Wednesday, April 30, 2014

claim proceeds against allegedly scammy publishing company now owned by Penguin

James v. Penguin Group (USA) Inc., 2014 WL 1407697, No. 13 Civ. 2801 (S.D.N.Y. Apr. 11, 2014)

Plaintiffs sued Penguin and Author Solutions, a Penguin company, for breach of contract, unjust enrichment, and violation of California, NY, and Colorado consumer protection law. The court dismissed all claims against Penguin, but kept most claims against Author Solutions.

Author Solutions markets to self-publishers, and since 2007 allegedly worked with 170,000 authors to publish over 200,000 book titles. Plaintiffs bought publishing and marketing services from Author Solutions, and alleged that Author Solutions didn’t provide promised services, but pressured authors into purchasing “more, equally bogus” editing, marketing, and publishing services. Author Solutions allegedly refused to fix errors in manuscripts, implanted new errors, and delayed publication until authors purchased more services. In addition, it allegedly didn’t pay authors their earned royalties or provide accurate sales statements.

As an example of the allegations, plaintiff James bought a “Premier” package for his second book, which includes a service called Editorial Evaluation, marketed as a “diagnostic tool” to help authors improve their manuscripts and to determine whether the author will receive an “Editor’s Choice” designation. James received an “opinion of the Editorial Board that the Editor’s Choice designation cannot be awarded without additional revision,” with a recommendation that he buy proofreading and editorial services. When he didn’t, he allegedly began to suffer delays, and his published work included multiple errors that were not in the manuscript he submitted to the publisher. Another plaintiff received the same evaluation and did buy the recommended services, but alleged that they fell short of what was advertised. Another plaintiff was told that she received a “Rising Star” designation, but that it would be removed if she didn’t buy additional marketing services, though this amount was later refunded. Plaintiffs alleged that no editorial board actually reviewed the manuscript or made an assessment that revisions to the manuscripts were necessary. 

Other allegations of misfeasance included: allegedly false claims about the royalty rate; assignment of a “Check–In Coordinator” or “Product Services Associate” who is instructed not to correct errors in manuscripts; errors uncorrected and introduced despite the purported opportunity to correct 50 errors at no cost; demands for a fee to correct errors; and delayed publication and difficulty contacting editors while sales representatives continue to call and attempt to upsell authors. Plaintiffs alleged underpayment of royalties, reflected in contradictory sales statements or claims that they’ve made no sales. In addition, plaintiffs alleged that Author Solutions developed websites that resemble independent advice sites on self-publishing (e.g., to direct readers to itself, along with “imprints”—essentially sub-brands—that offer identical services, “creating the impression that authors have more self-publishing options than is actually the case.”

Penguin bought Author Solutions in July 2012, publicly stating a desire for its “skills in customer acquisition and data analytics.” A year later, the president of Penguin International became Author Solutions’s CEO. Plaintiffs weren’t attempting to pierce the corporate veil, and they didn’t sufficiently allege that Penguin participated in the deceptive conduct. Penguin didn’t acquire Author Solutions until after “virtually all of the conduct alleged with any specificity” in the complaint. So Penguin was dismissed.

Unjust enrichment under NY law is available only in the absence of an enforceable contract. Thus, unjust enrichment claims relating to unpaid royalties were dismissed, while unjust enrichment claims based on alleged failure to provide services that were purchased without entering into a contract survived.

The California UCL/FAL claims were based on allegedly false statements to induce authors to purchase “Publishing Packages and Services,” false claims that Authors Solution services would create books “primed for retail success,” and false promises regarding the quality of its services. The court found the claims adequately pled.  The complaint satisfied Rule 9(b) by, for example, quoting from a plaintiff’s “Editorial Evaluation” and its opinion that her manuscript might receive a special designation if she purchased additional services and completed tasks satisfactorily. The complaint pled that the representations that an “editorial board” had formed an “opinion” about the quality of the manuscript was false, and explained its reasons for so concluding. Author Solutions argued that many of the statements alleged in the complaint were puffery, which isn’t actionable under the FAL. But statements about providing publishing and marketing services delivered by professionals were objectively verifiable and likely to trigger reliance.

Author Solutions also failed to kick out the UCL unfairness claim.  When brought by a competitor, an unfairness claim must “be tethered to some legislatively declared policy or proof of some actual or threatened impact on competition.” It’s not yet clear whether this applies to consumer claims or whether the older test, “balancing the harm to the consumer against the utility of the defendant’s practice,” applies.  But either way, the complaint adequately alleged unfairness.  “By alleging that Author Solutions is in essence a scam, the [complaint] has described conduct that would impact competition, have no lawful utility, and would harm consumers.”

Turning to the NY GBL § 349 claim, the court refused to apply Rule 9(b) since it doesn’t require the same essential elements as common-law fraud; thus the NY plaintiff didn’t need to identify with specificity the misstatements that deceived him.  The complaint adequately pled deceptive consumer-oriented conduct; “Author Solutions engages in an extensive marketing scheme that has impacted many would-be authors.”  Author Solutions argued that the authors weren’t consumers, but were instead publishing their own work. See Tasini v. AOL, Inc., 851 F.Supp.2d 734 (S.D.N.Y. 2012) (blogging contributors to The Huffington Post were held not to be “consumers” under GBL § 349).  However, Karlin v. IVF America, Inc., 712 N.E.2d 662 (N.Y.1999), endorsed a broad reading of the GBL, which applies to “virtually all economic activity.”  Karlin cited with approval a decision in which a GBL § 349 claim had been brought against an editing company that had “organized and directed a fraudulent and deceptive scheme to induce authors seeking to publish their manuscripts to submit them to [the company] for editing.”  Thus, the claim survived.  (I don’t think the court has to disagree with Tasini, and it doesn’t do so explicitly—Tasini wasn’t suing in his capacity as a consumer of AOL’s services, whereas these people are.)

Again, Author Solutions argued puffery, but the plaintiff identified several non-subjective representations.  E.g., “because Author Solutions represented itself as a publisher that assists authors in publishing their manuscripts, it promised a base level of quality and speed consistent with such a publisher.”

Finally, the Colorado consumer protection law claim also survived.  This one was based on a failure to disclose known material information with intent to induce the consumer to enter into a transaction. The allegation that defendants “knowingly made false representations as to the characteristics and benefits of their editorial and marketing services, and their royalties’ payments structure” was adequate. The Colorado plaintiff wasn’t required to allege knowledge and intent with particularity; the complaint raised a strong inference of both by alleging that Author Solutions was aware of numerous complaints by authors that it routinely failed to provide its promised services and that Author Services was a fraudulent scheme designed specifically to induce individuals to purchase its “bogus” services. Though the plaintiff didn’t specify what the omitted information was, the complaint adequately alleged specific material misrepresentations and then that those statements had material omissions, which was enough to provide adequate notice.  Because a defendant has a duty to disclose material facts that in equity or good conscience should be disclosed, the plaintiff also adequately pleaded a duty to disclose.

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