In a ruling issued on Tuesday, a New York federal judge threw out the authors claim that Harlequin had used a corporate sleight-of-hand to pay them 3-4 percent of ebook royalties instead of the 50 percent they believed they were due.

The case, which turned on technical questions of law, is an example of the collisions that can arise as a result of book contracts signed in an age that pre-dated the current boom in ebooks. (In another case in the same court, parties are squawking over whether an author signed to a 1971 contract can shop ebook rights to another publisher.)

In the Harlequin case, the authors pointed to publishing contracts that granted them 50 percent of the digital royalties that the publisher collected. The authors believe this should let them collect half of the $4 Harlequin earned from an ebook with a cover price of $8.

Harlequin instead decided to pay 3-4 percent ($0.24 to $0.32 on an $8 book) on the grounds that this was half of the 6-8 percent it received from licensing the rights to a different publisher. The issue became contentious because the third party publishers in this case were subsidiaries created by Harlequin for tax purposes.

In a related letter to authors, Harlequin explained that, prior to 2005, no one had foreseen the growth of ebooks and that it was reasonable to pay authors less than 50 percent.

In a four-page decision, the New York court declined to consider the authors’ arguments that the “third party publishers” were alter-egos for Harlequin. Instead, the court relied on a narrow interpretation of contract law to dismiss the claim.

The decision is very brief and contains an unusual footnote stating that the judge’s clerk, a second-year law student, had largely researched and drafted the opinion (clerks often help with such tasks but judges rarely acknowledge this).

The authors’ counsel included veteran publishing lawyer David Wolf. Reached by phone, Wolf declined to comment and said his clients were considering their options. You can read the ruling for yourself here:

Harlequin Dismissal

Two months later, what’s the fallout? Well, nothing. Instagram’s new rules went in place in January and the site appears popular as ever (based on my own experience and Facebook’s optimism on a recent earnings call).  Meanwhile, Instagram this week issued a stinging rebuke to Lucy Funes, the California woman who is leading a class action suit against it.

In a filing to dismiss the suit, Instagram’s lawyers said the case was based on “wrongheaded, even frivolous, legal theories.” The document, reported by Reuters, added that Funes’ alleged injury was “self-inflicted” and pointed to “her failure to take the self-help measure of deleting her account.” (our emphasis)

The comments are harsh but also fair. Instagram, and every other social media company, is right when it points out that no one is forcing people to use their service and that, if you don’t like their rules, you can just leave. Instagram notes that Funes is still using the service.

This take-it-or-leave-it approach may be exasperating to consumers who feel powerless as Facebook and others turn them into product pitchmen (Instagram will follow suit soon enough). But for now, the licenses these companies impose ensure the law is on their side and, as long as people don’t pay for sites like Gmail and Twitter, advertising is the only option that will sustain them.

Unfortunately, companies that do try to be transparent about their advertising intentions are likely to be punished for their efforts. As Verge reporter and former copyright lawyer Nilay Patel explained in December, the controversy over Instagram only creates an incentive for companies to be obtuse or sneaky about their terms of service in the future.

This doesn’t mean, of course, that everything is okay. Instagram and the other companies do pose serious threats to our privacy, data and dignity. But until there is a system in which consumers have an option to pay these companies to leave us alone (would you pay $5 a month for ad-free Facebook? — I might), this is the world we’re stuck with.

The Instagram episode ultimately reflects a familiar pattern of hysteria, resignation and forgetting. There will be other examples soon enough.

In case you missed it, a San Diego law firm this week sought to run to the rescue of Instagram users who are upset that the site will change its terms of service in January. These new terms are meant to help Instagram introduce advertising practices akin to its new parent company, Facebook, which turn users into pitchmen for products.

The lawsuit, which came after weeks of uproar about the maladroit way in which Instagram rolled out the proposed changes, made for good headlines. Too bad, then, the case stands as much chance of success as that petition to deport CNN’s Piers Morgan.

Writing on Eric Goldman’s respected Technology and Marketing Law Blog, Seattle lawyer Venkat Balasubramani described the case as “flimsy,” “borderline frivolous” and “an example of lawsuits against social networks gone completely amok.”

Balasubramani, who tracks social media cases closely, points out that that the revised terms haven’t even gone into effect (meaning that users can simply leave) and that, in any case, Instagram has the right to change its terms of service if it darn well pleases. You can see the full take-down, including Goldman’s view, here.

So why are the good folks at Finkelstein & Krinsk law firm filing this case in the first place? My own hunch is that it’s a way for the firm to get on the radar as part of California’s growing cottage industry of privacy lawsuits. This involves law firms who wait for the latest privacy outrage, and then race each other up the courtroom steps to file a case. Next, they ask for Facebook (or whoever) to pay them as part of a “privacy settlement” which typically compensates lawyers and activists — but not the users whose privacy was breached. In this case, though, the only payout Finkelstein & Krinsk are likely to receive is a clobbering by Facebook’s veteran legal team.

Overall, the Instagram episode is just the latest example of the ritualistic cycle of complacency-outrage-resignation that occurs whenever users discover that websites like Facebook and Google are providing a free service in exchange for advertising data.

(Image by ollyy via Shutterstock)

For the unfamiliar, “Sponsored Stories” is Facebook’s term for drafting its users as product pitchmen based on their “Likes.” Here are some examples taken from the revised legal settlement filed Friday in California:

Facebook feels the ads are fair since users pay nothing for its services. But the company landed in hot water because the “Sponsored Stories” appear to violate a California law that forbids companies from using people’s endorsements without their permission.

To make the issue go away, Facebook followed a familiar playbook when tech companies get sued over privacy issues: throw a pile of money at lawyers and privacy groups. This has worked many times in the past for Google and others but, unfortunately for Facebook, one judge finally had enough. In August, U.S. District Judge Richard Seeborg refused to sign off on a $20 million plan, noting that lawyers had plucked numbers out of “thin air” and that the Sponsored Stories stars got nothing. Now, under the new plan, reported by Wired, Facebook could pay real cash money to users.

This time, users could get up to $10 if the judge approves the deal, but a closer look at the filing shows this is unlikely to happen. As it turns out, users will only get $10 if there is enough to go around after lawyer and other expenses are paid. If too many of the estimated 125 million eligible people claim the money, everyone’s share will be reduced accordingly. And if the reduced amount falls below $5 per person, the Court has the discretion to give it to the usual suspects — the privacy groups.

This isn’t the only strange feature of the new deal. Another is the notification process. Under the new settlement, Facebook is obliged to create a website and to notify users via email and to place ads in USA Today. This is all well and good but there is no obligation to notify them through, I dunno, Facebook.

The deal also provides lawyers to ask the Court for their share of the $20 million later on but doesn’t specify how much they’ll get. It also obliges Facebook to create a control panel of sorts for users to manage their role in the Sponsored Stories scheme but many of the details are fuzzy.

Overall, the deal is slightly better for consumers but it may not go far enough to charm Judge Seeborg. Here’s a marked up copy of the settlement if you want to decide for yourself:

Fraley v. Facebook Settlment 2

Background

Recall that publishers and Apple have been in a throw down with the government over the price of ebooks. Government lawsuits say that the publishers’ switch to a commission-style pricing system (like the one used in iTunes) amounted to price-fixing. Three of the five publishers threw in the towel while Apple and two hold-out publishers are fighting in court.

The feds’ lawsuit demands that publishers change their pricing model so that Amazon and others can set the price they want (even it the price is below cost). The lawsuit by the states is instead about money; the states want to collect refunds on behalf of ebook buyers.

Three publishers agreed to pay up several months ago, but it was only on Thursday that the dollar figures finally came out. Meanwhile, Apple and the others are refusing to play ball.

• See also: Everything you need to know about the e-book lawsuit

What the deal means for you: a tiny Kindle or iTunes credit and a long wait

If you bought an e-book from one of the five big publishers between April 1, 2010 and May 23, 2012, you will get a 25-cent refund for each old title you bought and $1.32 if the title was a recent New York Times bestseller. The refund will come in the form of a credit to your Amazon, Barnes & Noble or iTunes account; you’ll get a check if you bought from Sony or Google. The retailers have your email address so it will not be hard to notify you.

This is a micro-windfall that you probably weren’t expecting, so it’s all to the good. The only catch is that it will be a long time coming. U.S. District Judge Denise Cote has to stamp the deal — and there’s a good chance she won’t while the case is ongoing against Apple and two hold-out publishers. Realistically, we’re talking years before that $1.32 credit hits your iTunes account. If the two hold-out publishers and Apple finally decide to settle, you may get another small credit.

What it means for publishers: ebook sales and an escape from the class action lawyers

The three publishers who struck a deal are looking smarter by the minute. The settlement not only gets them out of legal purgatory, it will lead to most of the money they pay coming right back to them. What do you think the average person is going to do with a $1.32 Barnes & Noble credit? That’s right. They will buy an ebook that likely costs $5 or $10. This is almost a net win for the publishers.

Just as important, the settlement lets publishers short-circuit the class action lawyers who are coming at them with a separate lawsuit. Those lawyers, who say they would get more money if they were in charge, are now frozen out because there is no money left to collect on behalf of consumers.

The two hold-out publishers, Macmillan and Penguin, now face a hard choice. They have to decide if their fight to keep commission pricing is worth years of legal bills and uncertainty (keep in mind, they could lose the case and face an even stiffer penalty). Given this choice, it’s possible that the publishers, even if they believe they did nothing wrong, will find it easier to just accept the states’ deal and move on.

What it means for Apple: fighting on

Unlike the publishers, Apple has more lawyers than the state of Connecticut. It can (and will) fight this thing forever. At the same time, Apple has a stronger defense than the publishers — it wasn’t in the room or on the phone when many parts of the alleged conspiracy took place.

Apple, which says it did nothing wrong, may also be concerned with protecting the commission model of its iTunes store (if the government wins on ebooks, will it come after apps or music pricing next?).

Finally, if the two other publishers fold and join the settlement, the government may quietly close the case against Apple rather than risk losing an expensive and high-profile court fight.

What it means for the government: election year headlines

The settlement is a trophy for Connecticut Attorney General George Jepsen and his counterparts around the country. They can tell voters, shortly before November elections, that they have won refunds for home state consumers.

This is a big fudge, of course. According to Beth Farmer, an antitrust professor at UPenn, the court is unlikely to approve the deal while the dispute with Apple, Macmillan and Penguin is ongoing. ”The notice and claims process is going to be complicated and it wouldn’t be efficient for the states to do that multiple times,” said Farmer by email last month.

Andre Barlow, a former Justice Department lawyer and antitrust expert, is also skeptical. “It’s not a clean way of doing this but it probably makes sense for the states to do it this way … At least they’ll have a big headline.”

(Image by Pagina via Shutterstock)

The settlement is meant to resolve dozens of lawsuits related to Netflix’s decision to retain subscribers’ rental histories for more than one year in violation of the Video Privacy Protection Act. The VPPA is a 1988 law that Congress passed to regulate video stores but, in recent years, it has become a headache for companies like Netflix and Facebook.

• See also: Netflix craves Facebook, tell Congress: Scrap Video Privacy Law

The Netflix settlement, which affects tens of millions of subscribers nationwide, was proposed in February and a federal judge gave it a conditional green light in July. Since then, lawyers have been sending out millions of emails to notify customers. The judge also ordered them to place 60 million notification ads on Facebook like this one:

This notification process would normally pave the way for the court to rubber stamp the $9 million deal at a scheduled hearing in December. But that approval may now be at risk given that court records show more than 50 objection letters. The objections vary in length and sophistication but the underlying complaint is the same — that third party privacy groups and lawyers get the money while the subscribers get nothing. You can see another full example below but here is a sample letter from a Michigan woman who notes “We are the customer who was done wrong” :

These objections come as judges are growing skeptical about privacy settlements that fail to do anything for the consumers who are affected. This month, for instance, a California judge refused to approve a $20 million settlement over Facebook’s “Sponsored Stories” on the grounds that half the money went to the lawyers and none to users. In the past, similar settlements involving products like Google Buzz and Facebook Beacon have typically sailed through the courts with only a handful of objections.

• See also: Facebook’s $10 million privacy pay-out – why you get nothing

Here’s a sample objection:

Netflix Objection

The lawsuit states that between 1990 and 2004, Harlequin Enterprises required its authors to enter into publishing agreements with a Swiss entity, Harlequin S.A., that it created for tax purposes. The suit alleges Harlequin Swiss didn’t perform any publishing functions like “exercising, selling, licensing, or sublicensing the ebook rights granted by the authors” — those were handled by the actual publisher, Harlequin Enterprises.

The publishing agreements stated that the authors would receive a royalty of 50 percent of the publisher’s net receipts on ebooks. However, the royalties were calculated based on “the license between Harlequin’s Swiss entity and Harlequin Enterprises,” rather than the “net receipts made by Harlequin Enterprises Limited from the exercise, sale or license of ebook rights,” resulting in the authors being underpaid. The suit alleges that authors received only three to four percent of the ebooks’ cover price as their 50 percent share — $0.24 to $0.32 on an $8 book — rather than 50 percent of Harlequin Enterprises’ receipts, which would amount to about $2 assuming net receipts of $4 on an $8 book.

In January, Harlequin sent a letter (PDF) to authors and agents outlining its policy on books published prior to 2005. In the letter, Harlequin argues that ebooks were so nascent prior to 2005 that it was not unreasonable to pay a low royalty on them. For books published before 2005, authors would receive “50% of Net Amount Received, as defined in their agreements, for the sale or the license to publish an ebook.” The publisher lumps ebooks published during that time period under the “All Other Rights” provision, which it says has been used over its history “to calculate royalties for a variety of variety of miscellaneous sales and uses, including third party advertising, special sales, remainders, introductory editions, and others. Such was the case for electronic books prior to 2005. This was well before anyone knew how — or, if — the market for electronic books would evolve or what the business model might look like. Of course, now our contracts contain specific royalty provisions for most of these types of sales and uses, including electronic books.”

The plaintiffs in the suit are romance authors Barbara Keiler, Mona Kay Thomas and Linda Barrett. They are represented by David B. Wolf, a New York attorney specializing in intellectual property and publishing and former litigation counsel at Time Inc., and Michael Boni who also represents the Authors Guild in the Google Books litigation.

Update: Harlequin publisher and CEO Donna Hayes said in a statement, “Our authors have been recompensed fairly and properly for their work, and we will be defending ourselves vigorously.”

The complaint is here (PDF).

The tens of millions at stake raise questions about the political and business motives behind the deal, and could provide more fodder for critics who question government decisions in the high-profile e-book case.

This investigation offers a closer look at the case’s many moving parts and, in the last section, an estimate of when (or if) any of the money will make it to e-book readers themselves.

“Parent of the nation” to the rescue

The conspiracy case is bitter and complicated but, at its heart, turns on whether Apple and five publishers broke antitrust laws by introducing a commission-style pricing system for e-books in early 2010. The new pricing system was a response to Amazon selling e-books below cost.

The publishers’ Apple partnership soon touched off a wave of class action lawsuits over alleged price-fixing as well as investigations by the Justice Department and state governments. The controversy crested this spring when the Justice Department formally sued Apple and five publishers for violating the Sherman Act.

Three of the publishers promptly settled and agreed to change their pricing policies but Apple and two other publishers, Penguin and MacMillan, are fighting the case in court. The court proceedings (including the settlement talks) are a sprawling affair scheduled to take years. The case has become especially complicated, however, due to the overlapping roles of the Justice Department, the state governments and the class action lawyers.

The Justice Department, you see, is only asking Apple and the publishers to change their pricing — not to pay out any money. It is the state governments and the lawyers who are after cash. They have competing lawsuits to shake civil damages out of Apple and the publishers.

While class action lawsuits are commonplace, the one filed by the state governments is not. The states’ case is based on a power called parens patriae (“parent of the nation”) that lets them sue on behalf of their citizens.

Connecticut and Texas initiated the civil lawsuit in April and more that thirty other states and Puerto Rico since decided to tag along. The dozen or so states sitting it out are mostly in the west.  Their attorneys general have not joined in because state laws require the governor or legislature’s permission to do so or, possibly, because they disagree with the lawsuit.

For the states that are taking part, the initial lawsuit paid immediate dividends. In April, the Connecticut attorney general held up a trophy in the form of a $52 million settlement with publishers Hachette and Harper Collins which will be used to pay “consumer restitution.” A third publisher, Simon & Schuster, settled soon after. The details of the Simon & Schuster deal have yet to be released but, if it’s consistent with the previous settlements, that publisher will also pay tens of millions.

If Connecticut’s prize was an immediate win for the states, it was a direct loss for the class action lawyers. These lawyers, who filed dozens of cases on behalf of Americans across the country, will not be able to collect if the defendants have already paid once to the state governments. (Right now, the class action lawyers still have a hope of collecting from Apple and the two holdout publishers – unless they too decide to settle with the states).

Steve Berman, a prominent lawyer who is leading the class action suit, argues that the states’ deal will ultimately shortchange consumers. He said via email:

“If you were a defendant would you want to negotiate with the law firm that was a lead counsel in the largest settlement in history (tobacco) … or would you prefer to negotiate with some relatively young and inexperienced assistant attorneys general? That’s an easy one, and we are disappointed the attorneys general took the bait.”

Consumer justice or just politics?

Parens patriae suits have been around forever but are still quite rare. The most prominent ones involve mass torts related to pollution or industry.

In the case of something like overpriced e-books, Berman says the job is better left to class action lawyers like him who have experience grinding the most money out of big companies like Apple and the publishers. So why did the states decide to file a parens patriae case in the first place?

“The reason the state is stepping in is it’s great politically for the attorney general,” says Daniel Gifford, an anti-trust professor at the University of Minnesota, who adds that he has “never seen anything like [the e-book suit] before.”

Connecticut’s ambitious former attorney general, Richard Blumenthal, was the impetus for the state investigations. He announced an investigation in mid-2010 when e-book pricing was a big news issue even though the Justice Department appears to have been investigating the situation at the same time. Blumenthal is now a US Senator and the mop-up work has fallen to his successor and has also been taken-up by the attorneys general of Texas and Ohio.

At the same time, the political winds are changing. This week, US Senator Charles Schumer penned an op-ed in The Wall Street Journal saying the New York publishers and Apple did nothing wrong, and urging the Justice Department to back off before it smothers the digital publishing industry. (At the state level, however, New York Attorney General, Eric Schneiderman, signed onto the multi-million dollar suit against the publishers. Schneiderman’s office did not reply to questions about how the money would be disbursed.)

The states’ lawsuit may be politically driven and redundant (don’t forget there is the class action case too) but that doesn’t necessarily mean it’s a bad idea. The states may demand lower legal fees than class action lawyers who typically collect 25 percent of the jackpot. This could mean more money overall for consumers.

The state governments could also bring a quicker end to the whole process. Bert Foer, the president of the American Antitrust Institute, says the three publishers’ motivations for settling with the states was to “make this go away as soon as possible.”

Foer, however, is skeptical about the state governments’ overall role in the process. He says the class action system was already poised to address any harm to consumers. Foer adds that the states will almost certainly take a cut of the settlement to cover legal expenses, including outside lawyers, in the same way as a class action law firm would do.

So when will e-book owners see the money?

Even though two of the publishers have signed a settlement to pay $52 million and a third (Simon & Schuster) is poised to top up that amount, it’s unlikely the money will flow to consumers anytime soon.

Beth Farmer is a law professor at Penn State and a former attorney with the New York attorney general’s office where she worked on antitrust cases. She points out that the proposed $52 million settlement still has to be approved by the court, that consumers have to be notified and so on. None of this is likely to happen while the cases against Apple and the holdout publishers drag on.

“[Consumers] need complete information before they can make an informed decision, I think, and mid-way through the case is premature.  Also, the notice and claims process is going to be complicated and it wouldn’t be efficient for the states to do that multiple times,” said Farmer by email.

For now, the states are scheduled to file for a preliminary approval of the settlement with the three publishers in late August. That filing (if it is not delayed) will lead to a period in which groups, including the class action lawyers, can file objections. Based on Farmer’s comments and the fluid nature of the larger case, it would be a surprise if Judge Denise Cote gives a go-ahead.

Meanwhile, the Justice Department’s case, which partially serves as the linchpin of the other lawsuits, is taking on a chaotic quality. The department has already missed a deadline to publish more than 800 comments filed in response to its proposed settlement. At the same time, political support for the settlement may be weakening as figures like Senator Schumer weigh in and as Justice Department staffers wait to find out if they will have a new boss come November.

Finally, the retail market for e-books is rapidly evolving. While a grand conspiracy between Apple and publishers may once have seemed a great threat to e-book buyers, some have suggested the Justice Department should have targeted Amazon and its giant market share instead. Others argue that the market for digital publishing is changing so rapidly that the government should simply step back from attempting to regulate it all.

As for that $52 million, e-book readers should not hold their collective breath about getting a $5 check anytime soon. The settlement money is tangled in a complicated political and legal process that makes it unlikely payment will arrive in the next two years – if at all.

See more: Everything you need to know about the e-book lawsuit in one post

(Image by StanOd via Shutterstock)

Lawyers for Apple, publishers, the U.S. Department of Justice and state governments on Friday filed a new schedule and status report about how they intend to undertake the case. The case itself turns on whether Apple and five publishers broke antitrust laws when they introduced a commission-style pricing system for e-books in a bid to halt Amazon’s growing dominance in the market.

The schedule confirms that a trial pitting the Justice Department against Apple and two of the publishers is set for June 3, 2013, and reveals that final preliminary filings in the related state government and class action cases are due in October of 2013. In reality, this means any class action trial would not take place until 2014. This second part of the proceedings is important because it determines how much money Apple and the two publishers will have to pay if they are found to have conspired to overcharge readers for e-books. The Justice Department segment of the case, set for next June, could result in new pricing rules but not payouts to consumers.

The new filings also set out a complex agreement as to how the parties will coordinate the expensive process of gathering evidence and deposing witnesses. Under the agreement, the Justice Department and state governments will share transcripts and other findings related to their investigations with the class action lawyers who are seeking millions on behalf of consumers.

The process has become especially complicated because three of the publishers have already reached a settlement with state governments, led by Texas and Connecticut, worth tens of millions of dollars that effectively cuts out the class action lawyers. The settlement, however, does not yet include every state and nor does it cover Apple or the other two publishers, Penguin and Macmillan. The holdout defendants, if found liable, could end up paying tens of millions more into the consumer settlement pool.

The holdouts, however, insist that they did nothing wrong and say that the Justice Department and their other accusers went after the wrong target. Apple and the publishers have said it is Amazon and its dominant control of the e-book market that should be the real subject of antitrust scrutiny.

The documents filed on Friday also state that the parties will begin talks with a mediator this fall to consider a settlement. For now, though, this appears to be a legal formality rather than a sign that the trial will be called off.

As the legal proceedings drone forward, the market for e-books continues to evolve rapidly. A growing number of reading platforms are entering the market — from the Galaxy tablet to new versions of the iPad, Nook and Kindle Fire — and the rest of the world is expected to join North Americans in embracing e-books (see my colleague Laura Owen’s recent report here).

E-book Litigation Schedule Copy
(Image by  Kristo-Gothard Hunor via Shutterstock)

A complaint filed in San Jose cites a “troubling lack of security measures” and accuses LinkedIn of negligence and breach of contract for failing to encrypt its user database with industry standard security measures. The incident resulted in hackers posting users’ information online but it is not yet clear how much data they obtained.

The lead plaintiff in the case is Katie Szpryka who paid for an upgraded account with the social network. The lawsuit, which also covers a separate class of users with free accounts, adds that LinkedIn breached California consumer protection laws. It cites a FTC complaint from 2003 in which the federal regulator accused the Guess! clothing company of unfair trade practices for storing customer information in an unencrypted database with poor security.

The case is likely to turn on whether LinkedIn did enough to protect its users accounts and whether it did enough to notify users of the hacking incident. The breach was first reported by a Norwegian security firm and then publicized by numerous technology sites but LinkedIn appears to have dithered for more than twelve hours before telling users that data had been compromised.

Critics claim LinkedIn should have used a common practice known as “salting” to make the passwords harder to decrypt.

The LinkedIn case is just the latest in a parade of class actions in which technology companies stand accused of violating user privacy. As we reported yesterday in regard to the latest $10 million Facebook settlement, money from the lawsuits rarely goes to users.

The complaint is below. It was first reported by CourtHouse news service.

Linkedin Class Actionhttp://www.scribd.com/embeds/97589713/content?start_page=1&view_mode=list&access_key=key-1yhcpot45wk857owp3z9

Photo courtesy of Shutterstock user [Blazej Lyjak].