Readers of this blog may be aware of the recent scandal at literary agency, Donadio & Olson, which filed for bankruptcy in December 2018 as a result of an accounting scandal. The agency’s bookkeeper Darin Webb had for years been embezzling money from clients of the agency with respect to royalty payments. Webb himself was sentenced to a two year jail term. Although he had embezzled over $3 million, no criminal fine was imposed because the judge held that Webb was not in a financial position to pay it. The agency was unable to compensate its client authors, many of whom had lost significant sums of money as a result of Webb’s actions.
This situation has led many in the publishing world, particularly authors and agents, to consider how to avoid these kinds of risks in practice. Obviously, partners/managers in literary agencies need to take proper care to supervise the financial side of things, and authors should do the same, and not rely totally on agents to do the right thing.
Are there any particular legal steps that can be taken to avoid fraudulent accounting and similar practices? Can authors use the law to protect themselves upfront before such a scandal occurs?
The answer is largely “no” or “perhaps, but just a little bit”. You can’t meaningfully include an anti-embezzlement clause in your agency contract, or at least there’s little point in doing so, because embezzlement is a crime and the agency can’t contract out of committing crimes. In other words, you don’t need a clause saying the agency won’t commit crimes that affect you as an author, because it’s illegal for the agency to engage in criminal activity no matter what the contract says.
You can—and should—have an attorney go through your agency contract, ideally at the point where you’re first offered representation, to check on other pitfalls that might be in the contract. However, the contract itself won’t likely contain any promises about not committing crimes. That goes without saying.
Your attorney will be able to advise you about clauses in the contract that explain how the agency plans to handle your money. In situations where a publisher pays your royalties direct to your agent, and your agent passes the funds to you (minus their commission), you’ll want to ensure that, in your agent’s hands, the money is kept in an appropriate account that’s earmarked for you (or you and other agency clients). There are a number of ways of doing this, and a good contracts attorney should be able to advise you on the safest options.
These days, publishers are increasingly also offering the option of splitting royalty payments direct between agents and authors, so your share of the royalties comes direct to you from your publisher, and the publisher likewise sends the agent’s commission direct to them. You could ask if your agent is prepared to include a clause in the agency agreement that, when she negotiates publishing contracts for you, she’ll do her best to secure these kinds of payment arrangements with the publishers. If your agent is not prepared to do this, you can look out for it yourself in your publishing contracts. While the agent will typically negotiate the contract, you get to read it before you sign it. See if you can ask for this kind of split payments arrangement to be included before you sign. Some publishers are even prepared to send the entire royalty payment to you direct and leave it to you to forward the agent’s commission to her. Many agents won’t agree to these arrangements, but you could ask if yours will.
At the end of the day, one important lesson from the Donadio & Olson situation is that authors can’t afford to be complacent about their royalty payments. As creative artists, most authors like to focus on the creative side of their lives and leave the business/legal/financial issues to agents and attorneys. However, an ounce of prevention is worth a pound of cure. At the very least try to read and understand your contracts, even if you occasionally have to hire an attorney to help you, and, make sure you’re keeping track of your royalty payments. If your agent is giving you a hard time about seeking payment information, it might be a sign that she’s not the best agent for you. After all, it’s your money.
And, of course, the usual disclaimers apply to this column. This is not legal advice, but hopefully is helpful background information. Those concerned about author finances should consult a legal professional.