We have previously covered the litigation arising out of the 2007 sale of a Rothko masterpiece; the work’s seller sued the buyer and an intermediary dealer over alleged violations of a confidentiality provision in the sale contract, after the buyer and dealer resold the piece in a highly publicized 2009 auction.  In late September, the Fifth Circuit Court of Appeals issued a decision in favor of the defendants, in an opinion that serves as a reminder about the importance of clear contracting in art transactions.

The “Red Rothko”

When Marguerite Hoffman and her husband decided to bequeath their art collection to the Dallas Museum of Art, the museum celebrated with an exhibition highlighting the works, including a stunning work by Mark Rothko.  In 2006, however, Hoffman’s husband passed away, and Hoffman decided to sell the Rothko (as permitted by the terms of the DMA bequest).  She wanted to keep the sale strictly confidential, and she thought she had a better chance of doing so if the work were sold privately, rather than at public auction.  Hoffman’s agent contacted the New York gallery L&M Arts, emphasizing the need for utmost discretion and confidentiality with regard to the sale.  L&M soon identified an undisclosed buyer of the work for $17.6 million, and assured Hoffman that the painting would “disappear” into a “very private” collection.  In the one-page letter agreement memorializing the mid-2007 sale, the parties agreed “to make maximum effort to keep all aspects of this transaction confidential indefinitely.”

In 2009, the buyer—an entity called Studio Capital, owned by a collector named David Martinez—decided to sell the Rothko at auction through Sotheby’s.  According to Hoffman, L&M executive Robert Mnuchin never mentioned to Sotheby’s the confidentiality provision contained in the underlying letter agreement.  And in the months preceding the auction, Sotheby’s featured the Rothko in promotional materials.  Although these materials did not explicitly list the Hoffmans in the work’s provenance, Sotheby’s circulated photos and statements linking the painting to the earlier DMA exhibition.  By the eve of the auction, it was clear to the art world that the Rothko on the block was the same one Hoffman had once owned; and Hoffman sued L&M, the buyer, and other related parties for breach of contract. See Docket No. 3:10-cv-00953 (N.D. Tex.).  At the auction, the Rothko sold for over $31.4 million ($13 million more than the price Hoffman had received in 2007).

The Lawsuit

The defendants moved to dismiss Hoffman’s suit, arguing that the confidentiality provision in the invoice pertained to disclosure of the terms of the 2007 private sale, but not about the fact of the sale itself. The district court disagreed, and held that the confidentiality provision was enforceable as a best-efforts clause, obligating the parties to make best efforts to keep confidential “all aspects” of the transactions, which included the very fact of the sale itself.

After discovery, all defendants moved for summary judgment.  Again, the district court sided with Hoffman, holding that a reasonable jury could find that L&M’s actions—including its failure to fully inform the buyers of their confidentiality obligations under the letter agreement, and L&M’s failure to inform Sotheby’s of the same—had been inconsistent with their contractual duties under the invoice to use “maximum effort” to keep all aspects of the sale confidential.  The court further concluded that a reasonable jury could find that the buyer breached the contract by selling and promoting the painting in a high-profile public auction.  The court also upheld Hoffman’s theory of damages, finding that she might be able to convince a jury that the Rothko painting would have sold for more than $17.6 million in April 2007 had it been offered at public auction, rather than privately.  The district court explained that the value of the confidentiality provision—the “benefit of the bargain” that Hoffman allegedly did not receive—could be measured by the difference between the actual sale price ($17.6 million) and what the painting would have sold for at public auction at that time.

Hoffman subsequently amended her complaint to add a claim against L&M for fraudulent inducement; specifically, she alleged, among other things, that L&M had misrepresented “that the undisclosed buyer was an individual and not an institution, and that the Red Rothko would ‘disappear’ into that individual’s very private European collection.”  This added claim prompted a new round of summary-judgment motions, after which the district court granted summary judgment for L&M on the fraudulent inducement claim, but again upheld Hoffman’s theory of damages on her other claims (i.e., that she would have achieved a higher price for the Rothko but for the confidentiality clause).

In late 2013, a jury heard the case and found all three defendants (L&M; the buyer, Studio Capital; and its principal, Martinez) liable on Hoffman’s breach-of-contract claims.  After trial, the district court denied judgment as a matter of law for L&M; however, the district court granted judgment as a matter of law for the Martinez defendants, holding that there was insufficient evidence that L&M even had authority to bind the Martinez defendants to the confidentiality provisions in the first place.

The Appeal

L&M filed an appeal with the U.S. Court of Appeals for the Fifth Circuit, challenging the district court’s denial of its motion for judgment as a matter of law on Hoffman’s breach-of-contract claim, arguing that there was insufficient evidence of two essential elements—breach and causation—to support the jury verdict.  L&M also argued that the jury award reflected an invalid measure of damages.  Hoffman cross-appealed, challenging, among other things: (1) the grant of summary judgment for L&M on her fraudulent inducement claim; and (2) the grant of judgment as a matter of law for the Martinez defendants on her breach-of-contract claim.  See Docket No. 15-10046 (5th Cir.).

Last month, the Fifth Circuit issued its opinion, and in doing so, handed a significant victory to the defendants in this case.  See Hoffman v. L&M Arts, — F.3d —-, 2016 WL 5431818 (5th Cir. Sept. 28, 2016).  First, it affirmed summary judgment for L&M on the fraudulent inducement.  The court reasoned, in part, that even if L&M had falsely represented that the buyer was an “individual” (not an entity), that misrepresentation had not caused her damages.  The court also explained that L&M’s representation that the work would “disappear” into a private collection was simply a prediction, more akin to a statement of opinion, as opposed to a true actionable misrepresentation about a fact.  As for Hoffman’s argument that L&M had also misrepresented that it had authority to bind the buyer, the court held that her amended complaint had not sufficiently spelled out this allegation.

Second, the appellate court held that the district court was right to enter judgment as a matter of law in favor of the Martinez defendants, and should have issued judgment as a matter of law for L&M, on Hoffman’s breach-of-contract claims.  Specifically, it examined the confidentiality clause (“All parties agree to make maximum effort to keep all aspects of this transaction confidential indefinitely”) and concluded that the “aspects of th[e] transaction” that the parties agreed to keep confidential did not include the fact of the transaction itself. The court reached this conclusion in part by examining other parts of the contract besides the confidentiality clause; in particular, it noted that “[i]mmediately after the confidentiality clause,” the agreement contained a promise that the buyer would not “hang or display the work for six months following” delivery.  The court reasoned that this language, by implication, showed the parties did not intend to forbid the buyer from displaying the painting indefinitely—even though such a display would likely effectively disclose the fact of the sale.  The court was also persuaded by testimony suggesting that resale restrictions in art transactions are usually explicit and limited to a particular time period or geographic area; and here, Hoffman was basically arguing that the parties had agreed to a resale restriction with no limits on time or place.  The court interpreted the contract to mean that the terms of the transaction were to be kept confidential, but not the fact of the sale itself; and because all of the allegedly breaching acts violated confidentiality, if at all, only by revealing that Hoffman had previously sold the Red Rothko, there had been no breach of the contract.

The appellate court also rejected the damages theory behind Hoffman’s breach-of-contract claim against L&M.  The court explained that “a benefit-of-the-bargain damages question must encapsulate the difference between what was bargained for and what was received,” which here was the value to Hoffman of the performance of the confidentiality duty, standing alone; in the court’s view, it was “far from clear that the hypothetical auction value of the Red Rothko is an appropriate proxy for the performance that Hoffman bargained for,” particularly since Hoffman also received in the deal, in addition to the sale price of the Red Rothko, other consideration (including that the buyers made a $500,000 contribution to the DMA, allowed Hoffman to keep the work for six months post-sale, and did not themselves display it for another six months).

The Importance of Clear Contracting in Art Sales

This case highlights why those who buy and sell fine art need to insist on sound legal advice and clear, detailed contracts before entering into major art transactions.  Art transactions can be motivated by many, many factors—and one buyer’s (or seller’s) priorities might be very different from another buyer’s (or seller’s).  A party might place a very high value on, for example, the identity of a buyer, or the ability to resell a work quickly, or some other factor that may not be fully appreciated by a counter-party; but if parties do not memorialize these considerations through sound contracting, they may be left both disappointed and with little recourse.

Here, Hoffman apparently clearly placed an extremely high value on maintaining her privacy and keeping both the existence and the terms of the 2007 sale confidential (a difficult goal given the work’s high profile); yet the transaction was governed only by a basic one-page letter agreement, which was probably drafted with little or no input from legal counsel.  More detailed legal vetting might have helped avoid this dispute.  For example, instead of simply relying on a rather vague commitment “to make maximum effort to keep all aspects of this transaction confidential indefinitely,” the parties could have spelled out specific, enforceable promises designed to protect Hoffman’s confidentiality (for example, through provisions expressly limiting the buyer’s ability to resell, loan, or display the work—or at least, to do so publicly—for a specified period of time, or perhaps provisions stating that the buyer must give the original intermediary dealer the right of first refusal to handle any resale privately).  It might even have been possible to negotiate and draft terms providing for some form of liquidated damages in the event of a breach of confidentiality, given that, as the court decisions in this case show, it’s difficult to quantify the monetary value of an intangible term such as confidentiality.

For those who buy and sell art, it’s worthwhile to examine their own expectations and priorities in a contemplated art deal, and seek legal advice on how to contractually protect those expectations and priorities in advance; strategic negotiation and drafting of art transaction documents may help avert disappointment—and years of costly litigation—after the fact.