Golden Unicorn Enterprises, Inc. v. Audible, Inc.

Background

Golden Unicorn Enterprises, Inc. and Big Dog Books, LLC were operated by independent, self-published authors Jan Bonthu and Elizabeth Noble. The companies used Audible’s ACX program to produce and distribute audiobooks under the ACX Audiobook License and Distribution Agreement. The agreement provided royalties based on “net sales,” defined to account for “returns,” and stated that royalty statements would be provided monthly on a net-30-day basis.

Audible allowed customers to return audiobooks within 365 days of purchase, including after listening to them, in exchange for money or subscriber credits. Plaintiffs alleged that Audible deducted these returns from their royalties and promoted the return program as exchanges or swaps. After a 2020 technical glitch showed gross rather than net sales in authors’ accounts, plaintiffs and other authors learned about the deductions. Audible later changed its policy so that it stopped clawing back royalties for titles returned more than seven days after purchase.

The remaining claims were breach of contract and breach of the implied covenant of good faith and fair dealing. Audible moved for summary judgment on both claims and three affirmative defenses. The parties also filed motions concerning expert testimony, spoliation sanctions, and class certification.

Contract claim

Under New York law, a contract claim requires a contract, performance by the plaintiff, nonperformance by the defendant, and damages caused by the breach. The court held that the agreement’s use of “returns” was unambiguous. Applying the term’s ordinary meaning, the court concluded that a return occurs when a customer gives back an audiobook in exchange for money or credit used to acquire it. That included exchanges in which the customer used the refund or credit to obtain another audiobook.

Because the agreement allowed Audible to deduct returns from net sales, the court held that Audible did not breach the agreement by deducting returned audiobooks from plaintiffs’ royalties. The court rejected plaintiffs’ effort to limit “returns” to technical defects or mistaken purchases. It also declined to consider plaintiffs’ evidence about industry practices, authors’ reactions, a different contract, and Audible’s later policy change because the agreement was unambiguous.

The court granted Audible’s motion for summary judgment on the breach-of-contract claim.

Implied covenant claim

Plaintiffs advanced two theories under the implied covenant of good faith and fair dealing: that Audible actively encouraged customers to return titles through the Great Listen Guarantee, and that Audible “surreptitiously” deducted royalties by reporting net rather than gross sales.

The court granted summary judgment to Audible on the “surreptitious” deduction theory. A claim based on the implied covenant cannot rest on conduct the contract permits, and the agreement expressly allowed Audible to report net-sales information on royalty statements. The court rejected plaintiffs’ argument that reporting net sales concealed the volume of returns in a way that violated the agreement.

The court reserved judgment on the theory that Audible breached the implied covenant by encouraging customers to return titles. It directed the parties to provide supplemental briefing on whether plaintiffs had a non-speculative method for calculating damages caused by that alleged conduct. The court also reserved judgment on Audible’s alternative argument that the remaining implied-covenant claim was duplicative of the contract claim.

Expert testimony

The court granted Audible’s motion to preclude Joseph Egan’s damages testimony. It found that Egan’s individual-damages calculations consisted of multiplying prices by royalty rates and adding the results, rather than applying specialized expert analysis. The court also found that his calculations covered all returns, without distinguishing returns allegedly caused by the Great Listen Guarantee from returns for technical defects or mistaken purchases. As a result, the calculations did not correspond to plaintiffs’ remaining theory of liability or damages.

Because Egan’s testimony was excluded, the court excluded Audible’s rebuttal expert, Juli Saitz, as irrelevant. The court denied plaintiffs’ motion to preclude Saitz’s testimony as moot.

Other motions and required briefing

The court reserved judgment on Audible’s motion for summary judgment concerning three affirmative defenses; Audible’s motion to preclude Thad McIlroy; Audible’s motion for spoliation sanctions; plaintiffs’ motion to preclude John Rodzvilla; and plaintiffs’ motion for class certification.

The supplemental briefing must address damages for the remaining implied-covenant theory and whether plaintiffs can satisfy the class-certification requirements concerning predominance and commonality, as well as Article III standing. The court stated that the summary-judgment record was closed and directed the parties to rely on evidence already in that record. The order did not resolve the remaining implied-covenant theory or the outstanding motions.