Can my publisher stop paying me royalties because its distributor went bankrupt?

Q: My publisher told me that I won’t be getting royalties for copies of my book that it sold lately because all its bookstore sales were made through its distributor and the distributor recently filed for bankruptcy. Is there language I can put in my next contract to make sure this won’t happen to me again?

A. Bad debt and credit problems are traditional business operating risks that publishers should properly assume; they are not an author’s responsibility.

To prevent a publisher claiming that it has the right not to pay royalties because it was not paid for books it sold, add “There shall be no reduction in royalties or ‘amount received’ because of nonpayment by customers” or similar language to your next contract. (The reference to “amount received” can be deleted if your royalties are based on the book’s suggested retail price rather than on the publisher’s net receipts.) It makes no practical difference where this language is added, although the logical place would be in the section about royalty statements or the one listing royalty rates.

If your royalties will be based on the “amount received” by the publisher from sales of your book (or if the contact says that your royalties are based on the publisher’s “net receipts” and that term is defined as “amount received”), you can also ask that “amount received” be replaced by “amount payable” or that net be defined as follows:

As used in this Agreement, “net receipts” means all monies payable to the Publisher from the sale or licensing of the Work pursuant to this Agreement. In determining “net receipts” for purposes of the royalty and licensing percentage sections of this Agreement, shipping, handling and insurance charges, and sales and similar taxes shall be excluded.

Not all publishers using “amount received,” directly or indirectly, intend that it be construed as excluding bad debt. Those using it innocently will be glad to clarify the issue. For those who understand and mean what they are saying, the clarification is even more important.

Note: Rather than readily accepting a publisher’s statement that it is not required to pay royalties on books sold by it because its distributor has filed for bankruptcy and didn’t pay the publisher, authors should contact the Authors Guild or consult a lawyer to see if your publisher is correct. Even if your contract does not have any of the language recommended here and says that your royalties are based on “amounts received,” you may still be able to argue successfully that from a legal viewpoint the distributor was acting on the publisher’s behalf in collecting the money – in legal terms, as “agent” for the publisher — and that for purposes of your contract, the distributor’s receipt from the bookseller of payment for your books was the same as if the publisher itself received that money.

(Originally published in the Spring 2007 issue of the Authors Guild Bulletin. © Mark L. Levine)

Answers to questions on this site are general in nature only. You should consult a lawyer for information about a particular situation. For more information about book publishing contracts and issues, see Levine’s book.

Do the bankruptcy laws abuse authors’ rights?

Q. The bankruptcy of Triskelion Enterprises, LLC, to which I had sold a romance, has brought to light an outrageous abuse of authors’ rights by federal bankruptcy judges. Many publishing contracts—I’ve sold eighty novels, so I’m very familiar with these– include a clause stating that, in the event of the publisher’s bankruptcy, all rights in the contracted work revert to the author. I discovered that bankruptcy judges routinely void this clause and allow the trustee to sell our contracts, en masse, to the highest bidder. Their rationale is that bankruptcies are adjudicated under federal law, whereas contracts are governed by state law, and federal bankruptcy law takes precedence. Thus, in addition to losing the money due us from royalties, authors are stripped of creative control over our books. This could happen to any author, with any publisher, as well as to composers, lyricists and illustrators. We get no say over who buys these contracts, and there is no guarantee this will even be a legitimate publisher. One can easily imagine situations in which our work would be distorted and our reputations harmed. This is a situation that can only be rectified by an act of Congress, and I urge everyone to write his or her senators and congressperson urging that they sponsor a bill barring bankruptcy judges from voiding these contract clauses.

A. Although I understand your annoyance and share your dismay that the termination clause is unenforceable as a matter of law, I disagree with several of the underlying assumptions of your letter.

  1. Judges are not negating the provision of their own accord but are applying basic constitutional principles. Bankruptcy, like the First Amendment, is a right that is guaranteed by the United States Constitution (Article 1, Section 8). There are many examples where federal law trumps state law (civil rights, New Deal legislation, gun control, abortion, auto gas emission limits). To argue against this requires an argument based on some other constitutional principle rather than a dislike of the result. I don’t see that other constitutional principle here.
  2. Courts are not discriminating against authors or other creative individuals when they rule that the typical termination clause in publishing agreements is unenforceable in a bankruptcy proceeding. Similar clauses exist in many contracts that do not involve publishing companies or creative individuals and, with limited exceptions, those contracts are not permitted to automatically terminate either. Lacking this discrimination or another appropriate reason (see point 5 below), I see no valid reason why we as authors should seek special treatment.
  3. Your concern that authors have no say over who buys their contracts ignores the fact that authors do have the right to present their views to the bankruptcy court in the same manner as others who have contracts with the bankrupt company, even though it is a right that few avail themselves of. Your concern that authors’ works could be distorted by the acquiring company overlooks the fact that it is legally bound by your contract’s provisions in the same way that the original publisher was; thus you have the same rights against the new company as you had against the old in the event it distorts your work or otherwise breaches your contract.
  4. I fail to understand how you lose creative control over your books. Your book has either been published already or not. If it has been, there is no creative control left to be had. And if it hasn’t been, you have two options: you can return your advance and not deliver the final manuscript (if you don’t like the new publisher) or you can hold the new publisher to the provisions all authors should have in their contracts that prohibit the publisher from making changes in your manuscript (with certain limited, specified exceptions) without your consent.
  5. I’m not unsympathetic to the difficulty that the ordinary author has in obtaining proper legal representation in a legal proceeding and being able to afford top-notch (or any other) counsel. But these are problems that most citizens have every day in legal proceedings of virtually every type and is not peculiar to our situation as authors. For us to argue for a special privilege simply because we are writers is without doubt appropriate in certain situations (such as censorship, journalist “shield” laws and the like), but I don’t consider our losing money or property because we entered into a business transaction with a company that ended up in financial difficulty to be among them.

Thanks to Gayle Ehrlich of Sullivan & Worcester LLP, Boston, Massachusetts, for her advice concerning federal bankruptcy law. Please note the more detailed discussion of bankruptcy law and author-publisher contracts in my column in the Summer 2006 issue of the Bulletin.

(Originally published in the Fall 2007 issue of the Authors Guild Bulletin. © Mark L. Levine)

Answers to questions on this site are general in nature only. You should consult a lawyer for information about a particular situation. For more information about book publishing contracts and issues, see Levine’s book.

How Helpful is the Bankruptcy Clause in Publishing Contracts?

A. Not very, but you would be ill-advised to remove it.

When a publisher is in bankruptcy, both the company and people dealing with it are prohibited from taking many actions without court approval. Among these is enforcement of the typical clause in publishing and certain other contracts that says the contract terminates when the publisher is in bankruptcy.

Getting court approval to terminate an author’s book contract is often difficult. If the bankruptcy is the type where the publisher seeks to reorganize so it can continue in business (and filed for bankruptcy primarily to stave off creditors), the company will often successfully argue that it needs those contracts to continue functioning after it emerges from bankruptcy. Where the bankruptcy is the kind in which the publisher goes out of business, the contracts are considered assets that can be sold to other companies with the proceeds distributed to creditors in partial payment of what they are owed.

Although authors who are owed royalties are also creditors, they are considered unsecured creditors because the publisher never granted them any “security” (i.e., collateral) on which they could foreclose if their royalties were not paid (just the way a bank can foreclose on your house if you don’t pay your mortgage). Under bankruptcy law, secured creditors–generally banks that lent the publisher money and got collateral to secure the publisher’s obligation to repay them–are entitled to have their loans repaid before unsecured creditors get repaid (with limited exceptions not relevant here).

Even if you had some of the publisher’s assets as collateral (and we know what publishers would say to almost any author who requested that provision, even if the only collateral sought was the publishing contract itself), that grant of collateral might help you get past-due royalties repaid but probably would not enable you to get your publishing rights back. This is because the publisher’s obligation to return the contract would be cancelled if those past-due amounts were paid (by the publisher or another creditor). Further, any foreclosure on the contract likely wouldn’t occur until after (often lengthy) bankruptcy proceedings and approval from both the court and specified percentages of the publisher’s other creditors.

It is nonetheless worthwhile to have the typical clause in your contract (and no publisher seriously argues that it should not be there) because, without it, the court would have little basis to grant a motion by you to terminate your contract when the publisher is in bankruptcy. Even with the clause, both the company and other creditors can argue against your motion.

The best chance that authors have of trying to avoid this situation when a publisher goes into bankruptcy is to include a provision like the following in their contracts:

“If Publisher shall fail to make any payment or deliver any royalty statement required by this Agreement by the date provided therefor herein and if, after x days [30 is plenty] written notice by Author to Publisher, (i) said payment has not been made or (ii) such royalty statement has not been delivered (together with all amounts shown thereon as payable, if any), as applicable, then this Agreement and all rights granted by Author to Publisher hereunder will automatically terminate (without any further action required by Author or Publisher) at the end of said [30th] day.”

Although this provision won’t get you your rights back if the publisher files for bankruptcy before the end of the time period specified, it should work if the filing occurs after that date. Because publishers in financial distress and delinquent in paying royalties are often among those that file for bankruptcy, this provision can be useful exactly when it is most needed. (Limiting the provision just to non-payment of royalties would make it relatively ineffective because royalty statements are the best and quickest way to prove you are owed royalties. Including non-delivery of royalty statements in the provision might also help authors not owed royalties regain their publishing rights.)

The suggested provision is also one that publishers can generally agree with—if the requirement for notice by the author to the publisher is included—because the duty to deliver royalty statements and pay royalties is completely within the publisher’s control and the notice requirement eliminates the danger that the contract could be terminated inadvertently because of an error by the publisher’s accounting staff or the post office.

Note that the clause saying that the contract automatically terminates should be qualified—either by a parenthetical or a separate sentence at the provision’s end—to say that the termination will not affect things such as the author’s right to receive monies then owed, royalties on books sold previously or afterwards, subsidiary rights payments not yet received or the author’s right to purchase film and bound books as if the Work were out of print. This is generally done by cross-reference to the relevant sections.

(Originally published in the Summer 2006 issue of the Authors Guild Bulletin. © Mark L. Levine)

Editors Note: Special thanks to Janice Grubin, Tim Casey and Dan Morse of Gardner Carton & Douglas LLP* and Gayle Ehrlich of Sullivan & Worcester for their assistance with certain aspects of the above article. (Ms. Grubin is now with Todtman, Nachamie, Spizz & Johns, P.C.)

Answers to questions on this site are general in nature only.  You should consult a lawyer for information about a particular situation.  For more information about book publishing contracts and issues, see Levine’s new book.