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Harlequin Authors' e-Book Royalties Suit Continues on “Unrelated Licensees” Rate Claim

The U.S. Court of Appeals for the Second Circuit dismissed breach of contract claims rooted in agency, assignment and alter ego liability in an authors' class action suit over the calculation of e-book royalties from the “publishers'” affiliate. But the court allowed the case to proceed on a claim of breach for allegedly failing to calculate those royalties at a rate equivalent to the “amount reasonably obtainable” from unrelated licensees. Keiler v. Harlequin Enterprises Ltd., 13-1753 (2d Cir. 2014).

Romance book authors sued Harlequin in the Southern District of New York claiming they were receiving artificially depressed royalty rates for e-book sales. The case involves contracts the authors signed with Harlequin's Swiss-based subsidiary Harlequin Enterprises B.V. (HEBV) and HEBV's Swiss-based successor-in-interest Harlequin Books S.A. (HBSA). The agreements specified that HEBV, then HBSA, (both established for tax reasons) was “publisher” and Harlequin Enterprises Ltd. a “related licensee.” (Harlequin authors previously signed directly with the latter.)

An “All Other Rights” clause provided that the authors would receive from e-book sales 50 percent of net income from a “related licensee” calculated equivalent to that received from arms-length licensees. Harlequin claimed that net income was 6% to 8% of e-book cover prices, of which the authors got half. The authors argued that Harlequin Enterprises Ltd. should be deemed “publisher” for royalty calculation purposes and that net income should be based on more than 50% of e-book cover prices.

The district court dismissed the suit for failure to state viable claims. Affirming in part, the Second Circuit noted in interpreting the contracts under New York law: “Based on our review of the Publishing Agreements, we conclude that plaintiffs' first through third claims are not viable because the Publishing Agreements unambiguously provide that HEBV or HBSA is the 'Publisher' and Harlequin Enterprises is a 'Related Licensee' for purposes of computing royalty payments. The fact that Harlequin Switzerland may have delegated certain publishing and administrative duties to Harlequin Enterprises [Ltd.] does not modify this relationship. The Publishing Agreements expressly contemplate that the 'Publisher' could assign or delegate publishing duties 'to any related legal entity,' including 'to its parent company or to an affiliate [or] subsidiary.' These provisions are unambiguous and enforceable.”

But the appeals court went on to find the authors' fourth clause of action, for failure to base e-book net income on deals with “unrelated licensees” stated a plausible claim at the pleading stage. On this, the Second Circuit noted the “plaintiffs have provided a basis, albeit 'upon information and belief,' that defendants engaged in self-dealing because the industry standard is considerably higher than the 6 to 8 percent of net receipts that Harlequin Enterprises remits to its subsidiary Harlequin Switzerland (i.e., at least 50 percent of net receipts). We have observed in the past that pleading on the basis of information and belief may be appropriate under such circumstances.”

New York Federal Court Sees No Joint Venture in Agreement Between Slip-N-Slide Records and Island Def Jam Music

The U.S. District Court for the Southern District of New York decided there was no joint venture between Slip-N-Slide Records and Island Def Jam Music (IDJ) that would create a fiduciary obligation by the latter's parent company UMG Recordings in splitting record royalties with Slip-N-Slide. Slip-N-Slide Records Inc. v. The Island Def Jam Music Group, 13-cv-04450. The parties entered into an agreement in 2006 under which IDJ/UMG would market and distribute recordings by Slip-N-Slide's artists. The contract provided for a “50/50 profit-split” after “all charges” were deducted, and for IDJ/UMG to turn over during a royalties audit by Slip-N-Slide “all necessary manufacturing and sales information, data, and documents maintained by IDJ in the ordinary course of business with respect to the exploitation” of the recordings. The agreement further stated: “Nothing herein contained shall constitute an employer-employee relationship, a partnership between, or a joint venture by, the parties.” In June 2013, Slip-N-Slide filed suit after UMG refused to turn over documents related to $15 million in charges it had deducted. (In 2014, UMG announced it was separating the previously merged Island and Def Jam labels.) But Southern District Judge Andrew L. Carter Jr. noted, though “'[p]arties can evince their intent to be joined as joint venturers ' impliedly through actions and conduct,' ' the parties did not evince an intent to form a joint venture, given that the Agreement is a product of an arm's length commercial transaction between the parties that does not bare any indicia of a fiduciary relationship, and that it expressly disavows a joint venture.”

Stan Soocher is Editor-in-Chief of Entertainment Law & Finance and a tenured Associate Professor of Music & Entertainment Industry Studies at the University of Colorado's Denver Campus. He can be reached at [email protected] or via www.stansoocher.com.

Harlequin Authors' e-Book Royalties Suit Continues on “Unrelated Licensees” Rate Claim

The U.S. Court of Appeals for the Second Circuit dismissed breach of contract claims rooted in agency, assignment and alter ego liability in an authors' class action suit over the calculation of e-book royalties from the “publishers'” affiliate. But the court allowed the case to proceed on a claim of breach for allegedly failing to calculate those royalties at a rate equivalent to the “amount reasonably obtainable” from unrelated licensees. Keiler v. Harlequin Enterprises Ltd., 13-1753 (2d Cir. 2014).

Romance book authors sued Harlequin in the Southern District of New York claiming they were receiving artificially depressed royalty rates for e-book sales. The case involves contracts the authors signed with Harlequin's Swiss-based subsidiary Harlequin Enterprises B.V. (HEBV) and HEBV's Swiss-based successor-in-interest Harlequin Books S.A. (HBSA). The agreements specified that HEBV, then HBSA, (both established for tax reasons) was “publisher” and Harlequin Enterprises Ltd. a “related licensee.” (Harlequin authors previously signed directly with the latter.)

An “All Other Rights” clause provided that the authors would receive from e-book sales 50 percent of net income from a “related licensee” calculated equivalent to that received from arms-length licensees. Harlequin claimed that net income was 6% to 8% of e-book cover prices, of which the authors got half. The authors argued that Harlequin Enterprises Ltd. should be deemed “publisher” for royalty calculation purposes and that net income should be based on more than 50% of e-book cover prices.

The district court dismissed the suit for failure to state viable claims. Affirming in part, the Second Circuit noted in interpreting the contracts under New York law: “Based on our review of the Publishing Agreements, we conclude that plaintiffs' first through third claims are not viable because the Publishing Agreements unambiguously provide that HEBV or HBSA is the 'Publisher' and Harlequin Enterprises is a 'Related Licensee' for purposes of computing royalty payments. The fact that Harlequin Switzerland may have delegated certain publishing and administrative duties to Harlequin Enterprises [Ltd.] does not modify this relationship. The Publishing Agreements expressly contemplate that the 'Publisher' could assign or delegate publishing duties 'to any related legal entity,' including 'to its parent company or to an affiliate [or] subsidiary.' These provisions are unambiguous and enforceable.”

But the appeals court went on to find the authors' fourth clause of action, for failure to base e-book net income on deals with “unrelated licensees” stated a plausible claim at the pleading stage. On this, the Second Circuit noted the “plaintiffs have provided a basis, albeit 'upon information and belief,' that defendants engaged in self-dealing because the industry standard is considerably higher than the 6 to 8 percent of net receipts that Harlequin Enterprises remits to its subsidiary Harlequin Switzerland (i.e., at least 50 percent of net receipts). We have observed in the past that pleading on the basis of information and belief may be appropriate under such circumstances.”

New York Federal Court Sees No Joint Venture in Agreement Between Slip-N-Slide Records and Island Def Jam Music

The U.S. District Court for the Southern District of New York decided there was no joint venture between Slip-N-Slide Records and Island Def Jam Music (IDJ) that would create a fiduciary obligation by the latter's parent company UMG Recordings in splitting record royalties with Slip-N-Slide. Slip-N-Slide Records Inc. v. The Island Def Jam Music Group, 13-cv-04450. The parties entered into an agreement in 2006 under which IDJ/UMG would market and distribute recordings by Slip-N-Slide's artists. The contract provided for a “50/50 profit-split” after “all charges” were deducted, and for IDJ/UMG to turn over during a royalties audit by Slip-N-Slide “all necessary manufacturing and sales information, data, and documents maintained by IDJ in the ordinary course of business with respect to the exploitation” of the recordings. The agreement further stated: “Nothing herein contained shall constitute an employer-employee relationship, a partnership between, or a joint venture by, the parties.” In June 2013, Slip-N-Slide filed suit after UMG refused to turn over documents related to $15 million in charges it had deducted. (In 2014, UMG announced it was separating the previously merged Island and Def Jam labels.) But Southern District Judge Andrew L. Carter Jr. noted, though “'[p]arties can evince their intent to be joined as joint venturers ' impliedly through actions and conduct,' ' the parties did not evince an intent to form a joint venture, given that the Agreement is a product of an arm's length commercial transaction between the parties that does not bare any indicia of a fiduciary relationship, and that it expressly disavows a joint venture.”

Stan Soocher is Editor-in-Chief of Entertainment Law & Finance and a tenured Associate Professor of Music & Entertainment Industry Studies at the University of Colorado's Denver Campus. He can be reached at [email protected] or via www.stansoocher.com.