From Legal Minimum:
On November 2, 2012, the authors(*) in the Harlequin class action upped their game against Harlequin. If they’re wrong, they will lose their class certification request. But if they win, they will find themselves making a point that will have repercussions far beyond just e-publishing and authors.
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In a nutshell, the authors signed contracts with a Harlequin entity in Switzerland, but the contracts were administered by the main Canadian Harlequin company and the authors contend this was just a tax strategy from Harlequin. But when it came time to publish e-books, Harlequin licensed the rights from the Swiss company (which I’ll call HS) back to the main Canadian company Harlequin Enterprises (which I’ll call HE). The publishing contracts with HS had a clause giving 50% royalties for things like e-books to the authors, but the license with HE gave HS only 6-8% of cover price, meaning the authors only got 3-4% (50% of 6-8%). They claim this was unlawful. Not surprisingly, Harlequin disagrees.
After Harlequin filed a motion to dismiss the lawsuit, the authors amended their claims. They didn’t add any new causes of action, meaning they didn’t find any new grounds to sue. But the new facts that they have added in support of the old claims aren’t very good for Harlequin.
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The one that looks big on paper, and has gotten a lot of attention, is the inclusion of more allegations to back up the argument that HS is nothing more than a shell for HE. The result of this argument, if the authors win, is that HE will be considered to be the Publisher under the contracts. That would make the 50% royalty payable on the amounts received by HE.
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But to me, the bigger issue is the one that isn’t really fleshed out in either the old or the new Complaint: that the 6-8% royalty itself isn’t equitable. That is, the authors are contending that even if the court decides that the HE-HS contract gets to be upheld, that doesn’t end the conversation. Instead, they would have the court determine whether the 6-8% rate in that contract was fair to the authors, on whose behalf HS was negotiating when it licensed those rights.
And that argument risks being very interesting. For two reasons.
First of all, there’s the fact that, when Amazon itself invited authors to go into the e-book business, it offered a rate of 70% for the authors, and Apple and B&N aren’t too far off. That’s a lot higher than 6-8%. Harlequin will be hard pressed to explain why its own inter-company rate should be respected by a court in light of numbers like that.
Just as with iTunes downloads, so too with e-books. They aren’t sold, they are licensed. Whether that’s good for consumers or not, it certainly sets up a very direct parallel between the two situations.
Played right, I think this could be a big issue for the authors, because it demonstrates that there is absolutely no need for HS to have put HE in the middle of this transaction flow. If the “sale” of e-books is actually a license, then why couldn’t HS have been the entity doing business with the e-book retailers and, under the agency model, the customers? Yes, it chose not to. As the authors themselves note in their amended Complaint, Harlequin is entitled to do its tax planning as it chooses. But if its tax planning results in the authors being prejudiced, Harlequin will have to demonstrate why its structure should be held up against them.
Link to the rest at Legal Minimum