13

‐ 1753

‐ cv

Keiler et al. v. Harlequin Enterprises LTD et al.



## In the 1 

# United States Court of Appeals

2



## For the Second Circuit 3

________ 4

5

A UGUST T ERM 2013 6

No. 13

‐ 1753

‐ cv 7

8

B ARBARA K EILER

, M ONA G AY T HOMAS

, AND L INDA B ARRETT

, ON 9

BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED

, 10

11

Plaintiffs

‐ Appellants

, 12

13

v. 14

15

H ARLEQUIN E NTERPRISES L IMITED

, H ARLEQUIN B OOKS S.A., 16

H ARLEQUIN E NTERPRISES B.V., 17

Defendants

‐ Appellees

. 1 18

________ 19

20

Appeal from the United States District Court 21

for the Southern District of New York. 22

No. 12

‐ cv

‐ 5558

― Harold Baer, Jr., Judge

. 23

________ 24

25

A RGUED : N OVEMBER 21, 2013 26

D ECIDED : M AY 1, 2014 27

________ 28

29

Before: K EARSE

, J ACOBS

, AND P ARKER

, Circuit Judges

. 30

________ 31

1 The Clerk of Court is respectfully directed to amend the official caption in this case to

conform with the caption above.No. 13

‐ 1753

‐ cv

Appeal from a judgment of the United States District Court for 1

the Southern District of New York (Baer, J. ) dismissing a complaint 2

alleging breach of publishing agreements for failure to state claims. 3

We AFFIRM the dismissal of plaintiffs’ first, second, and third 4

claims. We hold that the fourth claim alleged sufficient facts to 5

plead a breach of the publishing agreements on the theory that 6

defendants calculated plaintiffs’ e

‐ book royalties based on an 7

unreasonable license fee. Accordingly, we REVERSE the dismissal 8

of the fourth claim and REMAND the case to the district court for 9

further proceedings consistent with this Opinion. 10

________ 11

D AVID B. W OLF (Michael J. Boni & John E. 12

Sindoni, Boni & Zack LLC, Bala Cynwyd, PA, on 13

the brief ), DavidWolfLaw PLLC, New York, NY, 14

for Plaintiffs

‐ Appellants

. 15

D ANIEL J. L EFFELL (Jay Cohen, on the brief ), Paul, 16

Weiss, Rifkind, Wharton & Garrison LLP, New 17

York, NY, for Defendants

‐ Appellees

. 18

J OHN R. T ANDLER (F. B RITTIN C LAYTON III, on the 19

brief ), Ryley Carlock & Applewhite, Denver, CO, 20

for Amici Curiae, Romance Writers of America and 21

The Authors Guild, supporting Plaintiffs

‐ Appellants. 22

________ 23

B ARRINGTON D. P ARKER

, Circuit Judge : 24

Plaintiffs

‐ Appellants Barbara Keiler, Mona Gay Thomas, and 25

Linda Barrett are authors of romance novels who bring putative 26

class action claims against publishing house Defendants

‐ Appellees 27

Harlequin Enterprises Limited (“Harlequin Enterprises”) and its 28

2No. 13

‐ 1753

‐ cv

subsidiaries Harlequin Enterprises B.V. (“HEBV”) and Harlequin 1

Books S.A. (“HBSA,” and together with HEBV, “Harlequin 2

Switzerland”). Plaintiffs contend that the Harlequin entities 3

breached agreements with them and other authors (the “Publishing 4

Agreements”) by paying them artificially low royalties on the sales 5

of digitized versions of their books. 6

The United States District Court for the Southern District of 7

New York (Baer, J .) concluded that plaintiffs’ allegations failed to 8

state claims and dismissed the amended complaint pursuant to 9

Federal Rule of Civil Procedure 12(b)(6). See Keiler v. Harlequin 10

Enters. Ltd.

, No. 12

‐ 5558, 2013 WL 1324093 (S.D.N.Y. Apr. 2, 2013). 11

For the reasons set forth below, we hold that plaintiffs’ claims based 12

on agency, assignment, and alter ego theories cannot serve to modify 13

the terms of the Publishing Agreements and were properly 14

dismissed. We also conclude that the amended complaint set forth 15

sufficient facts to plead a breach of the Publishing Agreements on 16

the theory that defendants calculated their e

‐ book royalties based on 17

an unreasonable license fee. Accordingly, we affirm the judgment in 18

part, reverse it in part, and remand for further proceedings 19

consistent with this Opinion. 20

I. BACKGROUND 21

This case arises in the context of a meteoric rise in e

‐ book sales 22

over the last several years. 2 Defendant Harlequin Enterprises is the 23

world’s largest publisher of romance novels. Prior to 1983, 24

Harlequin Enterprises directly contracted with authors for the 25

publication of their works under the Harlequin ( and related) imprints 26

using a standard agreement which Harlequin Enterprises signed as 27

the “Publisher.” (Am. Compl. ¶ 34). 28

2 Amici note that from 2008 to 2012, e

‐ book sales grew from $64 million annually to over

$3.0 billion annually—an increase of over 4,700 percent. Amici Curiae Br. at 5, Dkt. No. 51.

3No. 13

‐ 1753

‐ cv

Beginning in 1983, Harlequin Enterprises changed this 1

arrangement, ostensibly “for tax and related purposes.” ( Id

. ¶ 31). It 2

registered a subsidiary HEBV, a Dutch company, in Fribourg, 3

Switzerland. Thereafter, Harlequin Enterprises required authors to 4

enter into publishing agreements substantially similar to its previous 5

agreements, but with HEBV signing the agreements as the 6

“Publisher” and with Harlequin Enterprises included in the 7

agreements’ definition of a “related licensee.” ( See id. ¶ 35). 8

Notwithstanding this change, Harlequin Enterprises continued to 9

draft, negotiate, and administer the publishing agreements, as well 10

as to edit, publish, and promote the authors’ novels. ( See id. ¶¶ 3, 40, 11

41). HEBV, however, sent out royalty statements and payments to 12

the authors. ( See id. ¶¶ 41, 42). Harlequin Enterprises advised 13

authors that the purpose of the change was to “rationalize business 14

procedures.” ( Id

. ¶ 35). 15

In 1994, Harlequin Enterprises registered HBSA, a Swiss 16

company, as the successor of HEBV, again “for tax and related 17

purposes.” ( See Am. Compl. ¶ 31). Thereafter, HBSA signed the 18

agreements as the “Publisher” and Harlequin Enterprises continued 19

to be defined in the Publishing Agreements as a “related licensee.” 20

Harlequin Enterprises continued to publish, and promote the 21

authors’ novels while HBSA sent out royalty statements and 22

payments. ( Id. ¶ 36). Harlequin Enterprises advised authors that the 23

change to having HBSA sign as the “Publisher” was a name change 24

that “would not affect” them. ( Id. ). 25

Under the terms of the Publishing Agreements, the authors 26

granted to the “Publisher” on a “sole and exclusive basis all the 27

rights in and to [their Works] in any country throughout the world 28

under various imprints and trade names during the full term of 29

copyright.” ( Id. ¶ 49 (brackets in original)). The Publishing 30

Agreements additionally provided that HEBV or HBSA as the 31

4No. 13

‐ 1753

‐ cv

Publisher had “the sole and exclusive right to execute, sell, license or 1

sublicense

. . . rights subject to the sharing of net proceeds.” ( Id .)

. 2

The Publishing Agreements also detailed how authors were to be 3

compensated in connection with the sales of various editions of their 4

works. Specifically, author royalties on U.S. sales of mass market 5

paperback and hardcover copies were based on a percentage of the 6

cover price. 7

Moreover, the Publishing Agreements contained two umbrella 8

clauses covering the potential sale, license, or distribution of the 9

authors’ works in other media. Under the “All Other Rights” clause, 10

the Publishing Agreements provided that the authors’ royalties 11

would be calculated as follows: 12

On all other rights exercised by Publisher or its Related 13

Licensees fifty percent (50%) of the Net Amount Received by 14

Publisher for the license or sale of said rights. The Net 15

Amount Received for the exercise, sale or license of said rights 16

by Publisher from a Related Licensee shall, in Publisher’s 17

estimate, be equivalent to the amount reasonably obtainable 18

by Publisher from an Unrelated Licensee for the license or sale 19

of the said rights. 20

( Id

. ¶ 52). The Other Rights clause provided: 21

If Publisher licenses, sublicenses or sells to an Unrelated 22

Licensee any of the following rights to the Work anywhere in 23

the world, in any language, Author’s and Publisher’s share of 24

net amount received by Publisher for said license, sublicense 25

or sale shall be apportioned as follows

. . . 26

[Author’s share] 50% [Publisher’s Share] 50%. 27

5No. 13

‐ 1753

‐ cv

(Am. Compl

. ¶ 53 (brackets in original)). In addition, the Publishing 1

Agreements provided that the Publisher could “assign this 2

Agreement to any related legal entity,” and could “delegate any of 3

its editorial, administrative and/or other responsibilities pursuant to 4

this Agreement to its parent company or to an affiliate, subsidiary or 5

other related legal entity.” ( Id .¶ 49). Consistent with this provision, 6

Harlequin Enterprises performed many of the responsibilities of the 7

Publisher under the agreements. ( See, e.g

., id .¶¶ 3, 39, 41

‐ 48). 8

As the market for e

‐ books expanded, Harlequin Enterprises 9

sold and licensed e

‐ books and e

‐ book rights directly to consumers 10

on its website and to e

‐ book licensees such as Amazon. ( Id

. ¶ 55). In 11

2011, Harlequin Enterprises informed authors that it believed that 12

author royalties for e

‐ books were covered by the All Other Rights 13

clause in the Publishing Agreements and accordingly advised the 14

authors that their royalty payments would be calculated based on 15

the net amount received by Harlequin Switzerland from a license to 16

publish e

‐ books that Harlequin Switzerland purportedly granted to 17

Harlequin Enterprises. Harlequin Enterprises claimed that the net 18

amount received by Harlequin Switzerland was 6 percent to 8 19

percent of the cover price of the e

‐ books, and that, consequently, the 20

royalties owed to the authors were 50 percent of that amount, or 3 21

percent to 4 percent of the cover price of the e

‐ books. ( Id

. ¶ 56). 22

Plaintiffs commenced this putative class action seeking to 23

represent authors who entered into Publishing Agreements with 24

Harlequin Switzerland between 1990 and 2004. In their amended 25

complaint, plaintiffs asserted three claims for breach of contract 26

grounded in agency, assignment, and alter ego liability. The 27

common contention was that, under the Publishing Agreements, 28

Harlequin Enterprises rather than Harlequin Switzerland should be 29

recognized as the “Publisher” when calculating royalty payments. 30

( Id

. ¶ 11). Under this reading, plaintiffs contended they are entitled 31

6No. 13

‐ 1753

‐ cv

to 50 percent of the amount received on e

‐ books by Harlequin 1

Enterprises (which is upwards of 50 percent of the cover price), 2

rather than the far lower 50 percent of the “Net Amount Received” 3

by Harlequin Switzerland. (Am. Compl. ¶¶ 6, 55). 4

In addition, the amended complaint asserted a claim for 5

breach of contract on the theory that the license fees paid to 6

Harlequin Switzerland did not comply with the“All Other Rights” 7

clause requiring that the net amount received from a related licensee 8

be equivalent to the “amount reasonably obtainable ” from an 9

unrelated licensee. Finally, the amended complaint asserted a claim 10

for unjust enrichment against Harlequin Enterprises. 11

Defendants moved under Rule 12(b)(6) to dismiss the 12

amended complaint and the district court granted the motion. The 13

court held that the first three claims failed because the contractual 14

definition of “Publisher” under the Publishing Agreements was 15

binding, and therefore, plaintiffs’ theories of agency, assignment, 16

and alter ego could not recast the obligations in the contracts. 17

Harlequin

, 2013 WL 1324093, at *2. The court dismissed the fourth 18

claim on the ground that the amended complaint failed to allege 19

sufficient facts supporting plaintiffs’ assertion that the licensing fees 20

Harlequin Enterprises paid to its subsidiaries were not equivalent to 21

“the amount reasonably obtainable from an Unrelated Licensee.” Id

. 22

at *3. Finally, the district court held that plaintiffs’ contention that 23

they were entitled to a larger share of e

‐ book royalties fell within the 24

scope of a written contract (the Publishing Agreement) and therefore 25

precluded an unjust enrichment claim. Id

. The district court entered 26

judgment in favor of the defendants and this appeal followed. 27

II. DISCUSSION 28

To survive a motion to dismiss under Rule 12(b)(6), a 29

complaint must allege sufficient facts which, taken as true, state a 30

7No. 13

‐ 1753

‐ cv

plausible claim for relief. See Bell Atl. Corp. v. Twombly

, 550 U.S. 544, 1

555–56 (2007). We review de novo the dismissal of a complaint under 2

Rule 12(b)(6), accepting all factual allegations (but not legal 3

conclusions) as true and drawing all reasonable inferences in favor 4

of the plaintiffs. See Ashcroft v. Iqbal

, 556 U.S. 662, 678 (2009); N. J. 5

Carpenters Health Fund v. Royal Bank of Scotland Grp

., PLC, 709 F.3d 6

109, 119 (2d Cir. 2013). 7

Plaintiffs contend that the district court erred in dismissing 8

their breach claims because, under principles of agency, assignment, 9

and alter ego, their amended complaint plausibly alleged that 10

Harlequin Enterprises was the “Publisher.” They also contend that 11

they plausibly alleged that the intra

‐ company licensing fees were not 12

“equivalent to the amount reasonably obtainable” from an unrelated 13

licensee. 3 We consider these matters in turn. 14

Under New York law, which governs the Publishing 15

Agreements, the best evidence of what parties to a written 16

agreement intend is what they say in their writing. Greenfield v. 17

Philles Records, Inc.

, 98 N.Y.2d 562, 569 (2002). Consequently, a 18

written agreement that is complete, clear, and unambiguous must be 19

enforced according to its terms. Id

. 20

A contract is unambiguous when the contractual language has 21

a definite and precise meaning about which there is no reasonable 22

basis for a difference of opinion. Law Debenture Trust Co. of N. Y. v. 23

Maverick Tube Corp

., 595 F.3d 458, 467 (2d Cir. 2010). By contrast, 24

ambiguity exists where a contract’s term could objectively suggest 25

more than one meaning to one familiar with the customs and 26

terminology of the particular trade or business

. See id. at 466; Fox 27

Film Corp. v. Springer

, 273 N.Y. 434, 436 (1937)

. Whether a contract is 28

3 In their briefs, plaintiffs also challenged the district court’s dismissal of their unjust

enrichment claim. At oral argument, plaintiffs withdrew this claim.

8No. 13

‐ 1753

‐ cv

ambiguous is a question of law. See Bailey v. Fish & Neave

, 8 N.Y.3d 1

523, 528 (2007); Greenfield

, 98 N.Y.2d at 569. 2

Based on our review of the Publishing Agreements, we 3

conclude that plaintiffs’ first through third claims are not viable 4

because the Publishing Agreements unambiguously provide that 5

HEBV or HBSA is the “Publisher” and Harlequin Enterprises is a 6

“Related Licensee” for purposes of computing royalty payments. 7

The fact that Harlequin Switzerland may have delegated certain 8

publishing and administrative duties to Harlequin Enterprises does 9

not modify this relationship. The Publishing Agreements expressly 10

contemplate that the “Publisher” could assign or delegate 11

publishing duties “to any related legal entity,” including “to its 12

parent company or to an affiliate [or] subsidiary.” ( See Am. Compl. 13

¶ 49). These provisions are unambiguous and enforceable. 14

Plaintiffs contend that they have set forth sufficient facts 15

regarding the parties’ course of dealing tending to show that 16

Harlequin Enterprises was actually the Publisher. But New York 17

law is well settled that a written agreement that is complete and 18

unambiguous is to be interpreted without the aid of extrinsic 19

evidence and that industry practice may not be used to vary the 20

terms of such a contract. See Law Debenture Trust Co. of N. Y.

, 595 21

F.3d at 467

‐ 48; Croce v. Kurnit

, 737 F. 2d 229, 238 (2d Cir. 1984). 22

Plaintiffs rely on Nolan v. Sam Fox Pub. Co., Inc.

, 499 F.2d 1394 23

(2d Cir. 1974) for the proposition that, in keeping with the course of 24

dealings between the parties, this Court could supplant the 25

definition of Publisher in the Publishing Agreements. This reliance, 26

however, is misplaced. In Nolan

, the district court interpreted the 27

word “Publisher” to cover its assignee where the named publisher in 28

the agreement at issue had been dissolved. See Nolan v. Williamson 29

Music, Inc., 300 F. Supp. 1311, 1319 (S.D.N.Y. 1969). Accepting the 30

9No. 13

‐ 1753

‐ cv

defendant’s interpretation of the contract, the court reasoned, would 1

have meant that only the dissolved publishing company would have 2

been liable for the payment of royalties due to the plaintiff. Id

. To 3

avoid this impossible situation, the district court elected to define 4

“Publisher” with reference to another provision of the contract 5

which referred to the duties of the “Publisher, its successors and 6

assigns.” Id

. In affirming, we observed: “Our construction of the 7

contract [did] not reform the agreement in any way, but [wa]s more 8

likely in keeping with the intentions of the parties.” Nolan

, 499 F.2d 9

at 1399. 10

Here, however, the Publishing Agreements explicitly provide 11

for the allocation of royalty payments between the Publisher 12

(Harlequin Switzerland) and the authors where the Publisher 13

engages the services of a related licensee such as Harlequin 14

Enterprises. Substituting Harlequin Enterprises as the Publisher, as 15

urged by the plaintiffs, would, in effect, require redrafting 16

significant provisions of the contract while ignoring other express 17

ones. 18

Moreover, as the district court observed, plaintiffs’ theories of 19

agency, assignment, and alter ego are not, strictly speaking, theories 20

of contract interpretation, but rather theories of vicarious liability. 21

Such theories, however, cannot displace the express terms of the 22

Publishing Agreement. Consequently, we hold that the first three 23

claims were properly dismissed. 24

The fourth claim alleged that defendants breached the 25

Publishing Agreements because the licensing fees Harlequin 26

Enterprises paid to Harlequin Switzerland—the figure on which 27

plaintiffs’ royalties were based—were not “equivalent to the amount 28

reasonably obtainable

. . . from an Unrelated Licensee.” The district 29

10No. 13

‐ 1753

‐ cv

court dismissed this claim on the ground that the factual allegations 1

supporting it were insufficient. We disagree. 2

As we have previously observed, Federal Rule of Civil 3

Procedure 8(a)(2) requires only a short and plain statement of the 4

claim showing that the pleader is entitled to relief, in order to give 5

the defendant fair notice of what the claim is and the grounds upon 6

which it rests. See Ideal Steel Supply Corp. v. Anza

, 652 F.3d 310, 323 7

(2d Cir. 2011); see also Twombly

, 550 U.S. at 555. Consequently, to 8

survive a motion under Rule 12(b)(6), a complaint does not need to 9

contain detailed or elaborate factual allegations, but only allegations 10

sufficient to raise an entitlement to relief above the speculative level. 11

See Ideal Steel Supply Corp

., 652 F.3d at 323

‐ 24. 12

The amended complaint identified the specific contractual 13

provision at issue, (Am. Compl. ¶ 81), and alleged how defendants 14

breached that provision: “[t]he claimed “license” from Harlequin 15

Switzerland to Harlequin Enterprises, in the amount of 6% to 8% of 16

the cover price of the works, is not “equivalent to the amount 17

reasonably obtainable by Publisher from an Unrelated Licensee for 18

the license or sale of the said rights.” ( Id

. ¶ 82). Further, the 19

amended complaint alleged that “[t]he amount reasonably 20

obtainable by a publisher from an unrelated licensee for the license 21

or sale of the said rights is, upon information and belief, much 22

higher than 6% to 8% of cover price and is at least 50% of net 23

receipts.” ( Id

. ¶ 83). 24

The amended complaint provided context for these 25

allegations, contending that after Harlequin Enterprises set up its 26

subsidiaries, ostensibly for tax purposes, it continued to control the 27

publication, marketing, and distribution of plaintiffs’ works. ( See id

. 28

¶¶ 31, 35

‐ 36, 38

‐ 41, 45, 47, 48). Moreover, the amended complaint 29

went on to allege that these actions substantially lowered the 30

11No. 13

‐ 1753

‐ cv

plaintiffs’ royalties, despite Harlequin Enterprises’ assurances that 1

its inter

‐ affiliate licensing arrangements would not affect their rights. 2

( See id

. ¶¶ 7

‐ 8, 35

‐ 36). These allegations, that the amount of 3

royalties they received were not equivalent to the amount 4

reasonably obtainable from an unrelated licensee, nudged plaintiffs’ 5

claims across the line from conceivable to plausible. See Twombly

, 6

550 U.S. at 570. 7

The defendants’ reliance on Astra Media Grp., LLC v. Clear 8

Channel Taxi Media, LLC

, 414 F. App’x 334, 336 (2d Cir. 2011) is not to 9

the contrary. That case involved a predatory pricing claim, where 10

price information is more critical. Consequently, we found the price 11

allegations to be conclusory where “[plaintiff] provide[d] no facts to 12

support its contention that $170 is actually close to the standard 13

industry cost.” Id

. Here, however, plaintiffs have provided a basis, 14

albeit “upon information and belief,” that defendants engaged in 15

self

‐ dealing because the industry standard is considerably higher 16

than the 6 to 8 percent of net receipts that Harlequin Enterprises 17

remits to its subsidiary Harlequin Switzerland (i.e. at least 50 percent 18

of net receipts). We have observed in the past that pleading on the 19

basis of information and belief may be appropriate under such 20

circumstances. See Arista Records LLC v. Doe 3

, 604 F.3d 110, 120 (2d 21

Cir. 2010) (noting the Twombly plausibility standard does not 22

prevent a plaintiff from pleading facts “upon information and 23

belief” where the facts are peculiarly within the control of the 24

defendant); see also Boykin v. KeyCorp, 521 F.3d 202, 215 (2d Cir. 2008). 25

We reach this conclusion in a context where discovery had 26

apparently begun to adduce additional information supportive of 27

plaintiffs’ claim. 4 In Ideal

, we reasoned that Twombl y would not 28

4 In their opposition to defendants’ motion to dismiss, plaintiffs cited a survey of

royalty rates paid by romance publishers. Harlequin

, 12 Civ. 5558, Dkt. 22, at 23 (S.D.N.Y.)

.

At the motion hearing, plaintiffs also purported to have discovered a sublicense agreement

12No. 13

‐ 1753

‐ cv

require that a complaint be dismissed if evidence had already been 1

produced during discovery that would fill the perceived gaps in the 2

complaint because pleadings may be amended. 652 F.3d at 324

‐ 25. 3

We underscore that Twombly does not impose a probability 4

requirement at the pleading stage. See Arista Records LLC

, 604 F.3d at 5

120 (citing Twombly

, 550 U.S. at 556). It simply requires factual 6

allegations sufficient to raise a reasonable expectation that discovery 7

is likely to generate evidence of liability. See id. For these reasons, 8

we conclude that the fourth claim should not have been dismissed. 9

III. CONCLUSION 10

For all the foregoing reasons, we AFFIRM the district court’s 11

dismissal of the first, second, and third claims. We REVERSE the 12

dismissal of the fourth claim, and we REMAND the case to the 13

district court for further proceedings consistent with this Opinion. 14

between Harlequin Enterprises and another subsidiary, Harlequin Digital Sales Corporation,

that showed a license rate of 40 percent of the cover price, significantly higher than the 6 to

8 percent license fee purportedly paid to Harlequin Switzerland. Joint App’x at 162.

13