Patent, trademark, and copyright license agreements typically give the licensor a right to audit the licensee’s records to ensure that the licensee is accurately reporting sales and calculating royalties that are due. However, licensors often forego this right and merely trust that the licensee will provide accurate reports of royalties due.
Licensors who fail to audit may be losing significant revenues. According to a new report from Invotex Group titled It’s Just Not Fair: Unintended and Unforeseen Intepretations of License Agreement Language, their audit practice has found that a whopping 86% of licensees underreport — and thus underpay — royalties due under intellectual property license agreements. These are no small errors: according to the study, over 40% underreport royalties by 25% or more.
The reasons for underreporting vary, with the most common reasons being (1) simply underreporting sales, and (2) questionable interpretation of the underlying contract. These finding emphasize the importance of carefully drafting license agreements to avoid ambiguity — especially when it comes to payment obligations.