Thursday, February 7, 2013

Royalty or Royal Pains? Contract Royalty Language, Part 1

It's Thursday, which means it's time to dive back into John Q. Penman's contract and translate a little more publishing legalese.

Last week, we looked at John's advance (remember: not all authors get advances - and the smaller the press you publish with, the less likely you are to see one), so this week we're moving on to the meat of the "money clauses" - the Royalties.

This is a complex topic, so we'll be dealing with it for several weeks to come.

"Royalties" is the contract term for the author's percentage of revenues (or sometimes profits) on sales of the work.

Or, in shorter form: Royalties are the money the author receives on sales.

Contract language impacting royalties will be spread throughout the contract - so John (and you) must read the entire document to understand exactly how and when the money must be paid. That said, every publishing contract will also have at least one paragraph dedicated to royalty calculations.

Let's look at John's:

Royalties. Throughout the Term of this Agreement, and as long thereafter as necessary for Publisher to report all sales of the Work made prior to termination hereof, Publisher will pay Author the following royalties ("Royalties") on Publisher's sales of the Work:
        a. Hardcover. On Publisher's sales of hardcover editions of the Work, if any, except as specified elsewhere in this Agreement, ten percent (10%) of the list price on all copies sold.
        b. Paperback. On Publisher's sales of paperback* editions of the Work, if any, except as specified elsewhere in this Agreement, eight percent (8%) of the
Publisher's list price on all copies sold.
        d. ebooks. On Publisher's sales of ebook editions of the Work (including without limitation all electronic, digital, and downloadable versions of the Work), if any, except as specified elsewhere in this Agreement, ten percent (10%) of the Publisher's list price of all copies sold.

        e. Audio Editions. On Publisher's Audio Editions of the Work sold in physical media form (e.g., on CD), if any, except as specified elsewhere in this Agreement,ten percent (10%) of the amount received by the Publisher on sales of the Work. With respect to exploitation of Publisher's Audio Editions by means of transmission, uploading, downloading, broadcast or similar means or methods other than sales in physical media form, if any (and except as otherwise specified in this Agreement) twenty percent (20%) of the amount received by the Publisher. 
        f. Foreign Sales. On Publisher's sales of the Work in physical media and/or ebook form outside of the United States, a royalty equal to fifteen percent (15%) of the amount received by Publisher on such sales.
*Note: Some publishers separate "trade paperback" from "mass market paperback" but for the sake of simplicity I've combined those provisions here (and also removed a few subsidiary rights - we'll look at them separately, later on).

Quite the block of text - and that's a heavily condensed version for educational purposes!

Why so long?
Royalty provisions need to cover every form, format, territory and language (or translation) to which the Publisher acquires publication and sales rights. Royalty clauses can be one paragraph or (more commonly) run on for over a page. The language is often complex, and must be evaluated carefully and with several factors in mind.

Today, we look at the first one: The Basis of Calculation.

Note that John's royalties are calculated either as a percentage of "Publisher's List Price" - meaning the price the Publisher sets as the "list price" or sale price of the Work - or as a percentage of "amount(s) received by Publisher [on sales]."

This is known as Gross Royalty calculation. Where royalties are calculated on a "Gross" basis, the author's share is calculated based on the Publisher's "list price" or "funds received [on sales]" and the Publisher doesn't get to deduct costs and expenses from proceeds before determining the amount of the author's royalty payments.

The other type of calculation, Net Royalties, refers to a situation where the publisher can deduct costs and other items (sometimes far more than just the costs of producing the books) and the author's share is calculated based on the publisher's "profits" after deduction of expenses.

You probably don't need me to tell you that "Gross" is better than "Net" from an author's perspective. Not only does the author receive more money, but it's easier to track the amounts the author should receive. There's no need for the contract to specify which costs and expenses the publisher can deduct, because no deductions are allowed.

By contrast, a contract which bases royalties on "net" should state, in detail, which expenses the publisher can and cannot deduct, and also require documentary evidence of those costs along with each royalty statement.

Fortunately for John, his royalties are based on gross, which simplifies matters somewhat.

Next week, we'll take a look at the numbers in the royalty clause - I wonder how many of you have already spotted the major problem lurking there?

What do you think about gross vs. net royalty calculation? Did you spot the problem in the royalty numbers? Hop into the comments and let me know!

Posted by Susan Spann 
Susan Spann is a California publishing attorney and the author of Claws of the Cat (St. Martin's / Minotaur, July 2013), the first novel in the Shinobi Mystery series featuring ninja detective Hiro Hattori.


Giles Hash said...

The one clause that really sets my teeth on edge is for the audio books. Percentage of "all money received" doesn't sound like an easy number to track. The other factor is ebooks clause that stipulates ALL digital formats, which might include digital downloads of audio formats since CDs are really only stipulated in the Audio Editions clause.

Susan said...

Good eyes. The audiobook language can be a problem when it's vague. "Money received" is actually ok - it's not perfect, but I wouldn't throw a deal in the garbage because of it. That said, you're definitely looking at the right kinds of things, and it's critical to make sure you clear up any ambiguities before you sign.

And you're right to zero in on the ebook language, though generally speaking a court will consider "digital formats" in that paragraph applicable only to the ebook versions because a separate part of the contract deals with audiobooks. Still, if you're not working with a lawyer, or an experienced agent, that's exactly the kind of language you'll want to have addressed.

Good job!