Legal Stuff

Arlington woman wins $11.5 million in Fifty Shades of Grey lawsuit

1 February 2016

From the Fort Worth Star-Telegram:

Five years after Fifty Shades of Grey became an international bestseller, Jennifer Pedroza of Arlington is getting closer to cashing in on the erotic novel’s success with an $11.5 million payday.

Saying it was time to “put the case to bed,” Tarrant County District Judge Susan McCoy signed an order Thursday awarding Pedroza $10,634.587 in royalties. A jury said last year that Pedroza was cheated out of her portion of the earnings by Amanda Hayward of Australia, a partner in a business that originally published the book.

. . . .

McCoy’s order ends this chapter of a legal tale that sometimes seemed as tortured as the plot to The New York Times bestseller, which inspired a movie of the same name. The courtroom fight stretched all the way to a suburb of Sydney.

. . . .

In 2014, Pedroza sued Hayward, her partner in an e-publishing business that originally produced Fifty Shades of Grey, saying she had been defrauded out of royalties that the novel and its two sequels had earned since it was released in 2011.

While records on the royalties have been sealed, court testimony and documents revealed that the novel made at least $40 million for the partners, about $3 million since the lawsuit was filed.

. . . .

Pedroza, a teacher at Sam Rosen Elementary School in Fort Worth, and Hayward, who lived in Dural, a Sydney suburb, were partners in The Writer’s Coffee Shop, which started out as an online blog in 2009, along with Jennifer McGuire of Waxahachie. Visitors to the fan-based website discussed books and wrote “fan fiction” stories.

McGuire did design work for the blog, Pedroza uploaded contributors’ writing, and Hayward worked with the authors. Later, Christa Beebe of Arlington joined and helped with marketing and distribution.

By 2010, Pedroza and Hayward had the Coffee Shop operating as a publishing house. And in 2011 it published Fifty Shades of Grey, which was written by British author E.L. James, as an e-book and print-on-demand full-length book.

The company published the sequels, Fifty Shades Darker and Fifty Shades Freed, in 2011 and 2012. The trilogy became a sensation, selling 250,000 copies through e-book and print-on-demand, with an additional 20,000 print copies.

In 2012, Random House made a deal with Hayward and James to publish the books. Pedroza received a one-time payment of $100,000 after the Random House contract was signed, but she was never told of the full terms of the transaction. Random House was not named in the lawsuit.

While Pedroza’s lawsuit acknowledged that she and Hayward never signed a prepared partnership agreement – but Pedroza said in the suit she was due 25 percent of the net profits – it showed that in 2011 their business filed a partnership income tax return naming Pedroza as a general partner.

After a four-day trial in February 2015, a jury determined that there was a partnership between Pedroza and Hayward. But the jury did not set a dollar amount for an award, leaving that to McCoy after an audit of the firm’s finances.

Eventually, an audit revealed that the books made about $40 million and that Pedroza was due $10.6 million. In recent months, attorneys have been haggling over fees and interest.

Link to the rest at Fort Worth Star-Telegram and thanks to Ginger for the tip.

PG says it costs much, much, much less to get a properly-drafted partnership or similar agreement when you start a business with someone else than it costs to fight about what the agreement would have said in court.

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Traditional Publishing, Non-Compete Clauses & Rights Grabs

27 January 2016

From author Kameron Hurley:

When you’re a new writer, you mostly talk to other new writers about craft. Once you publish a book or two, though, you’re increasingly talking to your peers about the business of writing and publishing. You talk about contracts and foreign rights deals and rights grabs and the benefits and drawbacks of self-publishing and being a hybrid author.

One of the big issues we’ve been dealing with the last 15 years or so as self-publishing has become more popular are the increasing rights grabs and non-compete clauses stuck into the boilerplate from big traditional publishers terrified to get cut out of the publishing equation. Worse, these clauses are becoming tougher and tougher to negotiate at all, let alone get them to go away.

. . . .

This reluctance to nurse mid-list careers is bad news for writers who want to go the traditional publishing route, especially as it’s happening at a time when many editors are overworked and marketing budgets continue to get slashed and advances continue to tumble. If you’re a new author in SFF, don’t be surprised to get a first offer of $5,000 that demands your first-born child and everything you and they will ever write, and if you sell just 3,000 copies, well, sorry, we’re done with you and maybe go back to the small houses or come back to us with some vampire erotica we can sell.

. . . .

Non-compete clauses ask a writer to take an advance of $10,000 or $20,000 or whatever and prevent them from having any other novel-length work come out for a full year (or more!) before and after the book is published by that house. Sometimes this is “only” six months before and after. Sometimes it’s “only” novels in a related genre or can be negotiated to “only” novels in the same world. But it’s always awful and you always have to yell hard about it to get it wittled down to something manageable.

. . . .

For authors who write four books, or eight books, or more a year, big houses adhering strictly to this clause while paying advances under $50,000 a book would mean preventing most authors from making a living wage as writers (remove agent’s cut, taxes, and health insurance from that number, and yes, friends, that is what I’d consider an actual living wage, not . . . $20,000.

. . . .

Also of importance is that this clause makes the sort of unreasonable demands on an author that can only be made of an actual employee. You know, someone who gets health insurance and other benefits. By asking authors not to compete against themselves, they’re skirting dangerously close to moving us into the “employee” category that they want to keep us out of.  I have a non-compete clause in my employment agreement at my day job that prevents me from taking on freelancing work that competes with my day job work, and those hold up (mostly) because I’m actually categorized as an employee.

So are we employees or contractors? I’m actually surprised no one has taken a non-compete clause to court, because I think a serious legal inquiry would be interesting.

. . . .

I have some great publishers, and editors who have gone to bat for me to make things work. I have great relationships with the vast majority of them. I know it’s a tough business. I know they struggle with it too

But their parent companies see us as widget-makers, and they make it tougher and tougher for editors to hold out the open palm instead of the fist. Goodwill with your editor, or “my editor is so nice!” does not always translate to the nitty-gritty of the contract. A lot of those things are determined by the parent company up high, and are negotiated not with the editor but with people in the contracts department. Having a super nice editor who wants the best for you is great, but it does not guarantee there will be nothing but roses in your contract.

See, the big corp parent companies prefer the fist. They’d like to legally tie you to them, condemning you to live in poverty or keep your day job throughout your contract. But what editors and writers would certainly prefer is that publishers provide you with more value that helps make you and the work a success. Publishers who do things that make you WANT to do business with them are going to win over those who make it tough.

But that takes time, and effort, and resources. And so many editors are so short on those that it’s criminal. The great ones have done a fabulous job of helping us along, but their parent companies don’t always make it easy.

Clearly the parent companies, like many businesses today, are choosing the cheaper solution first. It’s way easier to serve up awful contracts than it is to invest in more editorial and marketing support. Better to just contractually bind authors to you because they have no other choice and are desperate for a sale.

Link to the rest at Kameron Hurley and thanks to Dana for the tip.

Here’s a link to Kameron Hurley’s books. If you like an author’s post, you can show your appreciation by checking out their books.

Kameron points out an interesting phenomenon in the dynamics of the author/editor relationship.

Authors, especially new authors, often regard editors as powerful deities who exercise life-or-death power over the author’s career. The editor is, of course, the gatekeeper controlling access to the publisher.

However, inside the publisher, except for all but a handful of senior editors, acquisition editors are pretty far down in the corporate hierarchy. Several levels of executives above the editor are the gatekeepers controlling the editor’s ongoing access to paychecks.

The lawyers responsible for a publisher’s contracts typically report through the general counsel up to the big bosses who are high above the editor in the corporate organization.

Life is much easier for the editor if she doesn’t rock the contract boat. While some authors can hire an attorney, who will talk directly to the publisher’s lawyer without going through the editor, new authors may be concerned about legal fees and being viewed as a troublemaker inside the publisher.

The power dynamics are completely screwed up for the new author unless he/she is determined to exert management control over his/her career.

A couple of notes on non-compete clauses that PG has mentioned before, but are worth repeating:

Non-compete agreements are creatures of state law and limitations on them can vary from state to state.

Virtually all Big Publishing contracts specify that New York law will govern the contract. PG is not a member of the New York bar, but his nonofficial opinion is that many of the non-compete clauses contained in publishing contracts would run into problems in New York courts. PG doesn’t believe that lifetime noncompete agreements (the life of the copyright is the length of most publishing contracts) in an author/publisher relationship would be enforceable under New York law, for example.

PG is a member of the California bar, however, and is able to state that California simply makes noncompete agreements unenforceable except for a couple of narrow exceptions that don’t apply to publishing contracts.

With respect to noncompete agreements that specify the law of another state will govern the contract, where a California resident is involved, California courts have, in the past, decided that California law will protect California residents from noncompete clauses regardless of what the contract says about choice of law and venue.

PG is not saying that all authors should move to California to get out of their noncompete publishing clauses. However, if an author is thinking a change of location might be a good idea (Malibu has never had two feet of snow), being able to write what the author wants to write without worrying about publishing contracts might be a factor to consider.

 

Crowdfunded ‘Star Trek’ Movie Draws Lawsuit from Paramount, CBS

4 January 2016

From The Hollywood Reporter:

For decades, Paramount and CBS have tolerated and even encouraged fans of theStar Trek franchise to use their imagination at will, but on Tuesday the entertainment companies went to their battle stations and launched a legal missile at a production company touting the first independent Star Trek film.

Axanar, the subject of a lawsuit filed on Friday in California federal court, is no ordinary Star Trek film. The forthcoming feature film (preceded by a short film) is the source of more than $1 million in crowdfunding on Kickstarter and Indiegogo. The producers, led by Alec Peters, aim to make a studio-quality film. As the pitch to investors put it, “While some may call it a ‘fan film’ as we are not licensed by CBS, Axanar has professionals working in front and behind the camera, with a fully-professional crew — many of whom have worked on Star Trek itself — who ensure Axanar will be the quality of Star Trek that all fans want to see.”

Paramount and CBS see a violation of their intellectual property.

“The Axanar Works infringe Plaintiffs’ works by using innumerable copyrighted elements of Star Trek, including its settings, characters, species, and themes,” states the complaint.

Axanar has become one of the biggest film projects in Kickstarter history and has been nearing warp speed with the reported help of Star Trek actor George Takei. The film mines subject area referenced in the late 1960s Gene Roddenberry television series and appears to be a prequel.

. . . .

By August, Peters was giving interviews expressing confidence that the project would survive any legal heat. He spoke to The Wrap that month and reported having a meeting with CBS. He says he was told the film couldn’t make money — and evidently, he took that to be a good sign that his film would be tolerated as long as it wasn’t a commercial endeavor. “CBS has a long history of accepting fan films,” Peters told the entertainment site. “I think Axanar has become so popular that CBS realizes that we’re just making their brand that much better.”

Not so fast.

Paramount and CBS, represented by attorneys at Loeb & Loeb, are now demanding an injunction as well as damages for direct, contributory and vicarious copyright infringement. Although the plaintiffs have allowed ample cosplaying over the years and even permitted other derivatives like amateur Star Trek shows to circulate, the lawsuit illustrates that there is a place where no man has gone before, where the entertainment studios are not willing to let be occupied: crowdfunded, professional-quality films that use copyrighted “elements” like Vulcans and Klingons, Federation starships, phasers and stuff like the “look and feel of the planet, the characters’ costumes, their pointy ears and their distinctive hairstyle

Link to the rest at The Hollywood Reporter and thanks to Antares for the tip.

In Supreme Court certiorari filing, Authors Guild continues to litigate Google Books case after ten years of failure

2 January 2016

From Chris Meadows at TeleRead:

‘Tis apparently the season for Hail Mary appeals to the Supreme Court. We already heard about Apple’s attempt to get its agency pricing antitrust conviction re-heard. It seems only fitting that, in the same month, the Authors Guild brings to SCOTUS an appeal of the case that some have said was indirectly responsible for the agency pricing situation coming about in the first place.

I refer, of course, to the kerfuffle surrounding Google Books, nee Google Print. The Authors Guild first brought suit against Google over the project all the way back in 2005—before I had even started writing for TeleRead. Google’s crime? Scanning and indexing as many books as it possibly could, to seed a search engine to let people search on their content.

The case dragged on and on and on, losing a few years as an attempt at a settlement that would let Google act as an e-book store meandered into the weeds and got lost, before finally being rejected by Judge Denny Chin as too much of an overreach. Eventually, when the Authors Guild’s request for class-action status made its way up to the appeals court, the appeals court told Judge Chin, “You know, this could be fair use. Why don’t you rule on that first?” Perhaps eagerly grasping at the first available straw to get the case out of his courtroom,Judge Chin ruled it was fair use and dismissed the case, passing it on to the appeals court. Unsurprisingly, the appeals court concurred. Appeals court Judge Pierre Leval gave a great lecture in which he explained exactly why Google books was fair use.

. . . .

Effectively, the Authors Guild is concerned over allowing the willy-nilly copying of twenty million complete books for a commercial purpose to be considered fair use, and wonders if the district and appeals court allowed the “transformative” nature of the use to eclipse the other three factors of the four-factor fair use test. But what really seems to burn their biscuits is that Google is making money off their content, whereas they should be the only ones allowed to make money off their content.

Link to the rest at TeleRead

PG says this is not a good use of the dues paid by Authors Guild members.

Stop Forcing Authors to Take Unlimited Financial Risks

19 December 2015

From The Authors Guild:

Warranty and indemnity clauses in standard publishing agreements tend to make authors’ eyes glaze over. But these clauses have the greatest potential to damage authors’ financial health. While other unfair terms give authors a raw deal when it comes to how much money they can receive for a book or how much control they can exert over it, far-reaching warranty and indemnity clauses are even more insidious. They can put an author’s entire net worth—or more—at risk.

When authors question these clauses, editors often contend that they’ve been admonished not to change so much as a word without clearance from the legal department. An editor may simply insist that such terms are “non-negotiable due to corporate policy”—an unhappy way to begin what’s supposed to be an amiable relationship.

Let’s look past the jargon to see what that editor is asking the author to sign. A warranty is a promise that something is true. Publishers ask authors to promise that the book under contract does not infringe anyone else’s copyright, does not invade another’s privacy, is not libelous, and, sometimes, does not contain “matter otherwise contrary to law.” If any of those statements turns out to be untrue, the author has breached the agreement.

The indemnity clause kicks in to give the warranties bite by making restitution a clear contractual obligation: if any claim is made for breach of the authors’ warranties, the author has to cover all related costs and liability—whether or not the claim is valid, and whether or not the author knew or should have known of the infringement, defamation, or invasion of privacy.

Sounds fair enough at first glance. But is the author really in a position to promise that her work doesn’t violate the law anywhere in the world? Why should an author absorb the entire monetary hit for all claims, no matter how unfounded, made against the book? And why doesn’t coverage for authors under media liability insurance policies protect authors from these problems?

. . . .

Publishers defend their standard warranty clauses on grounds that may initially not seem specious: It’s the author’s work, after all, so who better to know what the risks are than the author, right? While this may sound reasonable, it essentially makes the author an insurer against any claim that may happen to arise, whether well-founded or frivolous. It also unfairly asks the author to be an expert regarding all sorts of laws around the world; publishers would have to pay authors a lot more than they currently do for authors to be able to afford the legal fees for that sort of review.

. . . .

An easy way to solve this is available: warranties should carry clear limits. For instance, the author might merely warrant that the book isn’t violating any laws to “the best of [an author’s] knowledge.” And because editorial insertions may lead to their own violations, the publisher should offer a warranty regarding any changes it makes to the work. Why don’t publishers offer these very reasonable limits up front?

. . . .

Most publishers refuse attempts by authors or agents to change this language and often impose their own language allowing the publisher to withhold author payments indefinitely to make sure money is available just in case any expenses are incurred from an asserted claim. But withholding royalties for an indeterminable period can unfairly jeopardize an author’s livelihood, especially when a claim is asserted but never pursued.

. . . .

Publishers’ media liability insurance used to solve most of this problem. Roughly three decades ago, the major publishers began paying extra to extend their own coverage to cover their authors, quelling authors’ fears of financial ruin. (Though they did this as a matter of practice, not out of any contractual obligation.) In exchange for coverage, authors were asked to share the cost of the deductible, originally about $10,000 to $15,000. That could be viewed as fair: as we’ve said before, publishing is a partnership, financially and otherwise. Now, with deductibles often running upwards of $250,000, most authors are again placed in the dire position of facing financial ruin. And many publishers don’t include authors in their liability insurance coverage at all.

Link to the rest at The Authors Guild and thanks to Jackie for the tip.

PG has been ranting about warranties and indemnities in publishing contracts since he saw his first publishing contract. See this rant and this one as examples.

A couple of items the Authors Guild piece didn’t mention:

Media liability insurance is certainly very helpful in the case of the claim. As the article mentioned, big deductibles make such policies less protective for authors. However, no media liability insurance or inadequate coverage amounts are even worse.

Media liability language in publishing contracts often neglects to include a mandate for the publisher to continue to maintain such coverage. If the publisher has a bad year and decides to save money by allowing the media liability policy to lapse, there goes the protection. If, as has been happening for many years, the publisher merges with or is acquired by another publisher who doesn’t want to pay policy premiums, adios to insurance for the author.

PG hasn’t seen any publishing contract that mandates the amount of coverage the publisher is required to maintain and specifies the deductible amount.

A media liability policy with a limit of $100,000 for any claim won’t do much good for an author. If the policy includes a $50,000 deductible, it does even less good for the author.

Another problem with most media liability policies with which PG is familiar is that their coverage limits apply to the total claims made against the publisher each year. For example, policy limits may be $1 million for any claim up to a maximum of $2 million total for any year. If your claim arises in the same year the $2 million policy limit has been used for other claims, you may be out of luck. (This is a simplification because some liability policy limits are based on when the claim originates, others on when claims are paid or a combination of the two.)

Setting aside the issues arising under liability policies, if there is an uninsured loss, every publishing contract PG has seen makes the author pay 100% of any losses. The AG article discusses the failure to consider whether a publisher’s editorial process contributed to the liability. That is one way in which a publisher may contribute to an author’s liability.

PG suggests that the mere fact that an author has published a book with a large corporation substantially increases the likelihood of a suit if anyone is upset by the contents of a book.

Why? Because a big publisher is a big target for attorneys who take cases on a contingency fee basis.

Contingency fees are permitted for many types of damage claims in the US, but not permitted in some other countries. Under a typical contingency fee arrangement, the attorney receives a percentage of the total recovery as the attorney’s fee. If there is no recovery, the client doesn’t owe the attorney any fee.

Rule #1 for contingency attorneys is to never take a case where you can’t clearly see someone with the ability to pay a big judgment or a big settlement. A big publisher, with or without a big insurance company, will have the ability to pay a big judgment. A little author who self-published will only attract very stupid contingency fee attorneys (who exist, but don’t stay in business for very long).

A book published by Randy Penguin? Let’s head for the courthouse. A book published by Jane Doe? Forget it.

The increased chance of an author being sued is an additional risk associated with traditional publishing that PG hasn’t seen anyone mention.

Here’s a humble proposal that might balance the risks for an author: The author and the publisher share liability in proportion to the amount of money each receives from the sale of a book.

If the author receives royalties of 25% of the amount a publisher receives from the sale of a book, the author is responsible for 25% of uninsured claims and the publisher is responsible for 75%. (Adequate insurance is almost always the best solution for liability claims.)

Since royalties for different types of books vary, a blended percentage based upon sales-weighted money earned from hardcover, softcover, ebooks, etc., could be calculated to divide claims between the author and the publisher.

If the publisher has 80% of the upside, the publisher should pay 80% of the downside.

Yes, the publisher has made a substantial investment in editing, printing, distributing, etc., each book. The author has also made a substantial investment in each book unless the publisher regards the author’s time as absolutely worthless.

But what does PG know? He’ll look forward to comments on this post.

Amazon Books and the Robinson-Patman Act from an Antitrust Law Perspective

19 December 2015

From author Randy Morris:

Let’s start by noting the parties in this case [AMERICAN BOOKSELLERS ASS’N v. BARNES & NOBLE, INC.] The district court judge sums it up nicely. “In this antitrust action brought by the American Booksellers Association on behalf of all California members (“ABA”) and twenty-seven independent bookstores against various defendants associated with Barnes & Noble, Inc. (“the Barnes & Noble defendants”) and Borders Group, Inc. (“the Borders defendants”), three motions are currently before the Court.” Put simply, the ABA joined with 27 independent bookstores to sue Barnes & Noble and Borders for violating the Robinson-Patman Act.

In this case, the ABA and independent bookstores allege that Barnes & Noble and Borders were receiving discounts and other favorable terms from Ingram. The judge notes under Section (II)(A) of his opinion that “[u]nder the Robinson-Patman Act, it is ‘unlawful for any person engaged in commerce, … either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, … where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them[.]’ 15 U.S.C. § 13(a) (Robinson-Patman Act § 2(a)).” Additionally, “‘[i]t shall be unlawful for any person engaged in commerce, in the course of such commerce, knowingly to induce or receive a discrimination in price which is prohibited by this section.’ 15 U.S.C. 13(f) (Robinson-Patman Act § 2(f)).”

In simpler terms, a buyer cannot knowingly induce a seller to give them better terms or better prices than they give to other buyers for “commodities of like grade and quality” when to do so would (a) lessen competition, (b) create a monopoly in any line of commerce, or (c) injure, destroy, or prevent competition with anyone benefiting from such a transaction.

. . . .

The court notes seven things that have to be proved (in this case, by the ABA) in order to get money damages:

“1. Two or more contemporaneous sales by the same seller to the plaintiff and a competing buyer;

2. At different prices;

3. Of commodities of like grade and quality;

4. Where at least one of the sales was made in interstate commerce;

5. The price discrimination had the requisite effect upon competition generally;

6. The competing buyer knew the price discrimination was unlawful; and

7. The price discrimination caused injury to the plaintiff. Rutledge v. Electric Hose & Rubber Co., 511 F.2d 668, 677 (9th Cir.1975) (citations omitted); Automatic Canteen Co. of Am. v. FTC, 346 U.S. 61, 73, 73 S.Ct. 1017, 97 L.Ed. 1454 (1953). Each plaintiff seeking damages must make ‘some showing of actual injury attributable to something the antitrust laws were designed to prevent.’ J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 557, 562, 101 S.Ct. 1923, 68 L.Ed.2d 442 (1981). Each such plaintiff ‘must, of course, be able to show a causal connection between the price discrimination in violation of the Act and the injury suffered.’ Id. (quotin

. . . .

The sticking point for money damages is the actual injury. The ABA and the independent bookstores needed to prove both that Barnes & Noble and Borders knowingly made agreements with Ingram that violated the Robinson-Patman Act and that these agreements actually injured them. To do so, they relied on the calculations of their expert witness, Dr. Franklin M. Fisher. The court refers to the evidence presented by Dr. Fisher as the “Fisher Model.” I’ll spare you the court’s analysis. The judge ultimately concludes that “[b]ecause the Fisher model fails to show that discounts received by defendants from any particular publisher or wholesaler harmed any of plaintiffs, the Fisher model fails to show that any publisher’s discounts to defendants caused any actual harm to plaintiffs.”

. . . .

What does this mean for Amazon? It means that the ABA would have to prove all seven elements I’ve quoted above from AMERICAN BOOKSELLERS ASS’N v. BARNES & NOBLE, INC. in order to obtain the triple damages provided for in the Robinson-Patman Act. That’s why, as noted at The Digital Reader, Tiecher at the ABA has said, “that it’s ‘far too soon to speculate’ about what Amazon is planning in terms of a bricks-and-mortar profile, ABA is watching the new physical store closely. And he promised his constituents that he has no intention of allowing Amazon Books to benefit from its ties to Amazon.com. He also pointed out that, for the small store to do so could be a violation of antitrust law.” In other words, the ABA likely recognizes that a lawsuit against Amazon and Amazon’s bookstore, Amazon Books, would be premature at this point.

Link to the rest at Randy Morris

Here’s a link to Randy Morris’ books. If you like an author’s post, you can show your appreciation by checking out their books.

Update on the EC lawsuit

10 December 2015

From Dear Author:

As you might have heard, I settled the EC lawsuit.

I want to set the record straight on a few things regarding my September 16, 2014, post about Ellora’s Cave. I made some errors and want to correct them:

1. Tina Engler has represented that she has not purchased a house in West Hollywood and has not indicated to me that she did.

2. She has not gone on any recent Rodeo Drive shopping trips.

3. The principals of Ellora’s Cave did not receive “no interest” loans.

4. It has been represented to me that, at the time of the post, most or all authors had been paid within their individual contracts.

5. Finally, Patty Marks has not said that the company will be entering bankruptcy or that any contracts will be sold in bankruptcy.

I am sorry that I got the above things wrong and am happy that I can now correct the post to more accurately reflect the facts at the time that the post was made back in September.

Link to the rest at Dear Author

Jane reveals her expenses for the lawsuit and mentions that the GoFundMe contributions were helpful, but did not cover all of her expenses.

The Authors United Amicus Brief from an Antitrust Law Perspective

6 December 2015

From law student Randy at History and Technology:

Apple has appealed the 2nd Circuit’s decision in UNITED STATES v. APPLE. They’ve petitioned for a writ of certiorari to the U.S. Supreme Court. In other words, the Supreme Court is still deciding whether they’re going to take the case or not. The Authors Guild and Authors United hired a New York law firm to file an amicus brief with the Supreme Court in support of Apple’s actions.

. . . .

I’d like to start by getting at the heart of the 2nd Circuit’s holding in UNITED STATES v. APPLE. When Apple decided to enter the ebook market, they made a series of agreements with 5 of the Big 6 publishers (Random House didn’t make an agreement) that ultimately caused these 5 publishers to impose new terms on Amazon. This had the effect of raising the prices of ebooks and allowed Apple to enter the market making a profit on every sale instead of taking a hit (which Amazon was doing). The 2nd Circuit had to decide whether the agreements between Apple and the publishers were vertical agreements or horizontal agreements because they have a different standard of review. The 2nd Circuit found these agreements to be horizontal agreements which makes them a per se violation of the Sherman Act.

. . . .

In very basic terms, the 2nd Circuit found that Apple’s agreements with the publishers were a “hub and spoke” agreement that includes both vertical and horizontal agreements. Their agreements effectively imposed a vertical agreement between Apple and each publisher individually and a horizontal agreement between the 5 publishers. Apple was the “hub” and the publishers were the “spokes.” This has been found to be a per se violation of the Sherman Act in the 3rd and 7th Circuits because “hub and spoke” agreements have both vertical and horizontal elements.

. . . .

Let me start by saying that you can read the entire AU amicus brief here. The entire brief is 38 pages and cites 8 cases. It does not include the word “vertical” or “horizontal” anywhere in the document. The brief instead relies on questionable facts (they cite Scott Turow articles several times) and a shaky legal argument that doesn’t even include an analysis of vertical or horizontal agreements. Let’s start with their argument for applying the rule of reason standard.

The brief starts off by noting that the rule of reason is the default standard for analyzing agreements under antitrust law. I agree with this idea and the Supreme Court has said the same. The brief then goes on to say that the 2nd Circuit ignored precedent and “the Second Circuit ignored this court’s unwavering instruction that per se rules should not apply to conduct with potentially procompetitive effects.” They cite LEEGIN CREATIVE LEATHER PRODS. v. PSKS, INC.. I disagree with this point. The court’s “unwavering instruction” is that “horizontal agreements among competitors to fix prices” are per se illegal. If such an agreement exists, and I believe that it does here, we don’t analyze the procompetitive effects of the agreement because it’s already automatically illegal.

. . . .

A. Douglas Melamed (Principal Deputy Assistant Attorney General for the Antitrust Division of the DOJ) gave this address to the American Bar Association. Here are a few quotes I find helpful:

“Although vertical agreements are generally procompetitive, they can injure competition, under some circumstances, when they deny (or raise the cost of) a needed or valuable input — such as distribution services — to a rival.”

“Exclusionary vertical agreements are agreements that tend to exclude competitors of one of the parties to the agreement. Examples include exclusive dealing, tie-in arrangements, and most favored nation agreements.”

“The foregoing suggests that a necessary condition for an exclusionary vertical agreement to be anticompetitive is that the agreement is likely to enable the manufacturer that would benefit from the exclusion of a rival to gain or preserve market power that it otherwise would not have. The additional market power enables the manufacturer to recoup its investment in the otherwise inefficient restraint, including the consideration it must pay to the distributors.”

The second quote is applicable because the agreements between Apple and the publishers included a most favored nations clause. The third quote applies directly to this situation. Apple gained market share that it otherwise would not have had but for the terms that the publishers imposed on Amazon.

. . . .

The AU brief also claims that allowing Amazon to have monopoly control over the ebook market is at odds with the 1st Amendment. The brief claims “Amazon’s dominant market position… threatened the free exchange of ideas which this country values so highly.” The brief goes on to argue that Amazon “suppressed” both Macmillan and Hachette. Throughout this entire section of their argument, AU cites no case law, with the exception of the first paragraph. Their argument also implies that the 1st Amendment pretty much mandates the continued existence of publishers since they fund nonfiction, academic research. Their first paragraph contains three cherry picked quotes from two cases. I’d like to look at those.

. . . .

The most amusing part of the AU’s 1st Amendment argument is as follows: “[f]ortunately, when Apple and others entered the e-book market, Amazon’s control over culture decreased. E-books not sold on Amazon were available elsewhere. E-books not marketed by Amazon were marketed elsewhere.”

They’re actually arguing that:

1. Amazon was violating the public’s 1st Amendment right to be able to purchase e-books through multiple channels.

2. Apple’s illegal price-fixing scheme with the publishers corrected this 1st Amendment violation so their illegal agreements were ok.

I’m not even sure how to respond to that. It’s ridiculous. Apple wanted to enter the market making money and illegally forced the market to change to accommodate higher prices. They weren’t courageously protecting the public from a continued 1st Amendment violation.

Link to the rest at History and Technology

Authors Guild Files Brief Affirming Benefits of Competitive E-book Economy

3 December 2015

From The Authors Guild:

The Authors Guild, the nation’s largest and oldest society of professional writers, discussed the benefits of competitive e-book pricing in a friend-of-the-court brief filed today with the Supreme Court of the United States.

The brief, filed jointly by the Authors Guild, Authors United, the American Booksellers Association, and Barnes & Noble, bolsters ongoing advocacy efforts by the Authors Guild and Authors United and asks the Supreme Court to review a decision by the Second Circuit Court of Appeals in U.S. v. Apple, which found that Apple violated antitrust law by coordinating with major U.S. book publishers to influence the price of e-books. In the brief, the author and book industry groups argued that the government’s focus on Apple’s allegedly anti-competitive activities was misplaced, because Apple’s conduct, in fact, enhanced competition by increasing e-book output, the number of e-book titles, and the number of e-book distributors, which led to technological improvements in the e-book market and enhanced freedom of expression and access to e-books.

In U.S. v. Apple, the Department of Justice brought a lawsuit maintaining that the publishers and Apple—by striking a coordinated deal to establish agency pricing for e-books—exhibited anticompetitive conduct by conspiring to fix prices. The publishers and Apple, on the other hand, maintained that Apple’s entry into the market actually increased competition, as demonstrated by the fall of Amazon’s market share from 90% in 2010 to around 60% two years later. After a 20-day trial in summer 2013, the trial court found that Apple colluded with the publishers to drive the price of e-books above the $9.99 favored by Amazon. The Second Circuit upheld that decision.

. . . .

In the brief submitted today, the groups sought to highlight the procompetitive impact of Apple’s conduct and the damaging effect on e-book publishing as well as the future of authorship that occurs when e-book distribution is in the hands of a single company. Attorneys with Kirkland & Ellis in New York and Washington, D.C. filed the amicus brief. “Absent correction,” they wrote in the brief, “the lower court’s wooden approach threatens to undermine the very objective of antitrust law—to ensure robust competition.”

“We authors feel strongly that diversity, competition, and the free flow of ideas are key to a healthy marketplace of books,” said Douglas Preston, founder of Authors United. “The numbers unequivocally show that Apple’s entry into the e-book market increased competition and gave authors and publishers greater choice in how content was delivered to the reading public.”

Link to the rest at The Authors Guild and thanks to Joshua for the tip.

PG says The Authors Guild has been making some noise about helping authors avoid the terrible contracts Big Publishing requires of them. Unfortunately, this amicus brief shows where AG’s real sympathies lie.

The actions of The Price-Fix Six could not have been more clearly illegal under US antitrust law. As PG mentioned during the trial, the facts of the lawsuit against Apple and five of the six largest publishers in the US would never have been used as the basis of a question on a law school antitrust exam because the violations were so obvious. A second year law student would instantly recognize them.

The “We broke the law because we wanted more competition” argument is as lame as it sounds. Amazon is permitted to gain a large share of the ebook market if it does so by providing good products and services at lower prices. Antitrust law exists to protect consumers and competition, not any particular group of competitors.

For all his virtues, Steve Jobs didn’t want to compete on price. That wasn’t (and isn’t) the Apple Way. Apple was coming to the ebook market late and didn’t want to deal with a company like Amazon who was all about low prices. Since Big Publishing didn’t like low prices either, Apple found ready allies in a plan to push the prices of ebooks up and keep them up.

Voila! Illegal price fixing.

The suit against the Price-Fix Six was brought by the US Department of Justice antitrust division. However, private antitrust suits are permitted and even encouraged under antitrust law by an automatic trebling of damages paid to a successful plaintiff. While Big Publishing has tried and failed to interest the DOJ in filing suit against Amazon, if Big Publishing really believes Amazon has violated antitrust laws, they can file that suit themselves.

Antitrust litigation is not cheap, but the big international media conglomerates that own all the big publishers have deep financial pockets. The fact that no private antitrust action has been filed is a huge indication, for PG at least, that Big Publishing’s lawyers are telling their clients that Amazon would win such a suit.

Signing Away Your Rights: Arbitration Clauses in Book Contracts

19 November 2015

From Victoria Strauss:

Recently, the New York Times published a fascinating three-part series of articles on arbitration clauses, and how such clauses “buried in tens of millions of contracts have deprived Americans of one of their most fundamental constitutional rights: their day in court.”

. . . .

The articles deal mainly with consumer and employment contracts, in which, according to the Times, arbitration clauses have created “an alternate system of justice” where “rules tend to favor businesses, and judges and juries have been replaced by arbitrators who commonly consider the companies their clients.” But arbitration clauses are increasingly common in publishing contracts, too–as well as in the Terms of Use of some major self-publishing platforms. And most authors don’t understand their implications.

. . . .

How Arbitration Clauses Limit Your Rights

Arbitration is often portrayed as an easier, more friendly method of dispute settlement, allowing the parties to avoid the hassle and expense of litigation. But as the Times points out, this reasonable-sounding explanation leaves out some darker truths.

Arbitration clauses are binding, and supersede your right to go to court to settle a dispute. If you sign a contract with an arbitration clause, you are waiving your right to legal action. Many people don’t realize this.

People often assume that arbitration is similar to appearing before a judge. But, says the Times, “arbitration…often bears little resemblance to court….Winners and losers are decided by a single arbitrator who is largely at liberty to determine how much evidence a plaintiff can present and how much the defense can withhold.”

Arbitrators–many of whom are retired judges–are supposed to be impartial, but often they’re not. Plaintiff and defendant choose an arbitrator from a list supplied by the arbitration company; for obvious reasons, defendants prefer to choose arbitrators with a history of defendant-friendly rulings, and plaintiffs, who may not have that inside knowledge, may not know enough to object. In turn, arbitrators feel pressure to favor defendants, since this makes it more likely they’ll be chosen–and paid.

Arbitrators’ decisions are hard to challenge. Courts have proved reluctant to reverse them, even where they are obviously unfair.
Arbitration can cost you, even beyond any judgment that may go against you. In addition to travel and filing fees, you may have to pay the arbitrator.

Christian organizations sometimes require Christian arbitration, such as that provided by Peacemaker Ministries. Prayer and scripture may be given preference over law and evidence. (I’ve seen publishing contracts with Christian arbitration clauses.)

Increasingly, arbitration clauses include bans on class actions. “By banning class actions,” says the Times, “companies have essentially disabled consumer challenges to practices like predatory lending, wage theft and discrimination….Corporations said that class actions were not needed because arbitration enabled individuals to resolve their grievances easily. But court and arbitration records show the opposite has happened: Once blocked from going to court as a group, most people dropped their claims entirely.”

Link to the rest at Victoria Strauss and thanks to Stephen for the tip.

PG says don’t believe everything you read in The New York Times.

Arbitration clauses are common in contracts between two businesses. Unlike most attorneys, PG has taken some business disputes through arbitration hearings and his clients have generally been satisfied with the results. PG has also inserted fair arbitration clauses into business contracts he’s drafted.

Most of the problems PG has heard about in arbitration practices involve arbitration organizations he has never heard of that are presumably established by the industries or, perhaps, large companies, that designate these arbitration organizations to hear disputes about their contracts. If you’re the arbitrator for the McDonalds Dispute Resolution Organization, then you may be inclined to worry about your job if you rule against McDonalds.

However, there are a couple of large, nationally respected arbitration agencies, The American Arbitration Association and JAMS (Judicial Arbitration and Mediation Services, Inc.).  These agencies are the named arbitrators in at least hundreds of thousands of business-to-business contracts and their reputation for fairness and competence is essential to their survival. If the word gets out that the AAA or JAMS is playing favorites, their future business would drop through the floor. Many companies, large and small, are relying upon them to fairly resolve disputes that often involve many millions of dollars.

What are the benefits of arbitration vs. taking your dispute to court? Here’s a not-comprehensive list:

  1. Cost. In civil litigation, the panoply of procedural roadblocks and discovery tools are available to the wealthiest party to the lawsuit. Common defense practice is to delay, delay, delay. In some cases, an individual may simply be unable to afford the attorneys fees necessary to make it through the preliminaries to trial. In a complex case, arbitration can take time and cost money, but arbitration is intended to be a faster and less-expensive alternative to litigation. The arbitrator is able to cut through the preliminaries and move to a hearing on the merits in ways a judge can’t.
  2. Expertise. The judges that hear contract disputes of the type that are likely to occur between authors and publishers or authors and etailers are generalists. Your judge may handle a hearing on a drug case in the morning and your contract dispute in the afternoon. There are no judges that only handle contract disputes involving books. Very few Intellectual Property attorneys ever become judges (PG doesn’t know any who have). One of the reasons for the rise and continued success of AAA and JAMS is that they offer arbitrators with substantial knowledge and expertise in a variety of specialized areas. In an author/publisher dispute, it would be reasonable to expect that the arbitrator might be a practicing or retired IP attorney who comes to the case knowing 95% of what an attorney would have to explain about copyright and publishing practices to a judge in a civil trial.
  3. Time. Big Publishing contracts always specify New York state or federal courts as the place where an author must go to pursue his/her legal claims. PG is not familiar with detailed backlog statistics for New York courts, but he feels confident in saying if you file a suit against a publisher today and the publisher wants to delay, it will be several years before you actually get to trial. Federal judges are overwhelmed with criminal cases, primarily drug cases. Because of constitutional requirements for speedy trial, etc., in criminal matters, etc., the drug cases will bump civil cases down the calendar over and over. 99% of arbitration hearings are completed months or years before the same matter would be resolved by the courts.
  4. Privacy. Unlike courts, which are open to the public, arbitration hearings and files are private. During the recent litigation between Ellora’s Cave and Jane Litte of Dear Author, several different blogs followed the court filings and commented about what they said. Indeed, for many, the Ellora’s Cave suit revealed Jane’s identity as the person behind Dear Author. In some cases, PG has used publicity or the threat of publicity to the advantage of his clients, but a great many authors don’t necessarily want to see their names and faces associated with a court case and spread all over the internet.

Can arbitration be abused and result in unjust outcomes? Yes, it can, particularly when shady arbitration agencies are involved. Can litigation be abused and result in unjust outcomes? Yes, it can, particularly when a rich publisher and a poor author are involved.

In a perfect world, courts would be fast, fair, efficient and cost-effective for disputes large and small. Arbitration exists because it’s not a perfect world.

Below, PG has embedded a document from the American Bar Association that discusses arbitration in more detail.

 


Benefits of Arbitration (Text)

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