Flynn v. McGraw Hill LLC

Background

The plaintiffs are authors of textbooks that the defendants publish in print and sell electronically through the defendants’ Connect platform. The complaint alleged that, from approximately 2009 to 2020, the defendants calculated royalties using the full amount received from customers who bought electronic versions of the plaintiffs’ textbooks. Beginning in approximately 2020, the defendants assigned separate values to the Connect platform, the electronic textbook, and “Derivative Materials” produced using the textbook. The plaintiffs alleged that the defendants then calculated royalties using only the textbook component and part of the Derivative Materials component.

The contracts require royalties based on “net receipts” from the plaintiffs’ “Works.” The contracts define “net receipts” as the “selling price” of the Work minus certain listed expenses, and define “Works” by the titles of the textbooks.

In an earlier opinion, the court dismissed the breach-of-contract claim and denied the defendants’ motion to dismiss the claim for breach of the implied covenant of good faith and fair dealing. The court held that the plaintiffs were entitled to royalties based on receipts from the textbook itself, but not on additional content sold with the textbook.

Motion to Amend

The plaintiffs moved for permission to file a proposed Second Amended Consolidated Class Action Complaint. They argued that the new allegations would cure the deficiencies in their breach-of-contract claim. They also argued that the motion was timely because discovery had recently produced evidence that had previously been withheld on privilege grounds.

The proposed complaint changed the theory of breach. Rather than alleging that the defendants improperly deducted the value of non-textbook components from the selling price, it alleged that the defendants improperly defined the selling price as only the amount attributable to the textbook, excluding the prices of the Connect platform and other non-textbook components.

The proposed complaint also added facts that the plaintiffs said showed the defendants’ motivation to reduce royalties, internal discussions about how to explain the decision publicly, and consideration of different ways to pursue the royalty reduction initiative.

Court’s Analysis

Courts generally should allow amendment when justice requires, but they may deny permission when amendment would be futile. Futility means that the proposed changes would not fix the earlier problems or would still fail to state a legally sufficient claim under Rule 12(b)(6), the rule governing failure to state a claim.

The court found the new contract theory futile because it was also foreclosed by the court’s earlier interpretation of the unambiguous contracts. Under that interpretation, the “Work” was the textbook identified by title, so the “selling price” and resulting “net receipts” covered the textbook and not additional content sold with it.

The court also rejected the proposed extrinsic evidence—evidence outside the contract—about what the defendants thought the contracts meant or why they adopted their interpretation. Because the contract language was unambiguous, that evidence could not change the contract’s meaning. The court found that the other proposed amendments were either unnecessary or still insufficient to state a breach-of-contract claim.

Disposition

Judge Lorna G. Schofield ordered that the plaintiffs’ motion for leave to amend be DENIED. The parties’ joint letter motion for oral argument was DENIED as moot. The Clerk of Court was directed to close the motions at Dkt. Nos. 93 and 111.