under the Consignment Agreement?

Holdings:

(1) Christie’s did not breach a duty to Koven when it sought to investigate Diamonstein’s complaints regarding authenticity.

(2) Christie’s acted in good faith in deciding to rescind the sale to Diamonstein and thus did not violate the Consignment Agreement’s terms.

Summary judgment for the Underwriters granted for her breach of the Consignment Agreement. Summary judgment granted to Christie’s on Koven’s third-party complaint because Christie’s did not breach a duty to Koven.

Discussion:

(1) Whether Christie’s breached a fiduciary duty to Koven by seeking verification of the pastel’s authenticity, as raised by Diamonstein?

No, Christie’s did not breach a duty to Koven when it sought to investigate Diamonstein’s complaints regarding authenticity. Christie’s was Koven’s agent, and as such is required to act as a fiduciary and owed the duty of undivided loyalty to its principal. However, an agreement may modify an agency relationship’s terms. Only if Christie’s acted in a way that was not agreed to would Christie’s actions be deemed improper. Koven agreed to Christie’s potential investigation of the pastel per the Consignment Agreement that was subject to the Conditions of Sale and Limited Warranty that governed Christie’s and Diamonstein’s relationship. The Limited Warranty guaranteed the pastel’s authenticity to Diamonstein. Koven knew or should have known about Christie’s conflicting loyalty to the buyer from the contract and New York case law that favors such warranties. Additionally, specific language of the Consignment Agreement authorized Christie’s to seek experts after a sale.

(2) Whether Christie’s action and rescission of the sale to Diamonstein violate Christie’s obligations to Koven under the Consignment Agreement?

No. Christie’s argued the proper standard of care in determining whether to rescind the sale is “complete discretion,” while Koven argued an implied covenant of good faith that implies an objective reasonableness standard. While the Consignment Agreement is subject to an implied standard of good faith and fair dealing, the appropriate standard is a subjective standard of dissatisfaction, according to the language of the Consignment Agreement (Christie’s had the “sole judgment” to rescind the sale). Christie’s was obligated to act in good faith—it was required to honestly believe it might be subject to litigation prior to rescinding the sale. Looking at the facts most favorable to Koven, there is no evidence Christie’s decision to rescind the sale was made in bad faith.

5

Breach of Contract

Greenberg Gallery, Inc. v. Bauman, 817 F.Supp. 167 (D.D.C. 1993)

Facts:

Klaus Perls sold a mobile by Alexander Calder entitled “Rio Nero” to Lionel Bauman in 1967, who later bequeathed it to his daughter, Patricia Bauman (“Bauman”). Palmer Gallery exhibited the mobile. Bauman contacted Perls to confirm the 1967 sale, and the Palmer Gallery sent a transparency of a photo of the mobile to Perls as documentation. Perls confirmed the sale and sent the invoice of the 1967 sale to Bauman, who then passed it to the Palmer Gallery. The owners of the Entwistle Gallery visited Bauman, and Bauman told them she might wish to sell it. In 1990, Entwistle sold the mobile to Greenberg for $500,000 and furnished him the transparency and the 1967 invoice.

The co-owners of the mobile (Greenberg and other art dealers) (“plaintiffs”) noticed problems with the mobile’s movement, and after comparing it to an archival photo furnished by Perls, concluded the mobile was different. They sent the mobile to Perls, who concluded the mobile was not an authentic Calder after a 10-minute inspection.

Bauman refused to rescind the contract. Defendants are the seller, L&R Entwistle and Co. Ltd. (“Entwistle”) and Bauman. Plaintiffs sued for fraud, breach of express warranty, and mutual mistake of fact. The parties tried the case to the bench.

Issues:

Whether the plaintiffs carried their burden to prove the Rio Nero was not authentic?

Holding:

No. Plaintiffs did not prove by a preponderance of the evidence that the mobile is not the authentic Rio Nero by Calder.

Discussion:

Plaintiffs rely on testimony by expert Klaus Perls, who was Calder’s exclusive dealer. However, Perls only inspected the mobile once for a maximum of 10 minutes and then again for a couple of minutes at his deposition, after not seeing the mobile for 23 years. Perls’ cursory, conflicting testimony, combined with the difficulties of comparing a three-dimensional mobile to a photo, shows that plaintiffs’ evidence is inconclusive. Moreover, the clear provenance and invoice from Perls leads to the inference the mobile was authentic and plaintiffs did not present evidence of how this supposed “copy” was made or substituted for the authentic mobile. Thus, it is more likely than not that the mobile is actually the original Rio Nero.

6

Liability of Authentication Committees

Thome v. Alexander & Louisa Calder Found., 70 A.D.3d 88 (N.Y. App. Div. 2009)

Facts:

In 1975, plaintiff contacted renowned artist Alexander Calder about re-creating a 1936 theatrical stage set that had been destroyed. Calder agreed and approved the plans for the re-created set (“the Work”). Calder died before he could see the Work. In 1997, plaintiff decided to see the Work and asked for authentication from defendant, the Alexander & Louisa Calder Foundation. The Foundation acknowledged receipt of plaintiff’s documentation, but did not include the Work in Calder’s catalogue raisonné. Plaintiff’s complaint asserts that without inclusion in the catalogue, the Work is unmarketable because exclusion essentially means the work is not authentic. Plaintiff also asserts that in 1997, defendant Alexander S.C. Rower made assurances the Work would be included. In 2007, plaintiff sued the Foundation for a judgment declaring the work to be authentic, a mandatory injunction for the Work’s inclusion in the catalogue raisonné and damages for breach of contract, tortious interference with prospective business advantage, and product disparagement.

Issue:

Whether the Foundation owes plaintiff a duty to authenticate Calder’s stage sets?

Holding:

No. The Foundation owed no duty to plaintiff for the causes of action asserted.

Discussion:

Mandatory Injunction Including the Work

Because creating a catalogue raisonné is a voluntary act, neither its creation nor its choice of works included creates any legal obligations. Plaintiff indirectly received a rejection of his submission of the Work by not receiving a response and he is not entitled to a different response.

Declaration of Authenticity by the Court

Because determinations of authenticity are subjective findings of fact, a declaratory judgment is inappropriate. Declaratory judgments are meant to resolve parties’ legal rights and courts are ill-suited to make meaningful determinations of authenticity that would affect the art market generally. Moreover, a court determination of authenticity would not resolve plaintiff’s dispute because his inability to sell is a result of the Foundation’s exclusion of the Work, not the court’s.

Breach of Contract

7

The Foundation’s invitation to submit applications for inclusion into the catalogue raisonné is too vague to be considered an offer and thus, plaintiff’s application did not constitute an acceptance. Moreover, the breach of contract claim is barred by statute of limitations.

Product Disparagement

The Court would have to significantly expand the law to treat the Foundation’s lack of response as a publication to a third person, which is a required element in the tort of product disparagement. However, the tort is time barred by the statute of limitations.

Tortious Interference with Prospective Business Advantage

Plaintiff does not assert defendant undertook actions solely to harm him, a required element of the cause of action. In any case, this claim is time-barred by the statute of limitations.

Officers’ and Trustees’ Duties

Defendants did not owe a fiduciary duty to plaintiff because being the sole decision-maker of authenticity of an artist’s work does not create legal obligations to take steps regarding authentication. Moreover, this claim is time-barred by the statute of limitations.

Conflict of Interest/Donnelly Act

Plaintiff asserts the Foundation did not authenticate the Work in order to buy it for itself at a cheaper price, which falls under New York’s antitrust statute entitled the Donnelly Act. Because plaintiff does not allege a conspiracy between two or more entities or that it had the economic impact of restraining trade and it is time-barred by the statute of limitations, this claim fails.

Qualified Immunity

The Not-For-Profit Corporation law entitles the individual defendants to qualified immunity, thus the complaint cannot proceed against them.

Liability of Authentication Committees

Simon-Whelan v. Andy Warhol Found. for the Visual Arts, Inc., No. 07 Civ. 6423 (LTS), 2009 WL 1457177 (S.D.N.Y. May 26, 2009)

Facts:

In 1989, plaintiff purchased a painting referred to as Double Denied purportedly created by Andy Warhol. Plaintiff alleges that the Estate of Andy Warhol (“the Estate”) and the Andy Warhol Foundation for the Visual Arts (“the Foundation”) had previously

8

authenticated Double Denied. Plaintiff alleged that Vincent Fremont (executor of the Estate) urged plaintiff to submit Double Denied to the Andy Warhol Authentication Board (“the Board”) after plaintiff offered to sell it in 2001. Plaintiff signed the required Submission Agreement, submitted Double Denied, and was rejected. Fremont urged plaintiff to resubmit after providing additional documentation, and plaintiff complied in 2003. Double Denied was once again denied, which the Board explained in a letter. Plaintiff alleges that because he was forced to sell Double Denied at a fraction of the price and exclusion from Warhol’s catalogue raisonné represented it as a fake, the market value of Double Denied diminished.

Plaintiff sues the Foundation, the Board, Fremont, the Board, and others for a declaratory judgment that the Submission Agreement is unenforceable; for declaratory, injunctive, and monetary relief as to claims under the Sherman Antitrust Act, the New York Donnelly Act, and the Lanham Act; as well as for fraud and unjust enrichment. Defendants filed a motion to dismiss.

Issue:

Whether defendants’ rejections of Double Denied as authentic are sufficient to allow plaintiff to recover on antitrust, Lanham Act, fraud, and unjust enrichment claims?

Holding:

Yes and no. Plaintiff’s antitrust claims for price inflation are dismissed for lack of standing. The Lanham Act claim pertaining to the omission of Double Denied from the catalogue raisonné is dismissed. Defendants’ motion to dismiss is denied as to all other claims.

Discussion:

Declaratory Judgment That Submission Agreement Was Invalid

Defendants cannot use the Submission Agreement to protect them where the underlying action involves intentional wrongdoing. Because plaintiff has sufficiently alleged he was fraudulently induced into signing the Agreement, defendants’ motion as to the declaratory judgment claim is denied.

Antitrust and Donnelly Act Claims

Plaintiff has successfully alleged a conspiracy involving the Foundation and the Board, the sole authenticating bodies of Warhol works in order to restrict competition in the Warhol market. This restraint raises prices of the Foundation’s Warhol works such that galleries and museums must choose their works and has a danger of monopolizing the market, thus violating Sections One and Two of the Sherman Act. However, plaintiff failed to allege any injury as a result of price inflation by the conspiracy because he did not purchase the work from the Foundation, sold it to the Foundation, or obtain recognition of authenticity from the Board. Further, his antitrust claim premised on the

9

purchase price of Double Denied will be dismissed because they are time barred by the statute of limitations.

However, plaintiff’s allegations regarding antitrust monopolization and market restraint grounded upon the Board’s second denial of the work may proceed because of the “continuing conspiracy exception,” which starts the statute of limitations clock over again due to the alleged repeated antitrust violation.

Lanham Act Claim

Plaintiff sufficiently alleged a Lanham Act violation pertaining to defendants’ letters. It is unclear whether the letters were mere statements of opinion (and thus outside of the Act). However, plaintiff’s Lanham Act claim fails as to exclusion from the catalogue raisonné because he failed to allege a connection of the catalogue to “commercial advertising or promotion.”

Other Claims

Plaintiff’s claim for fraud survives because plaintiff stated with sufficient particularity that Fremont fraudulently induced plaintiff to submit Double Denied for authentication, while Fremont knew of the certain rejection. Plaintiff sufficiently pled allegations for unjust enrichment, including that defendants profited at the expense of plaintiff. Plaintiff’s claims regarding Fremont in his official capacity also survive.

Liability of Authentication Committees

Killala Fine Art, Ltd. v. Weissman, No. 11 CIV 00702 (RJS), 2011 WL 8200713 (S.D.N.Y. July 28, 2011) (Trial Pleading)

Third-Party Complaint

Settled 10/6/2011

Nature of the Action:

The following is a description of the allegations made in a third-party complaint filed by Defendants/Third-Party Plaintiffs Julian Weissman and Julian Weissman Fine Art, L.L.C. (“Weissman”) against Third-Party Defendants Glafira Rosales and Glafira Rosales Fine Art, L.L.C. (“Rosales”).

Weissman and Rosales have worked together in selling art since 1998. In 2006, Rosales provided a painting she asserted was made by Robert Motherwell to Weissman, who in turn sold it to plaintiff Killala Fine Art, Ltd. (“Killala”). The Dedalus Foundation, Inc. (“Dedalus”) provided Weissman with an opinion of authentication, but withdrew this opinion in 2009. Killala and Dedalus have commenced action against Weissman. Weissman seeks indemnification and contribution from Rosales pursuant to

10

their indemnity agreement made in 2000 and reaffirmed in 2007 that holds each party “equally responsible” for issues involved in their transactions.

In 2006, Rosales provided Weissman with the purported Motherwell painting for Weissman to solicit buyers, and a sale to Killala resulted. Killala required authentication from Dedalus prior to the sale. After Weissman conveyed background information provided by Rosales to Dedalus, Dedalus authenticated the painting in 2009. Rosales and Weissman split the commission from the sale.

In 2011, Killala filed suit against Weissman, alleging the “Motherwell” was a forgery. Dedalus claimed against Weissman for false designation of origin, fraud, breach of fiduciary duty, and negligent misrepresentation regarding the background information he provided.

Weissman’s causes of action against Rosales are: contractual indemnification, common law indemnification, and contribution. Weissman alleges that Rosales knew Weissman would convey to Dedalus the background information she provided to Weissman about the art. She thus breached her duty of care and fair dealing and disclosure to Wissman, Dedalus, and Killala and is liable based on the indemnity agreement and the reaffirmed agreement. Weissman also alleged that all of Dedalus’ damages were the proximate result of Rosales’ acts, thus making contribution appropriate.

Liability of Authentication Committees

Vitale v. Marlborough Gallery, No. 93 Civ. (PKL) 6276, 1994 WL 654494 (S.D.N.Y. July 5, 1994)

Facts:

Plaintiff bought a painting supposedly signed by Jackson Pollock at an antique auction in 1969. She sought approval to auction the painting by Lee Krasner, Pollock’s widow. Plaintiff dropped off the painting at Marlborough Gallery (defendant) in order to meet with Krasner. While attempting to retrieve the painting the next day, plaintiff was questioned by Assistant District Attorneys from the Manhattan District Attorney’s Office as part of an art forgery case. From 1969-1974, defendant maintained possession of the painting and did not return it to plaintiff, despite her inquiries. Plaintiff retrieved her painting in 1974, and in 1978, the painting was listed in Pollock’s catalogue raisonné as a forgery. Plaintiff attempted to sell the painting, but was told by each gallery contacted they would need a letter of authentication by defendant, the Krasner Foundation, or the Krasner Committee. In 1994, plaintiff commenced this Sherman Antitrust action, seeking damages over $15,000,000. Defendant moved to dismiss.

Issue:

Whether defendant’s rejection of authenticity and publication of the painting as a forgery constitute claims under the Sherman Antitrust Act and the Lanham Act?

11

Holding:

No. Both of plaintiff’s claims for antitrust violations and the Lanham Act are barred by the statute of limitations.

Discussion:

Antitrust Claim

Plaintiff adequately states that Jackson Pollock paintings are a submarket which can be monopolized in violation of the Sherman Antitrust Act. However, plaintiff did not assert that the required element of an injury resulted from the alleged anticompetitive acts of (1) refusing to authenticate the painting, (2) failing to use reasonable means to determine authenticity, (3) ongoing preparation of another edition of the catalogue describing the painting as a forgery once again, and (4) failing to allow authentication by others outside of the Committee. Plaintiff did not attempt to have the painting authenticated by the Committee in the required time frame and thus, her antitrust claim is time barred. However, there are two exceptions to the statute of limitations in antitrust claims:

Continuing Conspiracy Exception: Plaintiff cannot recover here because she cannot show she was injured by separate antitrust violations. Plaintiff merely made subsequent efforts to deal with defendant that were a continuation of defendant’s initial refusal.

Speculative Damages Exception: Here, a cause of action would not accrue until future damages occur, if those future damages are unascertainable. Plaintiff cannot recover here because her damages, the obtainable value at an auction, can be estimated.

Lanham Act Claim

Plaintiff’s allegation of the publication of the painting in 1978 is time barred by the statute of limitations.

Liability of Sellers

Tony Shafrazi Gallery, Inc. v. Christie’s Inc., 2011 WL 6002677 (N.Y. Sup. Ct. Nov. 22, 2011), aff’d, 101 A.D.3d 654 (N.Y. App. Div. 2012)

Facts:

Tony Shafrazi purchased a painting purportedly created by artist Jean-Michel Basquiat at a Christie’s auction in 1990. In its catalogue, Christie’s represented it had acquired the painting directly from Basquiat. In 1991, Shafrazi sold the painting to Guido Orsi after showing Orsi the catalogue. Orsi sought authentication from the Authentication Committee of the Estate of Jean-Michel Basquiat, which informed Orsi the painting was a counterfeit. Orsi discovered Basquiat’s father, Gerard Basquiat (Gerard), and the

12

director of the gallery representing the estate, John Cheim, had determined the painting was “not right” several days before the initial 1990 auction. Orsi and Shafrazi sued Christie’s, with the only remaining claims for fraud and fraudulent inducement remaining. All other claims were dismissed by motion. See Tony Shafrazi Gallery Inc. v. Christie’s Inc., No. 112192/07, 2008 WL 4972888 (N.Y. Sup. Ct. Nov. 7, 2008). Defendant Christie’s moves for summary judgment.

Issue:

Whether plaintiff carried his burden to show an issue of fact that Christie’s had knowledge of the falsity of the painting and intent to defraud?

Holding:

No. There is no evidence sufficient to show that Christie’s had knowledge the painting was fake or that it intended to defraud Orsi. Defendant’s motion for summary judgment granted.

Discussion:

Plaintiff relies on testimony by Gerard that he said the painting was “not right” to an unidentified Christie’s employee. Gerard unequivocally stated he never used asserted the painting was a fake or ever communicated to anyone at Christie’s that it was a counterfeit. This evidence is insufficient to raise a contestable issue that Christie’s had knowledge that the painting was not authentic or that it had intent to defraud Orsi.

Liability of Sellers

De Sole v. Knoedler Gallery, L.L.C., 974 F.Supp.2d 274 (S.D.N.Y. 2013)

Facts:

Knoedler Gallery (“Knoedler”) obtained art from Glafira Rosales, an art dealer who claimed to have access to a collection of “masterworks” from a collector she referred to only as “Mr. X.” Amy Freedman was president and director of 8-31 Holdings, Inc., Knoedler’s sole member. Knoedler sold paintings purchased from Rosales to several customers, including works supposedly created by Jackson Pollock, Mark Rothko, William de Kooning, and Robert Motherwell. Knoedler sold almost 40 works from Rosales for approximately $60 million.

One customer, Jack Levy, bought a painting supposedly created by Jackson Pollock from Knoedler for $2 million in 2001. However, the sale was conditioned on obtaining a review verifying its authenticity from the International Foundation for Art Research (“IFAR”). The report stated it could not positively attribute the work to Pollock and that the provenance of the work was questionable. Knoedler cancelled Levy’s sale and refunded his price, but never again submitted a work obtained from Rosales to IFAR.

13

In 2008, the Dedalus Foundation, responsible for the Robert Motherwell catalogue raisonné, asserted its belief that seven works brought by Rosales to Knoedler were forgeries. Knoedler requested details from Rosales about the original collector of the works, which Rosales refused. Knoedler completed forensics tests on two of the works, which concluded they were inauthentic (“the Orion report”). After meeting with Rosales, Knoedler dismissed the Orion report as conjecture.

A grand jury subpoenaed Freedman and Knoedler in 2009 and Freedman was fired. Knoedler stopped selling Rosales’s works and became unprofitable, eventually closing.

Plaintiffs Domenico De Sole and Elenaore De Sole bought a supposed Rothko painting from Knoedler in December 2004 for $8.3 million. Rosales had provided the “Rothko.” After reading a news article about Knoedler’s closing, the De Soles had their “Rothko” tested, which proved it was a fake. De Soles filed suit against Knoedler, Freedman, Rosales, and Jaime Andrade (the employee who introduced Rosales to Knoedler), alleging fraud, violations of the Racketeer Influence and Corrupt Organizations Act (RICO), aiding and abetting fraud, and fraud conspiracy. All defendants move to dismiss.

Issue:

Whether the De Soles, as purchasers of a forged Rothko painting for $8.3 million from Knoedler, have adequately alleged their various fraud and RICO claims?

Holding:

Yes. The De Soles have sufficiently pleaded violations of RICO, a RICO conspiracy, fraud, fraudulent concealment, and aiding and abetting fraud. Only the conspiracy to commit fraud claim will be dismissed as duplicative.

Discussion:

Plaintiffs’ fraud claims are not time-barred by their 2004 purchase of the “Rothko” because they had no reason to think their painting was not authentic at that time. Freedman unequivocally assured the plaintiffs the “Rothko” was authentic and the plaintiffs were not put on inquiry notice.

RICO Claims

Plaintiffs’ allegations are sufficient to allege the existence of a RICO enterprise and that Freedman, and by extension, Knoedler, participated or directed the alleged racketeering enterprise. The allegations plead facts that demonstrate Freedman probably knew she was making false statements (for example, by asserting details about Rosales’ source of the artwork). Plaintiffs’ allegations against Rosales and Andrade are also sufficient to demonstrate their participation in the alleged racketeering enterprise.

The alleged acts of wiring money to Knoedler by consumers including the De Soles, Howard, and Lagrange to purchase the forged art constitute predicate acts of “closed-

14

ended continuity” and thus plaintiffs sufficiently plead racketeering activity. Moreover, plaintiffs satisfy the injury requirement by purchasing art that later turned out to be forged.

Further, the De Soles’ claim for RICO conspiracy as to Knoedler, Freedman, Rosales, and Andrade is sufficient to show they conspired to sell forged art and knew of the general nature of the conspiracy.

Fraud

Plaintiffs’ fraud claims against Freedman and Knoedler are sufficient. Fraud requires “reasonable reliance” upon a misrepresentation made by a defendant. Defendants’ argue that failure to investigate the art prior to purchase defeats reasonable reliance, but this argument is invalid because this not a matter of law that can be resolved at this stage. Additionally, because plaintiffs’ conspiracy to commit fraud claim is duplicative of their fraud claim as to Freedman and Rosales, it will be dismissed. However, the conspiracy claim as to Andrade and Rosales will continue.

Fraudulent Concealment

Plaintiffs’ allegations are sufficient under either theory that defendants made an ambiguous statement or acted knowing the other had mistaken knowledge.

Aiding and Abetting Fraud

Plaintiffs’ allegations are sufficient to show the critical role Andrade and Rosales played in the fraud, because (1) Andrade introduced Rosales to Freedman and helped create a false provenance story regarding the art, and (2) Rosales provided the counterfeit art.