Collecting Unpaid Royalties: Trends, Traps, and Litigation Strategies in Textbook Royalty Enforcemen
Much has been written about changes in the college textbook marketplace over the last decade. The industry has adapted to new pedagogical methods, the proliferation of digital learning materials, and profitability pressures felt by publishers -- all leading to significant innovation in the publication of learning materials. Some observers have concluded that we may be witnessing the death of the textbook as we have known it.
As the textbook publishing marketplace has changed, so too have relationships evolved between authors and their publishers. Commercial arrangements forged in the era of print media -- which were amended and extended over time to apply to the publication of new editions -- have been impacted by these industry-wide changes. In light of these developments, the traditional issues in the author-publisher relationships should be re-examined: terms related to inventory, sales, and returns; identification and allocation of royalties on compilations or derivative works; subsidiary and geographic publication rights, and record-keeping.
Textbook authors operate with significant information asymmetries to their publishing counterparties. These asymmetries of information, combined with the opacity of publisher accounting and calculation procedures, can make it difficult for an author to determine the correct amount of royalties to be paid under a publishing agreement. Given the complexities of untangling a publisher’s record-keeping, authors have increasingly turned to auditing experts as a means of determining their rightful royalties. Juli Saitz of Ankura Consulting, one such auditor, has found that, in her experience, “authors’ royalty underreporting averages from 10 to 20 percent of reported earnings.” For textbook authors with significant annual sales, that 10 to 20 percent discrepancy can become quite substantial over the years.
This article outlines some of the trends, traps, and litigation-based strategies related to these changes and authors' efforts to assure they are being paid their royalties due. How are relationships between publishers and authors changing? How do those changes impact an author’s ability to collect his or her rightful royalties? And -- when an author can’t get the required information, or a publisher refuses to pay the correct royalties -- how can auditing or collection rights be enforced through the courts?
Trends and Traps Affecting the Author/Publisher Relationship
Redefining and Manipulating the Work. Two recent innovations in the textbook industry include (1) the availability and use of eBooks along with (or to replace) hardcopy textbooks, and (2) the practice of bundling textbooks with study-guides and supplemental digital packages developed by the publisher. Particularly for authors whose initial print editions and publishing agreements pre-date these now popular forms of publication, digital innovations create questions as to how royalties should be allocated and paid. The packaging and repackaging of an author’s primary and derivative works requires close attention to publisher calculations where there are proliferating ISBNs, and royalty calculations based on the pricing and portion of a work attributable to an author.
In Gitman v Pearson Educ., Inc., for example, (a case settled earlier this year), the plaintiffs alleged, among other things, that Pearson -- without authorization -- sold textbooks in packages combined with other materials, “systematically inflating the value of the royalty-free portion of the kit (i.e., the other study guide material attached to the textbook) while decreasing the value of the textbook.” In custom versions of the book that Pearson published, the publisher allegedly “assign[ed] an unreasonably high value to the additional material, which [was] not assessed a royalty, and a low value to the textbook component. Gitman v. Pearson Educ., Inc., 14-cv-8626(GBD), 2015 WL 5122564, at *2 (S.D.N.Y. Aug. 31, 2015). Relatedly, in Hibbeler v. Pearson, 3:17-CV-00945 (M.D.Tenn. 2017), the author alleged (among other things) that Pearson exploited his works in unreported study package supplements and stand-alone study packet sales, neither of which was authorized by the terms of the publishing agreement, and both of which should have been royalty-bearing.
These and similar practices may result in the systematic non-disclosure or undervaluing of royalty-generating sales. In an industry of changing print and digital products, which can be combined and reassembled in various ways, contractual language in publishing agreements must be analyzed and clarified to take these issues into account.
Subsidiary Rights and Sales. As publishing houses have both consolidated and internationalized, issues of subsidiary rights and sales have taken on increasing significance for some authors. Unattended, contract language may permit a publisher to sell works to a subsidiary for purposes of marketing and distribution, and to pay royalties not on the ultimate end-user purchases, but on a lower intra-corporate transfer price. In Cordell v McGraw-Hill Companies, Inc., for example, McGraw Hill was alleged to have engaged in this practice. The Court noted, however, that under the pertinent agreement, the royalty could “be calculated in one of two ways: either based on sales to the McGraw–Hill international book division or to third parties for use outside the United States.” 525 Fed Appx 22, 23 (2d Cir. 2013) (emphasis in original). While the Court observed that the claim might have been upheld “[h]ad Cordell pleaded any facts showing bad faith, or otherwise supporting his assertion that McGraw–Hill set the prices for his works at improperly low levels,” it found no such allegations in the complaint and accordingly dismissed. Id. The publisher was just doing what the contract authorized it to do, which was almost surely not, in fact intended by the author.
Complicating the issue, publishers may rely on the absence of contractual privity between the author and a subsidiary to insulate themselves from record-keeping demands directed to the subsidiaries, or the subsidiaries may not maintain standard records depending on their geographic location. Though the case dealt with trade paperbacks and not textbooks (and later settled on other grounds), in Keiler v. Harlequin Enterprises Ltd., the Court dismissed claims targeted at subsidiaries, based on the clear roles of different entities set forth in the publishing agreement, observing that to hold the subsidiaries liable “would, in effect, require redrafting significant provisions of the contract while ignoring other express ones.” 751 F.3d 64,70 (2d Cir. 2014). Authors may have difficulty sustaining claims against subsidiaries without a direct contractual relationship.
Geographic Rights and Sales. Just as subsidiary rights may create challenges for an author in determining his or her rights, contractual language that provides for different royalty rates based on sales in different geographic areas may also result in underpayment of royalties. In Gitman, for example, the plaintiff alleged that Pearson “breached the publishing agreement by improperly categorizing certain sales as export sales when the textbook never left the United States,” thereby calculating royalties at a lower (export) rate. 2015 WL 5122564, at *2 (S.D.N.Y Aug. 31, 2015). Determining how and where sales take place, and thus which royalty should be applied, may require detailed analysis of the available data.
Litigation-Based Strategies for Enforcing Royalty Payments
Royalty auditors like Saitz encourage authors to “remember that their publishing agreement serves as the codification of a business relationship,” and that “publishers are regularly faced with audit requests as part of the normal course of business.” But publishers are not always forthcoming with audit information: an extra 10%-20% in royalties owed as a result of an audit may be significant to the publisher, and the publisher may have little incentive -- even when innocent errors are discovered -- to correct them. Moreover, the economics of conducting an audit may also work against an author seeking to assess the accuracy of his or her royalties. For works with fewer sales, it may be difficult for an auditor to work on a contingency fee basis (as is typical) because any recovery -- and thus the contingency -- will likely be too small to justify the work. An individual author may not be able to justify paying hourly auditing fees out of pocket, for the same reason. In these situations, litigation strategies may assist authors in achieving results:
Pre-Complaint Discovery. A common concern for authors is how to handle the publisher who is not forthcoming with clear audit information, or who has not agreed to an audit provision, at all, under the publishing agreement. How to determine whether royalties are being properly paid? Under the Civil Practice Law and Rules of New York (i.e., the civil litigation rules of procedure in New York state courts), there is a lesser-used provision that allows a plaintiff to obtain disclosure from a defendant, prior to bringing a lawsuit, when it is necessary to determine whether the plaintiff has a basis for asserting a legal claim. In some cases, such as where the right to an audit of publisher records is not clear from the publishing agreement, pre-complaint discovery may be warranted to determine how the publisher is calculating royalties and whether the plaintiff has a cause of action along the lines set forth above. Pre-complaint discovery may effectively provide a court-supervised alternative to haggling with the publisher over audit procedures.
Causes of Action. Various causes of action are implicated by a publisher’s failure to pay royalties or comply with auditing provisions. The most obvious claim is breach of contract, which may be asserted based on a publisher’s material noncompliance with the terms of the agreement, frustration of an agreement’s terms, or bad faith in handling claims. Thus, for example, a publisher who has not paid royalties as due, who has denied timely information under an audit clause, or who has provided incomplete or confusing data, may be liable for breach of contract
A plaintiff may also assert a copyright infringement claim against a publisher or subsidiary, on the theory that a publisher has reproduced the author’s work, prepared derivative works, or distributed those works without authority (i.e., beyond the scope of the contract). With this claim, a plaintiff may be able to establish unauthorized reproductions and derivative works in kit or digital forms, depending on the contractual language. A party may be able to hold a subsidiary liable -- otherwise remote, because it is not in contractual privity with the author -- for unauthorized distribution.
The equitable or ‘quasi-contract’ theory of unjust enrichment, which typically cannot be asserted when a contract governs the relationship between two parties (e.g., a publishing agreement) may be relied upon to hold responsible a subsidiary that is otherwise not a party to an agreement with an author. The author may allege, for example, that an intra-corporate transferee has been unfairly enriched by an artificially-low transfer price, so as to defeat the author’s fair royalty.
In some situations, an author may allege fraud on the part of a publisher, if the author has the basis for asserting -- with specificity -- that representations made to the author for purposes of inducing his reliance were false, and that the author reasonably relied upon those representations. Such circumstances may entail royalty statements that falsely represent sales, and conceal the true basis for royalties to be paid, particularly when the author has extended his relationship with a publisher in reliance upon those statements or when the publisher has then obstructed audit efforts. Fraud claims create an additional threat of punitive damages to a publisher, but may add a degree of complication to litigation, as they frequently warrant broader discovery (of both the defendant and the plaintiff) to elicit information about (i) the intent behind certain publisher practices; and (ii) the author’s reliance on the allegedly false statements.
Class Actions. Authors who individually may have small claims for unpaid royalties, but who may be subject to similar publisher practices, may be able to assert allegations on a class-wide basis, rather than individually, to create a greater pool of damages, make litigation a more economical proposition, and potentially recover attorneys' fees under statutory provisions that authorize fee recoveries. Class allegations have been upheld both in federal courts, (see Gitman, discussed supra), as well as in state court. And New York courts have noted that class certification may be particularly warranted where “the damages suffered by many individual authors would likely be insufficient to warrant their institution of separate suits.” Englade v Harpercollins Publishers, Inc., 289 A.D.2d 159, 160 (1st Dep’t 2001). Proceeding on a class basis thus may transform a small, individual claim, which is difficult to pursue economically and may not attract the attention of the publisher, into a significant matter that demands to be resolved and for which attorneys fees may be available from the defendant.
As the textbook market has changed over the last decade, the commercial relationships between authors and publishers have been tested. Many of the old issues that arose in the context of determining appropriate author royalties for print editions have morphed into new challenges based on the development of new pedagogical methods and the evolution of digital materials. Authors can obtain help from professional auditors, who may assist them in obtaining and analyzing publisher data, but there is sometimes no substitute for the support of lawyers and a formal dispute resolution process. When those issues arise, it is critical to have the support of well-informed and experienced lawyers who can assist in the strategic development and execution of a claim.