Sean Flynn, Dean Karlan, Jonathan Morduch, David Myers, and Jean Twenge, individually and on behalf of all others similarly situated, Plaintiffs-Appellants v. McGraw Hill LLC and McGraw Hill Education, Inc., Defendants-Appellees* Appeal by plaintiff authors from so much of a judgment of the United States District Court for the Southern District of New York, Lorna G. Schofield, Judge, as dismissed their amended consolidated putative class action complaint (“Complaint”) alleging that defendants breached publishing agreements by ceasing or reducing royalty payments on certain revenues generated from defendants’ online platform that hosts and delivers plaintiffs’ electronic textbooks and related course materials. The district court granted defendants’ motion pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the breach-of-contract causes of action for failure to state a claim, (a) ruling that the contract definitions of “net receipts” unambiguously foreclosed plaintiffs’ claims of right to royalties on sales of any products other than their textbooks, and (b) ruling that defendants’ reduction of royalties on textbooks sold through the online platform did not violate the contracts’ requirement that the publishers distribute the textbooks at their “own expense.” On appeal, plaintiffs contend that the court erred in interpreting the contracts’ “net receipts” and “own expense” clauses, or at least erred in finding the “net receipts” clauses unambiguous. We reject plaintiffs’ challenge to the dismissal of their claims based on alleged breach of the “net receipts” clauses; however, we find merit in their challenge to the ruling that the Complaint failed to state a breach-of-contract claim based on the “own expense” clauses. See Flynn v. McGraw Hill LLC, No. 21 Civ. 614, 2022 WL 103537 (S.D.N.Y. Jan. 11, 2022). Vacated in part, and remanded. AMALYA KEARSE, C.J. Plaintiff textbook authors Sean Flynn, Dean Karlan, Jonathan Morduch, David Myers, and Jean Twenge (collectively “Plaintiffs” or the “Authors”) appeal from so much of a judgment of the United States District Court for the Southern District of New York, Lorna G. Schofield, Judge, as dismissed their amended consolidated putative class action complaint (“Complaint”) alleging that defendants McGraw Hill LLC and McGraw Hill Education, Inc. (collectively “McGraw Hill” or the “Publisher”), breached publishing agreements by ceasing or reducing royalty payments on certain revenues generated from McGraw Hill’s online platform that hosts and delivers electronic textbooks and related course materials. The district court granted McGraw Hill’s motion pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss Plaintiffs’ breach-of-contract causes of action for failure to state a claim, ruling (a) that the contract definitions of “net receipts” unambiguously foreclosed Plaintiffs’ claim of right to royalties on sales of any products other than their textbooks, and (b) that McGraw Hill’s decision to reduce royalties on sales through the platform did not violate the contracts’ requirement that the Publisher distribute the textbooks at its “own expense.” On appeal, Plaintiffs contend that the court erred in interpreting the contracts’ “net receipts” and “own expense” clauses, or at least erred in finding the “net receipts” clauses unambiguous. For the reasons that follow, we reject Plaintiffs’ challenge to the dismissal of their claims based on the “net receipts” clauses but find merit in their challenge to the ruling that the Complaint failed to state a breach-of-contract claim based on the “own expense” clauses. Accordingly, we vacate so much of the judgment as dismissed the claims of breach of contract and remand for further proceedings. I. BACKGROUND The Authors entered into their respective publishing contracts with McGraw Hill or its predecessors-in-interest (“Publishing Agreement” or “Contract”) at various times dating back to 1979. This action centers on McGraw Hill’s distribution of Plaintiffs’ textbooks in electronic form (“ebooks”). The following description of the controversy accepts the factual allegations in the Complaint as true, as required with respect to a Rule 12(b)(6) motion to dismiss, and includes terms of the agreements relied on by Plaintiffs in the Complaint. A. Publishing Agreement Provisions as to Royalties and Expenses Each Publishing Agreement pertained to a textbook with a tentative title (subject to replacement with “such other title as may be mutually agreeable to the Publisher and the Author”), which was referred to in the Contract as the “‘Work.’” The Author or Authors agreed to prepare and deliver to the Publisher a manuscript for the Work; the Publisher agreed to publish the textbook and remit royalty payments to the Author(s). The Contract sections at issue in this action, exemplified by the 1989 Flynn Contract, include the provision that [a]fter giving written notice to the Author that it has accepted the Work as being in form and content satisfactory for publication, the Publisher shall publish the Work at its own expense…. (Complaint 57 (quoting, with emphasis, Flynn Contract §6.)) Section 7 of the Contract governs the Publisher’s obligation to pay the Author royalties (“Royalty Clause” or “Royalty Contract”). It provides that “[a]s full payment to the Author, the Publisher shall pay to the Author” various specified “percentage[s] of the Publisher’s net receipts for each copy of the Work sold by the Publisher” (the “Royalty Percentage”), depending on, inter alia, whether the copies are sold for use within or outside of the United States (Complaint 58 (quoting, with emphasis, Flynn Contract §7(a)(1))); and it defines “[t]he term ‘Publisher’s net receipts’” to “mean the Publisher’s selling price, less discounts, credits, and returns, or a reasonable reserve for returns” (Complaint 59 (quoting, with emphasis, Flynn Contract §7(c))). The Contracts of the other Plaintiffs contain definitions of “net receipts” that are “substantially similar” to that in the Flynn Contract. (McGraw Hill brief on appeal at 7 n.3.) And all of the Plaintiffs’ Contracts provide that “the Publisher” is to “publish the Work” “at its own expense.” (See, e.g., Complaint
7, 57, 64, 70, 71.) The Complaint alleged that “[i]n or around 2006, McGraw Hill amended older Royalty Contracts to include a new provision making clear that the domestic royalty rate also applies to electronic sales of the works.” (Complaint 61.) For example, the Flynn Contract “was amended on May 11, 2006 to state that the ‘Royalty for electronic rights to the work is the same as the domestic royalty rate’” (id.); and in the Contract entered into by Plaintiffs Karlan and Morduch in 2008, the “Publisher’s…own expense” clause states that “the Publisher will publish the Work in book and/or electronic form at its own expense” (id. 64 (quoting, with emphasis, Karlan & Morduch Contract §10(A))). B. The Original Application of the Royalty Clauses to eBooks In 2009, McGraw Hill launched a platform called “Connect, a Content Management System…for hosting ebooks and course materials.” (Complaint 34.) The Complaint alleged that [e]lectronic textbooks (“ebooks” or “smartbooks”) are the central element of the Connect platform and represent electronic versions of the authors’ works. Corresponding features offered on Connect (“Core Connect Content” or “CCC”) are designed based on the authors’ works themselves and are exclusively offered in conjunction with their works. (Id. 6.) According to the Complaint, [t]he Connect platform is a single online location where teachers and students can access electronic textbooks and course materials, complete assignments and track performance. The electronic textbooks, or “ebooks,” are delivered through…Connect, which, among other things, allows the books to be viewed online and includes certain course materials. (Complaint 37.) “Each Connect offering consists of an ebook” along with Core Connect Content (or “CCC”); the ebook is “sold together with CCC for a single unitary price”; and “CCC cannot be purchased exclusive of an ebook.” (Id. 38.) 39. The ebook component of a Connect textbook is an online copy of the book identical to its print form. Many Connect ebooks also have a digital overlay including clickable links and videos, and adaptive study reviews that provide questions based on students’ mastery of relevant topics…. 40. CCC includes features intended to aid instructors in teaching courses and content like PowerPoint lesson plans and test banks. The majority of CCC is textbook-specific, meaning that it is designed to be used in conjunction with particular textbooks. The online course materials typically include guides, presentations, and question and answer banks, as well as other aides, and commonly draw directly from the associated textbooks. The textbook authors themselves have a significant role in developing those materials. 41. Textbooks are the necessary component of the Connect platform. Not only do educators and students continue to seek high-quality textbooks for their courses, but the books also form the basis of the courses and CCC built around them. Simply put, if the authors did not produce the textbooks, McGraw Hill would not be able to market Connect: it would be an empty, useless platform. All of the other purposes or applications available on Connect require a textbook; without the textbook, the other applications of the platform are useless. 42. …. Each Connect course is specific to one textbook; it is impossible to launch a course on Connect or access CCC without selecting a textbook to serve as the basis for the course or to select multiple textbooks for use in the same course, further underscoring that textbooks are the necessary component of the Connect platform. (Id.
