Monday, October 22, 2012

Three reasons Harlequin shouldn't get to have the e-books litigation dismissed

On October 19, Harlequin filed a motion seeking to have the e-books litigation dismissed. They make a lot of interesting arguments. Their lawyers are earning their money. But ultimately these arguments collapse onto themselves. This motion should lose.


For those of you not aware of the lawsuit, back in July a group of authors went to court to get permission to bring a class action alleging that they were being underpaid for e-books under their publishing contracts with Harlequin. Under these contracts the authors claim they were supposed to receive 50% of e-books revenue received by the Publisher. But, they claim, Harlequin did some inter-company sleight of hand by licensing the e-publishing rights to a related company that paid a 6-8% royalty on e-books, and then the authors received 50% of 6-8% of the sale price (the money received by the Publisher), rather than 50% of the sale price of the e-book (the money received by the related party).

Because the authors were looking to make this a class action they need court authorization to do that, and so their first step was to file a motion asking for authorization. The motion filed on Friday by Harlequin asks the court to declare that these plaintiffs, and basically any plaintiffs, shouldn't get to sue Harlequin on these facts.

I've glossed over one thing by saying "Harlequin" and that's important to the motion filed on Friday. The authors had their contracts not with Harlequin Enterprises (HE), the Canadian company that you think of when you think of Harlequin, but rather with either Harlequin Books S.A. (HBSA) or Harlequin Enterprises B.V. (HEBV), a Swiss or Dutch company both of which are related to HE but not the same. So the Publisher under the contracts was HEBV/HBSA, not HE.

It's this distinction that makes the difference, as far as Harlequin is concerned. Boiling down their arguments, we end up with this:

  1. The authors had no contracts with HE so there can be no breach of contract by HE.
  2. Just because HBSA/HEBV licensed the e-book rights to HE, a related company, that doesn't make HE the "Publisher" under the authors' contracts.
  3. There's no legal basis to say that HE was unjustly enriched by getting to keep the money that the authors think should be theirs, because the authors had a contract and that's all that matters.
The second argument is the interesting one and I'll unpack it a bit.

There's no question that the authors got paid 50% of the money that HEBV/HBSA received. What they want is 50% of the money that HE received. In order to win, they will need to demonstrate that there was something illegitimate about the transaction where HEBV/HBSA licensed the e-book rights to HE (I'll call that the License going forward) so that the judge will say that HE is effectively the "Publisher" under the contracts, rather than HEBV or HBSA. That would then obligate HE to pay the 50% royalty.

The heart of the motion filed on October 19 addresses this argument. Looking at each of the reasons raised by the Plaintiffs, Harlequin attempts to prove that each of them is wrong.
  1. The License wasn't an assignment because HEBV/HBSA didn't intend to give HE any obligations to pay the authors and because the authors' contracts had allowed HEBV/HBSA to license the rights to HE if HEBV/HBSA wanted to.
  2. HEBV/HBSA weren't HE's agents when they contracted with the authors because HE never intended to make HEBV/HBSA into its agents: they were always supposed to be the contracting parties. The License doesn't change that.
  3. HE didn't assume the obligations of the Publisher under the contracts just because it did the work under the contracts in publishing the books, because HEBV/HBSA had the right to delegate work to a related company under those contracts. The License isn't a delegation of work, it's a license.
  4. The court shouldn't pierce the corporate veil and find that HEBV/HBSA were really just the alter ego of HE, as a result treating HE as the "true" Publisher under the contracts. That's not what the License is for. The Plaintiffs don't have any proof that was the case, and so the Plaintiffs shouldn't be allowed to argue it.
But these arguments can all be addressed by 3 responses:
  1. Of course HEBV/HBSA didn't have any intention to give HE any obligations toward the authors. That was the whole point of the License. The court shouldn't look to the intentions of the people who structured the transaction between themselves, who had every incentive to structure it in the way that gave HE no obligations, and conclude that HE shouldn't have had obligations.
  2. Of course the Plaintiffs don't have any proof that HEBV/HBSA were really just the alter ego of HE. How could they? They haven't been allowed to look into HE's files yet. That's what happens in discovery, and discovery doesn't happen until after this motion.
  3. If HEBV/HBSA had published the e-books then the authors would absolutely have been entitled to 50% of the money. But why couldn't they have published these books? Why did they need to do an inter-corporate License in order to exercise these rights?
Ironically Harlequin's #3 argument above makes this last point perfectly. HEBV/HBSA were able to delegate the paperback publishing work to HE and get the job done. They didn't need an inter-company license for that business, which has higher fixed costs including printing, distribution, and marketing. Why then did they need a license for the business operation that has none of those costs?

The only logical conclusion for a court to draw is one based on the different royalty rates: Harlequin chose to delegate the work where the royalty rate makes business sense to Harlequin, but where the royalty rate payable to authors would have made no sense to Harlequin, time for the License. Yes, the authors' contracts allowed Harlequin to do each of these. But there's also a legal doctrine that each side of a contract has to exercise its rights under the contract in good faith.

The judge should give the Plaintiffs a chance to argue that never happened.

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