On November 6th, the 2nd Circuit Court of Appeals overturned the lower court’s dismissal in Flynn v. McGraw Hill, and allowed the plaintiffs’ breach of contract claim to move forward.
The breach of contract claim involves McGraw Hill’s alleged practice of reducing or ceasing royalty payments on revenues generated through McGraw Hill’s online platform, Connect, which hosts electronic textbooks and related course materials since its launch in 2009. The publishing contracts at issue specified that McGraw Hill would publish the plaintiffs’ textbooks “at its own expense” and that royalties would be based on “Publisher’s net receipts”—defined mostly as “the Publisher’s selling price, less discounts, credits, and returns, or a reasonable reserve for returns;” although the initially signed contracts only covered print works, McGraw Hill later amended the contracts to cover electronic works under the same royalties structure. McGraw Hill paid royalties based on the entire revenue from ebook sales through Connect, which included both the ebook and its accompanying materials such as PowerPoint lesson plans and test banks.
This changed in 2020, according to the plaintiffs, when McGraw Hill started paying royalties solely on sales attributed to the ebooks, excluding the revenue derived from the accompanying materials, despite the fact that the accompanying materials cannot be bought independent of the ebook. Under the new practice, McGraw Hill would unilaterally determine which part of the revenue is attributable to the ebooks, their accompanying materials, or the Connect platform, even though the sales are always based on a “single unitary price”.
The plaintiffs argue that this new arrangement violated McGraw Hill’s promise to publish the works “at its own expense,” a provision that should have meant authors wouldn’t be charged for the cost of operating or maintaining the publisher’s infrastructure; this claim is now allowed to go forward. The claim related to “net receipts” was again dismissed.
While the ongoing developments in this case are worth watching closely, it also serves as a timely reminder—especially in light of publishers’ licensing content for AI training—for authors to carefully review and negotiate their publishing agreements, and to rely on the contractual terms that hold publishers accountable to their promises.
Let’s take this opportunity to quickly remind ourselves of a couple of less-discussed contractual terms that may in fact be too important to ignore.
1. “…media now known and may be developed in the future”
The harm plaintiffs are claiming, in this case, is a whopping 25% to 35% drop in royalties when works are published on McGraw Hill’s online platform. Although this case only arose out of the electronic rights of textbooks, it reminds us how the advent of new technology could easily undermine instead of boost the income of authors.
Barely a decade ago, most experts of the publishing industry believed that the economics of e-book publishing were more favorable to publishers, as e-books are cheaper to produce than print books. As a result, authors should expect to receive a much larger share of the revenue—well above the typical 10-15% of the retail price for trade books.
The Flynn case confirms many authors’ suspicion that authors may not necessarily share in the financial boon brought by new technologies. It is thus important for authors to be wary of a broad copyright license that allows all future technology for disseminating the authors’ works.
It’s worth reviewing terms that address the publisher’s ability to license your works in specific contexts, including digital platforms and emerging technology that are not named. Instead of “media now known and may be developed in the future,” authors should consider limiting the publication of their works to specific, enumerated media, such as print books or ebooks. Failing that, authors should propose alternative terms that could safeguard their interests, such as a clause that allows for rights reversion if royalties fall below a certain level.
2. Royalty Audit
A common feature of publishing contracts is a clause that allows authors to audit the publisher’s accounting. While it may not seem like a top priority at first glance, authors should absolutely take advantage of this provision if it’s included in their agreement. An audit right provides authors with the legal right to review the publisher’s financial records to verify whether they are being compensated fairly and according to the terms of the contract.
Authors in the Flynn case learned about the new royalties arrangement through an email from the publisher. It is of course important for authors to monitor any communications sent by their publishers. However, it is not certain that publishers will always disclose it when they adopt a new method of calculating royalties, and certainly not a given that their accounting never makes any mistake. When authors become suspicious of their publisher’s deductions or other financial practices, the ability to audit can be crucial. Publishers may make deductions or shift expenses that are not immediately obvious to authors based on the royalties they receive. An audit can help uncover if a publisher is deducting expenses that are unjustified (such as fees for maintaining online systems, as in this case). The audit right can be an essential tool for discovering accounting discrepancies and ensuring the publisher is acting in good faith.
As generative AI tools become more prevalent, many authors are concerned about how their works may be used for AI training without their knowledge or consent. It’s important to remember that not all contracts automatically grant publishers or other entities the right to license works for use in AI training. If you have retained sublicensing rights, or your publishing contract offers a broader definition of net receipts or profits, you could be entitled to the revenue your publishers earned from selling your works to train AI.
Just as with traditional royalties, income from AI licensing should be distributed according to the terms of the contract. If you’re uncertain about whether you are getting fairly compensated, don’t hesitate to utilize the auditing right to request detailed information from your publisher.
Final Thoughts: Be Proactive and Stay Informed
At the heart of the Flynn v. McGraw Hill case is a breach of contract claim. The plaintiffs argue that McGraw Hill’s royalty deductions for maintaining its online system violated the terms of the agreement. Central to the argument is the publisher’s promise to ‘publish at its own expense.’ This case serves as a prime example of how important it is to scrutinize the details of a publishing agreement, where the devil often lies.
Many publishing agreements are complex and may contain clauses that, while seemingly minor, can have significant financial and creative consequences. It’s essential that authors take the time to review their contracts thoroughly, ideally consulting with colleagues and mentors who have more extensive experience with similar situations, to fully understand—at the very least—how their income will be calculated and what rights they are granting to the publisher.