Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—S.D.N.Y.: Authors’ deceptive practices claims proceed against publishing consulting company, (Apr 14, 2014)

By Edward L. Puzzo, J.D.

The federal district court in New York has refused to dismiss state unfair business practice claims by book authors against a publishing consulting company that had purported to provide them with manuscript editing and marketing expertise (James v. Penguin Group (USA) Inc., April 11, 2014, Cote, D.). However, the court did dismiss claims against the parent company of the consulting company.

Three book authors—residents of California, New York and Colorado—brought a putative class action alleging, among other claims, that Author Solutions had violated the unfair trade practices statutes of those three states. Author Solutions offered publishing and marketing services to individuals wishing to self-publish their books. The authors alleged that Author Solutions sold packages of services to the authors for improving their manuscripts, such as proofreading, editorial services, editorial evaluations, developmental edits, and marketing.

The authors alleged that Author Solutions was structured to push authors to purchase additional products rather than provide the promised services. The authors allegedly were initially misled as to royalty rates, induced to purchase error-correction services that were not performed, misled as to sales figures, and underpaid royalties.

California law. It was alleged that Author Solutions made unlawful, unfair, and fraudulent statements and claims regarding its services in violation of California’s Unfair Competition Law (UCL) and False Advertising Law (FAL). Author Solutions moved to dismiss these claims, asserting that the allegations failed to meet the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure. The court, however, found that the specificity requirement had been met by allegations such as that plaintiffs had been falsely told that an editorial board had formed an opinion about their submissions.

Author Solutions also claimed that its statements were permissible as “mere puffery.” But the court noted that puffery would include only opinions incapable of being proven true or false, whereas Author Solutions’ statements — such as that publishing and marketing services would be provided by professionals — were statements which could be tested by objective evidence and upon which consumers were likely to rely. By alleging that Author Solutions was in essence a scam, the authors described conduct that would impact competition, had no lawful utility, and would harm consumers. Thus, the court ruled, the FAL and UCL allegations were adequately pleaded and could not be dismissed.

New York law. The authors further alleged that Author Solutions violated the New York Deceptive Practices Act (GBL). The court noted that this statute required that the defendant’s conduct be “consumer-oriented,” but that courts have interpreted this requirement broadly to include acts that have a broader impact on consumers at large. Relying on Tasini v. AOL, Inc., 851 F. Supp. 2d 734 (2012), which held that blogging contributors to The Huffington Post were held not to be consumers under the GBL, Author Solutions argued that the statute would not apply to authors engaged in the business of publishing their own work. The court countered that other New York case law supported a broad reading of the GBL encompassing virtually all economic activity, and a broad definition had been used in a similar case, People ex rel. Vacco v. Appel, 685 N.Y.S.2d 504 (1999), involving a deceptive scheme to induce authors to submit manuscripts for editing. Thus, the court denied Author Solutions motion to dismiss the New York claims.

Colorado law. Finally, the authors alleged that Author Solutions violated the Colorado Consumer Protection Act (CCPA) by engaging in unfair and deceptive trade practices, such as false representations as to the benefits of their editorial and marketing services and their royalty payment structure. The court noted that the plaintiffs pleaded that Author Solutions failed to disclose material information about its services to consumers, with the intent to induce consumers to enter into transactions. The court found these allegations of material omissions sufficiently raised an inference of fraudulent intent, and met the CCPA pleading requirements. Thus, the court also denied Author Solutions motion to dismiss the Colorado claims.

Penguin. Penguin Group purchased Author Solutions in 2012. Penguin argued that it should be dismissed from the case because a parent corporation should not be liable for the acts of its subsidiaries. The court noted, however, that the corporate veil could be pierced when the corporate form was used to accomplish wrongful purposes, such as fraud. Nevertheless, the court ruled, since plaintiffs did not seek to pierce the corporate veil, and the actions complained of occurred prior to Penguin’s acquisition of Author Solutions, Penguin could not be held liable for the actions of Author Solutions. Therefore the court dismissed all claims against Penguin.

The case is Civil Action No. 1:13-cv-02801-DLC.

Attorneys: Oren Giskan, O. Iliana Konidaris, and Raymond Audain (Giskan, Solotaroff & Anderson & Stewart, LLP) for Kelvin James, Mary Simmons, and Jodi Foster. Jonathan M. Herman, Christopher G. Karagheuzoff, and Jonathan R. Montcalm (Dorsey & Whitney LLP) for Penguin Group USA, Inc. and Author Solutions.

Companies: Penguin Group USA, Inc.; Author Solutions.

Cases: Advertising StateUnfairTradePractices CaliforniaNews ColoradoNews NewYorkNews