wjlta

Whatever Happened to Trust Busting in Sports?

/ Washington Journal of Law, Technology & Arts / Leave a comment

By: Mayel Tapia-Fregoso

Professional sports leagues in the United States (US) have existed since the first professional baseball league emerged in 1858. Since then, Major League Baseball (MLB), the National Football League (NFL), among other leagues, have dominated US sports with little competition from other independent leagues. These sports leagues have, in large part, escaped the comprehensive antitrust regulatory scheme laid out in the Sherman Antitrust Act. Despite the law’s enforcement, sports leagues have nonetheless enjoyed soaring profits because of their monopolies over broadcasting, labor, licensing, and media rights. Recent lawsuits against Major League Baseball and the National Football League are the latest in a series of cases designed to curb these professional leagues’ power and reveal the effects sports league monopolies can have on consumers.

A Brief History of Antitrust Regulation 

In 1890, Congress passed the Sherman Antitrust Act (Sherman Act), the first federal law outlawing monopolistic business practices. Congress designed the Act to combat previously unregulated industries, such as oil. Such industries were dominated by a single company and restricted interstate commerce. The Act empowered private parties to bring lawsuits against monopolist companies to enforce antitrust laws and seek damages for violations of the Sherman Act. Today, the Sherman Act “promotes consumer welfare by enhancing economic efficiency in commerce.”

Before the First Radio, There Was . . . Sports!

Professional sports have been a core part of American culture for more than one hundred years. The National Association of Base Ball Players was founded in 1858, eventually becoming Major League Baseball in 1903. Other major sports leagues, like the National Football League formed in 1920, were founded in the following decades of the twentieth century. These entities are the primary leagues within their respective sports, and have little competition from other leagues. 

How Do Professional Leagues Fit into Antitrust Laws’ Regulatory Scheme? 

Antitrust laws are designed to regulate national sports leagues, however some leagues are structured more like economic monopolies rather than single entities. In most sports leagues, along with its assets like land, player rights, media rights, and intellectual property. These teams collude with one another to control the supply of a product to increase profits, limit competition, and dominate the market.

Leagues with antitrust exemptions and those that have evaded the Sherman Act’s reach have monopolized their respective industry (labor, media rights, region exclusivity, licensing etc.). For example, if an athlete wants to play professional baseball, an MLB team must draft or sign the player, obtaining the rights to that player. Professional baseball athletes have few other options to play professional baseball besides MLB and MLB-affiliated minor league baseball teams (MILB). MILB teams or “farm teams” are teams affiliated with specific MLB clubs whose rosters are composed of players whose rights are owned by an MLB team. MLB teams have agreements with MILB teams to develop players they have signed or drafted, some of whom eventually feed that MLB team’s roster. MILB leagues and teams exist to develop players’ talent and provide MLB teams with a steady supply of players. MILB teams do not compete with any MLB teams—they are often located in small media markets. Currently, there are nine independent leagues composed of teams not affiliated with MLB teams. However, many of these leagues, like the American Association of Professional Baseball, have specific partnerships with MLB and, coincidentally or otherwise, do not have teams in any city where an MLB team plays. 

Other leagues have faced more direct competition. Over the years, a few independent football leagues have challenged the NFL’s foothold in the market. In 1986, the United States Football League (USFL), facing bankruptcy, challenged and defeated the NFL in an antitrust lawsuit. Despite finding that the NFL prevented the USFL from securing a television contract, the jury found the USFL was not damaged “except to the extent of $1.” In 2019, Charlie Ebersol and Bill Polian founded the Alliance of American Football (AAF), which held its season during the NFL’s offseason months. Even with the backing of a billionaire investor, the AAF could not stay afloat and ultimately failed because the NFL refused to partner with the league. In March 2024, a new United Football League will try its luck taking on the NFL this Spring.

The lack of competition from independent leagues has contributed to monumental revenues for these sports leagues. The NBA earns an estimated $12 billion annually, behind MLB’s $14 billion and the NFL’s astounding $25 billion.

Recent Challenges to Sports Leagues’ Anti-Competitive Behaviors

Recently, groups of plaintiffs are wielding antitrust laws to challenge leagues’ anti-competitive behaviors. In 2023, a group of plaintiffs filed a class action lawsuit against the NFL seeking $6.1 billion in damages, alleging that the NFL clubs conspired to suppress out-of-market telecasts of football games with the NFL’s broadcast partners. NFL games are distributed to broadcasters, like Fox and CBS, through regional coverage to only a specific region; for example, each team’s home market can view the games without blackout restrictions. In the NFL, a blackout restriction is when a team’s televised game is only available for viewership in that team’s media market.  To watch their team play, out-of-market fans must subscribe to NFL & DirecTV’s streaming platform called “NFL Sunday Ticket.” However, Sunday Ticket forces subscribers to choose between paying for every out of market game or not watching at all. The plaintiffs allege that the NFL and DirecTV collusion to suppress out-of-market telecasts violate the Sherman Antitrust Act. Judge Philip S. Gutierrez approved the plaintiff’s class-action status to two groups of Sunday Ticket subscribers and denied finding summary judgment for the NFL. In his order, Judge Gutierrez stated that a reasonable jury could find that the NFL conspired with its broadcasting partner to suppress telecasts in violation of the Sherman Act. The case is now heading for trial.

This is one of many lawsuits that has challenged the business model of professional sports leagues. MLB avoided a challenge to its antitrust exemption by settling a lawsuit filed by Tri-City ValleyCats and other non-MLB affiliated minor league teams. The plaintiffs alleged that MLB clubs colluded to cut ties with certain independently owned MILB teams, like the Tri-City ValleyCats, and their MLB affiliation. The aggrieved MILB teams argued that the MLB clubs replaced them with other MILB teams owned by MLB owners. The United States Court of Appeals for the Second affirmed the lower court’s decision to dismiss the case, citing MLB’s antitrust exemption. MLB settled with the plaintiffs before the US Supreme Court had a chance to consider the case.

Professional sports have become a multi-billion-dollar industry because of sports leagues’ successful business practices, which arguably cross the line into anticompetitive behavior. The recent wave of antitrust lawsuits highlights the call by some for tighter regulation of professional sports leagues and the consequences leagues’ anticompetitive behavior can have on consumers.

Washington Supreme Court Preview: Greenberg, et al. v. Amazon.com, Inc.

/ Washington Journal of Law, Technology & Arts / Leave a comment

By: Sofia Ellington

On January 18th, 2024, The Washington Supreme Court came to the University of Washington School of Law to hear oral arguments in the case of Greenberg, et al. v. Amazon.com, Inc. The Court seeks to answer a question that will substantially affect consumers: Whether the Washington Consumer Protection Act’s (WCPA) prohibition on “unfair” acts protects against price gouging.

What is the fight about?

Plaintiffs, a class of consumers led by Alvin Greenberg, are suing Amazon in federal district court to hold the company accountable for price gouging during the COVID-19 pandemic. The complaint cites price increases of up to 1000 percent on certain items such as face masks, cold remedies, toilet paper, and baking soda. In Amazon’s reply brief, they argue that price increases are not a per se unfair practice under the Washington Consumer Protection Act (WCPA) or the Federal Trade Commission Act (FTC Act).

Whether the prohibition on unfair and deceptive practices in WCPA protects against price gouging is a question of first impression that originally came before Judge Lasnik in the United States District Court in the Western District of Washington. In certifying the question to the Washington Supreme Court, Judge Lasnik explicitly acknowledged that the complex and competing policy interests at issue influenced his decision to certify instead of making that judgment himself.

What is a Certified Question?

A certified question is a formal request by one court to another for an opinion on a question of law. In this case, it is a federal court asking the Washington Supreme Court to answer a question regarding the interpretation of a state law. While the Supreme Court Justices were visiting classes at UW Law the day before the oral argument, I had the opportunity to ask Chief Justice González how the Washington Supreme Court strategizes about answering certified questions. He told our class that the Court answers certified questions in a way that does not decide the narrow controversy at hand, but instead focuses on interpreting the law for broader applications. The court will thus presumably examine the broader implications of interpreting the WCPA to prohibit price gouging into account when making a decision. That could include policy considerations like how the market will be affected, consumer well-being, and how states across the country interpret their statutes.

Amazon’s shift from forced arbitration to Washington’s choice of law provisions

Most large technology companies, including Amazon, have forced arbitration clauses and class action waivers in their terms of service (TOS). These clauses operate to prevent potential plaintiffs from pursuing their claims in court, forcing them to take disputes to a privatized off-the-record forum where they are less likely to prevail. So how did a class action dispute against Amazon end up before the Washington Supreme Court on a certified question?

Amazon sent a brief email to customers that they were dropping their forced arbitration clause and class action waiver from its TOS after receiving a coordinated 75,000 individual arbitration claims.  A single arbitration takes less time and is more cost-efficient for corporate defendants than litigating a class action—but if thousands of people file individual arbitration demands, dealing with thousands of arbitrations is more costly than defending against a single class action.

In the absence of an arbitration clause, Amazon’s TOS now includes a forum selection clause that mandates that any user consents to litigating in Washington courts, and a choice of law clause, that reads: “By using any Amazon service, you agree that applicable federal law, and the laws of the State of Washington . . . will govern these conditions of use and any dispute of any sort that might arise between you and Amazon.” That means any consumer who wants to sue Amazon must do so under the laws of Washington State, and more importantly in this case, the WCPA.

Oral Arguments 

At oral argument, counsels for both the plaintiffs and Amazon urged the court to think about opposing policy considerations. Plaintiffs emphasized that Amazon did not dispute that they engaged in price gouging after a nationwide public health emergency was declared. Those alleged “unconscionable” price increases caused substantial injury to consumers. Their argument is that price gouging, while not currently regulated under the CPA or FTC Act, is a fundamentally unfair practice that violates the spirit of the CPA. They did not tell the court that there should be a bright line rule—instead arguing cases would proceed like other antitrust claims. This would involve asking the jury to decide on a product-by-product basis what percentage price increase violates the WCPA based on expert testimony and the totality of the circumstances. The plaintiffs concluded by asking the court to find that their facts state a claim under the WCPA.

Amazon argued that in their view, the plaintiffs are asking for something unprecedented. They urged the Court to refrain from making policy decisions that are best left to the legislature to decide. They pointed out that the WCPA is based on the FTC Act, which has been construed to not cover pricing— underscoring that, if the justices rule in favor of the Plaintiffs, they would be the first court in the nation to read such an act to limit pricing. They pointed to other states that regulate pricing through acts of the legislature, not the courts, and only to regulate certain items. Moreover, they advanced an economic argument, warning that supply and demand would be negatively impacted,  throwing off market indicators that are actually helpful to consumers.  

What does this mean for Washington courts and consumers?

In 2021, the Attorney General of Washington, Bob Ferguson, called for a bill that prohibited price gouging during an emergency. Since then, the bill has passed the state Senate but failed in the House of Representatives due to disagreements about the particulars of the act. The outcome of this litigation may push the Washington legislature to act once again on this issue to protect consumers.

At oral argument, both sides had strong policy arguments that the Washington Supreme Court will have to weigh carefully in their decision. Regardless of which way it comes out, consumers around the world will be affected by the Court’s decision. Additionally, Amazon’s choice of law provision in their TOS will undoubtedly have an outsized impact on Washington courts causing a heavier Amazon-related caseload. However, Amazon could change their TOS at any point, so it will be interesting to see how long those provisions last—especially after the outcome of this litigation.

The Making of a Myth: Big Tech, Billionaires, and the Wild West

/ Washington Journal of Law, Technology & Arts / Leave a comment
Photo by Trace Hudson on Pexels.com

By: Sofia Ellington

When former Amazon CEO, and current billionaire, Jeff Bezos and his girlfriend Lauren Sanchez appeared on the cover of Vogue in November 2023, social media was on fire, incredulous over the cover that seemed to exaggerate the tech billionaire’s biceps. Less ablaze was discussion about the setting for the photoshoot: Bezos’s ranch in West Texas. Dressed like Hollywood cowboys, Bezos and Sanchez harkened back to imagery of American film icons such as John Wayne and Clint Eastwood. While the glitzy couple may seem to be a far cry from the national icon that has come to represent rugged individualism, personal freedom, and self reliance, I argue that the choice to exhibit Bezos as a modern cowboy reveals a salient truth about the status of billionaire tech tycoons and the businesses they champion: just like the American cowboy, the law has aided in making the myth of the genius tech billionaire. Both myths demand a harder look.  

The myth of the western cowboy plays on false myths of life on the range. The archetype of heroism and self-reliance is more accurately characterized as a life sustained by government subsidy and lack of oversight. The myth of the genius tech billionaire has captured the American imagination in much the same way as the cowboy. Distrust of government overreach and spending as well as lack of resources for life’s essential building blocks like housing, school, and healthcare leads to semi-reliance on the ultrawealthy’s philanthropic escapades and leave us in awe of their romanticized entrepreneurial genius. Behind the myth are exploitative practices that implicate anti-competitive practices and concerns over consumer exploitation. 

First, we must understand the cowboy archetype. Look no further than country music for imagery of the romanticized cowboy. In his 1993 hit, “Should’ve Been a Cowboy,” the late Toby Keith croons longingly, “Go west young man, haven’t you been told? / California’s full of whiskey, women and gold.” Drawing on the promise of manifest destiny, the cowboy archetype is full of imagery of young, brave men going West to an empty landscape full of opportunity, independence and a chance to strike it rich off the plentiful natural resources. In reality, the land in the West was never unoccupied because it had been the homeland of Native Tribe’s since time immemorial, and the seemingly endless supply of natural resources was a delicate environmental balance easily disrupted by exploitation. 

Initially, Federal laws encouraged early western homesteaders to settle by offering 160 acres of federal land for only the cost of an initial filing fee. Along with those 160 acres, ranchers and homesteaders were able to claim water rights and graze their cattle on public lands at no cost. The sense of ownership over public western lands increased, and some cattle ranchers began to erect barbed wire enclosures to keep out other competing users of the land, along with other tactics that created a hostile atmosphere that helped keep competition away. 

After a long period of little federal oversight, the increasing enclosure of public land and environmental concerns over grazing practices spurred Congress to act. In 1885 they passed the Unlawful Enclosures Act and then Taylor Grazing Act in 1934. The U.S. Supreme Court’s 1895 decision in Camfield v. United States, made clear that private landowners could not make exclusive use of public lands and resources, holding a Nevada cattle rancher had violated the Unlawful Inclosures act after he fenced off nearly 20,000 acres. Additionally, the dust bowl in the midwest warned of the environmental consequences of overgrazing. The Taylor Grazing Act purported to curb future damage to the lands through establishing grazing districts and requiring grazing fees to be paid to the Bureau of Land Management. Congress must take similar legislative action to respond to the growing tech industry to help control the power that tech companies, and their billionaires, have on the economy and their consumers. 

Like a rancher’s exploitation of public lands to the determinant of other users, big tech has been able to harvest invaluable information and record breaking profits from a resource they never had to pay for: your data. Additionally, the escapades of once worshiped tech tycoons such as Bezos, Sam Bankman-Fried, Mark Zuckerberg, Elizabeth Holmes, and Elon Musk make even the biggest sycophants take pause.

In addition to the criminal proceedings some tech entrepreneurs are facing, the big tech business model is going through an antitrust reckoning thanks to the Federal Trade Commission (FTC) launching lawsuits against Amazon, Google, and Apple, to name a few, for alleged tactics that disadvantaged their rivals leading to illegal monopolies that hurt consumers. Policy on emerging technology has long prioritized the economic and social benefits of a connected world. That has left guidance on how to hold tech companies and their billionaires accountable for how they exploit user data, like early rangeland policies, severely lacking. 

Many of the provisions in the U.S. data privacy framework only minimally restrict businesses and allow for the maintenance of the status quo. Unlike Europe’s comprehensive privacy law, General Data Protection Regulation (GDPR), the United States only has a conglomeration of laws that target specific types of data. For example, the Health Insurance Portability and Accountability Act (HIPAA) does not protect your private health information broadly, it only protects communication between you and your health care provider, or other similar “covered entities.” Additionally, the Gramm-Leach-Bliley Act (GLBA) requires that financial services like loan or investment service explain how they share data and requires an opt out option, but does not restrict how the data is used. The FTC is also empowered to go after companies that violate their own privacy policy by, for example, deceiving users as to the protection their products offer. Other federal laws such as the Fair Credit Reporting Act, The Family Education Rights and Privacy Act, and the Electronic Communications Privacy Act help to fill in the universe of federal U.S. data privacy. Your state’s laws may also offer additional protections. 

In addition to frustration with a lack of coordinated data protections that tech companies regularly exploit, public blowback on lack of taxes on the ultra-wealthy and reports that billionaires became richer during the pandemic has invigorated popular distaste for billionaires and an interest in holding their companies accountable. A slew of recent lawsuits have aimed at section 230 of the Communications Decency Act, which immunizes tech companies from liability related to content posted by their users. The U.S. Supreme court however, in both Twitter, Inc. v. Taamneh and Gonzalez v. Google, have balked at holding the tech giants liable when their algorithms promote problematic content, allegedly “aiding and abetting” terrorism.  Given the intense scrutiny that billionaires and big tech have been under recently, it is no surprise that Bezos tried to invoke the beloved American cowboy fantasies of freedom from federal oversight, independence, and self-reliance on the cover of Vogue. The irony is that by invoking the myth of the cowboy, Bezos’ cosplay underscored the need for more government oversight and regulation. Just as the practices of fencing off public land and overgrazing lead to more government oversight of ranch life, public frustration with the exploits of big tech are coming to a tipping point which suggest that a breakthrough is imminent. Just last month the FTC moved to ban data brokers from selling geolocation information for “sensitive data locations” such as visits to correctional facilities or reproductive health clinics. While big tech has had the tendency to divide and isolate, it has also provided the tools for a more connected public that has the potential to collaborate in order to protect against the disastrous consequences of unchecked exploitation of public resources.

Who’s Your Drug Dealer? Snapchat and Section 230 Under Scrutiny

/ Washington Journal of Law, Technology & Arts / Leave a comment

By: Caroline Dolan

While Snapchat may no longer feel as trendy as it once was, the social media platform is alive and well. However, the same cannot be said for all its adolescent users. Snapchat’s unique filters and features attract 406 million daily active users, but the app is being dubbed “a haven for drug trafficking” by grieving parents. Numerous parents are seeking justice for their children who used Snapchat to purchase drugs unknowingly laced with fentanyl. While Section 230 would normally immunize a social media platform from civil liability and be grounds for dismissal, a Los Angeles judge has denied Snapchat’s invocation of Section 230 immunity and overruled twelve of its sixteen demurrers. In other words, the judge has determined that the causes of action asserted by the Plaintiffs have merit and will continue through the litigation process. 

A Snapshot of Section 230 

The Communications Decency Act (“CDA”) of 1996 was passed in light of the internet’s rise and Congress’s desire to protect children from exposure to dangerous content, particularly pornography. However, out of fear that platforms would overly censor themselves to avoid violating the CDA, Congress passed the Internet Freedom and Family Empowerment Act, better known as Section 230. Section 230(c) governs the liability of providers of an “interactive computer service” and states that “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” In other words, an “information content provider” like Twitter or Facebook cannot be held civilly liable for what you or your friend post. It also cannot be held liable for voluntarily moderating content in good faith. While Section 230 does not protect against federal crimes, ​​electronic communications privacy law, or intellectual property violations, it is still a wide-reaching shield and online platforms rarely hesitate to invoke it. 

The Suit Against Snap

Represented by the Social Media Victims Law Center, the Plaintiffs asserted that Snap’s product features and business choices resulted in the serious injury and foreseeable deaths of their children. The Plaintiffs alleged that Snap’s automatic message deletion, location mapping, and “quick-add” features create an inherently dangerous app and enable kids to connect with adult predators. The parents contend that Snap has been aware that the app is an “open air drug market,” yet failed to implement any meaningful changes to improve age and identity verifications or prevent foreseeable consequences. Notably, the Plaintiffs did not allege that Snap is liable for failing to eliminate or moderate the content of the third-parties selling drugs, but rather that the “feature-packed social media app” facilitates an unreasonably dangerous avenue for strangers to contact vulnerable adolescents. 

Snap demurred to all sixteen alleged causes of action and invoked general immunity under Section 230. It advocated for an extremely broad reading of the statute and asserted a “but for”/ “based on”/ “flows from” construction wherein, “if the alleged harm flows from the content provided by third parties, Section 230 applies.” In Snap’s view, it should be privy to Section 230 immunity because the Plaintiffs’ children would not have been injured but for the content of the third-party drug dealers.

The Ninth Circuit’s three-prong test established in Barnes v. Yahoo!, Inc. applies Section 230 immunity to “(1) a provider or user of an interactive computer service (2) whom a plaintiff seeks to treat, under a state law cause of action, as a publisher or speaker (3) of information provided by another information content provider.“ 

In Neville v. Snap, Inc., the judge agreed with Snap that as an (1) “interactive computer service,” Section 230 absolves it from liability as a (2) “publisher or speaker” of any (3) information posted by third-party users. However, the judge concluded that the Plaintiffs had not alleged that Snap was a “publisher or speaker.” Rather, the allegations centered on the purported unreasonably dangerous and defective product. The judge recognized the unsettled bounds of Section 230 but nonetheless found that the claims related to Snap’s product and business decisions were “independent … of the drug sellers’ posted content” and beyond Snap’s “incidental editorial functions” (e.g. choosing to publish, remove, or edit content), which Courts consistently have held as protected under Section 230.

Snapchat On The Docket

Section 230 does not have the same meaning or relevance as it did nearly forty years ago. Yet, it continues to tread through pressing issues related to AI technology, national security, and public health and safety. The Supreme Court has continued to sidestep these questions but may soon be forced to more clearly define this statute. Neville v. Snap, Inc. will seek to clarify the outer bounds of Section 230 as well as provide justice and solace to the victims’ families.

Financialization of Art: Off-the-Wall, or a Stroke of Genius?

/ Washington Journal of Law, Technology & Arts / Leave a comment
Photo by Matheus Viana on Pexels.com

By: Patrick Paulsen

One of the few universal features of human cultures is that of artistic expression. To express something creatively and aesthetically is fundamental. Just as fundamental perhaps, is the drive to bring such enterprises into the economic sphere. Of course, while some mediums of expression have long been intertwined with finance (such as plays, films, music), this blog seeks to explore the growing nexus between investing and markets for singular works of art, such as paintings, photographs, and sculptures.

Works of fine art are prohibitively expensive. With price tags reaching well over $100 million (for works by Van Gogh and Cézanne), and resales fetching anywhere from 3% to 86% net returns (for works by Warhol and Gilliam), the finances behind fine art sales have caught the eye of financiers, wealth managers, and retail investors. While scholarly conjecturing about the applicability of securities law to art sales have existed for decades, the rise of NFTs and fractional ownership services have increased the availability of, and conversation around, fine art as an investment tool.

Painting the Picture

Of all the ways to make money, why invest in fine art? While owning a masterpiece is something persons and corporations with vast resources may be interested in merely for extravagance, some reports indicate up to two thirds of fine art purchasers do so “solely as an investment to grow wealth.” Some industry insiders have even revealed that some clients “buy museum quality art, hold it in storage, and sell it for a significant profit, all without ever seeing the picture.” If fine art purchasers are missing the picture, then what is it they are seeing?

Despite major accounting firms, such as Deloitte, summarizing the characteristics of art investment as high-risk, illiquid, opaque, unregulated, with high transaction costs, at the mercy of erratic public taste and short-lived trends, 85% of wealth managers believe art and collectibles should be among those securities offered to clients (as of 2022, up from 53% in 2014).

There are several reasons why art and similar collectible classes are beneficial from an investment management perspective. First, fine art serves as excellent collateral for loan servicing. Due to their ability to be stored in centralized management facilities and high public value, art pieces provide wealth managers and high net worth individuals with appreciable assets which can be loaned against without even having to move the painting. Second, art pieces can serve as a diversification tool due to the art markets low correlation with that of stocks and bonds. This means that when traditional securities have volatile fluctuations in pricing, art collections maintain stability. And third, industry reports suggest that investing in fine art can serve a plethora of other purposes, including:

  • Hedging against inflation and currency devaluation
  • Little risk of principal loss (assuming proper due diligence)
  • Favorable tax treatment
  • Easy transfer and movement of the asset
  • Potential for revenues through exhibition loans.

Certain commentators have treated art investment as analogous to that of real estate. Noting that because paintings are physical objects, their price can be computed per square inch or square centimeter and compared to high end real estate. However, this exercise serves to emphasize the expense attached to painted “real estate.” Compare the works of Picasso, which can fetch on average $350, $1,300, and $2,000 per centimeter squared (depending on the muse) with a luxury co-op on Manhattan’s Upper East Side, priced at “only” $1.2 per centimeter squared).

Given the seemingly high barriers to entry, why would a typical retail investor care about auction prices at Sotheby’s?

Framing the Future

In the past, access to fine art investing was limited only to very rich individuals and firms, before becoming more available through boutique art collection funds. Nowadays, several companies are offering services which seek to make fine art investing available for ordinary individuals through the practice of selling fractional shares.

Masterworks, a pioneer in the field of expanding availability of investment in art, makes its portfolio of over 200 pieces (valued at over $700 million) available for individual purchase via the selling of fractional shares. Masterworks and similar firms create fractional shares by purchasing individual pieces worth millions, transferring the ownership of the asset into an LLC, and then selling individual shares of the LLC through offering registered with the SEC.

One example of this can be seen in MASTERWORKS 001, LLC, whose form 1-K on file with the SEC notes that its business purpose is to “facilitate investment in a single work of art created in 1979 by Andy Warhol.” The artwork in question, “1 Colored Marilyn (Reversal Series),” initially was securitized into 99,825 shares at an initial offering price of $20 a share. Masterworks is not alone. Other entrants into the field range from ARTSPLIT, based in Nigeria, which sells share in African art and music, to London-based Showpiece, which sell shares in fine art and collectibles.

While some see “these new investment models as a democratization of an otherwise hard-to-access market place,” both the financial sector and art world have reservations. On the one hand, the financial insiders, while increasingly hospitable, have worried about the lack of regulation and subjective pricing methods. Art as a market presents many legal concerns which ought to be addressed given its growing prominence. There are difficulties in classifying fine art as commodities or securities for regulators and state agencies. Further, due to the unique nature of the items involved, questions of forgery, title, and cultural consideration suggest that a more encapsulating legal regime is necessary going forward.

Art insiders, on the other hand, are concerned with the intrinsic conflict between art and money, as they believe entangling the two risks the incommensurable value of art once it is standardized and transformed into speculative objects. Of particular importance to lawyers, is how the sale and alienation of art pieces from given cultural heritage, interact with existing laws governing cultural and artifacts.

Final Touches

Works of cultural, historical, and aesthetic merit are increasingly being utilized as financial objects to achieve investment goals. While this process has been criticized by both the financial world and many within the art community, its growth has not been stunted. This is expected to continue, as the global art market continues to grow, and as more opportunities for individual investors to get in on the action arise. And while art financialization continues to be debated within the conversations surrounding the democratization of art, at least some benefits previously confined to the monied few, are now available to almost anyone.