Understanding The Harlequin Lawsuit

In March 2011 we blogged about a significant legal ruling supporting a claim brought by the producers of recording artist Eminem. The claim was that what Eminem’s record company defined as “sales” – which paid a low royalty – should actually have been calculated as license revenues, a far higher number. We predicted that the court’s interpretation would one day be applied to book contracts. That day has come in the form of a class action lawsuit against Harlequin on the very same grounds.

For anyone trying to understand the lawsuit, here is our original posting, When is E-Royalty Not a Royalty? When 9th Circuit Court Says It Isn’t.
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Authors – time to lawyer up?

The United States Supreme Court has refused to hear an appeal of a lower court’s ruling that digital music royalties should be treated as a license. Given the similarities between music and book contracts, the implications for authors are significant. Below is our original article on the subject published in October 2010.

Don’t just stand there. Look at the royalty language in your book contract.

RC

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Is there a reason why publishers are not wailing, gnashing their teeth and rending their garments over the Eminem decision?

Maybe they haven’t heard about it. Maybe they don’t understand it. Maybe they don’t think it applies to them. Maybe they just don’t want to think about it at all.

They really must think about it and so must you. The case heard by the Ninth Circuit Court of Appeals was ostensibly about music but you can bet it won’t be long before it’s about e-books, and it could throw the publishing industry’s royalty structure into chaos.

Ethan Smith of the Wall Street Journal explains the issues (the italics are ours): “Under most recording contracts, artists are entitled to 50% of revenue from licensed uses of their music. That usually means soundtracks for movies, TV shows and ads. Sales, on the other hand generate royalties for the artist at a much lower rate—generally in the low teens, and rarely more than 20%.”

For “recording contracts” read “publishing contracts”. Under current book industry standards publishers pay authors a 25% royalty for e-book sales. Their contracts also call for a 50% share of e-book licenses made with third parties. But publishers do not consider e-book revenue to be license revenue. If they did they’d have to pay authors 50% of what they receive rather than half of that amount.

In the case in question, Eminem’s producers F.B.T. Productions brought a lawsuit against Aftermath Records claiming that what Aftermath defined as sales were really license revenues and Aftermath therefore owed them the difference between the low royalty they were being paid and the much higher share of license money. The three judge panel of the San Francisco Federal court agreed:

Pursuant to its agreements with Apple and other third parties…, Aftermath did not “sell” anything to the download distributors. The download distributors did not obtain title to the digital files. The ownership of those files remained with Aftermath, Aftermath reserved the right to regain possession of the files at any time, and Aftermath obtained recurring benefits in the form of payments based on the volume of downloads . . . Under our case law interpreting and applying the Copyright Act, too, it is well settled that where a copyright owner transfers a copy of copyrighted material, retains title, limits the uses to which the material may be put, and is compensated periodically based on the transferee’s exploitation of the material, the transaction is a license.

For a cogent analysis of the case and its implications for the book industry, read Copyright Alert: 9th Circuit Holds Digital Downloads are Licenses Not Sales by copyright authority Lloyd J. Jassin, to whom we’re indebted for bringing the case to our attention.

It will not surprise us to find a flurry of amendment letters from publishers in the next few months saying “Wherever we refer to ‘royalty’ we mean ‘license’ but we’re still going to pay you 25% of what we receive.”

Richard Curtis

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One Response to Understanding The Harlequin Lawsuit

  1. Dela Smith says:

    “Maybe they haven?t heard about it. Maybe they don?t understand it. Maybe they don?t think it applies to them. Maybe they just don?t want to think about it at all.”

    Considering that these are companies which apparently didn’t understand antitrust law or the legal ramifications of collusive price-fixing, and whose in-house counsel doesn’t exactly seem to have been on the ball, either, with regard to long-established federal law… I’m going to go with “they just don’t understand it” when it comes to the ramifications of the Eminem decision.

    Decades in this business have taught me over and over that when dealing with publishers and with their legal departments, one is seldom dealing with the best and the brightest.

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