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The Value of Royalty Audits

Lewis Stark of the firm EisnerAmper discusses the import of royalty auditing and contract compliance to the licensing industry, in particular how to protect intellectual property.

April 6, 2018

3 Min Read

Brand licensing is now a global business What is the impact on IP protection and royalty compliance?

It has made it harder, more complex, more time consuming and costly. IP owners can mitigate the risks associated with global licensing, including problematic manufacturing facilities, agent self-dealings, distribution of unapproved, inferior products and gray market goods, down-market distribution, under-reported royalties and more by actively monitoring the international marketplace and proactively auditing factories, foreign agents and foreign licensees.


Lewis Stark, partner, EisnerAmper

What is the best royalty strategy?

By undertaking some reasonable due diligence, licensors can learn how the licensee operates. Licensors should pay particular attention to how product is sourced, packaged and sold, as well as to the limitations of the licensee's accounting and royalty systems, including the common terms their customers require to sell licensed products. On the flip side, licensees should make sure the financial provisions in all agreements make sense and allow for a profitable business without circumventing any provision. Simply put, the best licensor/licensee strategies are based on common goals with clear and consistent two-way communications.

Are the days of a verbal agreement gone forever?

I believe they are gone and for good reason. IP owners understand the value of their trademarks and brands, and licensees have to make substantial commitments. With so much at stake, both parties should understand how important it is to document their agreement. In today's world of e-communication, we advise all parties to follow up by email confirming all verbal accommodations.

What should a licensor expect from a typical royalty arrangement or engagement letter?

Several expectations should be met in the agreement or engagement letter, with clarity of scope (periods and agreements to be covered) and intent being paramount. The underlying agreement should also address under which professional standard the audit is being conducted, the form of the deliverable, the fee and expense arrangement and how the auditor will assist with the settlement of the findings. Licensors should expect their concerns to be addressed by the auditor and that the auditor focuses on the licensor's goals for the audit, with the aim that their relationship with the licensee be maintained, if not enhanced.

How would you describe today's IP and royalty protections services compared to a decade ago?

There is a greater emphasis on brand protection and mitigating risks. Substantially more resources and data are available to licensors today enabling them to self-police IP. Licensing and royalty systems can automatically identify issues with unpaid or underpaid minimum guarantees, sales of unapproved product, excessive deductions and more. The Internet provides a view into the marketplace, as well. There are a variety of networking groups for licensors where IP protection best practices and information on licensees is shared.

How would you describe today's IP and royalty protections services compared to a decade ago, and what do you predict for the future?

I believe license agreements will expand to include more language that focuses on brand protection, audit rights and reporting transparency, and monetary penalties for non-compliance will be added to agreements. Licensors will require more self-monitoring and self-reporting by licensees, and licensors will also require the use of licensing software and product approval solutions that are compatible with their systems. More data about products, budgets, manufacturers, markets and royalties will be transmitted electronically providing added intelligence. As e-commerce expands, the need for forensic IT auditors will increase.

Lewis Stark, partner, EisnerAmper

Stark specializes in conducting royalty, distribution and profit participation examinations, contract compliance investigations, vendor examinations, financial due diligence and litigation support. His practice encompasses trademark, brand, character and patent licensing as well as vendor, landlord and tenant compliance examinations.

Lewis leads a team of compliance professionals who represent a variety of licensors of intellectual properties such as movie studios, fashion designers, research organizations, technology and pharmaceutical companies, universities, inventors and software developers. His clients also include licensing and talent agencies, video game developers, franchisors, producers, directors, entertainers, athletes, landlords and tenants.

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