The hardest-fought license terms may be the least likely to be in compliance.

Licensors whose assets are in particularly high demand may be able to negotiate unusually favorable contract terms.  Hiring a skilled lawyer to negotiate the terms of your license agreement will help ensure you get the best deal possible.  But those efforts may be wasted if there is no one confirming that those terms are followed.  In fact, unusually good terms might be at the greatest risk of being ignored.

Licensors who engage in numerous licensing arrangements often employ calculation templates that meet their standard contract terms.  In addition, they may have written code that automatically pulls what is normally the relevant source data from their computer reporting systems.   The separation that exists between those negotiating the license and those performing royalty calculations can also lead to confusion.  Many times the royalty reporting division of an audit target protests that the calculation just isn’t done that way.   Below are a few examples that we’ve heard in our work as auditors:

  • “We never pay on international sales since they are not covered by the US patent”
  • “We always use the exchange rate on x date”
  • “We always pay on cash collections, not shipment of goods”
  • “We never pay royalties on free product we send out for marketing purposes”
  • “We never pay a royalty on the full price of a bundled product.”

When faced with the specific contract language requiring different treatment than they have been employing, they agree to the audit finding.   But unless an audit occurs, the beneficial terms negotiated by the licensor would not have been followed.

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