Last week, Sheldon P. Blau, MD, author of How to Get Out of the Hospital Alive, filed a class action suit against Simon & Schuster, claiming that the publisher has been improperly calculating royalties on ebook transactions as sales rather than as licenses.

IP lawyer Lloyd J. Jassin wrote about the suit on his blog:

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…

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.”

So why the difference? Royalties for sales are lower than for licenses, because they take into account the cost of distribution, marketing, publicity, production, etc.—things a publisher must undertake in order to successfully create and promote a book. By contrast, the sale of a license—as it is typically understood—displaces the cost of production and promotion to the licensee, and to account for the lower overhead on sales a larger proportion of revenue is distributed back to the author.

Blau’s argument hinges on the fact that a consumer buying an eBook from Amazon (or Kobo or wherever) isn’t actually buying a unit of physically auditable inventory; they’re buying a limited license to access and use a piece of digital content. §18 of the filing makes the point plainly: “The distribution of e-book copies of books written by Plaintiff and others similarly situated to end users [i.e. readers] constitutes a ‘license’ provided to the end user, rather than a ‘sale.’”

This isn’t the first time the legal status of a digital “sale” has been put before the courts. Back in 2010 the Ninth Circuit Court of Appeals ruled against Dr. Dre’s Aftermath Records in favor of the plaintiffs, one Marshall Bruce Mathers III (please stand up!), and his production company FBT Productions.  According to that decision, downloads through services like iTunes have the formal status of licensing agreements, not product sales, meaning that Slim Shady and FBT were entitled to back royalties accounting for the higher rate.

The relevance of that case to the publishing industry was clear at the time, and the majority of publishers quickly took it into account in their subsequent contracts, clearly categorizing eBook purchases as sales for royalty calculations. This has enabled them, in calculating royalties, to limit their definition of “licensing agreements” to situations in which a publisher allows another entity to reproduce material on which it owns a copyright (as is the case with special large print editions, translations, or academic reprints, for example). So the results of Blau’s suit will likely apply only to older contracts, for back list or legacy titles.  Further, because this case (unlike Eminem’s) was filed in a New York State court, it will not be directly applicable to contracts signed under federal law, or the laws of other states.

A final note of interest is that, while Dr. Blau’s work was originally published as eBook in 2010 and so may well qualify for back royalties, Simon & Schuster won’t be paying, no matter how the court decides. Despite being the defendant named in Blau’s suit, S&S hasn’t owned Blau’s publisher, Macmillan General Reference, since 1998, when it sold the imprint to Pearson. Pearson in turn sold the imprint to IDG Books in 1999, which in turn sold them to Wiley in 2001.