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Contracts on Fire: Amazon’s Lending Library Mess

Are any of the books in Amazon’s new e-book subscription/lending program properly there?

Earlier this month, Amazon launched its Kindle Online Lending Library as a perk for its best group of customers, the millions who’ve paid $79 per year to join Amazon Prime and get free delivery of their Amazon purchases. Under the Lending Library program, Amazon Prime members are allowed to download for free onto their Kindles any of more than 5,000 books. Customers are limited to one book per month and one book at a time – when a new book is downloaded, the old one disappears from the Kindle.

The program has caused quite a stir in the publishing industry, for good reason (as you’ll see).

First, let’s look at how books from some major U.S. trade publishers wound up on the Lending Library list.

Major Publishers Turn Amazon Down

Amazon approached the six largest U.S. trade book publishers earlier this year to seek their participation in the program. By all accounts, each refused. Small wonder. Publishers aren’t eager to allow Amazon to undermine the economics of the e-book market, representing the lone bright spot for the industry, by permitting an estimated two to five million Amazon Prime customers to start downloading e-books for free. So books from the Big Six publishers – Random House, Simon & Schuster, Penguin, HarperCollins, Hachette, and Macmillan – are not in the Library Lending program.

Amazon’s attempts to enlist the next tier of U.S. trade book publishers, major publishers that are slightly smaller than the Big Six, appear to have fared no better. Many, perhaps all, also refused.

No matter. Amazon simply disregarded these publishers’ wishes, and enrolled many of their titles in the program anyway. Some of these publishers learned of Amazon’s unilateral decision as the first news stories about the program appeared.

How can Amazon get away with this? By giving its boilerplate contract with these publishers a tortured reading.

Amazon has decided that it doesn’t need the publishers’ permission, because, as Amazon apparently sees it, its contracts with these publishers merely require it to pay publishers the wholesale price of the books that Amazon Prime customers download. By reasoning this way, Amazon claims it can sell e-books at any price, even giving them away, so long as the publishers are paid.

From our understanding of Amazon’s standard contractual terms, this is nonsense – publishers did not surrender this level of control to the retailer. Amazon’s boilerplate terms specifically contemplate the sale of e-books, not giveaways, subscriptions, or lending (Amazon does have a lending program that some publishers have authorized, but it’s a program that allows customers – not Amazon – to lend their purchased e-books). Amazon can make other uses of e-books only with the publishers’ consent.

Amazon, in other words, appears to be boldly breaching its contracts with these publishers. This is an exercise of brute economic power. Amazon knows it can largely dictate terms to non-Big Six publishers, and it badly wanted to launch this program with some notable titles.

Why did it matter so much to Amazon? It’s all about the Kindle Fire, and Amazon’s unexpected e-book device battle with Apple and especially Barnes & Noble. (More on that, in another post.)

Some Small Publishers Sign On, Without Authority

Now, let’s look at the publishers who did willingly sign on to the Kindle Lending Library. Many (but not all) of these are smaller, newer companies that devote their efforts to e-book and on-demand publishing. They signed licensing agreements with Amazon for a selection of their titles, providing for a flat annual fee per title.

While these publishers generally have the right to license e-book uses for many of their authors’ titles (just as most trade publishers do), our reading of the standard terms of these contracts is that they do not have the right to do so without the prior approval of the books’ authors.

Licenses are traditionally done on an advance-and-royalty basis. In this way, the interests of the author and the publisher are aligned: if the license pays off, both benefit. When a list of titles is licensed for a flat fee, however, interests can easily become misaligned, and opportunities for mischief abound.

For example, a publisher could cherry pick a selection of “loss leaders” to license for unlimited use in order to attract readers to the publisher’s other books. To avoid this conflict of interests, publishing contracts have for decades included an array of clauses intended to prevent a publisher from using cheap or free copies of one author’s books to promote another’s.

Under most (perhaps all) publishing contracts, a license to Amazon’s Lending Library is outside the bounds of the publisher’s licensing authority. This isn’t a minor matter – in order to protect the author’s interests, all publishers should be asking permission before entering into such a bulk licensing agreement, and most would need to seek a contract amendment to do so. For more on this, see the post of Simon Lipskar of Writers House at the AAR’s blog.

What to do if your book is in the program

If your book is in the Lending Library without your approval, we recommend that you:

1. Get in touch with your publisher (or ask your agent to do so) and say that you object to your book’s inclusion in the program without your approval and that you do not consent to have your work in any such initiatives without your prior authorization. This is fundamental.

2. Ask your publisher why your book is in the program. The publisher may be using the program to introduce your books to Amazon Prime customers with the hope that they’ll then come back to buy your other titles. Other publishers may be seeking to give some life to quiescent titles. Once you’ve heard your publisher’s rationale (it may be well considered and in your favor), you’ll have to decide whether you’d like your book to remain in the program.

If it’s a major publisher, however, you may learn that Amazon chose to include your work in its lending program over your publisher’s objections. If so, we expect that you will be compensated for the uses (Amazon is paying its regular wholesale price for the e-books from these publishers), but this may still not be in your best interests: Amazon, for its own reasons, has chosen to override your publisher’s marketing plan.

No matter what you decide to do, please be in touch – one of our attorneys would be happy to discuss the matter with you.

So, are any of the more than 5,000 books legitimately in the program? Probably. Amazon published 138 of the titles in the lending program, according to Publishers Lunch (subscription required). Other publishers may have gotten their authors’ permission, or may have unusual contracts that give them authority to enter into bulk licenses without their authors’ approval. If so, we’ve yet to learn of such arrangements.