Three authors filed a complaint in U.S. district court asserting that McGraw Hill is in breach of contract for a recent change to royalty calculations for products sold on its Connect digital platform. The complaint, Flynn v. McGraw Hill LLC, 21-cv-00614, U.S. District Court, Southern District of New York (Manhattan), was filed on January 22 by Sean Flynn, Associate Professor of Economics, Scripps College; co-author of Economics: Principles, Problems, and Policies. (Now in 22nd edition.), Dean Kardan, Prof Economics and Finance, Kellogg School of Management, Northwestern U; co-author three textbooks: Economics, Microeconomics, and Macroeconomics, and Jonathan Morduch Professor of Public Policy and Economics at Wagner Graduate School of Public Service in NYU, co-author with Dean Kardan of the above three books.

McGraw Hill’s digital distribution platform, Connect, was launched in 2009, and until recently authors were paid royalties based on the entire sale price of textbooks sold as a single unit on this platform. In 2020, however, McGraw Hill unilaterally changed the structure of digital royalty payments by identifying three components of a Connect sale, described in a letter to authors as:

• eBook: author created
• Platform: MHE created, content-agnostic software that provides access to course management tools, as well as access to the course-related technology and content
• Course Content: Course materials that include the re-use of author eBook content in McGraw Hill’s Smartbook technology

Now McGraw Hill intends to pay royalties only on the eBook portion of the sale, but not on the portion of the sale deemed to be the value of the platform. In addition, McGraw Hill would only pay a permission fee for the author’s materials used in the course content.

It is not clear what value McGraw Hill intends to attribute to the Connect Platform, or whether that valuation will be the same between different authors and works, or whether it will remain consistent over time. Some authors have been told that the value of the Connect platform is about $25. Under the new royalty method, that amount will be subtracted from the royalty basis before calculating the royalty that will be paid to the author.

For example, if a student pays $100 for a book hosted on the Connect platform, $25 is subtracted from that NET leaving the royalty basis as $75 instead of $100. Rather than receiving $14 in royalties (at a 14% royalty rate) per book sold, the author would receive only $10.50. In addition, whatever amount is attributed to Course content would not receive a full royalty, but rather a flat permission fee – generally much lower than the royalty rate. The complaint estimates that one author’s royalties would likely be reduced by 37% under this new royalty calculation method.

The complaint points out that these authors’ contracts specify that McGraw Hill is required to publish the textbooks at its own expense and that royalties are to be calculated based on net receipts.

For printed textbooks, the requirement to publish each work “at its own expense,” means that the publisher will absorb the cost of paper, ink, and printing. Those expenses are not passed along to the authors. The Plaintiffs argue that the Connect platform is the digital equivalent to publication and that the cost of this platform should not be passed to authors in the form of a deduction from the royalty basis.

The contractual definition of “net receipts” is the purchase price of the Work, with a specified set of deductions, such as discounts, rebates, and credits. Publication costs, however, are not among  the items listed that may be deducted in calculating net receipts.

As this article goes to press, McGraw Hill has yet to respond to the complaint.

With digital publication gaining more and more traction among students, publishers are experimenting with various ways to maximize profits with innovative pricing, subscription, and royalty models. Flynn v McGraw Hill may be certified as a class action, which could then be joined by other authors who meet the class requirements, which will likely be based on their having McGraw Hill contracts with the same or analogous terms. Regardless of whether this action moves forward, it is instructive to carefully read your author contract to discover the answer to the following questions:

1. Is the publisher required to publish the work at its own expense?
2. Is there a clause that specifies the publisher’s responsibilities for publishing digital works?
3. In the net receipts clause, are there deductions specified for digital publication?

The case is being handled by the law firm of Grant & Eisenhofer. Authors with concerns about the new McGraw Hill royalty structure may want to contact Andrew Dodemaide at adodemaide@gelaw.com.

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Marlys Mayfield, TAA Publishing Practices Committee