Flynn v. McGraw Hill LLC

Background

Sean Flynn, Dean Karlan, Jonathan Morduch, David Myers, and Jean Twenge brought the action individually and purportedly on behalf of others similarly situated. They alleged that McGraw Hill LLC and McGraw Hill Education, Inc. breached their publishing contracts and the implied covenant of good faith and fair dealing. The plaintiffs are academics who author textbooks, and the defendants publish, sell, and distribute those textbooks under publishing agreements.

The contracts generally required the plaintiffs to provide manuscripts, required McGraw Hill to publish the works at its own expense, and provided royalties based on the publisher’s “net receipts.” The contracts defined the “Work” by reference to the textbook titles. In 2009, McGraw Hill launched Connect, an online platform that combines an electronic textbook with course content and technology and sells those components together for one price. For more than a decade, McGraw Hill paid royalties based on the entire Connect sales price. Beginning with the July-to-December 2020 royalty period, McGraw Hill instead paid royalties only on revenue attributed to the ebook component.

Rule 12(b)(6) Standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. At this stage, the court accepts well-pleaded factual allegations as true and draws reasonable inferences for the plaintiffs, but it does not accept conclusory legal assertions as facts.

Breach of Contract

Applying New York law, the court held that the royalty contracts unambiguously define the “Work” as the titled textbook. The plaintiffs were therefore entitled to royalties from the net receipts of the textbook, but not from additional content that the defendants sold with it through Connect.

The court rejected the plaintiffs’ argument that the contracts required royalties based on the full Connect sales price. It also rejected their argument that McGraw Hill’s new policy effectively charged the authors a platform fee in violation of provisions requiring McGraw Hill to publish the works at its own expense. The court reasoned that Connect includes content beyond the textbook, such as PowerPoint lesson plans and tests, and is not equivalent to the ink and paper used to publish a hardcopy textbook.

Finally, the court declined to consider the parties’ ten-year course of performance because the contract language was unambiguous. The court held that the plaintiffs failed to state a viable breach-of-contract claim.

Implied Covenant of Good Faith and Fair Dealing

The implied covenant of good faith and fair dealing is a promise inherent in every contract that parties will not act to destroy or injure the other party’s right to receive the contract’s benefits. When a contract gives a party discretion, the covenant can require that discretion to be exercised without arbitrary or irrational conduct.

The court held that the plaintiffs plausibly alleged a violation of this covenant. The Complaint alleged that the defendants unilaterally and arbitrarily set the price attributed to the authors’ textbooks in a way that reduced royalty payments and diverted money that should have gone to the authors. The defendants argued that the ebook component’s price was fairly based on market value, but the court treated that argument as presenting a factual dispute that could not be resolved on a motion to dismiss.

Disposition

The defendants’ motion to dismiss was granted in part. The breach-of-contract claim was dismissed, and the claim for breach of the implied covenant of good faith and fair dealing survived. The defendants’ letter motion requesting oral argument was denied as moot. The Clerk of Court was directed to close the motions at Docket Numbers 34 and 42.