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“Changed Market Conditions” Clause to the Rescue

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Jonathan KirschJonathan Kirsch, a publishing attorney based in Los Angeles, is general counsel of the Independent Book Publishers Association and a recipient of its Benjamin Franklin Award for excellence in publishing.

What is a publisher to do if a manuscript is delivered on time and in a publishable form but the publisher changes its mind about putting the book into print because it no longer seems like a good business decision?

Some publishers have equipped their author-publisher contracts with a so-called “Changed Market Conditions” clause that entitles them to cancel the publication of an otherwise publishable book, at least under certain specific circumstances. (See below for a sample clause and an explanation of how it works.)

But as one major publishing house recently discovered, without such a clause, a publisher does not enjoy the right to cancel a book simply because the publisher comes to the conclusion that it will not be profitable to print, bind, and sell it.

The case of Chodos v. West Publishing Company is a kind of morality tale for publishers who want to back out of a bad deal, and it’s an example of how a “Changed Market Conditions” clause can help them achieve that goal.

The Case of the Lawyer & the Legal Publisher

Rafael Chodos is a leading attorney based in Los Angeles and a specialist in “fiduciary duty,” the body of law that defines the special obligations of accountants, attorneys, physicians, corporate officers and directors, and the like. Bancroft-Whitney Publishing Company is one of America’s leading publishers of legal reference works, copies of which can be found in virtually every law office in America.

Chodos entered into what the U.S. Court of Appeals for the Ninth Circuit called “a standard Author Agreement” with Bancroft-Whitney for a treatise on fiduciary duties. Working without an advance, and scaling down his busy law practice, he spent some 3,600 hours over a period of three years, and his final manuscript totaled more than 1,200 pages. Along the way, he was continually encouraged in his work by his principal editor and other members of the Bancroft-Whitney editorial staff.

By the time Chodos finished the manuscript, however, Bancroft-Whitney had merged into West Publishing Group, another leading publisher of law books. The new management took a very different view of the “market potential” of a 1,200-page treatise on fiduciary duty. The manuscript was admittedly of “high quality,” as the new publisher readily conceded, but it did not “fit within [West’s] current product mix.” For that reason, the publisher told Chodos that the book would not be published after all.

The Duty to Publish in “Good Faith”

Rafael Chodos promptly filed a lawsuit against West Publishing Company for breach of contract. The publisher, however, won the first battle–the trial court entered a summary judgment against Chodos on the grounds that the publisher was entitled to reject the manuscript on the basis of its concerns over “market potential.” Chodos appealed to the Ninth Circuit Court of Appeals, which overturned the summary judgment in a decision published this year. Chodos, the court ruled, was entitled to his day in court on his claim that the publisher had breached its contract by refusing to publish his book.

The decision in Chodos v. West Publishing Company follows a well-established principle of law that tends to favor authors when they come into conflict with their publishers over the acceptability of a manuscript. Most publishing contracts allow a publisher to reject a manuscript and cancel a contract if the manuscript is “unacceptable in form or content.” But, as West found out, the right to reject a manuscript is not unfettered, and the law imposes some weighty burdens on the publisher who relies on the “acceptability” clause in killing a book project.

West contended that it was entitled to reject an author’s work “for any good-faith reason, regardless of whether the reason was related to the quality or literary merit of Chodos’s manuscript.” But, as the court ruled, the law imposes an obligation on the publisher that does not appear in the contract itself–the so-called “implied covenant of good faith and fair dealing.”

Under the “implied” covenant, the publisher must act in good faith in making “a judgment as to the quality or literary merit of the author’s work…, and cannot reject a manuscript for other, unrelated reasons.”

Thus, when West candidly told Chodos that it was canceling his book because of concerns over its “market potential” rather than deficiencies in the quality of its scholarship or writing, the publisher was inadvertently conceding that it had no right to reject the manuscript.

“[H]ad Chodos submitted a badly written, poorly researched, disorganized or substantially incomplete work to West, the publisher would have been well within its rights to find that submission unacceptable,” the court explained. “[N]owhere in the contract does it state that the publisher may terminate the agreement if it changes its management structure or its marketing strategy, or revises its business or economic forecasts…”

The court in Chodos v. West delivered a sharp warning to publishers in general: “[T]o allow a publisher to escape its contractual obligations for these reasons,” the court concluded, “would be directly contrary to both the language and spirit of the standard Author Agreement.” Thus a publisher cannot rely on the customary “acceptability” clause to cancel an otherwise acceptable book even if it fears that publication of the book will result in financial disaster.

The Clause that Can Rescue

Not every publisher, however, would have found itself in the same position as West in this case. The fact is that the “standard” author-publisher agreement has changed in recent years, and many publishers are now including a clause that expressly permits the publisher to cancel an otherwise publishable book based on concerns over “market potential.” Indeed, if West had consulted its own attorneys and updated its own contracts, it might very well have won the case.

The clause in question squarely addresses the problem that West faced when it began to entertain doubts about how much money it might expect to make from publishing Chodos’s book.

Here is an example of a so-called “Changed Market Conditions” clause now in use by many publishers and publishing attorneys:

Publisher shall not be obligated to publish the Work if, in its sole and absolute judgment, whether before or after acceptance of the Work, Publisher determines that supervening events or circumstances since the date of this Agreement have materially and adversely changed the economic expectations of the Publisher regarding the Work at the time of making this Agreement. Upon making such a determination, Publisher may terminate this Agreement without further obligation by notice in writing to Author, and Author may retain all payments previously made to Author under this Agreement.

The sample clause does not empower a publisher to cancel a book under contract simply because the publisher later develops a case of “buyer’s remorse.” Indeed, a clause that placed no limits on the publisher’s right to cancel a book would create an acute legal peril of its own–if the publisher could simply change its mind and walk away, the contract would be deemed “illusory” and would not be enforceable at all.

That is why the sample clause requires the publisher to specify what “events or circumstances” have resulted in a change in the “economic expectations.” Strictly speaking, the changes must have taken place after the contract was first signed, and they must be serious enough to have “materially and adversely” changed the publisher’s expectations of how the book will fare in the marketplace.

Equally crucial is the obligation of the publisher to pay something to the author as a kind of “kill fee.” In the sample clause, for example, the author is entitled to retain all advances paid by the publisher through the date of termination of the contract. If no advance has been paid to an author, then the clause should specify a dollar amount that will be paid on termination as a kill fee. Otherwise, the whole contract may be unenforceable for the reasons discussed above–it is only an “illusory” contract if the publisher can walk away at its own whim.

Clearly the “Changed Market Conditions” clause might not have protected West Publishing Company from a lawsuit–the publisher would have been required to explain to Chodos exactly what had changed in the market for legal treatises between the date when the contract was first signed and the date when West decided to cancel the book. And everything we know about the demanding author suggests that he would have put his publisher to its proof on that issue too!

But the fact remains that a “Changed Market Condition” clause, if it appears in a book contract and if it is used in good faith, provides an important and sometimes crucial legal resource for a publisher who might otherwise be forced to publish a book that will almost certainly lose money.

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