University Royalty Audits

University Royalty Audits

“‘Doug is thorough; listens to the client but gives wise advice; responsive, and reasonably priced.”
- University Technology Transfer Client

One of the biggest financial risks a licensing organization has is the risk of underpayment by licensees for licensed goods and services. Whether on a proactive or reactive basis, technology transfer offices receiving royalties under intellectual property license agreements need to know if they are being paid correctly.

In business, the seller (licensor) usually calculates and tells the buyer (licensee) how much to pay. In the unique licensor/licensee relationship, the licensee calculates and tells the licensor how much it should pay based on information not seen by the licensor. This makes it very difficult for licensors to know if they are being paid what they are owed.

In this context, faith in the licensee’s ability to accurately calculate payment amounts is insufficient. Monitoring and verification are required. A well-organized financial compliance program, including executing royalty audits, demonstrates to your stakeholders that you value and protect the organization’s intellectual property assets and maximize the financial benefits of license agreements.

Royalty audits provide the opportunity to learn more about licensees’ interpretations of license agreement clauses and their use of the licensed technology, increase the likelihood of a higher dollar return, provide the organization with opportunities to strengthen its processes and encourage more communication and compliance by licensees.

Royalty audits are simple; however, the execution of royalty audits is complex and can be disruptive to the relationships between business partners and should be handled with care by a seasoned and experienced royalty auditor. Aguilera & Associates is recognized in this area and has distinguished itself by:

●      Providing testimony on the normal scope of a royalty audit before an international arbitration panel in Geneva, Switzerland.

●      Providing testimony on the results of a multi-country royalty audit before an international arbitration panel in London.

●      Helping clients recover millions of dollars of underpaid royalties.

Proactive Royalty Audits

Good licensing practices dictate that licensors routinely and proactively perform royalty audits.  These proactive royalty audits provide information that can be used in future negotiations and license agreements.  More importantly, it establishes a channel of communication that will enhance your relationship and give you the best chance of receiving all your earned royalties.

Reactive Royalty Audits

Reactive royalty audits can start as the result of a hunch or an obvious error in the amount of royalties received.  In either case, a natural first step is to call for a royalty audit.  This allows you to gather information and determine if the royalty amounts are wrong and, more importantly, why.  If the relationship is heading toward a dispute, the royalty audit can provide valuable information that can be used to make decisions about the best way forward.

Litigation Support

The successful navigation of disputes relies heavily on facts. There is usually an urgent need to determine all of the positive and negative facts. DA Forensic Accounting can be trusted and depended upon to gather and provide as much information as quickly and efficiently as possible to you (or your client).

In disputes, attorneys and executives can rely on DA Forensic Accounting to communicate the facts in deposition and before the trier of fact while standing up under scrutiny through written rebuttal and cross-examination. Additionally, having someone experienced at sifting through a large quantity of accounting information from many sources and distilling the facts into a set of clear and easy-to-understand conclusions helps you focus on the legal aspects of your case.

When Should You Audit?

Some of the top reasons to call for a royalty audit include the following:

  • The Licensee is paying a large amount of royalties

  • The Licensee has stopped reporting or paying royalties

  • Complex or ambiguous license agreement terms

  • A new licensed product has come on the market

  • A merger or bankruptcy is anticipated or has occurred

  • The license agreement has a complex calculation methodology for determining the royalty base or application of the royalty rate.

  • Incomplete, untimely, inaccurate, or frequently revised royalty reports

  • In the first few or last few years of a license agreement

  • Before or right after a merger or acquisition

Common Findings

We frequently find that the licensee has accurately calculated the amount due and paid correctly. We see this as beneficial and evidence of active management of the risk of underpayments.

A few of the more common underpayment findings include the following:

  • Errors due to high turnover in royalty calculation role

  • The employee calculating the royalty amount does not have or has not read the license agreement

  • Underreported licensed products because products were missed (new product lines or sales territories were not included, new internal reporting systems, etc.)

  • Deductions from gross sales go beyond the agreement

  • Subcontractor sales are wrong

  • Math or royalty rate errors