Crazy times. Crazy situations. Hopefully you and your family are COVID-19 free, and your sanity is still intact.
One blessing from a forced hunker-in-the-bunker reality is that I’m writing a ton. On the flip-side, the COVID-19 recession has caused such economic upheaval that, from an author’s perspective, could mean bankrupt publishers.
Most publishing agreements contain bankruptcy clauses. The gist is to allow authors to terminate their contracts and have their book rights returned if a publisher files for bankruptcy.
In the event of bankruptcy, insolvency, or liquidation of the Publisher, Author may terminate this Agreement. All rights granted from the Author to the Publisher shall revert to the Author automatically. Termination and/or reversion of rights shall not require a written notice or demand from the Author.
Looks pretty solid, right?
Unfortunately, under federal bankruptcy law, bankruptcy clauses that terminate contracts are unenforceable.
Why is that?
When a corporation (like a publisher) files for bankruptcy, control over the corporation’s assets and liabilities goes to the bankruptcy court. In the case of a bankrupt publisher, assets would include the intellectual property license to an author’s book, any printed books, and any royalties collected. Once a publisher files for bankruptcy, the court will determine how to disperse the assets so the proceeds can be distributed to the publisher’s creditors, even if your publishing agreement contains a bankruptcy termination clause.
Essentially this means that if an author wants to terminate their book contract and reclaim their book rights and any unpaid royalties, the author must request it from the bankruptcy court. Whether this request is granted is totally up to the court. Such a request takes time and money. Bankruptcy proceedings can be difficult and long. Depending on the size of the company, a bankruptcy can last as little as four months, but often over a year before closure is reached. Even worse, if the publisher is seeking to reorganize, the publisher will most likely request the book rights be retained so the publisher can continue to function and do business.
There is one silver lining, some federal courts have held that federal intellectual property laws allow an intellectual property licensor, like an author, who does not consent to an assignment of their book rights to a third party to block the assignment of those rights during a bankruptcy case. Meaning there is precedent for you, the author, to argue you don’t want your books assigned to another publisher, and you want your rights to revert back.
Going forward, it still makes sense to have some sort of bankruptcy related clause in your publishing contract. Partly because, bankruptcy isn’t the only financial disaster. If there is insolvency or liquidation but no bankruptcy case ever filed, then a bankruptcy court won’t seize control of the publisher’s assets and the author can then enforce the termination/reversion clause.
If a bankruptcy case is filed, the bankruptcy clause in your agreement will at least give you reason to request from the court that your contract be terminated and your book rights reverted. The court may not grant you that request, but at least you have a solid reason for asking.
Stay safe and health!
Legal Disclaimer: This information is provided for educational purposes only. Consult a qualified lawyer in your jurisdiction for all legal opinions for your specific situation.