PUBLISHED OCTOBER 1996
by Ivan Hoffman, Publishing Attorney —
It frequently seems that book publishers are not in the business of selling books. Rather, it often appears that they are in the business of consigning books. Although the paperwork may be marked “INVOICE,” the reality is that some or indeed all of the books represented by that piece of paper have a way of coming back to the publisher at the most inconvenient of times. An”inconvenient” time, by the way, is any time. Living in dread of the United Parcel Service can make the business of publishing a nightmare.
Different sorts of books have different shelf lives and may find their way back to a publisher in varying lengths of time. Hardback books in the chain stores may sit on the shelves for upwards of a year while paperbacks may last only a few months. Or visa versa. Go to any supermarket and look at the mass market titles and you may find that they last only a few weeks at best before they get packed back up. Only melons rot faster!
The “Reserve Against Returns” Clause
In order to protect themselves as best they can, publishers have clauses in their agreements with authors that allow those publishers not only to deduct “actual returns” but to set up and maintain a rolling “reserve against anticipated and future returns.” The same sort of clause exists in agreements between smaller publishers and sub-distributors, with similar consequences, but I will focus on the author/publisher agreement for the sake of clarity.
The clause usually reads something like: “Publisher may maintain a reasonable reserve against anticipated returns.”
This type of language provides the most flexibility for the publisher but the least protection for the writer and can only lead to disputes. Although a bit riskier for the publisher, establishing some numerical parameters to this open-ended language may actually help both parties.
These parameters may include the following:
- Establishing a fixed percentage of each amount shown as “sold” on every royalty statement. This percentage for reserves can be as low as say 10% or as high as even 50%!
- A different reserve may be required for newer authors who have not yet established themselves in the market and whose historical “sticking power” is not yet clear.
- You may have a different reserve for different categories of books, such as hardback, softback, mass market, or the ridiculously ephemeral computer book. Also included in a separate category may be audio books and CD-ROMs.
- A fixed period of liquidation. In other words, this clause would allow a publisher to establish a reserve, whether in a fixed amount, a
variable-by-category but otherwise fixed amount, or even the open-ended”reasonable” amount, provided that any books not “actually” returned after a
stated period of time must then be paid for by the publisher and the reserve liquidated. This period can be as long or short as the parties can agree to and should, of course, reflect some market realities, knowing however that eturns can be returned basically forever.
Let me give an example that might cover each of these approaches. Suppose a publisher “sells” 100 books and reports them on a royalty statement for the period ended December 31 of a given year. Depending upon the contract, the deal may allow the publisher to hold back payment on say 25 of those books. In this example, I am assuming that one category of sale might be “normal trade channel hardback.” Obviously it can get a bit more sophisticated if the contract provides for different treatment of different editions. However, after say two accounting periods, in this example, the publisher must liquidate any such reserve so established that does not reflect actual returns and pay the author thereon.
An additional wrinkle may arise, however. Often the publishing agreement allows the publisher to give away for “free” copies of the book for”promotional purposes.” I am not talking here about books to reviewers and the like. Those seem valuable in order to get the book out and may be marked”Promotional Copy. Not for Sale.” No problem exists in respect of the issues in this article, although there may be other issues that should be faced in that regard but which are beyond this discussion.
On the other hand, in order to encourage sales, a publisher may often provide a certain number of “free” books for every certain number “purchased” on a given invoice. These “free” books are not really “promotional” books; they are additional books sold but, because they are not priced on the invoice, serve merely to reduce the per unit cost of each book that is priced. For example: if the publisher sells a retailer 10 books at $5.00 per book, the cost per book is $5.00 and the invoice total is $50.00. But if, in order to encourage sales, the publisher provides three additional books”free” but the invoice price remains $50.00 for the 13 books, the actual cost per book to the retailer is only $3.85.
While this may be a wise business strategy, it does present a couple of problems. One, of course, is how many units are reported as “sold” to the author. Does the author get credit for 10 or 13? This may depend upon what the contract says and whether or not there are any limits to this “x free for every x sold” policy.
The other issue concerns the “returns” question. What happens when the bookseller returns some or indeed all of the books? How is the author to be treated? Does the author get charged for 10 returned books or 13? Suppose that when reported as “sold” the publisher only credited the author for the 10 invoiced as “sold” and not the full 13? Is the same formula applied when the books come back? The answer may depend upon what the agreement says and what is the “custom” in the industry. But the author and publisher may be able to anticipate this issue by making certain the contract reflects that returns be allocated only in the same ratio as books “sold” compared to ones”given away.”
In the end, of course, “eating” returns is a cost of doing business, and even though there may be some protection against overpaying royalties on these units, the publisher may end up losing actual money. There are, of course, “remainder persons” who purchase cut-outs and such for small pennies on the dollar. The publishing agreement often provides that the author is not paid on these sales, although the exact justification for this provision is not that clear. Income is, after all, income and its source should not be that relevant. Perhaps a smaller royalty is justified but none at all…?
These are some, if not all, of the issues respecting returns that can arise in the contract negotiation between an author and publisher, or between a publisher and sub-distributor. It is often a matter of some significance and should be examined with some care.
Ivan Hoffman is an international publishing attorney and a published writer and author. He practices in the Los Angeles area. You may reach him at firstname.lastname@example.org.
This article is not intended as a substitute for legal advice. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. You should consult with an attorney familiar with the issues and the laws. No portion of this article may be copied, re-transmitted, re-posted, duplicated, or otherwise used without the express written approval of the author.