How Helpful is the Bankruptcy Clause in Publishing Contracts?

Posted on December 28, 2009August 8, 2012 by Mark Levine Leave a comment

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.

How Is “High Discount” Defined?

Posted on December 28, 2009August 8, 2012 by Mark Levine Leave a comment

Q. Is there a commonly accepted definition of what kinds of publisher’s book sales are “high discount” and result in a lower royalty rate than the basic royalty rate I negotiate in my contract for sales at the publisher’s standard discount?

A. No one definition is accepted by everyone in publishing. Indeed, rather than using “high discount,” “deep discount” or a similar term in the publishing contract, the situation is generally handled in one of two ways. The preferable way for authors, which many publishers accept, is to add a sentence saying that the reduced royalty rate “does not apply to sales outside ordinary wholesale and retail book trade channels.” This does leave some ambiguity of what “ordinary” channels (or “traditional” channels, a term sometimes used instead) are, an ambiguity that many people tend to overlook. If using this formulation, discuss with the publisher beforehand which of its customers or distribution channels fall outside the phrase’s ambit. This way, you will at least have a general understanding of whether sales to a K-Mart or Sam’s Club, for example, will result in regular or reduced royalties if that clause is included and you can negotiate your contract intelligently.

More typically, a contract will specify the exact discount from the book’s suggested retail price that triggers the lower royalty rate(s). These should generally be 51% or 52% for hardcovers and trade paperbacks and 55% or 60% for mass market paperbacks. Many publishers will accept these, although their preference for the hardcover discount will more likely be 50%. If agreeing to 50%, be particularly careful of the difference between a discount “of 50% or more” and a discount “more than 50%” when negotiating your contract. To the extent your publisher sells its hardcovers at exactly a 50% discount, you will receive less money if your contract says the reduced royalty applies to sales at a “discount of 50% or more” instead of at a “discount of more than 50%.”

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

How Much Should I Pay for My Remaindered Books?

Posted on October 1, 2009August 8, 2012 by Mark Levine Leave a comment

Q. My publisher is remaindering the trade paperback edition of my book but intends to keep the hardcover edition in print until all of its hardcover copies are sold. It is offering to sell me copies of the remaindered paperback (which retails for $35; the hardcover retails for $50) at $7/copy. My contract doesn’t cover the situation. Is the price offered a reasonable one?

A. Although all contracts contain provisions giving authors the right to purchase copies when the book goes out of print (and generally specify a method for determining the purchase price), few specify what happens when the publisher has published different editions of the book but is remaindering only one.

I suggest you ask the publisher what price it plans to sell the remainder copies for (these are generally bought in bulk by a company specializing in remainders) and offer to purchase your copies at the same price. You can also ask what it cost the publisher to print each copy of the paperback; these should be paper, printing and binding costs (“PPB”) only, and exclude typesetting and similar one-time costs that would have been incurred regardless of the number of copies printed. Unless the person buying the remainders is paying a higher price, the price you pay for each copy should not exceed that PPB and, in fact, should be less. Because of basic set-up costs involved in printing and binding a book, most of the cost of printing a book is incurred whether a publisher prints 1,000 copies or 10,000 copies at the same time. Thus the cost per book for printing these later, additional copies (the “run-on cost”) is generally significantly lower than the cost per book for printing the initial thousands of copies in the print run, as well as lower than the average cost per book of the entire print run. Since 50% of PPB or the price offered by others wanting to buy the remainders is often the price specified in publishing contracts for authors to buy copies when a book goes out of print, it is likely that most publishers would agree to this method in determining what you should pay for copies of your book in the situation you describe.

Additionally, given the markups that publishers typically use in pricing their books, I’d wager that the PPB for your book was probably close to half the $7 your publisher is asking, if not less.

In future contracts, consider adding a sentence along these lines to the section of the contract dealing with your right to buy copies when all editions are out of print:

“When Publisher has more than one edition of the Work in print, the provisions of this Agreement concerning Author’s right to buy copies of the Work when the Work is out of print (including the price at which Author may buy unsold copies) shall apply also to separate editions of the Work published by Publisher which Publisher declares out of print or remainders.”

How Often Should Royalties Be Paid?

Posted on May 9, 2009August 8, 2012 by Mark Levine 2 Comments

Q. Is there a commonly accepted schedule of royalty accounting and corresponding royalty payments? My publisher does its accounting only two times a year and sends that accounting and royalties to the author five months after the end of the reporting period.

A. Most trade publishers prepare author royalty statements twice yearly, for the January-June and July-December periods. Most academic publishers generally do their accounting only once a year, which is something that authors of those books should always seek to change to twice yearly when negotiating their contracts. A handful of very small publishers do accountings (and pay royalties) more frequently, some even monthly.

A twice a year accounting and payment schedule is generally considered fair by most publishers and authors. Similarly, sending the royalty statements and paying the required amounts three months after the end of each royalty period is relatively standard and considered reasonable by most publishers and authors. Not paying royalties until the fifth month after the end of the reporting period is outrageous and unfair to authors (and, disappointingly, standard practice for at least one major publisher). Holding an author’s money that long is simply a crass way for a publisher to, in effect, borrow money from an author at zero interest. Publishers that refuse to make royalty payments until 120 days or longer following the end of a reporting period should be embarrassed by the practice and pressured by adverse publicity to change that policy.

Can My Publisher Hold Back Hardcover Royalties for Possible Paperback Returns?

Posted on May 9, 2009August 8, 2012 by Mark Levine Leave a comment

Q. My book, which was published in hardcover about a year ago, earned out its advance by about $500 but the publisher has told me that it might hold back part of that money as a reserve against returns of the trade paperback edition that it is about to publish. Can the publisher do that?

A. A reserve against returns of a paperback edition should be withheld only from royalties payable to you on copies of the paperback that have actually been shipped to booksellers and wholesalers. If the paperback has not been published or shipped yet, there are no royalties payable to you on those copies against which a reserve can be established. Money received from other income, whether sales of the hardcover or the licensing of subsidiary rights, cannot properly be held back in anticipation.

All or part of the $500 can be kept by the publisher, however, if the amount it had held as reserves for the hardcover edition proved to be insufficient because the publisher got back more returns of that edition than anticipated. But if that were the case, it would mean that your advance had not earned out even though you and the publisher thought it had.

As with all questions answered in this series, of course, there could be specific language in your particular contract that would require a different result. The answers given here are based on language typically found in most contracts.