Second Circuit Revives Some Class Claims by Textbook Authors Against McGraw-Hill
This is a new chapter in fight over authors’ rights in digital age. Plaintiff textbook authors alleged that defendant McGraw Hill had breached its publishing agreement with them by ceasing or reducing revenues generated from McGraw Hill’s online platform that hosts textbooks and supplementary materials. The Court lays out the basic terms of the parties’ agreements. McGraw Hill agreed to publish the Plaintiffs’ works “at its own expense.” It also agreed to pay specified percentages of the its net receipts for each copy of the plaintiffs’ works. In 2006, McGraw Hill amended its agreements to provide that the domestic royalty rate would also applies to electronic sales.
In 2009, McGraw Hill launched Connect, a content management system. Each Connect offering consists of an electronic book plus “Core Connect Content” (CCC). The complaint alleges that Connect is nothing more than the plaintiffs’ works in electronic form. CCC are supplementary materials that draw on the content of the books available electronically through Connect. CCC has no value apart form that work and is not sold independently. Nonetheless, in 2020, McGraw Hill informed its textbook authors that their royalties would be based on the sales of the Connect product and not for the value associated with CCC.
Plaintiffs first alleged that this change in the definition of “net receipts was a breach of contract.” Second, they alleged that the redefinition of the “price” of Connect products constitutes a breach of the duty of good faith and fair dealing. Back in January 2022, the District Court dismissed plaintiffs breach of contract claims. McGraw Hill did not have to pay plaintiffs royalties for the CCC content, and it had not violated its contractual obligation to publish plaintiffs’ works “at its own expense.” Still, plaintiffs’ good faith and fair dealing claim survived, because a jury could conclude that the price allocated to plaintiffs’ works might not have been fairly set. But plaintiffs took a voluntary dismissal of that claim in order to challenge the dismissal of their breach of contract claim, which otherwise would not have been ripe for appeal.
The Second Circuit found that “net receipts” was a defined term in the plaintiffs’ contract and was unambiguous. Applying New York law, the Second Circuit, like the District Court, refused to consider extrinsic evidence relating to the parties’ course of dealing prior to 2009. New York law does not permit the consultation of extrinsic evidence to vary unambiguous contract terms. The plaintiffs were entitled only to royalty payments based on the sales of their textbooks, not to royalties based CCC sales related to their textbooks.
However, the Second Circuit rejected the District Court’s reasoning as to what it meant for McGraw Hill to publish the plaintiffs’ works “at its own expense.” The District Court rejected plaintiffs’ argument that the costs associated with delivery of the plaintiffs’ works through Connect was analogous to the costs of printing hardcopy textbooks. The Second Circuit disagreed:
The availability of content other than the textbooks themselves on the Connect platform does not negate the fact that McGraw Hill publishes the textbooksthrough Connect. And that an online platform may be “more than a publishing platform” does not warrant a legal conclusion that it is not a publishing platform at all.
McGraw Hill notified plaintiffs that it had figured out a way to calculate the valuation of the Connect platform apart from the value of the books sold through the platform. It attributed some revenue to the books and some revenue to the platform. However, the Second Circuit treated the platform as an expense incurred by the company in publishing the plaintiffs works. Taking the plaintiffs’ allegations as true, they have stated a claim that McGraw Hill breached its obligation to publish their work at its own expense.