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).

Several publishers have even launched “digital-first” romance imprints, which publish only e-book originals. Harlequin, the largest romance publisher in the world, started Carina Press in 2009, while HarperCollins announced “Avon Impulse” in March 2011.

But at libraries, romance ebooks are underrepresented relative to size of their popularity among readers–that is in part because the major publishers are still figuring out their e-book lending strategies.

A new partnership aims to help libraries build their romance e-book collections by giving greater exposure to more titles from smaller, ebook-only publishers. Starting today, Library Journal, which has long helped librarians decide which books to purchase, will begin reviewing romance e-book originals. The advance review copies will come through NetGalley, which provides digital galleys to “professional readers” (critics, bloggers, booksellers, librarians and teachers).

The expansion of e-book offerings is the most complicated issue libraries are dealing with now, says Heather McCormack, Book Review Editor of the 135-year-old Library Journal. Some 72 percent of libraries now offer e-books, but licensing them from publishers can be difficult. In general, publishers work with e-book vendor OverDrive to broker contracts with libraries; the end result tends to be that libraries have limited access to publishers’ e-books, and restrictions on lending (an ebook can’t be checked out simultaneously to more than one person, for instance). Currently, Macmillan and Simon & Schuster (NYSE: CBS) do not make any of their ebook titles available to libraries. HarperCollins has generated controversy by allowing its e-books to be checked out only 26 times before they expire, forcing libraries to buy them again.

As a result of these restrictions by big publishers, McCormack says librarians are turning to smaller presses, which are generally less restrictive about offering access to their ebooks. Library Journal‘s arrangement with NetGalley will introduce librarians to new titles from many of these smaller e-book-only romance publishers. Angela James, Executive Editor of Harlequin’s Carina Press, estimates that over half of digital-first content is in the romance genre.

James predicts that romance e-book originals will be a hit for libraries. “Romance readers are such voracious readers and they can’t afford to buy all that content,” she says. They also tend to be very loyal to specific authors, so checking out e-books in libraries gives them a chance to try out authors they’re unfamiliar with, she says.

Although Library Journal is only accepting romance e-originals now, it plans to expand to other genres. “All signs are pointing to sci-fi and mystery,” says McCormack–two other genres that are fast-growing segments of the e-book market. She says that shorter nonfiction works, such as those offered by Byliner and through the Kindle Singles program, are a prime target for libraries as well.