BY:
Michael I. Rudell(Originally published in the Entertainment Law column in the New York Law Journal, November 22, 2002.)
A recent case, Chodos v. West Publishing Company, Inc.,1 makes a good bookend to the Nance decision discussed in a recent column.2 Both concern the “acceptability clause” contained in the agreement between an author and a publisher. In the Nance case, the publisher prevailed. In the Chodos decision, the refusal by West to publish a treatise on fiduciary duty was held under California law to be a breach of its agreement with the author. In its opinion, the Court discusses two Second Circuit decisions cited in the Nance opinion.
Rafael Chodos is a California attorney whose specialty is the law of fiduciary duty. Early in 1995 he sent a detailed proposal, to the Bancroft-Whitney Corporation, which at the time was a leading publisher of legal texts. After having expressed enthusiasm for the project, Bancroft, entered into an agreement (the “Agreement”) with Chodos which both parties agree is a standard form contract used to govern the composition of a literary work for hire.
The Agreement provided that Chodos would receive a 15% share of the gross revenues derived from the sales of the work. A representative of Bancroft had informed Chodos that a typical, successful title which it had published might gross $1 million over a five-year period, although, of course, Chodos’s work might be more or less successful than the average. Chodos alleges that he sought publication of the work not only for direct financial rewards, but also to enhance his professional reputation.
From July 1995 through June 1998, Chodos spent approximately 3600 hours writing the treatise and developing the accompanying electronic materials. He did so with the guidance of the Bancroft staff. When the book was finished, it consisted of 1247 pages.
In 1996, Bancroft was purchased by the West Publishing Group and the two entities merged at the end of the year. The Bancroft editors, now employed by West, continued to work with Chodos in preparing the work for publication. In the summer of 1998, the West editors provided him with detailed notes and suggestions, to which he diligently responded. In November, 1998, West again sent Chodos a lengthy letter, including substantive editorial suggestions and followed up in early December 1998 with a letter apologizing for delay in publication and assuring him that the publication would take place in the first quarter of 1999.
When Chodos did not receive any communication from his editor at West, Chodos contacted West to check on the status of this treatise. On February 4, 1999, he received a response from a member of the marketing department who informed him that West had decided not to publish the book because it did not “fit within [West’s] current product mix” and because of concerns about its “market potential.” West admits, however, that the manuscript was of high quality and its decision was not due to any literary shortcomings in Chodos’s work.
In late 1998, West had developed new internal criteria to guide publication decisions. Applying these criteria, West’s Director of Product Development and Management for the Western Market Center, decided not to go forward with the publication of the treatise. She did not in fact read what Chodos had written, but instead reviewed the proposal and a detailed outline of the treatise. After Chodos informed West that in his view the publisher had breached his contract, West did prepare an economic projection that concluded that the publication of the work would be an unprofitable venture.
Chodos then filed a state action against West for breach of contact which was removed to federal court on the basis of diversity of jurisdiction. Chodos moved for summary judgment which was denied. West moved to dismiss the amended complaint for failure to state a claim and the motion was denied. At the conclusion of discovery, West moved for summary judgment and Chodos sought to amend the complaint again in order to add a claim for fraud. The district court granted West’s motion and entered judgment in its favor; it simultaneously denied Chodos leave to amend his complaint.
Chodos makes two alternative arguments: first, that the Agreement is an illusory contract and second that if a valid contract does exist, West breached it. Under either theory of liability, he contends that he is entitled to recover in quantum meruit.
Regarding the first argument, the Court indicates that California law, like the law in most states, provides that a covenant of good faith and fair dealing is an implied term in every contract. A court will not find a contract to be illusory if the implied covenant of good faith and fair dealing can be read to impose an obligation on each party. The Court concludes that the contract is not illusory because West’s duty to exercise its discretion is limited by its duty of good faith and fair dealing.
The Court found Chodos’ argument that West breached the Agreement to be more persuasive. It rejects West’s contention that it could decline to publish the manuscript after Chodos completed writing it for any good faith reason, regardless of whether the reason was related to the quality or literary merit of the manuscript. The two relevant paragraphs contained in the Agreement are as follows:
“After timely receipt of the Work or any portion of the Work prepared by Author, Publisher shall review it as both form and content, and notify Author whether it is acceptable or unacceptable in form and content under the terms of this Agreement. In the event that publisher determines that the Work or any portion of the Work is unacceptable, Publisher shall notify Author of Publisher’s determination and Publisher may exercise its right under paragraph 4.”
“[I]f Publisher determines that the Work or any portion of it is not acceptable to Publisher as provided in paragraph 8 [the acceptance clause] … [a]fter thirty (30) days following written notice to Author if Author has not cured such failure in performance Publisher has the right in its discretion to terminate this Agreement.”
The district court had agreed with West that in determining whether a manuscript is satisfactory in form and content under the acceptance clause, the publisher may in good faith consider solely the likelihood of a book’s commercial success and other similar economic factors. The Court unequivocally rejects that view. It notes that under that clause a publisher may deem a manuscript unacceptable only if it is deficient in form and content. Nothing in the Agreement, however, suggests that the ordinary meaning of those words was not intended, and nowhere in the Agreement does it state that the publisher may terminate the Agreement if it changes its management structure or its marketing strategy or if it revises its business or economic forecasts, all matters unrelated to form and content.
This interpretation is supported by the provision in the Agreement that affords Chodos an opportunity to cure any deficient performance. The inclusion of such a provision indicates that a deficiency in form and content is one that the author has some power to cure. Chodos had no power to cure West’s view that the marketplace for books on fiduciary duty had changed, nor could he cure a change in West’s overall marketing strategy and product mix.
The Court indicates that the uncontroverted evidence in the case is that Chodos worked diligently in cooperation with West to produce a book that met the highest professional standard and that he was successful in that venture. It would be inequitable to allow West to decide that due to the vagaries of its internal reorganizations and changes in its business strategies or in the national economy or the market for legal treatises, his work, although admittedly of high quality, was for naught. Further, it would be contrary to both the language and the spirit of the Agreement to allow a publisher to escape its contractual obligations for these reasons.
In urging the Court to affirm the district court’s ruling, West cites two cases from the Second Circuit involving a clause similar to the acceptability clause. In Doubleday and Co. v. Curtis3 a publisher rejected a manuscript by the well-known actor Tony Curtis because of its poor literary quality. There, as here, the publishing agreement allowed the publisher to reject the submission if it was not satisfactory as to form and content. The Court distinguishes the facts in the Doubleday decision by noting that in that case the manuscript was unsatisfactory in form and content. Curtis’s claim was that the publisher had a good faith obligation under the contract to re-write his admittedly unsatisfactory manuscript and to transform it into one of publishable quality. The holding was that a publisher’s good faith obligation does not extend that far. The Court does note that the Second Circuit “appears to have stated its holding in Doubleday more broadly than the case before the court warranted” stating: “[W]e hold that a publisher may, in its discretion, terminate a standard publishing contract, provided that the termination is made in good faith, and that the failure of an author to submit a satisfactory manuscript was not caused by the publisher’s bad faith.”
The Court indicates that read in context, the Doubleday holding does not make it clear whether the decision means that a publisher may reject a manuscript for reasons wholly unrelated to its literary worth, or that it may do so only if it determines in good faith that the submitted work is unsatisfactory on its literary merits. It indicates that if the former is the view of the law by the Second Circuit, it respectfully disagrees.
The second decision on which West relies is Random House, Inc. v. Gold4 which the Court believes is more apposite than Doubleday. There the court held that a publisher may consider economic circumstances when evaluating a manuscript’s form and content. The Court notes its disagreement with the holding for the reasons set forth above, and does not consider itself to be bound by it, but the opinion does indicate that even in Random House the court did not go so far as to state that economic considerations may be the sole reason for a publisher to decline to publish a manuscript that is in every other respect acceptable.
The Court concludes that, because West concedes that Chodos’s manuscript was of high quality and that it declined to publish it solely for commercial reasons, rather than because of any defect in its form and content, as a matter of law West breached its agreement with Chodos. As a result of such breach, and because, under California law Chodos is entitled to recover for the breach in quantum meruit, the Court reverses the grant of summary judgment by the district court in West’s favor and remands the case to the district court with instructions to enter summary judgment as to liability in favor of Chodos, and for further proceedings consistent with its opinion.
1 No. 00-55954, U.S. Court of Appeals for the Ninth Circuit (June 7, 2002)
2 Nance v. Random House, Inc., New York Law Journal, Volume 228, No. 26, (August 8, 2002 S.D.N.Y.)
3 763 F.2d 495, (2d Cir. 1985)
4 464 F. Supp. 1306 (S.D.N.Y. 1979)