Celebrated Chinese artist alleged that the mammoth members-only warehouse club operator had sold counterfeit limited editions of his paintings.

The plaintiff is celebrated in both the United States and internationally for his unique contributions to the art world. Cao Yong captured the true spirit of America in his limited editions of "Freedom" and "We the People," both of which were dedicated to United States heroes – its pioneers, founders and those who continue to promote peace and liberty. His art also captured the beauty of France, Italy, Hawaii and other picturesque locales.

The defendant, the world’s largest membership warehouse club chain based on sales volume, sells everything from cereals, diapers and produce to clothing, furniture and tires – all at high volume and low prices and usually bulk-packaged and marketed primarily to large families and businesses. It is not particularly known as a purveyor of fine art.

In a press release, Burkhalter Kessler Goodman & George LLP, which said it was representing Cao Yong, alleged that Costco Wholesale, Inc. had sold phony prints of his paintings in Southern California and provided buyers with faked certificates deeming them "signed and numbered by the artist." The lawyers claimed that more than a year after being accused of selling counterfeit paintings, Costco still had not notified all of the unsuspecting buyers that they may have purchased illegal knockoffs and had yet to conduct a proper investigation into the authenticity of the paintings in question. The other defendants were a Los Angeles company, Day-O Graphics Inc., suspected to have provided the prints to Costco, and Dan Luo, a former employee of Yong.

The lawsuit, brought in U.S. District Court in Los Angeles and set to go to trial this month, was recently settled. In an article by Mike Boehm for The Los Angeles Times, Yong's attorney, Eric Goodman, was quoted as saying that the artist was "happy with the resolution" but that the parties had agreed to keep the terms of the settlement private. Goodman added, however, that the settlement doesn't end Yong's concerns because having bogus prints floating around "potentially impacts the value of legitimate (ones) in circulation." Moreover, federal law gives Yong the right to seize any fakes of his work.

Goodman also added that the artist expects Costco to reimburse the buyers, although this was not part of the settlement. In response, Barry Kellman, attorney for Costco and Day-O Graphics, said by e-mail that, "Unrelated to this lawsuit, you should know that Costco guarantees ... 100 percent satisfaction (for all merchandise)."

The artist himself began to suspect that something was amiss when he learned that his work was being sold in Costco stores in California although he did not have any sales agreement with this company. He subsequently purchased prints of three of his works, priced from $1,000 to $2,165, at Costco stores. What gave them away as forgeries were the substandard frames, canvases and reproduction quality.

This case brings to the fore the issue of art licensing. License is defined as "a promise (by the licensor) not to sue (the licensee). In the area of art, a licensor may grant permission to a licensee to copy and distribute copyrighted works such as "art" (e.g., Thomas Kincaid's painting "Dawn in Los Gatos") and characters (e.g., Mickey Mouse). With such license, a licensee need not fear a claim of copyright infringement brought by the licensor.

Delving deeper into the issue, artists have an option to either assign or license their art. What is the difference? According to Richard Stim, legal editor of nolo.com, a legal website, assigning your art is like selling your house wherein you give up all ownership rights to your art, while licensing your work is like renting your house in which you temporarily transfer your rights but retain ownership of the art.

Today, as the sale of artwork grows and its licensing becomes big business, artists are advised to better understand and properly word contractual terms to achieve effective copyright protection.