Monday, July 23, 2012

If I were Harlequin... potential defenses to the e-books class action

I've spent a couple of posts talking about the reasons why I think Harlequin has a tough burden in the e-books lawsuit. But they're not going to concede defeat. As the last posts I'll do on this for a while I'll give four arguments I could envisage being in their defense.

Note: I'm not saying I agree with these. I'm just saying they are defenses that a company in Harlequin's situation could raise and that would pass the "fall down laughing" test: would you fall down laughing in court if you heard them.

To break this up a bit I'll give two today and two tomorrow.

1. The Kindle and Nook self-publishing royalty rates were created too late and shouldn't be used to determine proper contract terms.

Everyone looking at these facts has to be doing so with the Kindle and Nook self-publishing royalties in the backs of their minds. How can 6-8% be a reasonable royalty if Amazon will pay 35% or even 70%?

But Harlequin could well argue that's not relevant. And there's a very strong point in their favor: these rates came into existence too late. I personally was a pretty early adopter of the Kindle and I bought mine in 2008. The contracts in the litigation are 1990-2004. The digital landscape in the 1990s, especially the early 1990s, was totally different. I had an email address and an Internet account through my university, but we used Archie searches to find information in Usenet because the Mosaic browser was too new and you couldn't get to everything through your AOL or CompuServe account. Dialup was too slow to be useful for downloading large documents.

And the e-book marketplace in the 1990s was just as alien. We were looking at things like CD-ROM e-magazines and hoping they would take off. There were people who envisaged a future of e-books, but devices like the Kindle just couldn't work without a series of developments that came into existence at the end of the 1990-2004 period: widespread adoption of broadband, cheap cellular phone technology, etc.

In that environment, digital rights were highly speculative ventures. Imagine that Harlequin Enterprises (HQE) had done a block deal in 1990 where they sublicensed the e-book rights for every book signed by Harlequin Switzerland (HQS) for a standard royalty rate. It would have been reasonable to think the fixed costs of book publishing would be replicated in e-books: replicating CDs, shipping them to stores, taking returns, etc.

In short: the Kindle wasn't just unforeseen, it was almost unforeseeable. (Almost.)

This will matter. The authors' claim somewhat presupposes the idea that individual books would have had individual e-publishing deals - they don't say that in so many words, but that subtext may be there. But that's not very likely to have been the case especially for a company that works from a standard form. And if it was I could see a court concluding that the authors would have accepted the terms that Harlequin put in its contracts back in the day. I haven't seen the authors' contracts for print publishing royalties but I'd be surprised if they were far off from 6-8%. Given the fixed costs I've described above and without knowing what the future would hold, would this seem like an unreasonable royalty for e-books also?

So Harlequin will may well argue that the authors would have accepted similar rates for e-books if they had been specifically negotiated back in the day. And this is a pretty good argument. If I were Harlequin's lawyer, I'd plead it.

2. For a sub-rights deal, these rates are completely standard.

This is an unfortunate truth of the entertainment business. The publishers, studios, labels, call them what you will: they have all structured their dealings so that they can make payments to each other and keep the money. Sometimes this is for a good reason but other times it's not (or at least the reason is pretty difficult to see).

Distributors will create various national sub-entities so they can pay each other fees. It happens in music publishing all the time: the US parent company creates a French subsidiary to collect French performance royalties and the French sub pays the US parent, and the parent pays the author based on the money the parent receives, not the money the sub receives. Yes it seems unfair, but if your options are between those cross-payments or having to find someone to handle the work directly in every country, sometimes it's less hassle just to pay twice.

So the HQE-HQS deal that the authors are complaining about is absolutely standard operating procedure for the entertainment business. That doesn't make it morally right. But it does mean that Harlequin will be able to find tons of comparable data to show that their activities were similar to other companies. If everyone in an industry is doing a similar thing, then unless that similar thing is illegal it sets a very strong presumption that what's being done is acceptable. The legal term for that is "commercially reasonable", and it's the same test that would be used under both the Siegel judgment and the authors' own contracts to check whether the HQE-HQS deal was fair.

But this argument is a double-edged sword. When "Hollywood accounting" cases get in front of a jury the results tend to go in one direction: in favor of the creatives and against the studios. Juries don't like seeing large corporations use what they read as backroom shenanigans to take money away from individuals. So if Harlequin were to raise this kind of argument, they might not like where it would end.

Now, do I personally think these arguments should win the day? No. And can I think of more? Yes. But this post is already too long. More tomorrow.


  1. I think #2 is a warning to every artist, every content creator, to be very careful who you get into bed with and make sure your contract covers any attempts to rip you off. Because, obviously, these vultures have no respect for what you do and can't be trusted.

    What a sad, sad world we live in.

    1. Thanks for your note. Unfortunately you're exactly right that creators need to make sure they are alive to these kinds of things in their deals and know the consequences of signing them.


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