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Fraud on the (art) market?

By Intellectual Property Law, Esq.

There was a decision earlier this month in a NY state court case that could have far-reaching implications for the auction houses.

In 1990 Tony Shafrazi Gallery bought a Basquiat painting at Christie's. In 1991, Shafrazi sold the work to collector Guido Orsi. Fifteen years later, in 2006, Orsi was told by the Basquiat Authentication Committee that the work was a fake. Shafrazi and Orsi brought suit against Christie's on a variety of theories, including fraud (they allege that two members of the Basquiat Committee had viewed the painting just before the 1990 auction, "determined that [it] was 'not right' and requested that Christie's withdraw it from the auction").

The court has now dismissed all of the gallery's claims on the ground that it didn't suffer any damage: since it was able to sell the work to Orsi, it has nothing to complain about. It also dismissed all of Orsi's claims on statute of limitations grounds . . . except for the fraud claims. There's no discussion of the statute of limitations as to those claims, but presumably they survived because the fraud wasn't discovered until 2006 (the suit was filed in 2007). But the more interesting fact about the case -- and the reason for the potentially far-reaching implications -- is that Christie's did not sell the work to Orsi. In sustaining the claim, the court seemed to rely on a kind of "fraud on the market" theory:

"Plaintiffs allege that when Shafrazi sold the Painting, he described it as 'Purchased from Christie's Contemporary Art ...' Plaintiffs have submitted affidavits to the effect that art purchasers rely on the expertise of a prestigious auction house such as Christie's, which they term a 'market maker,' and that when Christie's provides a warranty concerning the authenticity or provenance of a painting, the custom and practice of the art industry is that the provenance of the work of art has been firmly and permanently established. Plaintiffs allege that Orsi purchased the Painting, relying on Christie's representations. If, as plaintiffs allege, Christie's fraudulently misrepresented the Painting's provenance, and published that misrepresentation in its catalogue, which Christie's could reasonably anticipate would be relied upon by bidders at its auction, as well as subsequent purchasers, it may be liable to those who relied upon its misrepresentation" (emphasis added).

Now, in this case, it happens that there was only one degree of separation, and about a year's time, between Christie's sale and the sale to Orsi. But by the logic of the court's decision, any subsequent buyer -- no matter how remote in time, and no matter how many intervening transactions have occurred -- could potentially bring a fraud claim against an auction house as "market maker."

The decision is here. The New York Law Journal has a story here.

Full post as published by The Art Law Blog on November 17, 2008 (boomark / email).