Royalty Audits – How to Avoid Losing Out Through Unscrupulous Licensees

What does Sir Paul McCartney have in common with Imagination Technologies, one of the UK’s largest suppliers of chip technology to smartphone manufacturers across the globe? Similarly, what problem does the Ian Fleming estate share with luxury clothing manufacturer, Burberry?

The answer, of course, is that all four are examples of individuals or organisations who hold intellectual property (IP) and other rights which are licensed out to third parties around the world in exchange for royalty income. Outside observers might conclude that this is the sort of problem they would quite like to have but it is no joke when you have to rely on licensees paying you what you think they owe you.

paul mccartney music licensing
photo credit: LizMarie_AK

Every time someone records a Paul McCartney composition or someone buys some James Bond badged product, money has to change hands and there are specialist lawyers and accountants who spend all their time making sure that the owners of IP get what is legally due to them. This might amount to a few thousand pounds or, in many cases, sums in excess of seven figures can be recovered.

Professional licensing and royalty auditing is an essential service for those entitled to receive monies earned through past efforts. Top forensic accountants who specialise in this type of work report that a thorough audit invariably uncovers sums which should have been paid but have been withheld as the result of various tricks of the trade.

These invariably involve abuse of deductions agreed in the original license or royalty agreements. Various deductions and discounts may be allowed when calculating the net amounts payable and this concession provides ample scope for exaggeration or inappropriate interpretation which can involve outright breach of contract.

So, if you are creating or developing something which is capable of being licensed to third parties as opposed to being sold outright, what is the best way to protect yourself against abuses and underpayments in the future? Well, the advice seems to be pretty straightforward.

On the basis that prevention is always better than cure, either get an accountant experienced in royalty auditing to draw up your licensing agreement in the first place or, at the very least, get one to look over it if it has already been drafted by a lawyer. Secondly, insist that anyone taking a license out on your IP must expect a royalty audit on a regular basis. This will get them into good habits right from the outset and ensure that any amounts underpaid for whatever reason do not accumulate into a significant sum.

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