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NINC DIGITAL RIGHTS GROUP

RE: Consultation with Elaine P. English, PLLC, on the subject of Harlequin's claims to digital rights

NOTE:  When, in her analysis, Elaine, at times, refers to a specific contract by year, that contract is the representative 'model' contract we sent her (please see chart).

Disclaimer:

The chart and this memorandum were prepared based upon certain contracts selected by the client group as representative “models” of Harlequin series contracts from their own files.  The memorandum and chart are based solely on these specific contracts and are not intended as all-encompassing of all Harlequin contracts from this time period.  The advice herein given was intended for the benefit of the client group.  It was not written as, nor intended to be, general legal advice for any other authors, including other Harlequin series authors.  Anyone using the chart or relying upon the memorandum should carefully compare his/her own contract to the terms of the model contracts outlined in the chart and should consult with  his/her agent and/or attorney before making any decisions.

Dear Ninc Digital Rights Group

As you requested, here is my analysis of the 15 Harlequin contracts you sent, showing examples of various grants of rights and contract terms from over the years.  I will then try to address the various questions that were forwarded to me, in no particular order.

I am attaching a chart that I created as I went through the contracts, detailing those provisions that are most relevant to the issues presented, namely the grant of digital rights, the applicable royalty provisions, the reversion of rights clauses, and any extension of rights provisions.  You’ll see in the far right column some miscellaneous notes and other provisions that as I went through seemed relevant as well.

Grant of Rights.

Based upon my analysis, I believe that Harlequin was clearly granted electronic rights under all of these contracts, except for the 1982 Mills & Boon contract and perhaps the 1991 Harlequin agreement.  My analysis is based upon the language that appears in each of these agreements regarding “any other rights now known or hereinafter invented” or some other slight variation of that same language.  While it is true that contracts are generally agreements mutually entered into by the parties based upon what each understood and knew at the time the contract was executed, courts will uphold language which is unambiguous.   I believe this language to be unambiguous.  Based upon my research, I believe that most courts would uphold that language as a valid grant and would interpret it strictly as it is written – i.e., that it granted all rights, even those later invented.  While most of the cases on this subject are those involving grants of rights to music and licensing of book rights for films, in virtually every case, the courts were willing to hold the parties to that language.  While the parties may not have known at the time that such rights (here e-books) existed or would ever be invented, the courts have read this language as saying that the parties clearly intended this to be a grant of whatever future rights might come into existence; i.e., an all-rights-at-all-times grant.

The 1982 contract uses only the word “publish,” and there, I think a strong argument can be made that neither party intended that word to include electronic publishing at the time.  Since there is no other language including later invented rights in that agreement, I think a court would be reluctant to stretch the word “publish” to include electronic publication.

The situation with the 1991 contract is a bit more ambiguous.  That contract uses only the phrase “information storage and retrieval” and has no additional language about later invented rights.  I acknowledge that at some point in the 1990’s “information storage and retrieval” came into use in publishing contracts and was probably understood by many to mean and include e-book rights.  However, information storage and retrieval was also a process by which publishers prepared text and sent it out for printing and/or maintained its own archive of materials.  An argument could be made that it was only for the limited purposes of archiving and printing that this right was included in the contract.  I don’t know, frankly, how persuasive that argument might be.  I would imagine that Harlequin will take the position that e-book rights are granted to them by virtue of this language and it would therefore, take litigation to establish otherwise.

I would also point out (because it was referred to in some of your questions) that the relevant issues for contract interpretation are not whether or not Harlequin, itself, was actively pursuing e-book rights at the time the contract was entered into, but rather whether the technology and/or the right was generally known.  Wikipedia suggests that the earliest e-books date back to Project Gutenberg that started in 1971.  From 1985 to 1992 the Voyager Company was selling books on CD-ROM to be read on computers and apparently in 1993 the first software was developed to read a digital book.  So it is possible that given these facts, a court could conclude that the parties intended this language regarding information storage and retrieval to be a grant of e-book rights.

For all the other contracts, Harlequin clearly possessed e-book rights and thus, is free to exercise those rights at any time it chooses.

If Harlequin holds these rights, then the reversion clauses and any out of print definitions become critical to determining whether or not an author can recover her rights at this, or any other, time.

Reversions.

The 1982 and 1983 contracts contain no definition for a work being out of print nor a clause allowing for the author to seek a reversion.  In the 1983 contract, it is only the Publisher who can declare a work out of print by discontinuing manufacture and making such a declaration.

Starting with the 1985 contract and continuing until 1991, the contracts provided that if the work were “not in print and for sale” under either the Publisher or its licensees’ imprint, the work would be considered eligible for a reversion of rights (provided the requisite number of years had passed).  This language would suggest that the presence of an e-book edition would, therefore, be insufficient to stop a reversion request from an author.  In the 1991 contract, that language was broadened to include “not in print, not for sale and no rights being exercised by Publisher or any licensee.”  This language would provide that any edition (even an e-book edition) would be sufficient to defeat the author’s request for reversion.   Just to be clear, the reversion provision is structured so that any request by an author is considered premature and untimely unless the specified conditions for the work being out of print are factually present.  So any edition whatsoever, even a foreign edition or a movie option, etc., would be sufficient to preclude an author from requesting a reversion.

I have noted on the chart that over time the requisite waiting period decreased from 7 years down to 5 years, but you’ll also note in that column of the chart that the measurement of time went from first publication of the work to the time of the last exercise of any right.  So if the last foreign edition wasn’t published until 2011, for example, that would be the relevant date for counting this period, not the 1995 release date of the original title. Apparently the Harlequin royalty statements show the on-sale date for each edition, so it should be easy to ascertain the relevant dated.

The reversion procedure is not automatic in any of these agreements.  It requires the author to send a letter to the publisher and then gives the publisher a stated period of time in which to reprint the work.  It is only if that publisher fails to reprint within that specified time frame that the Author actually gets the rights returned to her.  The time frame for Harlequin to reprint in response to an author request for reversion started out being 9 months but by 1995 had been extended to 18 months and remained that through the last contract I was asked to review (2010).  While that period is longer than most literary attorneys (or agents) would want to see, there is nothing fundamentally unconscionable about that time frame.  If the publisher reissues the book in any format (and the Publisher gets to choose that format), then all rights under the contract are deemed extended.

Starting with the 1991 contract, the Harlequin reversion of rights clause further provides that if the publisher reissues the book (in the appropriate format) that the publisher’s rights are extended not indefinitely but only for an additional five (5) year period.  The 1991 – 1996 contracts provide that the five year period runs from the exercise of any rights; so, if Harlequin does an e-book now, for example, and then later sells foreign rights (whether e-book or print), then the extension would extend to a date five years from that subsequent, later exercise of rights.   Presumably any time thereafter during the extension that any right was exercised the 5-year period start anew.  Starting with the 2004 contract, the extension provision in these later contracts has a set five year term from the date of the exercise of any right after the reversion notice is received and the work reissued.  A flat five-year extension is a more author-friendly provision and one that I would recommend you try to see if Harlequin is willing to amend the agreements that have the earlier language. The earlier contracts (1982, 1983, 1985, 1986, 1987) do not contain the five year provision and thus, are deemed to be indefinitely extended until the expiration of the author’s copyright in the work.

In the 1991 and 1993 contracts, the publication of a digital edition should not be sufficient to extend the publisher’s rights after a reversion request.  In both of these contracts, only specific exercises of rights will serve to extend the publisher’s rights and digital is not among the listed rights.  By the 1995 contract (and for all the remaining years), that “oversight” seems to have been addressed by including whatever provision exists in the contract defining electronic rights as among those that will serve to extend the publisher’s right to publish after such a request.

In the earlier contracts (1985 and 1986), the language provides that the publisher must “reprint and offer for sale.”  An argument can be made that the word “reprint” should be interpreted to mean only a “print” copy.  However, because those contracts do extend to the publisher e-book rights and the publisher has discretion to choose the format in which it publishes, I can see Harlequin taking the position that an e-book “reprint” is sufficient.  This might be another issue that would have to be finally determined via litigation.  The 1987 contract is even more ambiguous.  It references only the publisher’s failure to “comply with such notice.”  The definition of out of print in that contract states that it will not be out of print if the work is available in any one edition, so perhaps Harlequin could argue that since it has the right under the contract to do an e-book, all it must do to comply with the notice is produce that one e-book edition.  Again, because the publisher is granted broad discretion to determine the format and manner of publishing in all of these agreements, it’s hard for me to imagine that a court would allow an author to impose a specific format demand as part of her reversion notice, but, I suppose, an author with this contract could try.

Royalties.

All of these contracts, except for the 1982 Mills and Boon agreement, expressly state royalty provisions for e-books.  (Yes, even those contracts written before e-books were a reality, include royalty provisions).  Up through the 1996 contract, the applicable royalty provision provides for the Author 50% of the Net Amount Received by the Publisher from such sales.  I’ve included the precise section where this provision may be found in each contract on the chart.  In many cases, this provision is a catch-all one that covers royalties for sales of any editions not otherwise covered in prior, more explicit provisions.

Net Amount Received (NAR) is not a term to be feared.  It has been used in thousands of publishing agreements for more years than I’ve been in the business (that’s more than 25 years).  In some of the contracts it is expressly defined, but in all cases, it is generally understood to be the actual amounts received by the publisher, less only a limited type of deductions.  NAR does take into consideration whatever discount the publisher has given to the distributor, reseller or customer of the work since it is a formula based upon whatever amounts the publisher actually received (versus the list or invoice price).  Other generally accepted deductions are taxes, shipping costs and insurance, and sometimes if the “sale” is a license, any agent’s or attorneys fees required to obtain the license.    By the 1995 contract NAR became a defined term.  In that contract, it is defined as “the actual monetary payment received by Publisher pertaining to use of the rights in the Work net of any applicable taxes.”  Therefore under this contract, taxes would be the only legitimate deduction from the total amounts the publisher receives.

At this point, it’s necessary to make a side-trip to discuss a bit about the organization of Harlequin before addressing further the specific issue of the royalty rates applicable to these contracts. If you will notice, all of these contracts (with the exception of the 1982 Mills & Boon agreement) are with a parent, corporate entity in Switzerland.  In the earlier contracts, it is Harlequin Enterprises, B.V., and in later agreements, Harlequin Enterprises S.A.  For our purposes, these are one and the same.  Without going into a great deal of technical explanation (which is beyond my abilities in any event), Harlequin has structured the author contract so that your agreement is with, what is in effect, this holding company, but the actual publisher (or receiver of funds from the sales of copies of the work) are various imprints and divisions (subsidiaries of the company) in the US, Canada and elsewhere throughout the world.  When the contracts speak of “related licensees,” it is referring to these subsidiary entities. Apparently actual license agreements were/are regularly entered into between each of these subsidiaries and first HEBV, now HESA.

What does this have to do with the royalty rates?  Well, in the contracts between 1985 an 1996, the applicable royalty provision for e-books is 50% of the Net Amount Received for such sales.  This actually means 50% of the monies received by HEBV (or HESA) from the license agreement it has with the appropriate imprint/division publishing and selling the e-books.  As a result of some communications between the Harlequin contracts department and myself on behalf of an author, I learned that the current licensing arrangement provides that HEBV (or HESA) receives royalties on e-books at the same rate as provided for in current author contracts for e-book royalties (namely rates starting at 6% of cover price).  Sadly, what this means for authors, is that you are entitled to only half of that amount or a royalty equivalent to 3% of cover price.  Is this fair or reasonable?  I’d say “no.”  But that’s what these contracts provide. The only avenue, I see, perhaps to challenge this is language found in contracts starting in 1991 and continuing through 1996.  That language provides that “the NAR for the sale or license of said rights by Publisher from a Related Licensee shall, in Publisher’s estimate, be equivalent to the amount reasonably obtainable by Publisher from an Unrelated Licensee for the license or sale of the said rights.”  That language which suggests these internal agreements must be the same as unrelated, arms-length negotiations, gives an author a small window to argue that the license between HESA and its subsidiary is unreasonable in that it provides lower royalties than would be obtainable from any other, outside licensee, since generally all other traditional print publishers are paying 15% of list or 25% of net, and e-publishers are paying even higher.  Of course, remember that even under this theory, the author is still eligible only for half that amount (or approximately 7-1/2% of list).  Unfortunately, the language of this provision (as well as the publishing contract generally) gives total discretion to Harlequin to determine the reasonableness of its licenses and the estimation of equivalence in this specific case.  (I’m sure all of you have heard Harlequin’s explanation of the equivalence of its e-book royalties, so I won’t try to repeat it here.)  I don’t know whether a court would step in to second-guess the publisher’s judgment on this, but I think it unlikely, and in any event, it would have to be the result of serious and expensive litigation.

In contracts starting in 2004 and continuing, the royalty rate begins at 6% of cover price and escalates from there, depending upon whether the e-book is sold in the US and Canada or elsewhere.  While I share authors’ frustration with this low rate, I don’t see anything in the context of these contracts that provides a basis for challenge.  Several of your questions asked about unconscionability or restraint of trade.  Perhaps a litigation attorney would give you a different evaluation here, but I don’t see either as a likely successful route to challenge the royalty rates.  Unconscionability requires that a fairly high standard of proof be met. Black’s Law Dictionary defines an unscionable bargain as “one which no man in his senses, not under delusion, would make, on the one hand, and which no fair and honest man would accept, on the other.”  It is also my understanding that the contract would have to be judged by standards and circumstances existing at the time of making the contract, not by current conditions.  You would have to overcome, first and foremost, the fact that you read, presumably understood, and accepted these financial terms.  With respect to contracts, unconscionability is often more successfully established against hidden terms, e.g., warranties in type too small to read.   Certainly, I think it’s difficult to establish that a 50/50 share of revenues from an unknown source was fundamentally unconscionable at the time.

Several of you have suggested that Harlequin’s position is monopolistic.  That is a factual matter and would have to be clearly established.  I’m not sure that the facts would actually support that position.  First, while there may not be as many avenues now for series romance, I don’t think that was factually the case back in the 1980’s and 1990’s.  But more importantly, I don’t see courts making the kind of distinction that would focus solely on series romance.  I think they would look at publishing opportunities in a broader context (probably fiction generally), and if they did, there is even less factual support for the notion that Harlequin had/has a monopolistic position. There certainly were other avenues for you, as the creator of your story, to produce it in a manner suitable for many other publishers.  I reiterate that I’m not a litigation attorney and perhaps have more difficulty seeing this analysis than others.  But I will say that over my twenty-five years in the business, I have yet to come across a reported case where an author successfully made an argument of this sort or even successfully challenged the terms of a publishing agreement.  These contracts are written to give broad discretion to a publisher and courts typically uphold that discretion.

Finally, starting in 1995 and continuing, Harlequin added a boilerplate clause entitled Severance that provides that if any provision of the Agreement should be declared invalid or unenforceable by any court (say, for example, because it is unconscionable), all other provisions remain in full force and effect and the parties will then meet in good faith to agree upon a replacement provision.  So, under the contract, the most you would gain from challenging the rate clause would be a further negotiation with Harlequin that perhaps could lead to a higher royalty rate, but not a reversion of rights.

Someone posed the question of whether or not Harlequin has to give authors the same digital rates as Carina Press.  The answer is “no.”  Carina Press was established as a separate legal entity and Harlequin acknowledged at the time that it was experimenting with a new model.  The only way I see the Carina rate being relevant is if Harlequin were using Carina to print and publish its e-books, but that is not what Harlequin is doing.

Statutory Reversion.

A number of you have asked, if Harlequin publishes an e-book edition and thereby puts your book back into print will their right to control that book be perpetual (assuming you don’t have one of the more recent contracts with the five year limit)?  Well, the good news is “no.”  US Copyright law provides a statutory termination right to every copyright holder.  Under this little known provision, an author may cancel any book contract (or other contract that includes a license of any rights under copyright) and reclaim her rights in her work.  To some extent Congress’ purpose in enacting this statutory termination of transfer right (as it’s called) was precisely the situation in which each of you finds yourself today.  Congress recognized that a new, struggling author might not be in a position to negotiate the best deal and wanted to afford him the right to be able to take advantage of changes in the marketplace to get a better deal later on.

The rules for exercising this right are very strict and must be complied with to the letter.  The details of the provision are outside the scope of this memo, but generally this is a one-time right that must be exercised during the five-year period that begins with the earlier of a) the end of 35 years after the date of publication of publication of the work under that contract or b) the end of 40 years after the date of signing the book contract.  If the copyright owner (or her heirs) do not exercise the right during this period of opportunity, the right is lost and the contract will remain in force for its duration (typically, the life of the copyright, i.e., the lifetime of the author plus 70 years).

As I said, this is a right granted by the copyright laws and it cannot be waived by any contract.  So, I would suggest for those of you in this position, that you make a note of your opportunity period for each of your books and plan to take the necessary steps at that point.  Sadly, there is no comparable termination of transfer provision in British copyright law, so the status of the early Mills and Boon contract could be in question.  That contract states that it is governed by the laws of England, so presumably no termination right applies; however it is possible that if the author is an American citizen, an argument could be made that US copyright law should still apply.  Whether this argument would prevail will require further investigation and research, which I would urge the author of that agreement to pursue at the appropriate time.

Miscellaneous issues.

Someone asked about why Harlequin shouldn’t have to share its 70% income that it likely receives from Amazon (assuming the agency model is being used) 50/50 with the authors under the subsidiary rights provisions of most of these contracts.  When publishers first started using Amazon to publish, authors seized upon this interpretation; however, I know of no publisher that has accepted this line of reasoning.  If you look closely at the Amazon titles, you’ll see that Amazon is merely the distributor of an edition published by Harlequin.  The Kindle is considered only a format, not a separately published edition.  So, what’s happening here is not a license that falls under the subsidiary rights section of the agreement, but rather a sale by Harlequin that simply occurs via a third-party distributor (Amazon) and therefore, the royalty provisions discussed in some detail above are the appropriate ones.

Some of the issues raised by the author notes fundamentally question only the fairness of the situation.  For example, some have said that limiting an Out of Print definition to 250 copies is too low or that the royalty rates should be higher for e-books since production costs are less.  I don’t see anything in any of those statements that rises to the level of unconscionability; they are simply matters on which reasonable people may disagree.  Publishers clearly believe that the costs associated with producing e-books are still substantial.  For this and reasons related to the uncertainty of the market, publishers are reluctant to raise royalties.  As we’ve seen, authors are bound by the terms of the agreement they sign, so the time to consider negotiating for different terms is when the contract is first presented or when there is an opportunity for amendments.  Remember the contract can always be amended by mutual agreement of the parties, and Harlequin wants to keep you as an author.  But otherwise, once terms are agreed to, they are binding.  For example, if a contract grants to Harlequin anthology or so-called “bundling” rights, then that is a right that Harlequin may exercise.  In these series contracts authors typically cannot negotiate for special consultation and approvals on the publisher’s exercise of these or other rights, so the timing and appropriateness of the exercise of these rights is left completely up to Harlequin.

With respect to the out of print clause and the 250 sales minimum, I would suggest that any number, even a low one, is better than no number at all.  Without a stated minimum, under most of these agreements, the mere presence of an e-book edition will be sufficient to keep a work in print so long as it is available for sale – i.e., accessible via Harlequin’s website or any other; no actual sales would be required.   I also think asking for a minimum sales number tied to a full or other price, is totally unworkable, and thus, unlikely to be successfully negotiated.  For both administrative monitoring purposes and for fairness across their author base, Harlequin has been very reluctant to introduce too much variation in the terms of its series contracts.  While there may well be some options open to those of you who have a basis to ask for amending these old agreements, you should recognize that those options, like your options in negotiating new series contracts, will be constrained.

On the other hand, when it comes to granting reversions or putting books back into print, you must recognize that Harlequin has full discretion to make those decisions.  Just because they granted a reversion of rights to one of your friends, doesn’t mean they have to grant a reversion to you.  Like any publisher, Harlequin will select those books with the greatest potential for sales to include in its new digital programs and release those they feel have exhausted their potential for one reason or another.  Whether to reprint a book after a reversion notice is received is left totally up to the publisher’s discretion.

Someone asked if a letter stating that the author could consider all rights to have reverted after 6 months from sending a notice if there were no response.  The answer is “no.”  Unless your contract expressly sets forth only a six month period, you must give the publisher the time frame specified in the agreement.  As you can see with the chart, for the older contracts, the relevant time period was 9 months and for the newer ones, it’s 18 months.  It is only after that specified time period expires with the publisher taking no action that you can consider the rights reverted.  While at that point, it does generally happen automatically, you will likely need some documentation (a reversion of rights letter from Harlequin) to ensure the next publisher that you have re-acquired these rights.  Harlequin, in my experience, has been very good in sending out written termination agreements; although with the current crash of requests, I’m sure it’s taking a bit longer than usual.

Recommendations:

If you have any leverage provided by any of your contracts with Harlequin, I would suggest using it to see if you can improve your situation by amending your agreement, particularly if you have some of the older contracts with the 50% of NAR royalty rate.  While you may not be happy with the current rates, I’d take them over half those same poor rates.  In addition, I’d endeavor to add a flat five year extension period, so that even though you’ll have to wait, at least you’ll be eligible to get your rights back five years from now (or five years from whenever they digitize your book).  You might also try to negotiate for the 250 sales minimum on e-books as part of the out of print definition as a bonus on top of the 5 year term, if you can get it.  You could also ask about a clause that would guarantee you a higher royalty should Harlequin ever raise its royalty rates for e-books for new authors.  If your books are in that period where a reversion request can be made, you might have some leverage to request these items in an amendment to your existing contract.  Even if you know that Harlequin plans to reissue your books in the e-book program and you have the 50% of NAR clause, you might still ask about getting the current royalty rate.  Asking probably never hurts.

For the larger issue of getting Harlequin to raise its royalty rates overall, collective action on the part of author groups, such as Novelist, Inc. or RWA, are more likely, in my opinion, to achieve results than individual author negotiations.  I’ve been discussing higher e-book rates for my authors with Harlequin for probably ten years as have most agents I know. But the results have been negligible.  But I do know that the contracts department at Harlequin is aware of the current firestorm over reversion of rights, and it’s possible that now is an opportune time for author groups to use their finest lobbying skills.

If there are specific questions about this memo, or if I failed to address something, please just let me know.

Sincerely yours,
Elaine P. English

An addendum from Elaine the next day:

Last night it dawned on me that I didn’t address a couple of questions about the reliability of royalty statements with respect to digital royalties.  I may have wanted to avoid the question because it’s not strictly a legal one, but it does deserve some response.

Basically, an author can question a royalty statement with respect to digital royalties the same way they question the reporting of any other sales.  First, by asking questions, and then by having an audit done.  From what I’ve read all publishers seem to be struggling with the reporting of digital sales.  The different platforms and different reporting practices of each of the distributors involved, I’m sure doesn’t make it easy.  But I don’t see any fundamental reason to question Harlequin’s good faith in reporting digital sales any more than one questions their reporting of any other sales.  Harlequin must have a humongous system for keeping track of all of the sales.  I think they’ve been doing a good job of reporting on all of them so far (foreign and domestic) and have no reason to think they won’t develop an equally good system for keeping track of digital sales.  But again, if any author has doubts, an audit is the ultimate way to resolve doubt.

Disclaimer: 

The chart and this memorandum were prepared based upon certain contracts selected by the client group as representative “models” of Harlequin series contracts from their own files.  The memorandum and chart are based solely on these specific contracts and are not intended as all-encompassing of all Harlequin contracts from this time period.  The advice herein given was intended for the benefit of the client group.  It was not written as, nor intended to be, general legal advice for any other authors, including other Harlequin series authors.  Anyone using the chart or relying upon the memorandum should carefully compare his/her own contract to the terms of the model contracts outlined in the chart and should consult with  his/her agent and/or attorney before making any decisions.


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