Three reasons Harlequin shouldn’t get to have the e-books litigation dismissed
From Legal Minimum:
[B]ack in July a group of authors went to court to get permission to bring a class action alleging that they were being underpaid for e-books under their publishing contracts with Harlequin. Under these contracts the authors claim they were supposed to receive 50% of e-books revenue received by the Publisher. But, they claim, Harlequin did some inter-company sleight of hand by licensing the e-publishing rights to a related company that paid a 6-8% royalty on e-books, and then the authors received 50% of 6-8% of the sale price (the money received by the Publisher), rather than 50% of the sale price of the e-book (the money received by the related party).
Because the authors were looking to make this a class action they need court authorization to do that, and so their first step was to file a motion asking for authorization. The motion filed on Friday by Harlequin asks the court to declare that these plaintiffs, and basically any plaintiffs, shouldn’t get to sue Harlequin on these facts.
. . . .
I’ve glossed over one thing by saying “Harlequin” and that’s important to the motion filed on Friday. The authors had their contracts not with Harlequin Enterprises (HE), the Canadian company that you think of when you think of Harlequin, but rather with either Harlequin Books S.A. (HBSA) or Harlequin Enterprises B.V. (HEBV), a Swiss or Dutch company both of which are related to HE but not the same. So the Publisher under the contracts was HEBV/HBSA, not HE.
It’s this distinction that makes the difference, as far as Harlequin is concerned. Boiling down their arguments, we end up with this:
- The authors had no contracts with HE so there can be no breach of contract by HE.
- Just because HBSA/HEBV licensed the e-book rights to HE, a related company, that doesn’t make HE the “Publisher” under the authors’ contracts.
- There’s no legal basis to say that HE was unjustly enriched by getting to keep the money that the authors think should be theirs, because the authors had a contract and that’s all that matters.
Link to the rest at Legal Minimum and thanks to Donna for the tip.
PG is not inclined to nitpick the litigation strategy of other lawyers because he hasn’t done the extensive legal research they have prior to filing suit. However, he was not alone in wondering why the authors didn’t sue Harlequin for fraud in addition to breach of contract.
As you can see below, the Complaint consists of six counts based on Breach of Contract and a seventh tag-along count based on Unjust Enrichment. The Motion to Dismiss filed by HQ is directly focused on the basis of the Breach of Contract claims.
PG has always felt that the HQ contracts were designed to mislead authors because HQ’s practice of having its European company automatically license ebooks to a related HQ company in Canada meant authors would never receive the 50% royalty rates stated in the contracts. The true royalty rate of 3-4% appears to have been intentionally concealed from the authors.
Here’s the original complaint filed against Harlequin by the authors:
, Amazon will pay Passive Guy a small affiliate commission on any of your purchases.
I’m comment as someone who is really, really, really NOT a lawyer, so this might be a dumb question…
… but could they have decided not to sue Harlequin for fraud because there’s not really any money in it? As far as I understood fraud is actually a criminal charge and not primarily a civil one.
If that’s not the case, could they be holding the fraud thing in their pocket in case this falls through? i.e., it might give them another chance to take Harlequin to court if Harlequin manages to get this class action thrown out.
The law confuses me. It makes for great comic strips through.
Christopher – At least in the United States, fraud is potentially the basis for both a civil claim and a criminal charge. Criminal fraud is less commonly prosecuted than civil fraud claims are.
Under the laws of many, if not all states, a civil claim for fraud may also carry the possibility of punitive damages in addition to actual damages.
I would be surprised if class action counsel were holding any material claims in their pockets for a second suit. They’ve spent and will continue to spend an enormous amount of their own money on this first class action suit and would not like that money to go down the drain.
The general approach of most lawyers to pleading in civil matters is to throw everything reasonable into the complaint so you still have something to take to trial even if some of your counts are thrown out. Additionally, if you fail to make a claim in one trial, you may be foreclosed from making that claim against the same defendant in a second trial.
Thanks for the clarification!
I’m British, so I don’t know how American courts litigate matters. In most jurisdictions the courts assume the facts that the Plaintiffs allege are true for summary dismissal. Is that the case in the USA? (in other words, motions to dismiss are granted on the basis that even if all the allegations are true there is no legal case to answer).
That’s a good summary of the way American courts deal with motions to dismiss, Thomas.
I don’t have actual knowledge of the thinking that went into the decision but have two thoughts on why they maybe didn’t allege fraud:
1. Alleging that someone committed fraud is, in certain circumstances, defamatory. They might be trying to avoid that.
2. One element of a fraud claim is that you’re required to show that you actually did believe the untrue statement. That might require an element of individual reliance that would kick this out of a class action.
Good point about class action fraud problem, Don.
However, that doesn’t seem to be a problem for all the securities fraud class action suits.
Some very quick and dirty research turned up Basic, Inc. v. Levinson, 485 U.S. 224 (1988), in which the Supreme Court approved a “fraud-on-the-market” doctrine by which a presumption of reliance might be available to satisfy the predominance prong of Rule 23.
Since Harlequin has such a large portion of the romance market, I’m wondering (without reading the case in any depth) if there’s something to be used there.
I actually litigated a case once based on the “fraud on the market” doctrine. It’s specific to securities situations. It’s related to efficient markets theory: the assumption that all public information about a company is baked into its stock price, so insiders who don’t reveal negative information about a company are committing fraud on the market by not revealing it. The doctrine was created specifically to get around this individual reliance problem.
I’ve read elsewhere that when one corporate entity passes goods (in this case, the authors’ books and the revenues associated with them) from itself to another, there must be an arm’s length relationship between them. It doesn’t appear to me that HQ and its entities satisfy that requirement.
That said, if it’s true, I don’t see them dismissing the class action.
Thoughts?
I don’t know that this is a general principle of law for related entities except for transactions whose primary purpose is to avoid taxation, Deb.
In fairer publishing contracts, you’ll see a provision to the effect that if the publisher is dealing with a related entity, the terms will be equivalent to similar dealings with an unrelated entity. This can be difficult to enforce, but it is a fairer structure than Harlequin’s SOP.
Irving Oil uses a similar scam to avoid paying any Canadian income tax, by passing ownership of the oil through a tax-free Bermuda corporation. After a protracted legal battle, the Canadian court ruled that, although it’s clearly unfair and unethical, they have no jurisdiction over a Bermuda corporation, therefore no action can be taken.
I hope the authors do eventually prevail, but I have my doubts.
Jeez, that’s logical, but it sure does suck. I imagine that no one in Bermuda wanted to stop the company from doing that.
However, even if a similar ruling occurs in this case, the authors could theoretically take it to the Netherlands or Switzerland, since that’s where the other Harlequin companies are located–couldn’t they?
Theoretically, yes, but since the authors’ contracts were with one corporate entity, and the monies flowed through another, which entity for legal purposes actually published the books? The publisher who executed the contract, or the one who got paid and paid the authors in turn?
Legal it may be; moral, not so much. You can wrap up a turd in Christmas paper, but it still stinks.
The US court DOES have jurisdiction over the Harlequin contracts. Even though the “publisher” is a Swiss/Dutch company, the contracts stipulate they’re under New York law. So a Bermuda-type sleight of hand shouldn’t work.
That may be true for the author-publisher contracts, but the contract(s) between the US Harlequin company and the foreign company is something different. It may depend on the corporate ownership structure too. It’s hard to say how it will all play out.
I’m not sure if the purpose of this lawsuit is to get more money out of Harlequin OR get their contracts dissolved so they’ll be free to self-publish their HQ titles. Many former HQ authors have done very well, putting their OOP and reverted books on Kindle and PubIt.