Cengage was established in 2007 and is a major publisher of college and other academic textbooks. Accumulated debt from corporate acquisitions, a shrinking textbook sales market, and a slow move into digital platforms sent the company into bankruptcy in 2013. Less than a year later, it emerged from bankruptcy protection with reduced corporate debt and a pledge to “reposition and reorient the company” with a focus on digital delivery of integrated learning solutions that would bring together textbook-based and other media materials.

A key part of that solution is Cengage Unlimited, which will allow access to Cengage’s digital learning platforms, as well as ebooks, online homework, and study tools in 70-plus disciplines for a single fee per semester. In addition, students will be able to receive a rental copy of their print textbooks for a small shipping and handling fee. The program launches in August 2018 for the fall academic semester. The authors who filed the suit see Cengage Unlimited as a way for the company to shift its financial challenges onto the backs of the authors by creating a model that greatly reduces their royalty income.

What’s at Stake

The shift from individual textbook sales to a subscription platform required a modification in the publishing royalty income due to the authors. While the actual contracts are proprietary and unavailable, a typical publishing agreement provides for the payment of a specific royalty based on sales of materials and may or may not have anticipated a subscription-based service. In March 2018, a Cengage press release announced a “new author royalty framework” for the Unlimited product, which it described as a “usage-based model” for which “every item used earns a percentage of royalties” to be paid to the authors.

Authors David Knox and Caroline Schacht, unimpressed with the Cengage proposal, filed their lawsuit on May 14, claiming that the unilateral change amounted to a breach of contract and tortious interference with contract (illegally interfering with or causing others to interfere with a contract). They claim that the Cengage “plan to overhaul its business model … trampled on its authors rights.” (The authors’ complaint is available at nysd.uscourts.gov/pacer.php, but registration is required, and a small fee may apply.)

Specifically, the authors assert that the royalty structure of the Cengage Unlimited model converts the traditional “royalty-on-sale” model that exists in most of the publishing agreements between Cengage and their authors into a “relative use” royalty structure in violation of the agreements. The relative use structure pays the authors a fractional percentage of the subscription fees based on the relative use of their work. This, they claim, reduces their ability to earn royalties, and by unilaterally imposing the new royalty structure, Cengage is violating the good faith and fair dealing standards that are applicable to all forms of contracts.

In addition, the authors claim that with the expansion of digital distribution of content through and including the Cengage Unlimited model, Cengage has developed other digital offerings that have been derived from the authors’ work, such as multimedia displays, homework, tests, and other supplemental material. Notably, the authors do not assert any copyright infringement claim against these works, suggesting that the right to create derivative works is permitted under the publishing agreements. However, the authors claim that Cengage “arbitrarily and improperly” values these supplemental materials and reduces the base against which the royalty rate is determined, further reducing royalties, in breach of the publishing agreements.

Finally, the authors claim that they have already experienced “marked declines” in their royalties and that Cengage has “adopted a policy of refusing to provide” any underlying data, such as sales levels and royalty calculations. This too is a breach of the publishing agreements, they claim.

The Impact of the Lawsuit

Prior to implementing the plan, Cengage acknowledged that it needed to shift away from a traditional print model of textbook sales to a solution that provides a digital substitute for a textbook. In an interview with Inside Higher Ed published after Cengage emerged from bankruptcy and heavily cited in the authors’ complaint, Cengage CEO Michael Hansen said that the company might need to “push very aggressively on converting those” who are “rightly reluctant” to accept the transition. The authors grabbed onto the phrase “rightly reluctant” and used it repeatedly in their complaint as they further asserted that the lower royalty model could have a “lasting adverse impact on the incentives for developing higher learning study materials.”

As of this writing, Cengage has not formally responded to the authors’ complaint, which would be in the form of an “answer” filed with the court. Cengage did issue a statement on the complaint in which it asserts that the subscription service is “consistent with the terms of [the authors’] contracts. …” The statement goes on to say that the company’s new business model is “designed to address the decades-old problem of affordability in higher education” and that the authors’ declining royalties are the “result of high prices that lower demand.” The authors’ lawsuit, Cengage asserts, “seeks to perpetuate a broken model of high costs and less access. …”

High costs for student learning materials are a very real concern. I interviewed my son Jeremy, a rising junior engineering student at Purdue University, and he reported that he has paid as much as $250 for a single textbook. His textbooks generally range in price from just less than $100 to more than $200, although occasionally he has been able offset the cost by selling the book to a friend or reseller after the class ended, “if the book didn’t change.” He has also rented books for often less than $100 per semester, but of course, could not resell them. He did report using one digital solution called WebAssign—which happens to be a Cengage product—that he found helpful.

The lawsuit is still in its early stages and will likely take several months or even years to resolve. An early test may be whether the court is prepared to accept it as a class action lawsuit, in which a small group files a suit on behalf of everyone who is “similarly situated.” A decision accepting the class action would be seen as a blow to Cengage because of the number of people that it could be liable to in a single lawsuit. Similarly, a decision denying class action status would be seen as blow to the authors, as it would require each author to sue Cengage individually, which many are unlikely to do. The authors have also asked for an injunction preventing Cengage from including class action members’ materials in the Cengage Unlimited program unless they specifically opt in. A test on that issue could come later this summer.