The execution of a license agreement is not the conclusion of the licensing strategy. The “Royalty Payment Audit Process” figure shows the activities that should follow.
After lengthy and difficult commercial negotiation many licensors and licensees don’t pay enough attention to the royalty clauses. The following 30 business terms that, when inappropriately converted in a contractual language, may give rise to creation of a fundamental gap between business expectations and business realities. It’s most important to pay attention to them. Which wording is used, and the implications of the wording, are critical.
The 30 words and clauses to watch out for are: gross revenue or net revenue, price invoiced or price received, direct and indirect income, cash and non-cash or diluted income, currency royalty payments, late payment, sliced royalties, stacked royalty, royalty basis, multiple royalties, progressive royalties, taxation, audit, duration of agreement, duration of royalty payments, territorial scope, hybrid technology royalties, total sales royalty, alternative technology royalties, minimum periodical royalties, minimum product royalties, royalty revision, patent and moment, transfer business, royalties for negative know-how, royalty consideration, royalties received an royalties earned, discriminatory royalties, excessive royalties, and lump sum payments.
Some of the typical problems licensors have regarding licensees’ adherence to the executed license agreements include: licensees failed to include revenue from all relevant products and royalty calculation; licensees misinterpret royalty payment provision; licensee sell products to subsidiaries of below-market prices; licensees misclassified sales; licensees make royalty calculation errors. Studies have shown that up to 88% of licenses have under-reported royalties and of those nearly 50% of licenses have under-reported royalties in excess of 25%. Because of these financial problems, licensors need to consider implementing going a royalty payment review process. The “Royalty Payment Process” figure illustrates the typical steps in a royalty payment review process. Utilizing experts in this field of royalty auditing is worth their contingency fee.
There are number of other benefits companies have realized through effective licensing programs in addition to the royalties they collect. These benefits include: the establishment of industry standards; the creation of strategic alliances; the obtaining of needed technology from other companies. Finally, some companies are able to utilize a licensing strategy in such a way to undermine R&D investment by a competitor and thus dictate technological developments of other companies.