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Litigation Services Handbook: The Role of the Financial Expert, 5th Edition by David P. Hoffman, Daniel G. Lentz, Roman L. Weil

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Chapter 20

Royalty Examinations*

J. Shawn McGrath

20.1 Introduction

Intangibles, whether they be formal balance sheet assets or not, have increased as a percentage of the total wealth of many companies over time. Such intangibles include intellectual property (IP) such as patents, trademarks, copyrights, and trade secrets. Companies that effectively leverage intellectual property can increase their revenue through licensing its use to others.

Many companies find, however, that monitoring compliance and collecting the payments associated with license agreements is difficult and expensive. Companies often rely on their licensees' integrity, processes, and reporting to assure the completeness and accuracy of their licensees' royalty reports. Some avoid active monitoring to convey trust and a spirit of partnership and cooperation. Nevertheless, because contract terms are often ambiguous and some licensees have inadequate processes for accurately calculating royalties owed, prudence suggests that owners of licensed intellectual property should trust but verify to prevent losses of rightful collections.

As licensing relations become a preferred vehicle for monetizing intellectual property, licensors need to monitor the risks associated with and the value derived from licensed assets. New media types, global alliances, and the challenge of accurately measuring licensing revenues can reduce the likelihood of companies recovering all the royalties that they are entitled to. As licensing ...

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