Red flags that your licensee may be underreporting royalties
Protecting your intellectual property and royalty revenue stream
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Many companies license their intellectual property, such as patents or trademarks, for third-party use, and must ensure they are fairly compensated based on contract terms. However, as business structures and agreements become more complex, underreported royalty disputes are increasing in frequency. Companies cannot assume royalties will be accurately paid; instead, organizations must understand red flags that could result in inconsistencies and lost revenue.
Licensors must understand why royalty underreporting can occur to efficiently identify and remediate issues, encouraging compliance moving forward and maximizing royalty revenue streams. In most cases, underreported royalties is an oversight by the licensee. Key reporting processes can be overlooked or inconsistent, and problems can be traced to issues as simple as insufficient record keeping.
Several licensee issues can lead to underreported royalties, including:
- Involving multiple countries or entities
- Changes in a licensee's accounting system or royalty accounting personnel
- New products or an expanded product line
- The licensee being acquired or acquiring another company
Many of these issues can arise without a licensor's knowledge, emphasizing the importance of a proactive framework to identify issues before they become significant. If companies suspect any inconsistencies within licensee's reporting processes, or if royalty revenue is not meeting expectations, a royalty audit is often beneficial to identify and recover underpayments.