Publishing agreements, as our Fair Contract Initiative keeps demonstrating, are among the most one-sided documents most authors ever see. But they enable another set of documents that can be at least as baffling and unjust: royalty statements.
The publishing contract dictates the terms of royalty accounting, and as usual, those terms are mired in the practices of a bygone age. For openers, most publishers pay royalties twice a year on income that they may have received as long as nine months before. In an era when financial records were kept by hand in ink, that might have made some sense; today, when computers account for money and it can be transferred electronically to authors’ accounts, it makes none. We understand that publishers themselves often have to wait months for payment from wholesalers and retailers, but in a world where Amazon manages to pay its Kindle Direct authors monthly, there’s no reason why traditional publishers can’t tighten up the turn-around time and pay out to their authors more quickly. We believe that fair book contracts should specify quarterly payments of income received by the publisher no more than three months in the past.
The delay in payments is bad enough. But in the real world, most authors don’t even receive the untimely payments they expect of the money their books have earned. The reason is the pernicious “reasonable reserve for returns” that virtually all publishers hold back from disbursements.
The rationale for a reserve for returns is that some of the books the publisher has shipped to booksellers may end up coming back to its warehouses for refunds. But if the publisher is the sole judge of what’s “reasonable,” it may continue withholding funds long after there’s any possibility of returns. We think that any fair reserve clause must include limits, both for the dollars that may be withheld (no more than, say, 20% of royalties) and the length of time the clause may remain in force (say, one year). Unlimited reserves for returns allow publishers to hold onto authors’ earnings and manipulate payments forever.
Another way to help make sure publishers don’t make mistakes is to include an audit clause in the contract. Without an audit clause, an author’s only recourse if he or she suspects a publisher of improperly accounting for royalties is to bring a lawsuit—an expensive and unpleasant way to settle differences.
Publishers will often agree to an audit clause if the author pushes for one. But too many standard audit clauses make the author pick up the check for the audit even if the publisher is found to be at fault. That’s unfair. A fair clause should stipulate that if an error of 5% or greater is found in the author’s favor, the publisher must pay the audit costs in addition to the money it owes the author, preferably with proper interest on the amount in question.
Also unfair: language in standard audit clauses that limits an author’s audit right to statements rendered in the last one or two years. Authors should be entitled to audit their publishers for any accounting period within the past six years, the statute of limitations for breach of contract claims in many states. If audits are limited to the most recent year or two years, publishers can get away with huge accounting errors in their favor.
But today’s standard contracts enable another fundamental problem: the impenetrable jumble of information contained in the royalty statements themselves. Despite, or perhaps because of, computer technology, royalty statements have become either woefully threadbare, where the publisher lumps all sales together and the author is forced to “trust” the numbers, or so detailed that a CPA specializing in royalty statements is needed to decipher them. And since publishing contracts typically don’t require more than generalities in royalty statements, publishers are happy to comply. Essential information, such as how many copies were printed and which books were sold for how much, is often missing. This means that there is no way to know if the statement is correct unless the author conducts an audit.
Fair contracts should stipulate exactly what information must be displayed in the royalty statement: the number of copies sold and returned; the list price; the net price; the royalty rate; the amount of royalties accumulated; the amount of reserve for returns withheld; the gross amount received by the publisher pursuant to each license along with copies of statements received by the publisher from its licensees during the accounting period; itemized deductions; the number of copies printed, bound, and given away; and the number of saleable copies on hand. Royalty statements will not become clear and transparent unless contracts force publishers to make them that way.
And publishers need to be more forthcoming in royalty statements about more abstract calculations such as the author’s share of subscription and bundle revenue. Authors can no longer tolerate being at the mercy of the publisher to accurately and honestly report the actual numbers behind these revenue streams as opposed to just some bottom-line figure computed in secret; it’s essential to know how many people are accessing a work and the income attributable to it in clear and precise terms. Our sister organization in the UK, the Society of Authors, has gone so far as to propose legislation holding both publishers and sublicensees to “regular reporting obligations…detailing all exploitations undertaken and revenues yielded.”
It’s time for royalty accounting to move into the 21st century. The only way that will happen is by forcing the issue in book contracts.