Keiler et al. v. Harlequin Enterprises LTD et al. In the 1

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
AUGUST TERM 2013 6
No. 13‐1753‐cv 7
8
B ARBARA K EILER , MONA G AY THOMAS, 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
ARGUED: N OVEMBER 21, 2013 26
DECIDED: MAY 1, 2014 27
________ 28
29
Before: K EARSE, J ACOBS, AND PARKER , 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.

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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
DAVID 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
DANIEL 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. TANDLER (F. B RITTIN CLAYTON 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. PARKER , 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
2

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No. 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.
3

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No. 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
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No. 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
5

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No. 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
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No. 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
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No. 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.
8

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No. 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
9

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No. 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
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No. 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
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No. 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 Twombly 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
12

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No. 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

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