Author Says McGraw-Hill Cheats on Royalties

MANHATTAN (CN) - In a federal class action, an author claims McGraw-Hill "systematically violates its contracts" by self-dealing transactions with its subsidiaries to cheat authors on royalties from foreign sales.

Lead plaintiff Bob Cordell claims McGraw-Hill fails to properly report third-party sales of works outside the United States to short writers for royalties due them.

Cordell, who wrote the textbook "Designing Audio Power Amplifiers," says he signed a standard publishing agreement with McGraw-Hill in February 2009, in which the publisher agreed to pay him 10 percent of net receipts for each copy sold to its international book division or to third parties for use outside the United States.

Cordell says McGraw-Hill uses its subsidiaries to avoid paying royalties on the full market price and fails to report sales to final purchasers.

The complaint states: "McGraw-Hill systematically violates its contracts with its authors by failing to remit royalties based upon the amounts received from third parties for sales of the works outside of the United States, when these third parties are the ultimate purchasers of works from McGraw-Hill.

"Instead of carrying out its contractual obligations in good faith, McGraw-Hill sells works to third parties for use outside of the United States by purporting to first transfer those works to related 'divisions' of McGraw-Hill in self-dealing transactions at below market prices. Although these McGraw-Hill 'divisions' subsequently sell these works to independent third parties at arm's length at the full market price, the publisher credits authors only with royalties on the lesser value of the artificial amount of the purported transaction with its 'division.'

"These purported 'sales' of works to its related 'divisions' are in actual fact little more than book-keeping entries - and not genuine sales - and McGraw-Hill actually sells the works on to third parties for use outside the United States at arm's length, at the proper market price upon which royalties should be calculated under the agreements. Although McGraw-Hill receives the full monetary benefit of third party sales, it never reports these third-party sales to the authors, or remits the full and correct royalties relating to such third-party sales.

"As a result of the foregoing, McGraw-Hill has failed in its contractual obligations to properly report third-party sales of works for use outside the United States, and has further failed to properly compensate its authors for the sales of such works."

Cordell seeks class certification, damages for breach of contract and wants McGraw-Hill ordered to stop its wrongful conduct.

He is represented by Robert Lax.

"We received notice of the case today and are reviewing it," McGraw-Hill spokesman Jason Feuchtwanger told Courthouse News Thursday. "We will defend ourselves vigorously."

McGraw-Hill employs more than 21,000 people worldwide and has more than 280 offices in 40 countries. It reported $6.2 billion in sales in 2010.

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