Why Superman might be a hero in the Harlequin e-books litigation

Superman is faster than a speeding bullet, more powerful than a locomotive, and able to leap tall buildings in a single bound. And for authors in the Harlequin e-books class action, he may also be their biggest hero.

On July 19, three authors filed a request for a class action lawsuit against Harlequin for its e-book publishing deals. For those of you keeping score at home: based on the Complaint, here's how the contracts look to work. (Note: I'm paraphrasing and omitting some not-so-relevant details to keep the flow going.)

Contract between Author and Harlequin Switzerland (HQS):

1. Author licenses to HQS two big buckets of rights: physical book publishing and the right to publish the book in any other format, including e-books.
2. HQS agrees to pay to Author 50% of the net receipts that it receives for publishing in any other format, so that's 50% of net receipts for e-books.
3. If HQS licenses the e-book rights to a company inside the Harlequin corporate family, it has to make sure the revenue it receives is equivalent to the revenue it would have received from a company outside the Harlequin corporate family.

Contract between HQS and Harlequin Enterprises (HQE): HQE agrees to pay to HQS 6-8% of the price paid by consumers for sales of e-books.

So combining those two contracts, and using the math from the Complaint:

1. Consumer pays $8.00 for e-book.
2. HQE receives around $4.00.
3. HQE pays to HQS 6-8% of $4.00, or $0.24-0.36.
4. Author receives 50% of amounts paid to HQS, or $0.12-0.24 per book sold.

And here's how the authors think it should have worked:

1. Consumer pays $8.00 for e-book.
2. HQE receives around $4.00
3. HQE and HQS are in the same corporate family, so we should ignore the contract between them.
4. Author receives 50% of amounts paid to HQE, or $2.00 per book sold.

So one of the big issues in the litigation is going to be: was it reasonable for Harlequin to act the way it did?

Believe it or not this isn't as easy a question as it looks at first glance. (I'll post this week to set out some of the things that I think Harlequin should raise as defenses to this claim). But there's a case out there that will provide some insight into how a court looking at this should make its decision.

Here's where Superman comes in.

In 1938, the very first Superman comic was produced. The creators of Superman, Siegel and Shuster, assigned away all the rights to Superman to the publishers of Action Comics for $100. Over time, Superman developed into the franchise that we know today, and Action Comics moved through various owners to end up as a part of DC Comics, a division of Warner Bros. Using a technical provision under the 1976 version of the Copyright Act, the heirs of Siegel and Shuster cancelled the original assignment and they were awarded ownership of the copyright in Action Comics issue #1. And with that ownership they get a portion of the profits from the ways people have used Superman over time.

But of course people have been making Superman movies and TV shows since 1938. So a court has had to sit down and figure out how much money these heirs should receive. And this court has had to look at very similar issues to the ones that will come up in the Harlequin litigation.

If you're Harlequin these don't really work well for you. In the Superman lawsuit the court held that you should look at every component of the deals and individually consider whether each one was fair. The court got data on other licenses for comic book movies: Spider-Man, Conan, Iron Man, Tarzan, and others. It looked at all of these and considered whether the Superman contracts between DC and Warner were the same terms as would have happened between third parties. Example: in the contract between DC and Warner for the Superman movies, there was an advance against royalties, an option, and no reversion clause. The court looked at each of these and said there should have been a reversion clause and the option payments weren't fair, even though the royalties were fair. The same principles will apply in the Harlequin situation.


So on the Harlequin facts, several questions come immediately to mind:

1. Why didn't HQE pay HQS an advance? They knew exactly how many copies each of these books had sold in paper, so they could have figured out a reasonable advance.
2. If they didn't pay an advance, was 6-8% comparable to what other publishers were paying for e-books? Put aside the Kindle and Nook self-publishing rates (although they will be important): what was Harlequin paying new authors for e-book rights? What about other publishers?
3. And the most important question: why did Harlequin have to do this inter-corporate deal at all? Why couldn't the e-books have been published directly through HQS? In the Siegel litigation there were good reasons for Warner to make the movies and not DC: Warner had the distribution relationships with theaters worldwide, the marketing organization, etc. It's tough to see why HQS couldn't have published the e-books.

Harlequin is going to have a tough time answering these. But not an impossible one, and they might be able to change the topic a bit. On that, as I've said, more in a future post.