Electronic Rights Publishing Agreement: Grant of Rights & Royalty Clauses

INTRODUCTION

When was the last time your "standard" author agreement was reviewed? This has become more important, especially as the contract relates to new issues based upon the growing importance of electronic rights. Although there are a number contract clauses in the book-publishing agreement that may be impacted by electronic rights this article will only discuss the grant of rights and royalty clauses. A subsequent article will discuss the out-of-print and permissions clauses and the related issue of copyright ownership and/or control of the components of a particular literary work.

GRANT OF RIGHTS

The "grant of rights" clause in a publishing contract enumerates the specific rights granted by the author to the publisher. Negotiation of this clause continues to increase in importance as more uses are being developed for literary content. The scope of the author's grant may vary widely. For example, the grant of rights could be all inclusive - granting all the exclusive rights and interests in the author's work to the publisher, or the grant could be very narrow - only including a single specific use of the author's work, or the grant could be somewhere between these extremes. The crucial point, as it relates to the publisher, is that the publisher may only exploit those rights that have been specifically granted by the author because any exploitation of a right that was not granted by the author could place the publisher at risk for infringing the author's copyright.

In the event that there is ever a dispute over electronic rights, then the specific inclusion of electronic rights in the grant of rights clause, as well as a future technology clause, may be critical in determining the rights of the publisher and author with respect to the control of all or part of the electronic rights in the literary work.

Recommendation: If the publisher desires to control the electronic rights in the author's work make certain that the publishing contract is very clear regarding the intent of the parties concerning the exploitation of these rights.

ROYALTIES

"Primary rights" and "subsidiary rights" have traditionally served as the main categories for distinguishing the different types of rights in a book publishing contract. These terms, despite their frequent use, lack precise definition and any existing definition has become even fuzzier as new and/or expanded uses are created for an author's content.

Normally, primary rights have only included those rights that the publisher specifically intends to use for itself. Therefore, for the small-to-medium size print publisher these rights have usually only included book publication rights for the original hard or soft cover edition and reprint rights for those editions. For some of the larger publishers, publishing conglomerates and even some of the smaller publishers, the definition of primary rights may include translation rights, serialization rights, book club rights, and the rights for special editions. Subsidiary rights on-the-other-hand, have been traditionally, as the name suggests, rights that are subsidiary to the right of publishing the literary work in book form. These rights include among others, electronic rights, motion picture and television rights, audio rights, audiovisual rights, merchandizing rights and dramatic or performance rights. However, these categorizations vary from publisher-to-publisher and today one can find publishers who normally include electronic and audio rights within the scope of their primary rights.

By now you may be asking why does it matter whether a right is considered a primary right or a subsidiary right? The short answer relates to the manner in which the publisher uses or licenses the author's content and its impact on the author's compensation from the commercialization of these rights.

Although the royalty clause differs from one publisher to another, there are royalty clause standards that exist in all book publishing agreements. The first standard relates to the payment of a fixed or escalating royalty percentage to the author from sales of copies of the book. While the second standard involves the author's compensation, usually a percentage split of the publisher's proceeds when the publisher licenses subsidiary rights in the author's work to third parties.

The royalty clause as it relates to sales of copies of the book usually provides that the author will receive a fixed or escalating royalty percentage based on the monies received by the publisher or on the suggested list selling price of the books or a variation of these compensation methods. However, does the existing royalty clause in your publishing agreement take into consideration the sales of electronic versions of the author's work or is the clause written in a manner whereby it only recognizes the sale of print versions of the author's work?

A more difficult contract question may arise with regard to the monies received by the publisher from a third party, such as an electronic publisher, who has licensed from the print publisher the right to publish the author's work in an electronic format. Assume that under this scenario the print publisher has licensed the author's work to the electronic publisher who has agreed to digitize, format, publish and sell the author's work in an electronic version. In return the print publisher will receive from the electronic publisher, possibly an advance against royalties, and a royalty of X% of the book's selling price on each sale/license of the author's work made by the electronic publisher.

The issue resulting from this scenario is whether the author should receive a royalty percentage payment based on a sale of a copy of the book or a compensation payment based upon the publisher having licensed subsidiary rights in the author's work to a third party. In other words, should the sale of an electronic version of the book be treated as any other sales distribution arrangement or instead should it be treated as a license of subsidiary rights? How does your publishing agreement handle this issue? Is it clearly defined or is it left up to interpretation?

I think that many publishers are struggling with the issue of whether the revenue received from third-party licensors of electronic rights should be recognized as (1) sales income whereby the publisher will pay the author a royalty percentage based on the selling price or net monies received from the sale of an electronic book or (2) subsidiary rights income whereby the income received by the publisher is split with the author.

It is my opinion that the electronic publishers are exercising a subsidiary right. I have arrived at this conclusion based upon the norm that when the publisher itself incurs the financial risk of publication by arranging the production, printing, marketing and sale of a book edition that the publisher is exercising a primary right and not a subsidiary right. Based on this reasoning I think that a subsidiary right should be defined as any right that a publisher does not exploit for itself and where the financial risk of publication and marketing is shifted to a third-party publisher. We should ask ourselves, is the licensing of electronic rights publication rights in form and substance any different than when the publisher licenses the paperback or audio rights to a third-party publisher? Is it not the case that we have always recognized these paperback and audio licenses as the licensing of a subsidiary right and have compensated the author accordingly? Although it is my opinion that electronic publishers are exercising a subsidiary right when they license content for electronic distribution, there is far from total agreement among publishers on this issue.

Recommendation: Review your standard royalty clause to ensure that it meets your requirements for the publication of electronic versions of the author's work. The royalty clause should cover those situations where the publisher exploits electronic rights for itself and when those rights are licensed to third parties.

CONCLUSION

Electronic rights have created a new revenue stream for publishers and authors. However, the business and legal dynamics of this new publishing model must be incorporated in the standard book-publishing agreement to ensure a successful transition to this new model. This transition will only occur if the publishing agreement is reviewed and revised accordingly.