FURTHER FALLACIES ABOUT

CROSS-COLLATERALIZATION

IVAN HOFFMAN, B.A., J.D.


When authors read the cross-collateralization clause in book contracts, both computer as well as trade book contracts, a couple of words may often mask the full implication of its operation. Authors assume that a publisher can recoup any sums owed under one agreement from royalties coming due under another agreement between the parties. As far as that goes, it is correct.

But it does not go far enough for if the author reads his or her contract the author will undoubtedly find that the publisher has the right to recoup any overpayments or other sums from one agreement from "monies" or "amounts" coming due under the current agreement.

These magical words-"monies" and "amounts"-are "terms of art," buzz words for "watch out!" Their inclusion in the contract was not by accident. They mean that not only may the author's royalties be subject to cross-recoupment but any advances the author may have coming can also be put in jeopardy. So if the author has periodic advance payments coming on subsequent books under the same or different contracts, the author is well advised not to spend the money quite yet. Given that authors often count on advances to cover such frivolous things such as rent, mortgages, car payments and…food, such a provision strikes at the very heart of the author's standard of living.

The real irony is that the more successful the author, the worse may be the author's contractual rights. The author, due to success, may have multiple book deals with the same publisher, either in one contract or spread over several contracts. If all those contracts contain the offending language, the successful author ends up cross-collateralizing both future royalties and advances should any given book come up short during any accounting period.

But were that same author to have multiple deals with different publishers because the author was simply not "hot" enough to warrant a multiple book deal, the author would have a firewall around royalties and advances under the separate agreements.

And yes, while the author is hot and everything is selling, there may not be any danger. But when the streak dries up, you can bet that some accountant somewhere is going to find the appropriate magic words and the check for the next advance may not actually be in the mail.

A paradox to be sure.

There are other, often "hidden" disadvantages to the author is this clause. Example. For every unrecouped dollar the publisher gets a tax write off, none of the benefits of which are passed along to the author. The author gains no tax advantage from the recoupment, only a diminished income.

More. Often the publisher may remainder the returned books and just as often, the author's agreement provides that no royalties are paid on the remaindered sales.

The sum of this may be that the publisher reduces its tax base, receives income from remainder sales and the author gets a reduced or no monies.

Now having said all that, let me also say that I am a true believer in the free market system. Much that I have already written in other articles is about having the marketing clout in a negotiation so that the legal and business points the author raises can have the monetary power behind them. And so this cross-collateralization clause is nothing evil but simply the publisher exercising its marketing clout over that of the author.

What the effect is, however, is that the publisher is shifting the risk of doing business in a free market onto the shoulders of the author who, often as not has no marketing decision-making power granted in the contract. The author writes and the publisher publishes. The concept of publishing includes, by definition, the concept of marketing, which is the reason marketing decisions are reserved to the publisher. But the clause makes the author the marketing guarantor of not only this book's success but the author's success across the board.

On a book-by-book basis, the author should of course not receive royalties absent sales of the given book. No one wants to be paid unjustly. But to cause the author to have to suffer losses under the wrap-around provisions that jeopardize the author's advance income coming from the same publisher seems unjustified. It is understandable as a function of the marketplace only within the 4 walls of the contract negotiation-which side has the stronger bargaining position.

But in the right situation, with the right negotiating tools and expertise backed by a sufficiently strong marketing power, the clause can be eliminated.

© 1996 Ivan Hoffman

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This article is not intended as a substitute for legal advice. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. You should consult with an attorney familiar with the issues and the laws.

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.


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