A successful licensing program includes two key factors. The first is the ability to negotiate and enter into license agreements that reflect the value of the intellectual property (IP). The second is the ability to monitor and ensure licensee compliance to the various terms of the agreements post license. The ultimate goal of a post-license monitoring program is to cultivate the relationship with your licensees without leaving money on the table.

What Is a Royalty Audit?

A royalty audit is a key component of a post-license monitoring program, with the objective of helping a licensor ensure what was bargained for is what is received. A royalty audit (sometimes referred to as a contract compliance investigation) is an analysis or investigation of a licensee’s compliance with the various obligations, particularly the financial terms and considerations, laid out in a binding contract, namely the license agreement.

Benefits of a Royalty Audit

A company that proactively performs royalty audits can realize the following benefits:

• Convey a consistent message regarding the licensor’s intent to protect its IP rights
• Deter underpayment of royalties
• Improve bottom-line profitability
• Identify and resolve issues arising from misinterpretations by the licensee and/or licensor
• Provide valuable and timely advice to the licensor prior to renewal of agreements
• Enhance drafting of definitions, compensation, and reporting clauses in future license

Our Services

Our dedicated team of royalty audit experts will help you realize the full value of your IP by ensuring compliance with existing license agreements.

Our team offers comprehensive services that help our clients systematically monitor and enforce license portfolios to maximize revenue. We leverage specialized auditing techniques, as well as very differentiated skill sets, including technological, negotiation, and interpersonal. Our engagements are executed in a professionally disciplined, skeptical, and planned manner.

We offer several services to meet the specific needs of our clients:

Desk Audits

Desk audits include a review of royalty reports and payments, and include a computational and analytical examination. The goal of a desk audit is to identify any red flag(s) for potential royalty underreporting. Our analysis includes:

• Tracking the sales trend of reported royalties
• Comparing the reported sales trend to licensee’s public/audited financial reporting
• Comparing reported sales to industry benchmarks such as competitor products and market share information, if available
• Reviewing for changes in reporting format and content
• Examining for new product launches and new territories or market expansion of existing licensed products

A desk audit typically can be executed in two to three weeks. 

Field Audits

Field audits include a limited or full scope audit of books and records of licensees and a review of controls and procedures within the royalty reporting process. We typically perform field audits at licensee location(s). The goal of a field audit is to identify specifics and the scope of royalty underreporting as well as to facilitate parties to discuss and resolve issues such as differences in interpretation of contract terms. A high-level overview of our approach:

• Review license and analyze royalty reports (similar to a desk audit)
• Initiate communication with licensee to understand licensee’s reporting process and discuss timeline for an on-site visit
• Enter into an appropriate NDA, if one is required
• Request information from licensee to be delivered prior to on-site visit
• Perform initial analysis of produced data, adjust approach based on risks, and establish procedures
• Conduct audit on-site, including interviews, testing, additional information requests and review, and compliance evaluation
• Hold exit meeting and discuss preliminary findings with licensee
• Communicate with client throughout the on-site audit
• Issue draft report for client review
• Issue final report

The duration of a field audit is dependent upon the cooperation and schedule of the licensee. Typically, the timeline ranges from two to four months from notification letter to final report.

Licensors should understand that, under certain conditions, their licensee may be required to pay for the royalty audit. We assist clients with negotiating and ultimately receiving unpaid royalties as well as a recovery of our fees and expenses for the audit.

Royalty Compliance and Monitoring Program

We work with clients to implement systematic programs to actively monitor and enforce license portfolios. The primary goal of such a program is to cultivate the relationship between the licensor and licensee without leaving money on the table.

Evaluation of Licensing Agreements

We provide expert reviews of key clauses of licensing agreements from a risk perspective. The goal of the review is to reduce any likely disputes stemming from poorly drafted agreements. Information provided can also be useful for negotiating and drafting future licensing agreements.

Who We Serve

Our professionals have worked with trademark, copyright, brand, and patent owners and/or licensors across a variety of industries, including consumer electronics, telecommunications, computer technology, life sciences, transportation, and nonprofit organizations. Our clients range from individuals to Fortune 100 organizations, including inventors, corporations, universities, and research institutions.

Why Stout?

• Our team combines a high level of technical forensic accounting experience with a deep and broad understanding of the IP sector that only comes through experience.
• Our forensic auditors are skilled in on-site interviews, forensic accounting analysis, and research to uncover issues and underreporting.
• Our litigation and forensic accounting expertise ensures tight support for our conclusions, which are highly defensible in courts of law, arbitrations, and mediations.
• Our team performs engagements objectively and professionally with a fair approach and in search of facts.
• Our professionals are fluent in many languages other than English including Chinese-Mandarin, Chinese-Yue, French, German, Greek, Hindi, Italian, Korean, Latvian, Polish, Portugeuse, Spanish, among others.
• We deliver value beyond identification of underpayments because our professionals understand that the licensors and licensees have common interests in a collaborative resolution of differences that will keep their business relationships mutually profitable.
• We have deep experience in telecommunications, consumer electronics, computers, biotech, pharmaceuticals, and automotive sectors.
• We have served clients globally in an efficient and cost-effective manner.