The Who, When, Why and How
of Royalty Auditing
Live Webinar
Presented by
Technology Transfer Tactics
www.technologytransfertactics.com
239-263-0605
The Pervasive Underpayments of Royalties
“Studies have repeatedly shown that more than 3/4 of royalty
payments made by licensees are based on reports that contain errors,
misinterpretations, or omissions.”
-Invotex presents updated aggregated results of nearly 15 years of royalty audit data in their latest paper:
Underpaid Royalties Are Pervasive, yet Proper License Management Maximizes Profits.
Visit www.invotex.com for details
Panelists
Glenn Tautrims, CA, CFE is a Director with Global Royalty Audits Inc.
Prior to co-founding GRA in 2005, Glenn was a Vice President in a large
international accounting firm, where he was responsible for implementing and
overseeing its Canadian Revenue Recovery and Licensing Management practice.
Glenn was also one of the original members of the team that created the Royalty
Audit practice for the accounting firm in 1996. In addition to his experience in a
range of industries, Glenn has presented papers and conducted seminars on
various intellectual property issues including Conducting Royalty Audits and
Licensing Management Best Practices. Some of the groups Glenn has addressed
include the Association of University Technology Managers and the Licensing
Executive Society.
www.graudits.com
Panelists
Matthew A. Hurewitz, CPA, is Managing Partner at Hurewitz,
Boschan & Co. LLP. The firm’s auditors have helped clients
recover in excess of $50 million from royalty and participation
compliance audits. Its principals’ 25 years of professional
experience, an international network of experts, and sophisticated
computer analytics yield reliable, timely and cost-effective audit
results. Auditors analyze voluminous data, often excavating
through layers of records to expose buried but critical information.
In most audits they find calculation errors, errors in contract
interpretation, and a variety of other mistakes that may otherwise
remain undiscovered.
www.royaltyaudits.com
Panelists
Robert Baron is a partner at the law firm Ballard Spahr LLC, where he is
Vice Chair of the Intellectual Property Department, a partner in the
Litigation Department, and a member of the Intellectual Property
Litigation, Complex Commercial Litigation, Higher Education, and Life
Sciences/Technology Groups. He regularly prosecutes and defends cases
at the trial and appellate levels involving patent, copyright, trademark,
and trade dress infringement; theft of trade secrets; licensing disputes;
unfair competition; and business terminations. He has litigated royalty
disputes, and advised clients on the use of audit provisions in royalty
disputes.
www.ballardspahr.com
Program Agenda
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Identifying major players
Desk audit versus a full royalty audit
License compliance program
Establish optimum audit schedules
License drafting tips
Identify all major players that should be on
your audit team
Remember: Audits are one part of managing royalty compliance.
• Have a “royalty” team:
(i) relationship person who knows the provision and the licensee, and who
is the main contact;
(ii) accountant who reviews royalty statement with relationship person
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External auditor
External/internal legal counsel
Director of Licensing / management
Principal inventor – for technical assistance if applicable
When you engage a formal audit, consult counsel and a good auditor.
Know when a desk audit is appropriate
versus a full royalty audit
• A desk audit can be a good “first check” of the
royalty statements, and appropriate when you
want an initial assessment before committing to
the costs of a full royalty audit.
• A desk audit is appropriate when the goal is to
determine if basic provisions of the agreement
are being adhered to, such as proper royalty
rates or correct advance recoupment.
Know when a desk audit is appropriate
versus a full royalty audit
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Relationship with licensee
Size
Volume
Depth of reporting and external info
Errors and omissions noted
Complexity of agreement
Audit clause threshold
What should be included in your license
compliance program
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Assign license to one person
Standardize procedures and royalty reports
Summarize license terms
Physically recalculate royalty report
Confirm payment
Identify due dates
Consistent analysis of risk
What should be included in your license
compliance program
• Develop a good relationship with the licensee.
• Require detailed royalty statements.
▫ Units sold, regions where licensed product is made or sold, gross
and net sales, currencies sold and exchange rate used.
• Be proactive when you think there may be a
problem.
License drafting tips
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Penalties (e.g. late payments)
Objection period
Audit rights
Reimbursement of audit costs
Document retention period
Examples of underreporting and other
non-compliance issues
• Unreported / underreported:
▫ Revenue
▫ Products
▫ Sales in specific territories
• Incorrect:
▫ Royalty rates
▫ Incorrect deductions/deductions
• Failure to obtain required licensor approval
• Sales of unlicensed product categories
• Late reporting
Reasons for underreporting and other
non-compliance issues
▫ People make mistakes
 Internal controls
▫ People think differently/contract interpretation
 Deductions
 Communication
▫ People even cheat
“Red flags” for targeting audit
candidates and activity
• Internal red flags
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Warnings from inventor
Known disputes on contract interpretation
History of errors
End of license term
“Red flags” for targeting audit
candidates and activity
• Licensee red flags
▫ Changes in communication
▫ Unexpected swings in amounts reported
▫ Submission of manual royalty statements instead of system
generated royalty statements
▫ “Net Negative” sales reportings for a product
▫ Licensee is experiencing financial hardship
▫ Licensee operation-specific
▫ Licensee claims in litigation (i.e., licensee states new product does
not infringe patent for similar technology)
“Red flags” for targeting audit
candidates and activity
• External red flags
▫ Public reports of product sales do not jibe with
royalty statements
▫ Foreign subsidiaries
Keeping the peace while maintaining
your audit rights
• Understand that audits are an anticipated and common
business practice and don’t have to rock the boat.
• Hire a professional and experienced auditing firm that
understands the importance of maintaining a your
business relationships.
• What is goal?
▫ Keep peace with important relationship, or
▫ Obtain information in a broken relationship, as
potential pre-cursor to litigation
Common mistakes to avoid
• Don’t assume communications with
“independent auditor” are privileged.
Common mistakes to avoid
• When drafting the license agreement:
 Don’t leave room for ambiguity and misinterpretation in key
provisions of the agreement such as: royalty rates and
escalations, applicable and excludable sales, allowable
deductions from sales, the books and records that are to be
provided to the auditors, expiration of audit rights and right to
contest royalty statements.
 Lack of specificity in royalty and audit provisions.
 Make sure licensee cannot depress royalties via lower-thanmarket sales to affiliates.
Common mistakes to avoid
▫ Failure to monitor licensees
 Comparison to license terms
 Make it constant, proactive
 Biggest mistake – Not auditing , because some licensors don’t
realize how fruitful audits can be.
 2nd biggest mistake - Waiting too long to audit, such that the
audit window has closed for periods with significant activity.
Common mistakes to avoid
▫ Failure to perform desk audits
 Search public information.
 Materiality issues
 Don’t confuse a desk audit with a full audit. There is much that
cannot be detected by a desk audit and unless an auditor
performs fieldwork and analyzes the books and records of the
licensee.
Establishing optimum audit schedules
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Product number
Units sold, price and extended sales amount
Details of discounts allowed
Royalty rate and royalty due
Details of sales by country with foreign
exchange rate used
▫ Withholding taxes taken and prior period
adjustments
Questions?
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