Tuesday, July 24, 2012

If I were Harlequin, part 2: two more potential defenses they could use

In the last post, I gave two arguments that I could see Harlequin bringing up in the e-books litigation: at the relevant time these didn't seem like unreasonable rates, and that inter-company deals are standard to the entertainment industry.

But these aren't the only defenses I could see Harlequin bringing up... I promised four, I've delivered two, so here's the others.

3. Giving Harlequin these rights induced them to take your book in the first place.

Here Harlequin's argument would be simple: I only took your book for print publishing because you offered me e-book rights also. These rights seemed speculative at the time because the market didn't really exist. I attempted to get whatever money I could from these rights because I needed to offset the cost of my investment in your print publishing.

This is a tougher argument but not impossible. It comes back to the general principle that Harlequin is in business to make money, and that it is entitled to ask for extra rights in order to try to offset its own expenses and to make additional profits. But I think that because the Harlequin contracts were contracts of adhesion this will be tough to defend: difficult to argue that Harlequin made a decision about taking these rights in any particular context when they insisted upon getting them in all contexts.

4. Harlequin provided services, this isn't just free money.

Of all the possible defenses I've discussed in this series, this might be the strongest.

Deciding that HQE/HQS were overpaid implies two things: they performed services, and those services shouldn't have cost that much. Focusing on the first point shows another weakness to the authors' case: HQE did actually perform services. And once you can show the first point, the second point becomes almost irrelevant.

It's clear that HQE did do certain things, like formatting the e-books, loading them up to the e-book sites like Amazon and Barnes & Noble, putting them in a catalog, and the usual back-office work like accounting. That may not seem like much, and in light of today's e-book environment it might not be much. But as noted in point #1, the relevant time period to consider is 1990-2004. HQE had contracted to provide these services and HQS had agreed to pay for them.

Just because the work got easier doesn't mean the rate automatically changes. There is a general rule of contract law that says courts don't ordinarily look at whether each side got a fair deal: if each side gets what it was supposed to get, that's the end of the inquiry. If you buy a suit for $500 at Macy's then walk into Marshall's and see the same suit for $100, Macy's doesn't have to give you your money back.

So a court may well look at the fact that HQE and HQS concluded a deal where HQE would perform services for HQS, see that HQE did perform those services, and decide to end the inquiry right there. Yes, the Siegel case might say they have to use a fair market value determination for these deals, but there's a loophole: if everyone in the industry was agreeing to take these horrible royalty rates on e-books in the 1990s, then Siegel may not be much help.

And again the fact that the authors might have been willing to do this work today, using the tools available to them today, isn't the right criterion. It's whether it was reasonable in the 1990s to conclude that authors should pay for these services because it was reasonable to think they would have required specialized tools and/or knowledge. And it's very possible that a court might conclude they would have. Today you can burn CDs in your computer but even with today's technology it takes almost a minute per disc: replicating 100,000 for a commercial release just isn't feasible without industrial equipment.

But at its core, this defense has a risk also. If the rates that the various Harlequin entities charged each other for these services weren't at fair market value or if they are buried in general terms like paying a percentage of the budget that's unrelated to the actual cost of the services, the Siegel case may become very important after all. And juries have a lot of room to maneuver in these kinds of determinations.

Now I'll put this topic aside for a while and get back to some more general information and tips for writers and other creatives. If you've got things you'd like me to address, please feel free to use the comments, or Twitter, or email, or dispatch a raven... And for people coming to RWA I'd also take questions on them at my panel with Serena Robar (www.serenarobar.com) at 3:15 on Friday.

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Thanks for commenting. Posts and comments aren't legal advice; requests for legal advice in the comment probably won't get answered. Sorry to have to do this but someone someday is going to make me glad I did...