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Harlequin plaintiffs bring new allegations, improve their case

26 November 2012

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.

. . . .

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.

. . . .

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.

. . . .

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.

But although I know there are other people who disagree with me on this, I think this argument is going to raise a bunch of issues that have already arisen in the music industry. And just as they worked to the artists’ benefit there, they will have the same effect here. In a case called F.B.T. Productions, LLC. v. Aftermath Records, Eminem sued his record label for treating purchases through iTunes like sales of a physical good, when they were really just licenses under the terms that purchasers had accepted when they accepted the iTunes Terms of Use. Eminem won this lawsuit, gaining the right to receive 50% of sums received (his contractual right for a sublicense) and not 12-20% (his right for a sale).

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

Contracts, Copyright, Legal Stuff

6 Comments to “Harlequin plaintiffs bring new allegations, improve their case”

  1. Now this is an interesting development.

    I negotiated lots of licenses with parent companies and my royalty rates ALWAYS took into account whether sales were to affiliates or to unrelated third parties. And this is exactly why I did it.

    I’m not faulting the authors for agreeing to this as such – they’re not licensing attorneys – but it does give the lie to any notion that affiliate sales are always treated like third party sales. I think that whether the rate was equitable and whether HS fulfilled its fiduciary duty to the authors are related but separate questions and I don’t see the second one coming out good for HS.

  2. Good. This sounds very good. Let’s have a judge looking at those contracts.

    Feeling grateful to those authors (and their lawyers!)who are suing Harlequin – blazing a trail for all of us!

  3. I wonder how the “licensing” argument is going to mesh with the Supreme Court looking at the “first sale” doctrine–Eminem might not have won that lawsuit depending on which side the Court comes down.

  4. What I can’t understand is how any author would now trust a HMB contract. They seemingly are not playing fair with authors.

  5. Harlequin’s Actions remind me of the Monty Python Sketch from The Meaning of Life– The Miracle of Birth:

    Obstetrician 1: Get the EEG, the BP monitor, and the AVV.
    Obstetrician 2: And get the machine that goes ‘ping!’.
    Obstetrician 1: And get the most expensive machine – in case the Administrator comes.

    Patient: What do I do?
    Obstetrician: Nothing, dear, you’re not qualified.

    Hospital Administrator: Ah, I see you have the machine that goes ‘ping!’. This is my favorite. You see, we lease this back from the company we sold it to – that way it comes under the monthly current budget and not the capital account.
    [The doctors and onlookers applaud.]
    Hospital Administrator: Thank you, thank you. We try to do our best. Well, do carry on.

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