Home » Ebooks, Royalties » Investigation into Underpayment of Ebook Royalties

Investigation into Underpayment of Ebook Royalties

10 August 2011

Passive Guy hadn’t heard of  a law firm called Hagens Berman before yesterday, but so far he’s a big fan.

Hagens Berman is investigating claims that several large e-book publishers are under-reporting the number of e-books sold, paying authors less than their share of royalties.

E-book authors typically receive royalty statements, which report the number of e-books sold in a specified time period. The authors are paid based on these sales numbers.

According to reports, the so-called “big six” e-book publishers may be using an outdated accounting systems to track the sales of e-books. As a result, some authors have reported various accounting errors on their statements, including the under-reporting of sales of the e-books.

Link to Hagens Berman

We’ve previously discussed reports from authors and agents that ebook royalties seem suspiciously low. See here, herehere and here. In PG’s mind, there is little question that there are problems with ebook royalty reporting by at least several publishers. Some people suggest it’s a reflection of antiquated royalty accounting software, but PG is not that charitable, in part because no one is reporting that they’re receiving more ebook royalties than they deserve.

PG is going to do some additional checking on Hagens Berman. At first glance, they look like a plaintiff-oriented firm that handles a variety of consumer rights, fraud, class action, etc., and they have some significant wins under their collective belts.

While PG has no reason to believe Hagens Berman is not the real deal, some mass tort and class action firms have a well-deserved reputation for watching out for themselves first and their clients a distant second. In a prior life, PG was heavily involved in working with courts that were overwhelmed by asbestos litigation. While some plaintiff’s firms in asbestos litigation were completely legitimate, others utilized unethical and illegal tactics. Also, some (not all) class action firms are noted for filing suit then settling on terms that provide each member of the class a few dollars and pay the firm a large legal fee.

With those caveats, it appears Hagens Berman is developing a practice that’s focused on big publishing. In the majority of cases, the losses of any single author from something like ebook royalty under-reporting would not justify the cost of mounting a lawsuit to collect royalties. What PG suspects is happening is Hagens Berman is collecting information and possible plaintiffs for a class-action suit on behalf of all authors who have been harmed by ebook royalty shortfalls.

If PG is correct, this is good for authors and bad for big publishers.

What are the implications for authors besides being paid proper ebook royalties? If the agency pricing suit and a class action suit on eroyalties move forward, big publishers will be spending serious money on legal fees and, quite possibly, settlements. We’ve already heard numerous reports that advances are down and we know publishing contracts are becoming more and more onerous. Serious lawsuits accelerate, but don’t change that trend.

If, as PG believes, big publishing is in a financial death/downsizing spiral because of indie publishing, ebooks, Amazon pricing pressure, death of physical bookstores, etc., that spiral will grow tighter if it has large losses in class action suits. You’ll see some consolidation, so unwary authors may end up publishing with a different house than the one who gave them their contract. Bankruptcy is also a possibility, so unwary authors may end up having their books unpublished or poorly published and their copyrights in a legal limbo.

Ebooks, Royalties

46 Comments to “Investigation into Underpayment of Ebook Royalties”

  1. Publishers under-reporting sales? Say it ain’t so. Is nothing sacred? What’s next, S&P downgrades the sovereign rating of the USA–

    Oh. Never mind.

  2. I’m not one to be charitable either. When there’s a financial error in my favor (hypothetically speaking; I don’t have a horse in this race), that’s clearly a mistake. When the error is in their favor, either a) it’s not an error, or b) they have demonstrated grossly negligent incompetence in handling my funds.

    When I first heard these rumors, I was shocked. Very Hollywood. I worked in financial administration for a while, and to think that anyone would fail to account for every penny and excuse it by effectively saying “it’s really hard to know exactly how much money we received on your behalf” is…deeply troubling.

    • Brendan – The attitude underlying out-dated and inadequate royalty accounting systems is that Ole Massah is always benevolent and the slaves should just stick to picking cotton and not pay attention to anything else.

    • I agree. Just a bit too convenient that all the mistakes are in the publisher’s favor.

  3. “it appears Hagens Berman is developing a practice that’s focused on big publishing.”

    PG,

    If that’s the case, why are they chasing a declining asset?

    “If, as PG believes, big publishing is in a financial death/downsizing spiral because of indie publishing.”

    See?

    I can see the point of Apple and Samsung going at it, and a big fight with Amazon V Publishers.

    I can’t quite see, unless Hagen are a white knight of the lege, why they would commit to a task where the money might disappear as fast as profits on a movie/record.

    My background is criminal law, not tort. To find the truth, you follow the money. Big pub is where it was, is it still?

    brendan

    • Brandon – Typically, serious class action firms treat each case as a project. If they do a good job, the project pays off and they move on to the next project. The ones I’m familiar with are not so much like a big general services law firm that has a tax department, an securities department, etc.

      My guess is that ebook royalty under-reporting has the status of a potential class action.

      I misspoke to describe this as a practice, like a practice area.

      I could be wrong, but I would guess that most of the partners in the firm are not likely specialize exclusively in something like automobile class action cases. They’ll handle an auto case one year and a fraudulent marketing case against a bank next year. Most will regard themselves as specialists in complex litigation more than specialists in complex litigation about a certain topic. They’ll hire experts to provide deep domain expertise.

      However, if someone has handled a big pharmaceutical class action before, he or she may be tapped to lead the next one that comes along a few years later. Also, if an attorney has won a big class action victory in pharma, that attorney will tend to attract referrals from other attorneys outside the firm if similar cases come up later on.

    • I have no special expertise, so take with as many grains of salt as suit to taste, but my feeling is that even on a dying elephant there is quite a bit of meat for an enterprising predator.

      Also – and this is where my lack of expertise is most glaring – the big 6 are all owned by huge conglomerates, yes? I imagine they’ve set up complex liability shields or what have you, but that doesn’t necessarily mean they’re completely immune, does it? Either way, a possible pay out for a class action suit, especially since this is forensic accounting, not an attempt to prove that some untested chemical has caused cancer. It may be a lower burden of proof.

      Either way, I repeat my earlier declaration: wizzle wam wam wozzle, indeed.

      • Whoops, I misspoke / wrote. It wouldn’t be a lower burden of proof, it would just be easier to meet. I think. Again, I don’t really know. But accounting mistakes, while complex, seem easier to prove than, you know, cancer, to go back to my example.

        They don’t have to prove intent to defraud, do they? That would be criminal, not civil?

      • Agree on the dying elephant, Genevieve.

  4. I think they’re missing out if they limit themselves to big NY pubs. I suspect under-reporting of royalties is pretty widespread and has been going on for quite some time, not everywhere and not with everyone, but baby, it’s out there.

  5. How difficult is it for an traditionally published author to get the actual sales numbers out of Amazon in the US?

    Is is necessary to use the heavy arguments like a court decision (or respectively accessing the data during as part of the court proceedings) or are there simpler ways, say during an audit conducted by a accountancy firm?

    • Chasm – My understanding is Amazon provides sales numbers to the publisher only. I am not aware of any option for the author to see the same numbers the publisher does.

      In order to justify the cost of an audit, an author has to believe the number is substantial.

      I’m not in favor of excess litigation, but failing to properly report Amazon and Nook sales is so elementary and so far away from any gray area that I think publishers need to be hammered so they’re not tempted to repeat the transgression.

      • I ask because here on the other side of the pond it should be relatively simple, and also relatively cheap, to get an court order (preliminary injunction?) to access the Amazon (Apple, B&N, …) numbers once an author can demonstrate probable cause to a judge.
        Even without resorting to forensic accounting to get the order – it is after all about probable cause, not irrefutable proof. ;)

        • Chasm – Once discovery starts, Amazon is one of the first places a plaintiff would go. As a matter of policy, Amazon would require some sort of subpoena, but that’s easy to obtain.

          The royalty data would be forthcoming shortly thereafter. As a general proposition, I expect Amazon would want authors to make as much money as possible from ebook royalties.

  6. Where there are large amounts of money involved, there is greed. Outdated software? Bullsh*t! I click a book, I send my credit card info, they get the money, a little $.35 gets credited to my account. eCommerce has been around for far too long for this to be a viable excuse. I would just as soon see the industry have a stake driven through its cheating heart (vampire/country song about lost love?) and get on with letting the dust settle. I still contend that indie publishing is where the money is going to be long term, so let’s get some honest players in the game and put any who may wish to enter the market on notice: “Don’t f@ck with our money!” Whew! I feel so much better, back to writing

    • Edward – I couldn’t agree more. It is far easier to handle numbers from Amazon than it is to track books at wholesalers, returns, etc.

      I’m glad The Passive Voice could provide some mental relief for you.

  7. I have no legal training, and I know nothing about anti-trust law, American law, or anything really, but my gut instinct is that this has far more chance of going the distance than the price-fixing suit.

    If the alleged under-reporting is taking place, then it could explain why so many traditionally published authors express such skepticism towards the viability of self-publishing and the indies reporting their numbers.

    • David – Generally speaking, successful class action attorneys don’t file borderline cases. In the nature of these things, the firm will be fronting significant litigation expenses prior to arriving at any reasonable possibility of a settlement, let alone a trial.

      This is the situation for all types of contingency fee cases in the US. If you want to be in that part of the legal business, you better be very good at picking your cases or you’ll go broke.

      One of the rules for class-action suits is that members of the class need to be similarly-situated as far as the wrong suffered. So there are often two fights – did the defendants do something wrong and are the members of the class damaged in ways similar enough so roughly-appropriate compensation can be calculated for the class?

      • PG, thanks for that.

        So it’s not like a plagiarism/copyright case where you often get a spurious/long-shot claim in the hope of quick pay-off or some publicity. Interesting. Very interesting.

        I have a couple of questions though (stemming entirely from ignorance). I can see how the members of the class in the price-fixing suit would be similarly damaged. But won’t there be wildly varying levels of damage amongst the authors in any potential suit regarding under-reporting of royalties? Or would they divide them into several classes based on sales numbers/titles out etc.?

        • Using my powers of cynicism to predict the likely outcome based on past class action settlements I’m guessing they’ll finesse the issue by making the settlement offer an extra 10% on top of the advance (carefully unspecified in size) the authors get if they sign another contract with their current publisher.

  8. One wonders if underpayment is because of incompetence, desperation, or greed? Bean counters are not incompetent, even if they work for publishers.
    The other day I was checking some Isaac Asimov eBook prices, thinking that since they’ve been published a long time ago they should cost little. Surprise, surprise! Most of the eBooks were priced at $7.99 or more. I think that’s high, considering that the publishers recovered their cost long time ago.
    So, it seems the publishers are desperate and/or greedy. And this is good for the indie publishers. At least we won’t have to compete with them on price.

    • DG – Once someone noticed the royalty accounting system always underpaid authors for ebook royalties, fixing it dropped to the bottom of the to-do list for IT.

    • DG, another thing to notice is that when you see these older books priced in the $7.99 and up range, the argument from the publishing houses is that the process of converting a paper book to digital is painstakingly difficult and requires tens of thousands of hands to make it work. As such, they have to recoup the money spent on the effort of conversion.

      • WC – that may be the excuse, but it has no basis in reality. Even if they physically have to crack the spine and manually feed the pages into a scanner, you are talking 2 days work (max) to turn it into a clean electronic doc which is ready for Smashwords and perfectly formatted mobi and epub files.

        Plus, these are one-off costs to the publisher.

        • I would make that a week (rounding up) to make sure that the OCR didn’t produce gibberish out of SF&F names, or otherwise make stupid-spellchecker-mistakes. At least one of Barbara Hambly’s traditional-publisher-created ebooks is riddled with Stupid OCR Errors. It’s clear that someone scanned the book in, ran a spell-check over it for the worst stuff, and never actually looked at what the spell-checker found.

          • (And then they charged $7.99 or $8.99 for it anyway.)

          • The legal secretaries where I used to work could clean up a book-length OCR doc in a couple of hours. Maybe add an hour if it was a really poor scan.

            They could hire a load of temps for $20 an hour to do the job. They would only need to proof it after and would have the original book as a guide.

            A week would be extremely generous. But let’s say that’s how long it takes. A week’s work doesn’t justify the price.

            Now, they are entitled to charge what they like, but I’m just pointing out that their reasoning for their price doesn’t hold water.

          • Worse than that, Beth, is discovering that your transfer has been farmed out! Stephen R. Donaldson was getting tons of emails of complaints from readers about huge errors in his Gap Cycle. When he contacted Bantam about it he was stunned to learn that Bantam had farmed his digital transfer to India (his and a bunch of others.) They’re obviously out to have to pay as little as possible for any conversion, and they don’t seem to care about the quality of that work, either.

            And DG, I totally agree that their argument doesn’t hold water….but that’s the argument they use as they try to get people to just accept high-priced digital copies.

            • Writer’s – Actually, farming it out overseas isn’t a bad way to do it if you have any sense at all.

              In a former life, I worked for a company that needed very high quality text from printed pages, many, many, many printed pages.

              The best and cheapest way to get this was not to scan and OCR, but rather to have lots of people typing, people for whom English was not a first language. If you don’t speak English well, you tend to type what’s on the screen instead of what you think something should say.

              The way you catch errors is to have at least two people type the same thing – three is even better. Then you use computers to pick out places where the different versions don’t match and have someone check the original and choose the correct version.

              There are very cheap but reputable keyboard services all over Asia that will guarantee something like 99.9% accuracy and pay penalties if they fall short. Scanning and OCR won’t get that high.

  9. Accounting for both print and ebook titles in the publishing industry is notoriously unreliable, which is why organizations like SFWA have assisted with audits in the past. On the print side, it’s been shown time and again that the numbers are often fast and loose; on the ebook side, it’s a real problem because the contracts often treat ebooks as a subsidiary right and the numbers given a supposedly a “roll up” of all ebook sales from the various systems. It’s a huge mess.

    That said, there are only a handful of forensic accounting firms/people that appear to have a reliable background in dealing with publishers. That makes finding a good one both expensive and time consuming. Most authors can’t afford to hire a forensic accountant in any case, which makes audit clauses sort of a freebie for the publishers.

    On a related note, Amazon has Author Central, which allows authors to see sales in almost real time. Obviously, these aren’t complete sales numbers, but they can be illuminating.

  10. If a book is ePublished then the selling price should equal the [replication cost] + [PR costs] + [share of web site cost] + [profit] + [royalties] + [tax].

    If [n] are sold, but only [n - x] are reported, leading to [n-x].[royalties] being paid, then surely only [n-x].[tax] is being paid to the IRS or Internal Revenue, …

    Suddenly this stops being a civil case and becomes a felony fraud case — no?

  11. You know, I really like these Hagens Berman people! The suit against Apple and now this. Thank God there are people out there supporting authors!

  12. Dear PG, Just so you know, Hagens Berman is very real. I worked for them before they were HB back in the 1980s. They are now a national firm that specializes in Class Action, one of the best at it in the country. Steve Berman was rated Top 100 Influential lawyers in the nation a few years ago.

    As to Class Action litigations, like any other tangling with the law, there are pluses and minuses. Does it “scare companies into going straight?”
    Perhaps… in some cases. This is actually the better part of some cases, not the payout, but the process cleanup because of the suit that “pays” into the future. Of course, you close a hole here, and there’s often a new one, just over there.

    Does it mean immense money to the beneficiaries?
    Perhaps… in some cases. Here’s a quick view of how Class Action breaks down: 1)after several years of investigation, lawyers feel they do or don’t have enough to drag everyone into court, 2)if they do, typically to avoid trial costs and risk exposure, a Settlement is eventually reached, 3)that Settlement will be for some percentage of what is actually owed. $100M in damages may be settled for 1/2 that or a 1/3 or… 4)From the Settlement, lawyers usually get 1/3 + expenses (they are rarely in it for the altruism -though I’ve worked on a couple of those and they’re wonderful cases -others can be downright farces). 5)Various and other expenses occur (settlement administration, charity, named plaintiff awards…). The balance is then distributed to the Class Members who filed a claim.

    This last bit is really important! If you get one of those fine print forms some day, read it, fill it out, and return it. If you don’t either a)turn in the form or b)opt-out so that you can sue on your own later, you will receive nothing, but still be bound by the terms of the Settlement, i.e. you can’t go after your money for the fault involved in the litigation because the company has agreed to a settlement of that particular breach of law.

    This is going to be fun to watch, as if the changing market weren’t already a squeeze enough.

    • Thanks for the detail, Matt. My investigation so far confirms what you say about Hagens Berman being a quality firm.

  13. So I came a bit late to the game, but this has been lingering in my mind.

    PG, is it possible that some of the Authors could use this breach of contract to terminate the contract? IE Full rights reversion to the original Author if they have not already been sold.

    Were I an established writer (I’m not) who had just been screwed on my digital royalties, I might be far more tempted to digitally self publish. Reclaiming those rights would allow me to ‘cease and desist’ their digital sales of my works and ‘do things the right way’ with my own.

    Some of those back list items might do far better for the author (and their grand children!) at 70% of $4.99.

    —-

    When (Not IF, darn it!) I get some of my stories written out and edited to professional quality, this is one more valid argument in favor of smashwords and Amazon.
    -Knave

    • Knave – I think terminating the contract is certainly a possibility, but each case would depend in part upon specific contract language and the nature and extent of the breach.

      • Thank you.

        You essentially confirmed my thoughts, on each of your additional points.

        If some of the Authors do end up getting some or most of their rights back, I suspect it could be far more damaging than a class action suit.

        Imagine for a moment if Stephen King or another similarly established writer, ended up with full rights back for their work, abruptly. It seems likely that some of their books are still actively being reprinted. It also seems likely that (at random?) one of their books may be under consideration of turning into a movie somewhere.

        It would be a very difficult life for a publisher if a lot of their “slow and steady” income streams dried up over night. It would be even more difficult if several of their prize ponies wandered out of the stables at the same time.


        Though take it all with a grain of salt, I’m still a n00b here.
        -Knave

        • Returns of rights would be great, but don’t underestimate the potential impact of a possible class action suit, Knave. In a class action, the class would consist of every author published by the defendant publishers who didn’t specifically opt out of the class. The total unpaid royalties could be large. In fact, the class action won’t be filed unless the law firm has good evidence that total unpaid royalties is a big number.

          • PG, you are probably right. I just grew up seeing too many blips in the news, where a class action suit turned into a slap on the wrist. Or worse, when wronged customers were issued “Coupons” to get minor discount in future purchases.

            By the time the settlement is valued, bartered, consolidated and the lawyers paid it tends not to be much.

            I just fear the authors will walk away with enough to buy a copy of one of their fellow victim’s e-books and maybe even lunch at the 1-star fast food joint of their choice. With all of this being settled after 3 years, etc.

            Honestly, one of my biggest hopes for this case is Amazon providing the sales information in a clear, detailed and organized fashion. With the right queries into their database, they can probably produce all the required data in perhaps a week. The wonders of technology…a digital audit can be preformed in a fraction of the time, hopefully at a fraction of the cost.

            Who knows, perhaps this may end up being a humbling experience for an industry used to others groveling?

            Perhaps it’s time someone introduced the 800 lb gorilla, to the 3 ton Rhino barreling down on it. Perhaps…

            -Knave

  14. Raymond Feist wrote a series of articles on publishing contracts for the SFWA Bulletin, in which he said that in dealing with publishers he attributed nothing to malice that he could reasonably attribute to stupidity. Sad to report that I’m now hoping for stupidity.

    I think the last time anyone made a NY publisher ante up unpaid back royalties was SFWA and ACE Science Fiction, roundabout the late 80′s. I think the total figure was something like a quarter of a million dollars. It was considered a triumph by writers everywhere then.

    • The ebook royalty underpayment investigation may not reach the litigation stage, but I’ve heard enough authors complain to think there may be something to it.

Sorry, the comment form is closed at this time.