Protect yourself from lower royalties from foreign sales
by Kim Pawlak

Textbook authors need to be alert for the possible impact on them of the practice among some U.S. textbook publishers of selling books in foreign countries using an "inter-company" transfer price.

U.S.-based publishers generally sell into overseas markets through relationships with foreign publishers based in the destination country. Books sold in this way are sold to the foreign publisher at a discounted price to compensate the foreign publisher for its role in the distribution process. In such a case, the author’s royalty is calculated on the lesser amount received by the U.S. publisher from that sale.

Where the U.S. publisher and its trading partner are not affiliated or commonly owned, this transaction is at arm’s length and the exchange price is presumptively fair. But sometimes the domestic publisher and foreign publisher are commonly owned. In such a case, there is at least the opportunity for the exchange price to be manipulated so that the author gets a lesser royalty as a result of the artificially low exchange price on those foreign, inter-company, sales.

Authors can avoid being caught in these inter-company sales by being diligent when negotiating contracts, said Stephen Gillen, an intellectual property attorney with Greenebaum Doll & McDonald LLC: "Make sure your contract is carefully written to avoid this problem. If you already have a contract with a publisher, put it on your list of items to review and, if necessary, renegotiate if you are ever given the opportunity to renegotiate your contract."

Inter-company sales surface in a number of different ways in a standard publishing contract, said Gillen. "One place it can be found is in the way the publisher is defined (e.g., is it defined to include the publisher’s subsidiaries and affiliates)," he said. "When a sale is made to an overseas trading partner, does the contract state that the royalty calculations are made on the domestic publisher’s receipts or on the receipts ‘at source’ or from the retail sale??"

A good lawyer, agent, or accountant will be familiar with this issue and know where to look, he said: "An author who has only dealt with a handful of these deals in his or her lifetime is not going to know what to look for."

Inter-company sales are not all "shenanigans," said Gillen: "It's perfectly legitimate to do business overseas with a trading partner. But not all are done that way. There are opportunities to abuse it, and authors just have to be vigilant."