THE ETHAN ELLENBERG LITERARY AGENCY

ETERNAL RESERVE
by Ethan Ellenberg

A group of papers recently crossed my desk that reminded me of the permanent or eternal reserve that many publishers keep on individual books. I suspect that few authors are aware of this, but it’s a serious issue that affects almost every author.

The root of this problem is that many publishers keep a tiny but permanent reserve against returns.  This should not be confused with illegitimate practices regarding the reserve for returns that less than reputable publishers have employed. This eternal reserve, as any of the publishers that utilize it will likely argue, is a legitimate accounting practice. And, if the permanent return is tiny and not fixed, it can be justified.  If it is not, it is an egregious use of the reserve concept and a serious way of depriving authors of royalty income.

First, some background: I have been on both sides of this issue. Prior to becoming an agent I worked in the contracts and royalty areas for two of the largest publishers.  In my first job I actually had access and spent some time with the large royalty books that housed the company's royalty records.  (Yes, the hand entered books that held the royalty records.) In these books you could follow the royalty records of titles that had been in print for 20 or even 30 years. I remember reviewing books that hadn’t had a return in five or even ten years. These were customarily “dead” books, long out of print. Sometimes a return came in, but rarely. 

Even on these titles, a permanent reserve was usually kept. The reserve would often be 50 books, period.  From the author’s point of view, you can make the case that no permanent reserve should be kept.  When a book is essentially dead—let’s say three years without a recorded sale or return––even the final or permanent reserve should be liquidated.  However, a publisher could legitimately argue that returns are received even ten years after a book is dead and so they shouldn’t be forced to pay royalties on books that could be returned.

From where I sit, this is a coin toss—both sides can make legitimate claims.  As long as the publisher must absorb returns for credit, it wants protection from paying royalties on these unsold copies.  If no returns are imminent by any common sense measure, authors should be paid royalty income that has in all likelihood been earned.

In my capacity as agent, I have several clients with long, productive careers.  I  have full access to their royalty records, which I periodically review.  Even though there is obviously a smaller collection of authors, the patterns of sale are similar to the ones I saw as a publishing house employee.  After the active life of a book, years could go by with no activity—no returns whatsoever. Sometimes a return or three would pop up. The fact is that nearly all books follow a similar pattern in their publishing lives. Ten year old books, with no new shipments, don’t suddenly return 500 or 1000 copies.  In fact, I can’t remember even moderate amounts of returns for an older book (for many books this would be at least three years post first publication).  If a book is very active, with new shipments, that is a different story.  In that case, the book will behave essentially like a recent title and substantial bursts of returns are possible.

Despite these patterns, that anyone who tracks royalties knows, many publishers do use an eternal reserve. It is a controversial, debatable practice, but it is legitimate. But, what happens if the permanent or final reserve is abused?  What if it is more than a token reserve or if it is completely disconnected from any common sense notion of how books are returned?  In these instances, the publisher is simply failing or refusing to pay royalties.

One such practice that greatly concerns me is a permanent reserve that is set as a percentage of gross shipments.  Even a 1% permanent reserve could deny substantial royalty income to an author.  Let me give you an illustration.  During the initial publication of a book 100,000 copies are shipped and the publisher establishes a standard 1% permanent reserve against this shipments, so that’s a 1000 copies.  Depending on the book’s sales, the permanent reserve isn’t visible or operative, but  subsumed in the traditional reserve and most likely would not have an impact on the author’s royalties.  But what happens five or even ten years out? What happens when in the prior five years only ten returns were received? Why would 1,000 copies need to be held in reserve when the publisher can be confident that it will not receive even 100 returns? 

Let’s continue to work with this example.  What if the permanent reserve wasn’t as tiny as 1%--say 3% (3000 copies) or 5% (5000 copies).  The numbers grow more and more absurd.  A reserve is not supposed to function in this way.  Let’s examine how the reserve is really supposed to function.  In our example, we’ve shipped 100,000 copies and let’s say that 50,000 are reported sold. The publisher knows they’re sold—they’ve been paid for them, the large accounts have actually given the publisher sales figures from individual stores. Now the potential pool of returns isn’t 100,000 copies, it’s 50,000 copies.  Of those 50,000 copies, let’s say 40,000 have been returned and credited. Now our 3% of shipments or 3000 copies is actually a reserve against 10,000 “unknown” copies.  It’s no longer a 3% reserve for returns, it’s now a 30% reserve for returns. And, as the number of “unknown” copies decreases, this percentage steadily increases. 

Obviously, a reserve set by a fixed percentage of net shipped is an unfair practice. A reserve should never be fixed; it should be based on actual experience. Publishers that employ a permanent reserve with a fixed rate based on gross shipments aren’t really using a reserve against returns at all, they are simply not paying authors royalties on every book sold, as promised in their contracts.  It may be 99% or 97% or 95%, but it’s is not 100% and in some cases this can amount to a significant loss of income to the author. 

The reserve for returns will continue to be an area of contention between authors and publishers.  Publishers have the right to protect themselves from paying royalties on unsold copies.  Authors have the right to be paid full royalty income on a timely basis and not be subjected to methods that unfairly deny them income.  The clearest path to moderating this tension is for publishers to increase the flow of accurate, timely sales information to authors so the legitimacy of the reserve can be openly and objectively judged.  Authors must accept that there will be instances where the publisher can legitimately delay payment of royalties until it’s clear that the books have actually been sold and will not be returned. 

Last word—a reserve based on a permanent fixed percentage of books shipped  is inconsistent with sound accounting practices and unfairly denies authors royalty income.

This article originally appeared in Nink (newsletter of Novelist, Inc.), December 2003

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