Forensic royalty audits are conducted to uncover the reasons for underreporting or undervaluation of license agreements. IP license agreements sometimes contain a clause that gives the licensor the right to determine whether royalties are being paid correctly. If a discrepancy is found after a royalty audit, the licensee pays the audit fee.
While audits may uncover gaps and increase revenue, it is important to consider the internal indirect costs, external costs, as well as the opportunity cost of implementing them. Internal costs include the external costs of hiring forensic scientists, consultants, legal teams, etc. These may be recovered from the licensee if the underreporting exceeds a 5% threshold.
This brings us to the opportunity cost i.e. what the licensee has to say if the audit is not carried out. In most cases, this is the difference between the expected royalties v/s those currently being received. Therefore, the time-consuming exercise of carrying out an audit should only be undertaken if that difference is considered significant.
Identify and correct current issues. IP licensing agreements serv Costa Rica Phone Number Library e as a roadmap for drawing future contracts.
It encourages other licensees to adhere to the license agreements and adds to the value of the company.
Increase in income from retroactive royalty payments as well as correct calculation of future payments.
Periodic audits help build a trusting relationship and keep the lines of communication open between the licensor and the licensee.
Preventing unauthorized use of Intellectual Property.
Conclusion
It is essential to have a well-structured management model in place to govern licensing. A set of clearly defined policies and meticulous record keeping for both parties is productive and avoids future conflicts. Larger companies with several licensing agreements perform better with regular royalty audits that help with compliance. However, smaller businesses with one or two licensees need to implement a system that manages and monitors the licensing relationships. The key to successful licensing is to build a solid structure with clear expectations that reduce ambiguity and foster understanding.
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