We’ve all read news stories about musicians and authors pursuing unpaid royalties, with some high profile cases dealing with figures in the millions. However royalty income is no longer the preserve of creative artists, in fact a huge percentage of royalty payments are now made to businesses and corporations which license out intellectual property (IP) to third parties.
Although licensing out IP leads to a reduction in profit margins and also a loss of direct control over sales it often makes sense to many owners of IP because it is often a quicker and cheaper process than handling everything in-house.
Because of the loss of control and the hit to profit margins it’s vital for businesses who license out their IP to ensure that they receive the royalties that were agreed on. To make sure that this happens most agreements include an audit clause, which allows the licensor to undertake detailed and regular royalty audits. These audits serve two main purposes. Firstly it means that royalties due are being paid. Secondly, it allows the licensor to analyse the performance of the licensee, so they can accurately assess if everything is being done to improve sales and by extension royalty income.
The Causes Of Underpayment
Royalties can be underpaid on purpose, but this kind of behaviour is actually fairly rare. Underpayment is usually down to a number of other factors, such as inaccurate reporting due to poor systems or housekeeping, or misinterpretation of the original agreement.
Mis-reporting of sales and omitting revenue from sublicenses are two major areas for concern, as is the failure to update product details when new iterations of products are created. But even if the figures are accurate in terms of sales, pricing errors, tax issues and exchange rates can also throw a spanner in the works.
Add to all this a marked tendency for royalties to be paid late, and without the addition of stipulated late payment fees and it’s easy to see why so many licensors end up out of pocket.
Getting Your Dues
To make sure that royalties due are paid in full and on time it’s important to enforce the audit clause in any agreement. A royalty audit will take a detailed look at how the licensee is recording sales and following the terms of the agreement. This will allow any areas of the contract that have been misinterpreted to be clarified, and also help to tighten up the licensee’s tracking and inventory systems.
The audit will also analyse exchange rate calculations and taxes to ensure that at each step of the process the correct procedures are being followed.
Sometimes licensors can feel worried that an audit will cause a strain on the relationship with the licensee. Although audits can be time consuming they should not be viewed negatively by a licensee that is acting honestly. Your IP is generating revenue for your licensee so you should receive exactly what is laid out in the terms of the agreement, and regular royalty auditing is the way to achieve this.
For more information and advice about royalty auditing please visit: www.hwfisher.co.uk/royalty-auditing-and-licensing