The Writing Show (WS): Welcome to The Writing Show, where writing is always the story. I’m your host, Paula B. My guest today is Gail R. Gross, Chief Operating Officer of R & M Royalty Review, LLC in New York City. Gail’s career in accounting includes work in both the publishing and investment industries. She has been with Royalty Review since 1994. Welcome, Gail. I’m so glad you could join us today.
Gail R. Gross (GRG): Thank you, Paula, for inviting me.
WS: It’s a pleasure. First of all, tell us what is R & M Royalty Review?
GRG: R & M Royalty Review is a division of an accounting firm here in New York that conducts reviews of authors’ contracts and royalty statements to determine whether or not royalties have been properly paid to the authors. We are employed by authors, agents, attorneys, other publishers to do this work for them.
WS: I think most authors probably aren’t aware that you exist or that they can have their royalty accounts audited. Why should authors review their royalty accounts?
GRG: In recent years, authors and agents have become much more savvy in negotiations. With new contract terms being negotiated, there’s a greater likelihood that the information is not getting into the royalty system properly, so royalties may not be calculated properly. In addition, there are a lot of mergers and acquisitions in which bigger publishers are acquiring smaller ones. That immediately is a red flag that indicates you should be watching out for your royalties. Many computer systems are not integrated properly and errors can occur when they are merged.
As far as not being aware, most publishing contracts contain an audit clause, so every author generally has the right to audit. There are a lot of publishing contracts that state that if you don’t object to your royalty statement within a certain number of years, some as little as 24 months or even 12 months, you lose the right to audit. You always want to be on top of what the terms of your contract say so that you don’t lose that right to as much information as you can acquire.
WS: That’s interesting. How common are problems with royalty accounts? First of all, what should authors be looking out for, and secondly, should they pay more attention to that clause when the contract is written and perhaps allow themselves more time?
GRG: We have expertise in publishing. I worked for Harcourt, I worked for Abbeyville Press, I worked for Academic Press. I have found that you should be attentive when you’re negotiating, because once you sign that contract, there’s no way to change it. If there’s no limitation in the audit clause, the statute of limitations for the state of jurisdiction is what holds. Most publishing contracts– a lot of them are New York contracts, so the statute of limitations is six years. If the publisher already has the statute of limitations behind them, there shouldn’t be any reason for them to limit the period of time under audit. There are a lot of publishers who will not negotiate that limit away, so the longer period you can get, the better off you are. If you can’t get the limit out of the contract, then three years is what you should aim for. If it’s shorter, that limitation forces every author to constantly accrue some sort of expense to audit, whether it’s one year or two years. For the most part, auditors usually work on an hourly basis. In our case, Royalty Review’s case, we work on a contingency basis. We don’t collect anything, our fee is not paid, unless we collect something from the publisher.
WS: How often do you find problems? And when you do, what do you think is the reason for them? You mentioned mergers and acquisitions being one. What are some of the others?
GRG: Well, I can tell you that I’ve been doing this since 1994, and on a contingency basis, we’re making a very nice living. So clearly, there are a lot of issues out there. The problems are mostly, I hate to say this, but stupidity and not intentional. Publishing is notoriously cheap. We’ve always said that. I remember the days when I was in the accounting department. The publishing company always has this concept that being in the academic world is something you aspire to. So there was always this idea of not having to pay because you have this wonderful work environment.
WS: Are you saying because authors are in the wonderful environment?
GRG: No. The people that work for the publishers are in the wonderful environment. It’s almost like being in Hollywood as a little starlet. Working for the publisher you have this place to grow with the company and meet all these wonderful authors and get this glorified feeling. So with that, they’re not paying wonderful salaries at the lower levels, and of course, authors are going to come up against people who aren’t trained so well and don’t have much experience. This is particularly true in the royalty department, which costs the publisher money. It’s not a profit center. The money’s always going out the door, so it tends to be a little less focused on the training.
In addition, computer systems are changing constantly. Every publisher calculates royalties one of two ways: either on the cover price of the book or on publisher’s net receipts. There are no two royalty systems out there that are the same. Now you would think that somebody after all these years would figure out that they could package a system and sell it to all the publishers, but all publishers think they’re unique and don’t really want someone else’s package.
A lot of times, communication between the person who’s writing the system and upper management and the users doesn’t always flow properly. Something falls through the cracks, and somebody’s calculation doesn’t get written into the program. There are all kinds of possibilities for things to go wrong. I have seen situations where rather than doing a computer conversion, they had somebody manually inputting the data again! That’s a clear-cut place for errors to happen. Those are the types of possibilities.
Again, it’s not intentional. The things that we find tend to be wrong royalty rates used, wrong application of a clause in the contract, wrong sub-rights splits. It used to be that sub-rights was always, for the most part, split 50-50. Again, negotiations are getting better and you’re getting a 75-25 split on translations, or 80-20 on the British rights, and it doesn’t always get put into the royalty system properly. Those are the specific areas where errors do occur.
WS: Do you find any difference between small publishers and large publishers?
GRG: Not really. Smaller publishers have a less sophisticated system most of the time. Smaller publishers also tend to put out cumulative statements rather than having the information current and cumulative. But, larger publishers, who keep changing their computer systems, when they say “cumulative,” it’s not necessarily cumulative from day one of a sale because they sometimes don’t have the ability to convert all of that information. So when a larger publisher says “cumulative,” you have to look for a little asterisk that says “Cumulative as of” a particular date. That’s the way their systems work. But I don’t really see a big difference in errors between the smaller publishers and the larger ones.
WS: Do you usually find small discrepancies, large discrepancies, a whole range?
GRG: We have found errors anywhere from $500 to—actually I should say it’s even lower than that. I had one for $135. Our largest recovery was over $900,000—for one person for a six-year period.
WS: That’s incredible. Can you tell us about that, or is it proprietary?
GRG: The issue was that there was a clause in the contract that was not tracked and was not put into the royalty system. It wasn’t able to be put into the royalty system, and it caused this kind of an error. Because we were only allowed to go back six years, we only recovered the $900,000. That error had been ongoing for quite a number of years prior, but it was out of the statute. So conceivably there could have been a lot more money, but we weren’t allowed to do anything with it. It’s clauses that people negotiate that somebody loses sight of, and it just doesn’t get communicated into the royalty system.
WS: When should an author undertake a royalty review?
GRG: When we take a royalty review on, it is generally after the book has earned out its advance. The reason for that is really economics. If we take something on when an author has not earned out yet, even if we reduce the unearned balance by what we found, there wouldn’t be actual cash available to pay us. That’s one of the reasons we only take it on after earn-out. With that being said, if we have a long enough period, a statute of limitations period, that won’t matter because hopefully the book will have earned out within the six-year statute (for example, for New York). So that shouldn’t be an issue. If we look at something and think that whatever we’re going to recover will, in fact, push it over to an earned balance, then we may take it on.
For the most part, if anyone contacts me, I will take a look at everything, and then we make the determining decision. If there’s a case where we see something but we don’t think we can take it on or that it doesn’t make economic sense on either side, I will let the author know exactly what they should be chasing after, and what I found in what we call our “smell test,” which is the initial look at the contracts and the royalty statements for the most recent three years. That’s our starting point. We will build a database of that data, and we have some analytics built into the database, and that’s how we make the determination whether we think further review is necessary, or if we think that there’s nothing there.
WS: Is it worthwhile for an author who maybe hasn’t sold that many books versus somebody who’s sold tens of thousands of books to do a review? Maybe somebody who’s sold five, ten, twelve thousand copies, or thinks that’s what they’ve sold according to their statements?
GRG: It’s always worth it. My feeling is that any work is valuable to the author. I mean, it’s your baby. You don’t want to be treated unfairly or improperly, so you should always be looking. It’s everybody’s duty, unfortunately in this society, to look over big business’s shoulder to make sure you’re getting your fair share. It’s not a case of 5000 copies versus 10 million, because the person who’s selling 10 million copies or a million copies is more than likely getting such a big advance up front that they may never earn out. So a royalty review really isn’t called for at that point. It’s the smaller guys who don’t have the representation, who don’t have a place to go and have somebody helping them along. That’s more of what my client base is than the big guys.
WS: I’m just wondering. I’m thinking about this in the back of my mind, of course, and I’m thinking, “Hm, maybe I could get some more money if I had you do this for me, but my publishers might be really upset and might never want to talk to me again.” What do you find is the publisher reaction, and does it hurt the author’s relationship with the publisher if you audit the accounts?
GRG: Every publisher at this point has accepted a royalty review as the ordinary course of business. They know that these problems happen. They know that they’re not looking at every case on an individual basis. I have sat on panels with royalty managers from major publishers, who say, “If you have a problem, call Gail.” Because first of all, the publisher would rather deal with us, the royalties department would rather deal with us, who already know the publishing industry, know the questions to ask, know the documents that we want to see, and can do this fairly rapidly with no learning curve. It’s easier for them to work with us to wrap everything up. They’re not going to revamp their entire system. It’s way too costly, so they would rather do this on a case-by-case basis.
As far as the relationship with the publisher, it has nothing to do with your editor, the publisher, your next book. It is totally an accounting function. When any kind of claims are put in, it is our job to work with and communicate with the royalty department to get a claim settled. It does not go up the ladder. It is not a reflection of anybody being called a troublemaker. It has nothing to do with that, and we have never…I shouldn’t say that. Once, once in all the years, and it was only because this particular author was a troublemaker to begin with before we got involved. There was an issue there. But other than that, we have never heard any kind of negative ramifications from doing a royalty review.
WS: That’s fantastic. I know there are so many points in an author-publisher relationship that seem so adversarial, and I would think that, well anything having to do with money, first of all. But that’s great. That’s really encouraging.
GRG: Even better is that when we put in a claim, we always add interest to it from the time that the author should have been paid until the time they do get paid. And every publisher pays it even if it’s not specifically stated in the contract.
WS: That’s amazing. You must be really diplomatic, Gail.
GRG: Well I think that’s part of my job, absolutely. I’m not about to go in there as a battering ram and smack somebody in the head. That’s not the job. It’s “Here are the issues, this is what we found.” A lot of times I’ll put in the claim, and the publisher will then turn around and give me additional documentation that may affect or may lower that claim. That’s what this is about. It’s proof to me why my claim is wrong. If you can prove it, then I’m more than agreeable to adjustments. But it is the publisher’s fiduciary responsibility to provide documentation to support what they’re reporting on their royalty statements.
When most authors look at the royalty statement, it’s usually for a six-month period. They’re not comparing what they see to last month. They don’t have the whole historic information in front of them. So it’s harder for errors to jump out. When we put together our database, we have a history, so we can see what’s going on. We can see how things tie out. We can see if the advance was proper, if advances paid on sub-rights have been recorded and subsequent sub-rights money is being recorded properly. When an author gets a six-month statement, there’s not so much there to set off any of those red flags.
WS: And some of them are very hard to read.
GRG: Yes. And that’s intentional. It always has been that way because for the longest time, publishers felt that if the author was getting a check, they would say, “Great. This is wonderful. I’ve always wanted to be published, and now I’m getting royalties.” And nobody would ask any questions. Well, those days have changed. Authors have become much more savvy, and they’re not just accepting a check as “This must be right.” It is the nature of all business to ask questions at this point because you just don’t know what’s right and what’s not anymore.
WS: Do you ever find mistakes in the publisher’s favor? And should I worry about doing this because I might owe the publisher money?
GRG: Prior to notifying the publisher, when we’re doing a little smell test, the publisher doesn’t know we’re even in the picture. There are times when I’ve done this initial review, and sometimes I’ll find that the publisher’s been overpaid. Well, at that point, nobody’s been notified, nobody’s been contracted, and I really am alerting the author that this is a possibility and asking whether they want to take the chance. If we go in, the possibility is that we won’t recover anything and that they will end up owing. Then it’s the author’s decision whether or not they want more information. Once we’ve notified the publisher and we’ve started a full review, there are times where I find monies due to the publisher. But in the big picture, the net result usually is that the publisher owes the author. There have been very, very rare situations where the author owes the publisher. And in that case, we always will set up some sort of repayment program where they’ll just recover the amount due from future royalties, or keep it as an unearned amount, increasing the negative balance. They may never recover it. But for the most part, the net result is usually that the publisher owes the author.
WS: Have you ever seen an author end up in court over one of these reviews?
GRG: There was one time, and it became a class action lawsuit because our client did the review, and the publisher said, “Take a hike” when we gave them a claim. She was not going to accept it that way, so she went out and hired an attorney. The issue was in fact an issue that affected all of the publisher’s authors, or most of them, and what should have cost the publisher about $40,000 in claims cost over a million and a half [dollars]. They chose to take this position, and those are the chances they take. That’s the only time. It usually is just a negotiation. Most of the time the claim is submitted and the publisher pays. There have not been any other cases where we’ve had a claim submitted and nothing has been agreed to and they took it to court. That doesn’t happen.
WS: How long does it usually take the publisher to pay if there is a claim against them?
GRG: From the time that the publisher is notified that we’re involved, that we have requested specific documentation, it could take up to a year, maybe a little longer for the claim to be developed. Once it’s been submitted to the publisher and they have gone through it, which is fairly rapid as far as reviewing the claim, they pay fairly rapidly. It’s within weeks of saying, “This looks okay.” It’s not a long period as far as payment goes. The longest period is really them gathering the data because there are multiple departments that are involved. We ask for inventory information. We ask for sales information. We ask for sub-rights information. So there are multiple departments, and everybody has to be coordinated. And usually I wait to get all the documentation before starting the review. That’s what takes the longest time, the accumulation of the information. But again, however long it takes them, the interest clock is still ticking.
WS: When does that clock start?
GRG: It starts from the period that the royalty should have been paid. So if I’m going back six years and I see an error that happened six years ago, I can calculate that error for the period ended [six years ago], and the interest will be from that period until the current period, or the current date that I submit the claim.
WS: Would they ever say, “You have to wait until your next check” instead of paying when you’ve concluded the process?
GRG: Usually that doesn’t happen. That’s not been my experience. It usually is a separate check from the royalty payment cycle.
WS: Have you ever had a case where the publisher—I know you had the one that ended up in court—but have you ever had a case where a publisher just wouldn’t put the documentation together or just stalled so long that nothing happened. And if so, what did you do?
GRG: There are situations where it takes a while. I have a relationship with the Author’s Guild, and when necessary, the Author’s Guild will get involved in making demand notices. Now, I’m in a part of an accounting firm. We’re not attorneys, so we don’t really have the law or any kind of legal backup to make demands. It doesn’t usually happen, and it’s usually not necessary. But if indeed legal backup is necessary, the first area is the Author’s Guild. There have been situations where a decision has to be made by the author. I can say, “Look, we’re not getting anywhere. Do you want to take this to the next step and incur legal costs to make the demand, or not go on?” But it doesn’t really happen.
We have a situation right now with a publisher who is standing on ceremony because one of the smaller publishers they acquired did not have an audit clause and they’re saying that the author doesn’t have the right to audit. Now, if the author goes into court, we have always been told that no court would not allow an author to have the right to review books and records. But what this publisher’s doing is forcing the author to incur legal costs just to get their right to audit. We’re working on how to remedy that right now with the Author’s Guild. And hopefully we’ll have an answer soon.
WS: Do you have to belong to the Author’s Guild? Not every author belongs to the Guild.
GRG: That’s true. It depends on the situation. Sometimes my relationship with the Author’s Guild helps. So yes, you should belong to the Author’s Guild because they are advocates for authors. When an issue comes up, they’re the first ones on top of it and they’re fighting for every author’s right. It’s certainly useful to be a member. I would take a look at their Web site and see what their requirements are. I’m not sure if they require you to be a published author in order to be a member or not.
WS: How about other author groups? The National Writers Union and the American Society of Journalists and authors?
GRG: Certainly depending on the type of writing that you do, they’re all advocates, and I highly recommend being a member. It always helps to have that kind of group behind you when you have a problem.
WS: You mentioned mergers and acquisitions, and I just wanted to follow up on that a little bit. If you’re in the middle of a review and the publisher is sold, what happens?
GRG: One thing shouldn’t have anything to do with the other. Regardless of whether a publisher is acquiring another publisher, they still have a responsibility to keep records to be able to supply to the author. There are publishers now who, after an acquisition is made, are shutting down the acquired publisher’s system and not keeping records. Well, as far as the claim goes, again, if I have a basis for my claim and they can’t support why I’m wrong with any backup material, they have to pay it.
In most circumstances, when a company acquires another company, they usually have a contingent liability account set aside, where they’ll put aside X amount of money for situations that may have an effect on the smaller company. So that if, in fact, a smaller company that they acquired should have paid X amount of dollars, the acquiring company can take that out of this contingent liability account. But for the most part, I don’t have to be concerned with that, and authors don’t have to be concerned with that. That’s not our problem. Where they get the money to pay is not our problem. They just have to pay.
It’s an issue I’m coming across often. The acquiring publishers are not necessarily keeping a lot of the back data, and it’s causing a problem. Nevertheless, the claims I’m submitting are getting paid because they know that they don’t have the documentation to prove me wrong. It’s a business decision on their side when they do these acquisitions. And it’s unfortunate that they’re not focused on royalty reviews as a potential area where they really need this documentation. In the big picture, they don’t see it [lost royalties] as a material number. So that’s a way of thinking on their side. From our side and from the author’s side, everybody has a right to know that they’re being accounted to properly, and if not, then royalty recovery is certainly due them. The major publishers are looking at it and saying, “This is not a big number, so I’d sooner pay it on a case-by-case basis than worry about the overall.”
WS: Is there a way to prevent these anomalies and mistakes from occurring? Is there anything an author can do?
GRG: The best thing to do is to negotiate the best contract that you can and protect yourself in every way possible. But as far as these types of problems, I think it’s really not something you can easily solve. I think it’s just inherent in any business, and it’s going to happen. So you have to be really on top of the information that’s being provided to you, and investigate whether or not it makes sense. If you’re traveling, and you see your book in a foreign language, and you’ve never been notified that there’s a translation, that’s clear indication that additional questions have to be asked. Everybody has to be watching out for themselves. Again not just in the publishing area. It’s in everything right now.
WS: Do you do royalty reviews for other artistic or creative people besides authors, say playwrights or musicians, screenwriters, that sort of thing?
GRG: I don’t. Royalty Review does the publishing side as well as any kind of audio or video that goes along with a particular published title. However, I have people in the accounting firm that I’m associated with who are experts in music royalties and in the entertainment world. So it’s not me personally, but certainly if anybody had an issue, I can direct them to other people that are experts in those fields.
WS: And would that be just only musicians, or what kinds of creative people?
GRG: They have a lot of theater clients. Theaters as well as actors and actresses. Musicians, playwrights, songwriters, record companies. All angles. Again, if there’s somebody who’s got a question, contact me and I can direct them to the best person for what they need.
WS: Do you ever get involved with any non-U.S. publishers?
GRG: Yes. We did a review of a UK publisher who had licensed video rights for children’s books. For four royalty periods—two years—we recovered $250,000. It happened because that contract specified particular expenses that the video house was allowed to take, and those that clearly that they were not allowed to take. They were taking things that, until you looked at the underlying detail, you never would have known. So we said, “You’ve got to pay all this back.”
We have worked with other U.S. publishers to recover monies from foreign publishers where they had made licensing deals. It’s rare, but we have done it, and hopefully we will be doing more in the future. It’s a benefit to the U.S. publisher as well as to the author. Clearly if the publisher is not following up on recovering foreign rights money, they’re not getting their share, and the author’s not getting their share. So we’re on top of that one and are trying to make some headway with some of the publishers.
WS: Gail, is there anything that I haven’t asked you about that you would like to talk about? I know you gave us some anecdotes. If you have any other anecdotes or other subjects that I haven’t mentioned.
GRG: A couple of weeks ago I was out in Los Angeles at the Society of Children’s Book Authors and Illustrators. I was trying to talk to published authors as well as unpublished authors regarding the royalty area. What I really want to stress is that authors tend to be creative, and that’s wonderful, and I don’t want to get in the way of that. But if you know you’re a creative person, and you’re not a business-minded person, get somebody who is, who understands the business, be it us, Royalty Review, or the Authors Guild, or an intellectual property attorney. You want people who know the industry that can help you and that can protect you. You don’t want a real estate attorney reviewing your publishing contract. We’ve seen that. We’ve had people say, “My brother-in-law is an attorney, and he knows.” Well, if you don’t know all the little nuances of what’s getting slipped into these contracts, you’re not going to be protected.
Since I’ve been home from California, I’ve gotten a number of inquiries from people saying, “What should I do with this? How do I handle this?” Three people have already sent me their documentation for doing a royalty review. It’s a scary thing. But it’s not detrimental. There’s no adversity in the relationships with the publishers. And you absolutely have to remember that it’s your right. Your work product is your baby, and you have to watch out for it. That’s what I try to do.
WS: Actually, you just reminded me of something. I have one other question for you. And that is, do you ever get involved with magazine royalties, tracking use of articles in either databases or other venues after something’s been published in a magazine?
GRG: We have not. I know that that’s a touchy area these days, and certainly with all the class action lawsuits and the Jonathan Tasini case. Again, everybody needs to do their own work as far as tracking where their articles are showing up and whether or not a particular publisher had the right to use them more than once. But that’s not something that we have looked at.
WS: Would you think about expanding into that, or is that just too different?
GRG: I will expand to anything because I like to learn. But is it cost-effective for the author or writer? That’s a concern. Nobody should have to pay someone for a learning curve. So I wouldn’t turn to somebody and say, “I can’t do this” or “I can do this.” I’m not going to put myself out there as an expert in something I don’t know.
I did want to mention that there are a couple of other things we do. There are situations, obviously, when authors need evaluation of their intellectual property for estate tax purposes, for divorce purposes, for gifting to their heirs. We do that. That type of thing is done on an hourly basis. There are times where there are court cases that come to us where we need to be an expert witness and do some calculations. That’s also done on an hourly basis. Usually we are engaged by the attorney because there are attorney-client privileges at that point. That’s another situation where we do intellectual property work that isn’t just royalty reviews.
WS: That’s good to know. Do you want to tell our listeners about your Web site?
GRG: The Web site is RoyaltyReviewLLC.com. It will give you some background on what we do and kind of a summary of how we do it, and bios on our key personnel. And contact information so that you can email me or call me. I respond to everyone. I’m not afraid to answer the phone. I don’t charge you for answering questions. Anything that I can do to help to direct you to the type of assistance that you need, I will do.
WS: That’s great. Gail, it’s been a pleasure having you on The Writing Show Today. This has been fascinating, and it’s been an education for me. I’ve got some things to think about myself. I wish you the best of luck with your continued efforts on behalf of authors.
GRG: Thank you. And again, if there’s anything I can do, just holler. I’m here.
WS: Hear that, everybody? And be sure to visit our Web site at www writingshow.com, where you’ll find not only Gail’s interview, but lots of other information and inspiration for writers. I’m Paula B., and you’ve been listening to The Writing Show.