Authors sue Harlequin for lost ebook royalties

Three authors are filing a class-action suit against romance publisher Harlequin for the deprivation of royalties on ebooks prior to 2005.
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).