Plaintiffs--authors of romance novels published by Harlequin--sued Harlequin Enterprises and its related entities alleging that Harlequin paid them artificially low royalties on sales of digitized versions of their books.
On Harlequin's motion to dismiss, the Southern District of New York dismissed the authors' complaint for failure to state claims. Although it affirmed the dismissal in part, the Second Circuit gave the authors' case a second life, concluding that they had sufficiently plead a breach of the publishing agreements based on the theory that Harlequin had used an unreasonably low license fee to calculate the authors' e-book royalties.
In 1983, "for tax and related purposes," Harlequin Enterprises changed its structure and publishing agreements. It registered a subsidiary, Harlequin Enterprises B.V. ("HEBV"), in Fribourg, Switzerland, and thereafter changed its publishing agreements to specify HEBV as the "publisher" and Harlequin Enterprises as a "related licensee."
Harlequin Enterprises took similar action in 1994, registering Harlequin Books S.A. ("HBSA"), a Swiss company, as HEBV's successor (referred to collectively as Harlequin Switzerland). The publishing agreements then specified HBSA as the "publisher" while Harlequin Enterprises continued to be identified as a "related licensee."
Of particular relevance to the appeal, the publishing agreements contained two clauses covering the sale, license or distribution of the authors' works in other media. One clause described how the authors' royalties would be calculated:
On all other rights exercised by Publisher or its Related Licensees [50%] of the Net Amount Received by Publisher for the license or sale of said rights. The Net Amount Received for the exercise, 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.
The second clause stated:
If Publisher licenses, sublicenses or sells to an Unrelated Licensee any of the following rights to the Work anywhere in the world, in any language, Author's and Publisher's share of net amount received by Publisher for said license, sublicense or sale shall be apportioned as follows . . .
[Author's share] 50% [Publisher's Share] 50%.
Harlequin Enterprises informed the authors in 2011 that, under these clauses, their e-book royalties would be calculated based on the net amount Harlequin Switzerland received under the license it purportedly granted to Harlequin Enterprises to publish the e-books. Harlequin Enterprises claimed that this net amount received by Harlequin Switzerland was 6-8% of the cover price of the e-books, which under the publishing contracts would entitle the authors to 3-4% of the cover price.
In their breach of contract claims based upon agency, assignment, and alter ego liability, the authors alleged that Harlequin Enterprises, rather than Harlequin Switzerland, should be considered the "publisher" under the publishing agreements for purposes of calculating royalties. Doing so, the authors alleged, would entitled them to receive 50% of the amount Harlequin Enterprises received on e-books, which was alleged to be upwards of 50% of the cover price. The Second Circuit affirmed the dismissal of these claims because the publishing agreements unambiguously identified Harlequin Switzerland as the "publisher" and Harlequin Enterprises as a "related licensee" for purposes of computing royalties.
But the Second Circuit reversed the dismissal of the authors' breach of contract claim alleging that the license fees paid by Harlequin Enterprises, a "related licensee," to Harlequin Switzerland did not comply with the publishing agreements, which required "that the net amount received from a related licensee be equivalent to the 'amount reasonably obtainable' from an unrelated licensee":
These allegations, that the amount of royalties they received were not equivalent to the amount reasonably obtainable from an unrelated licensee, nudged plaintiffs' claims across the line from conceivable to plausible.
The case cite is Keiler v. Harlequin Enters. Ltd., Appeal No. 13-1753-cv (2d Cir. May 1, 2014).