Simon & Schuster Slapped with eBook Royalty Class Action Lawsuit

A book is a book, except when it comes to eBook royalties. That's the premise of a class action lawsuit filed on Thursday, May 19, 2016, in the Supreme Court of the State of New York by class representative Sheldon Blau, MD.   

The lawsuit alleges Simon & Schuster has been cheating its authors by improperly categorizing eBook transactions as "sales" rather than "licenses."  

The distinction is significant, because the royalty rate for sales is much lower than the rate for the license of rights.  If categorized as a license the author receives 50% of net receipts, rather than 25% of net typically paid to authors for the "sale" of an eBook.

A book is a book, except when it comes to eBook royalties

According to a report in Law360, an unnamed spokesman for Simon & Schuster told Law360 that the division that published Dr. Blau's book, was sold (or was it licensed?) to another company in 1998, and that the publisher never published a digital edition of the book.

The eBook royalty class action looks back approximately six years, the statute of limitations on contract actions in New York State.  It alleges Simon & Schuster engaged in a "pattern and practice of paying Plaintiff and others similarly situated royalty payments for the distribution of licenses for electronic books, or "e-books," at a rate for book "sales," or some other lower rate than that required for "license" transactions."

This issue arose, in a different context, in F.B.T. Productions v. Aftermath Records, a 2007 federal lawsuit brought by Eminem's management company against his record label over digital royalty rate splits.  Like the music industry, book publishers have taken the position that digital downloads should be accounted for as sales not licenses.

In its 2010 decision, the F.B.T court held that digital downloads should not be treated as auditable physical units for royalty accounting purposes.   The Ninth Circuit ruling was important for the recording industry, because recording artists (like book authors) receive 50% of the record company’s net receipts from rights licensed to third parties -- as opposed to 12% to 20% of the retail price when a recording is "sold."

In the wake of the Eminem decision, most publishers amended their contracts, so the sale or license of  an "eBook" is unambiguously treated as a sale.   The lawsuit, therefore, challenges the publisher's interpretation of their legacy or backlist contracts.