It’s fair to say that Harlequin, the world’s leading romance publisher, has also been at the forefront of digital publishing, at least among mainstream publishers with a substantial print legacy. The Toronto-based company (it’s owned by Torstar and has offices in North York as well as New York City) was among the first to launch a digital-only imprint, and it has proven adept at experimenting with new technologies.

However, Harlequin’s reputation as a digital pioneer may be tainted. As first reported by Publishers Lunch (subscription only), the publisher is the target of a class action lawsuit alleging that it has been underpaying authors on digital royalties. The lawsuit alleges that Harlequin used a pair of Swiss-registered companies it controlled to pay authors only a fraction of the digital royalties they were owed.

According to the initial complaint (which can be read in its entirety at HarlequinLawsuit.com), Harlequin authors are entitled to receive 50 per cent of net receipts for all digital sales. The problem is how “net receipts” is defined. The industry generally interprets the term as referring to the amount received by the publisher once the retailer has taken its cut (usually no more than 50 per cent).

The lawsuit alleges that Harlequin based its calculation on a much smaller sum, which the publisher was able to justify by interpreting “net receipts” as a licensing fee paid to its Swiss-based affiliate. The defendants argue that Harlequin’s Swiss arm (which was preceded by a Dutch company also registered in Switzerland for “tax purposes”) does not engage in any publishing activities and should not be used as the basis for calculating royalties.

The initial complaint breaks it down into dollars and cents. For an $8 ebook, authors should expect a royalty of at least $2 (in other words, half of the $4 Harlequin would receive from the retailer). In reality, authors received between $0.24 to $0.32 for every digital sale, or just 6“8 per cent of true net receipts.

The lawsuit was filed in the Southern District of New York on behalf of three U.S.-based authors, Barbara Keiler (who writes under the pseudonym “Judith Arnold”), Mona Gay Thomas (“Gayle Wilson”), and Linda Barrett.

The initial complaint, which concerns publishing agreements entered into from 1990 to 2004, defines the class as about 1,000 Harlequin authors based in the U.S. and Canada (as well as other Commonwealth countries) whose contracts include the standard digital royalty of 50 per cent.

UPDATE: Harlequin released a brief statement Thursday afternoon in which it states, “The publisher wishes to make clear that this is the first it has heard of the proceedings and that a complaint has not yet been served.”

Publisher and CEO Donna Hayes gives the following statement: “Our authors have been recompensed fairly and properly for their work, and we will be defending ourselves vigorously.”