A group of textbook authors, including Sean Flynn and Jean Twenge, sued McGraw Hill LLC, alleging that the publisher breached their publishing agreements by reducing royalty payments on electronic textbooks sold through McGraw Hill's 'Connect' online platform. The authors argued that the contracts required royalties to be paid on the entire net receipts of the platform sales and that the publisher was obligated to bear all costs of publishing at its own expense. The district court granted McGraw Hill's motion to dismiss, ruling that the 'net receipts' clause unambiguously defined the 'Work' as only the textbook, excluding the platform and course materials, and that the 'own expense' clause did not apply to the digital platform because it contained more than just the textbook. The authors appealed, challenging both interpretations.
The Second Circuit applied New York contract law principles, which mandate that a contract is unambiguous only if its language has a definite and precise meaning. Regarding the 'net receipts' clause, the court found no ambiguity. The contracts defined the 'Work' as the textbook and 'net receipts' as the selling price less discounts and returns. The court held that this plain text unambiguously limited royalties to the textbook itself, excluding the Core Connect Content and platform access, and thus properly rejected the authors' claim that they were entitled to royalties on the entire platform sale price. However, the court reached a different conclusion regarding the 'own expense' clause. The clause required the publisher to publish the work 'at its own expense.' The court reasoned that this provision, read in conjunction with the precise 'net receipts' formula which did not deduct publishing expenses, implied that the publisher was to cover all publishing costs from its retained share of revenue. The court found the clause ambiguous as applied to the Connect platform because the platform serves as a delivery mechanism for the textbook but also contains other content. Under New York law, ambiguity must be construed against the drafter. The court rejected the district court's view that the presence of additional content on the platform negated its function as a publishing platform, noting that the complaint plausibly alleged that McGraw Hill was shifting its own operating expenses for the platform to the authors by deducting an attributed portion of revenue from the royalty base.
The decision allows the authors' breach-of-contract claim regarding the 'own expense' clause to proceed to trial, while the 'net receipts' claim remains dismissed. McGraw Hill must now defend against the allegation that it violated the contract by deducting platform costs from the royalty base. The ruling clarifies that 'own expense' clauses in publishing contracts may be interpreted to cover digital distribution costs if the contract language is ambiguous, but it does not expand royalty rights to include ancillary course materials where the contract explicitly limits the 'Work' to the textbook.
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