Wednesday, December 28, 2011

Who Controls eBook Rights?

The Court Battle that Could Determine the Fate of the Book Industry:A Review & Analysis (Updated)

The picture of publishing economics has changed dramatically.  Since the middle of 2011, Amazon is selling more eBooks than hardcover and paperback books combined.  What this trend makes clear, is it is becoming increasingly difficult to publish a book profitably based solely on bound book sales.  This article looks at HarperCollins' recently filed lawsuit against eBook publisher Open Road, and the role legacy publishing contracts, and contract ambiguity, plays in the battle over lucrative eBook rights.   

Let us consider HarperCollins’ legal position that the term “in book form” in a pre-Internet age contract includes eBook rights -- a technological achievement that wasn't invented when the contract was signed.  By way of background, the publisher filed a complaint in the United States District Court for the Southern District of New York on December 23, 2011, against eBook publisher, Open Road Integrated Media.  Open Road, founded by Jane Friedman, former CEO of HarperCollins, publishes eBook versions of print books otherwise controlled by major publishers.  In its complaint, HarperCollins seeks damages and injunctive relief against Open Road because Open Road intends to publish an eBook edition of Jean Craighead George’s YA classic, Julie of the Wolves

In its complaint for copyright infringement, HarperCollins argues that its contract for Julie of the Wolves, a book first published in 1972, gives it the sole right to publish George’s novel in eBook form. It bases its argument on its interpretation of the term “in book form,” which it argues encompasses eBook rights. 

Old Wine in New Bottles

By filing its complaint, HarperCollins follows a well-established pattern in the entertainment industry. Cases addressing whether older entertainment industry contracts granted rights for new uses such player piano rolls, radio, motion pictures, television and videocassettes are plentiful. Like HarperCollins, motion picture studios once claimed that they already had the right to exhibit films on television, and to distribute them as home videos.

When a contract is ambiguous, the job of ascertaining the parties’ intent is left to the courts. To determine the parties’ intent, a court will consider the precise language of the grant (e.g., the existence of any “future technologies” clause, the inclusion or exclusion of a “reserved rights” clause), whether the parties contemplated “new uses” when the contract was entered into, and the sophistication of the parties. Since contracts are not drafted in a vacuum, courts may also look at industry practice. What this case makes very clear is that a contract is a private body of law between two parties.   Ideally, a contract between an author and publisher anticipates potential problems by clearly setting down in writing both parties' rights and obligations.  If done properly, future readers of that contract will be able to discern what was intended.

Tesla's Original eBook
Most likely, the court will ask whether the distribution of books in digital form were recognized by knowledgeable people in the publishing industry in 1972.  The court will also analyze the contract to see if there are any provisions that tend to limit the “exclusive right to publish . . . in book form." If the court finds there is no clear intent – which is often the case in dealing with a later developed technology -- the court may decide the matter based on social policy considerations.[1] That is, when the intent of the parties -- the Holy Grail in contract interpretation -- cannot be ascertained, courts apply “off the rack” rules to decide what they feel the proper result should be. In other words, if there’s no Rosetta Stone to help decipher the parties’ intent, the court will decide the matter for the parties

New York courts have adopted one rule of contract interpretation that favors large entertainment companies.  The rule states that if there’s a broad and general grant of rights, an ambiguous grant will be interpreted to apply to technologies that were known at the time of the grant. The seminal case for this proposition is Bartsch v. Metro-Goldwyn Mayer, Inc.2

Bartsch involved an agreement entered into in 1930, in which plaintiff’s predecessor in interest granted Warner Bros. Pictures, all of its motion picture rights in a popular musical play.3 The issue in Bartsch was whether a grant of motion picture rights included the right to broadcast the film, based on the play, on television. The court focused on the grant of rights to “copyright, vend, license and exhibit . . . the motion picture photoplay throughout the world.” In holding that the grant did include television rights, the court observed that “if the words are broad enough to cover the new use, it seems fairer that the burden of . . . negotiating an exception should fall on the grantor,” at least when the new medium is not completely unknown at the time of contracting.4

Notwithstanding Bartsch, which can be limited to its facts (a film producer's expectations are different than a book publisher's or author's expectations), when a contract is susceptible to two reasonable interpretations, with each party knowing or having reason to know of the other party's understanding of the term, courts, as a policy matter, will often construe the agreement against the party that drafted the contract. The Restatement (Second) of Contracts states that an agreement susceptible to more than one interpretation should be construed against the party who drafted the language.5 Here, since, HarperCollins was in a stronger bargaining position, the the burden of negotiating new ways to exploit their exclusive rights, should have fallen on them.6 If the court follows the Restatement, as opposed to the Bartsch line of cases, it would appear, then, that unless the author's representative had an equal hand in drafting the agreement, which is almost never the case, the contract should be interpreted in the light most favorable to Ms. George, and, in turn, Open Road.  


When an agreement is equally susceptible to either interpretation, the author or grantor often wins.7 
 In Cohen v. Paramount Pictures Corp, the 9th Circuit Court of Appeals, held that “television viewing” and “videocassette viewing” were not “coextensive” terms.8  And, that a license which included the right to exhibit a film on TV did not include the right to distribute the film on home video.  In resolving this “old wine in a new bottle” dilemma , the court placed primary emphasis on the fact that videocassette recorders were not invented when the license was signed.  Focusing on the means by which videocassettes were viewed and distributed (i.e., by sale or rental), the court emphasized that exhibition of a film on television differed fundamentally from the exhibition by a videocassette record/player.9 A similar argument – persuasive or not – can be made for printed books sold in bookstores, and eBooks downloaded and displayed on a screen.  eBooks were neither invented nor reasonably foreseeable when the HarperCollins contract was signed. 

Future Tense Publishing

Where things get interesting, is the impact of HarperCollin’s “future technologies” or “now known or hereinafter” clause.   Here the book publisher’s claim seems stronger, although, not all courts have enforced these provisions.  For example, in Tele-Pac, Inc. v. Grainger, the court held that the license to distribute films for “broadcasting by television or any similar device now known or hereinafter to be made known” did not encompass videocassette rights.10 The Appellate Division of the New York Supreme Court, rejecting the lower court’s attempt to equate broadcasting with the grant of videocassette rights, held that distribution of a film by videocassettes was not analogous to broadcasting by television. 

If the Southern District of New York adopts the Tele-Pac analysis, it could determine that “in book form” does not encompass eBooks.  Just as broadcasting by television is not analogous to the sale of videocassettes, distribution of physical books is not analogous to the sale of downloadable eBooks.  That is, a plausible argument can be made to suggest eBooks and bound books are two distinct media. Whereas a book is a book, an eBook -- whether downloadable or accessible from a cloud -- is a community.   If the batteries run low on your Kindle, Nook, or smart phone, the screen goes black, and your ability to link beyond the book is lost. Unlike an ad supported Kindle, or Nook you can synch with various electronic devices, bound books are low tech, and can survive fire and ice.  Run an iPad below 32 degrees, or above 95, and it's likely to shut down, whereas, legible writing on papyrus over two thousand years old has been rescued from the fiery ruins of Pompeii.  When it comes to fire and ice, tree-based books trump plastic and silicon-based readers.   And, have you ever tried to read an iPad in the sunlight?  

There are other arguments – some favor HarperCollins' interpretation while others would support Open Road.  Richard Curtis, for example, in an excellent piece on his eReads blog, addresses the significance of the phrase “Computer Storage and Retrieval” found in many legacy contracts.  It’s a solid piece of reporting and legal analysis. 

Good Contracts Make Good Neighbors

While HarperCollins pleads only one count of copyright infringement, the complaint also raises breach of contract and state law unfair competition claims.  Reference is made to a provision in George’s contract that requires HarperCollins to ask George to consent to the license of “computer, computer-stored, mechanical or other electronic” rights.  It's unclear if this provision supports the publisher or Open Road.  If the publisher is incapable of exploiting these rights without the author's prior approval, does HarperCollins possess an exclusive right or something less?   What exactly is this evidence of?  What distinguishes this case from other "old contract - new technologies" cases is the complaint states that George’s ability to withhold consent, does not give her the ability to grant a third party the right to publish an eBook edition.   A court could reason that since neither the 1972 advance paid for the book, nor the P&L for the book, placed any value on eBook rights, the publisher did not bargain for those rights.  The significance of the case, however, is the exploding market for eBooks and the very real danger Open Road, and others, pose to old school print publishers.  That danger recognized in several places in the complaint, but no more poignantly than in paragraph 29:   

Open Road’s unlawful exploitation of those rights is directly competitive with sales of the Work in paper format and HarperCollins’ own plans to publish June of the Wolves as an e-book.  Open Road is understandably content to allow HarperCollins to have made its considerable investments in the Work, only now to reap where Open Road has not sown, by seeking to divert sales of the Work from HarperCollins in the rapidly expanding e-books market.

HarperCollins’ attorneys may be accused of trying to stretch the definition of “in book form," but, it is harder to take issue with the proposition that a publisher should be able to protect its investment in an author’s work. While the grant of primary rights does not mention eBook rights, the court may find it unfair for Ms. George to collect royalties from her print publisher, while, at the same, time enjoying a royalty stream for the same work from Open Road.  However, there’s scant case law on the enforceability of non-compete clauses found in publishing contracts.  Even in the absence of a non-compete clause, there is an implicit duty in every publishing agreement that neither party will do anything that will destroy or injure the right of the other party to enjoy the benefits of the contract.11 While this doctrine is riddled with exceptions, is not without force.12

A Battle Over Words on Paper Will Determine the Digital Future

Because many in the book trade were not thinking about future technologies that would enable readers to license or purchase digital books, old contracts are being dusted off and ambiguous language scrutinized by lawyers like myself to answer the question, “Who controls eBook rights?”  In the case of pre-Internet contracts, author and publisher often ascribe different meanings to the phrase “in book form.”  Where the grant of rights can be interpreted in more than one way, it can lead to disputes, and, in the case of Jane Friedman’s Open Road, expensive and distracting litigation. 

Depending upon how the case brought by HarperCollins is decided, or resolved, the big six multinational, New York-based, publishers (and their cousin to the north, Harlequin) could either score a copyright and unfair competition protection windfall, or meet their digital Waterloo.  Only time will tell. 


1See Dolch v. Garrard Publishing Company, 289 F.Supp. 687 (S.D.N.Y. 1968) (exclusive right of publication of books” held to encompass right to publish in paperback form). But see, Field v. True Comics, 89 F. Supp. 611, 614 (S.D.N.Y. 1950) (“the sole and exclusive right to publish, print and market in book form” did not include the right to publish the work in “comic book” form).
2 Bartsch v. Metro-Goldwyn Mayer, Inc., 391 F.2d 150 (2d Cir.1968), cert. denied, 393 U.S. 826 (1968).
3 Id at 152
4 Id. at 154.
5 RESTATEMENT (SECOND) OF CONTRACTS § 206 (1981).
6 See, e.g., US Naval Inst. v. Charter Communications, Inc., 875 F.2d 1044,1050,1051 (2d Cir. 1989) (interpreting ambiguous copyright grant against party preparing agreement); See, also, Rey v. Lafferty, 990 F.2d 1379, 1390 (1st Cir.) (ambiguity should be construed against drafter-grantee, especially given relative expertise of parties), 67 Wall Street Co. v. Franklin National Bank, 37 N.Y.2d at 249, 333 N.E.2d at 187, 371 N.Y.S.2d at 918; Rentways, Inc. v. O'Neill Milk & Cream Co., 308 N.Y. at 348, 126 N.E.2d at 273-74.
7 Cohen v. Paramount Pictures Corp., 845 F.2d 851,854 (9th Cir. 1988).
8 Id. at 854.
9 Id. at 853,854.
10 Tele-Pac, Inc. v. Grainger, 168 A.D.2d 11,13, 570 N.Y.S.2d 521, 522 (1st Dep’t 1991), appeal dismissed, 79 N.Y.2d 822, 588 N.E.2d 99 (1991).
11 Van Valkenburgh v. Hayden Pub. Co., 30 N.Y.2d 34, 281 N.E.2d 142, cert. denied, 409 U.S. 875 (1972).
12 See Wolf v. Illustrated World Encyclopedia, 34 N.Y.2d 834, 316 N.E.2d 342, 359 N.Y.S.2d 59 (1974) (author can license same illustration to another publisher absent a contractual prohibition against doing so).

8 comments:

  1. Great reporting and analysis. I hope you will continue to follow this case.
    -Ryan

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  2. Does the impact on the purchaser (i.e. buying a physical object -- book -- vs. the clear statement when "purchasing" an ebook that the purchaser is only licensing the right [usually] to download and read on one or more devices) have any bearing on how the courts might view the relationship between a physical book and an ebook?

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  3. I think a court would certainly take that into consideration.

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  4. Lloyd, how would you compare this case to the Random House vs. RosettaBooks case from the turn of the century? Random House rather hastily settled that case after the court said (in response to its request for a preliminary injunction) that it was "not likely to succeed on the merits of its copyright infringement claim”.

    From my own limited research, it seems to me that case also turned on the question of what qualified as a "book".

    http://scholar.google.com/scholar_case?case=3273998830508997802

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  5. The problem with any claim that the grant of a license to sell a work "in book form" encompasses the grant of a license to "sell" the work in ebook form is that ebooks aren't "sold".

    The end user license for Kindle Editions and most (if nor all) other major ebooks makes clear that it is not a sale of the work but a limited license grant, and does not include essential elements of a "sale" such as first-sale rights of re-sale.

    The clear distinction made in the license terms between the *sale* of a work in book form and the limited *license* (not a sale) of certain rights to an ebook provides a clear basis for distinguishing ebooks -- unless they are licensed on terms clearly constituting a "sale", which they almost never are -- from any contract provisions relatin to "sale" of the work.

    This has implications both for the scope of the grant and, where ebooks are included in the grant, the applicable royalty: Since an ebook license is not a sale, the applicable royalty percentage is the (typically much higher) percentage provided by the contract for licenses of (subsidiary) rights, not the (lower) percentage applicable to any sort of "sale".

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  6. Edward -- You make an excellent argument. Digital downloads are licenses, not sales, and should be accounted for as such. Of course, each contract stands on its own. Recording artists -- not authors -- are at the forefront of the "license vs sale" battle. I blogged about the issue last year in the context of the Eminem case. The pro-artist decision was a major blow to record label. See, http://www.copylaw.org/2010/09/copyright-alert-music-publishing.html.

    The divisibility of copyrights was the theory relied upon by the court in determining that a digital download from the iTunes store was not a sale but a license.

    The influential Ninth Circuit held:

    "When the facts of this case are viewed through the lens of federal copyright law, it is all the more clear that Afterrmath’s agreements with the third-party download vendors are “licensed” to use the Eminem master recordings for specific purposes authorized thereby — i.e., to create and distribute permanent downloads . . . — in exchange for periodic payments based on the volume of downloads, without any transfer in title of Aftermath’s copyrights to the recordings. Thus, federal copyright law supports and reinforces our conclusion that Aftermath’s agreements permitting third parties to use its sound recordings to produce and sell permanent downloads . . . are licenses."

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  7. Chris, unlike the Rosetta Books case, which involved multiple titles, it looks like this case (if not settled on the courthouse steps) will turn on the interplay of the "future technologies" and approval clauses. Otherwise, it looks like another old contract / new technologies case.

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