Intellectual property license agreements often include a provision by which the licensor is paid a royalty that is calculated as a percentage of the revenue received by the licensee from licensed products. Given that licensees have a financial incentive to reduce the amount of revenue that is reported*, the prudent licensor includes an audit provision in the license agreement.
The audit provision typically:
- Specifies the frequency and nature of audits that may be conducted;
- Provides that the licensee will pay any underpayment amount that is discovered plus interest; and
- Obligates the licensor to pay for the audit unless the underpayment exceeds X% of the royalty that was due, in which case the licensee must reimburse the licensor for the cost of the audit.
Here is a sample audit provision:
During the term of this Agreement and for two years thereafter, Licensee will keep full, true and accurate records containing information required to confirm all amounts payable to Licensor hereunder. Upon reasonable notice, Licensor or its accountant may inspect and audit said records on an annual basis during normal business hours to verify Licensee?s payments hereunder and compliance with this Agreement. Licensor will bear the fees and expenses of such inspection and audit unless same reveals that Licensee has underpaid Licensor by at least 10% during any calendar year, in which case Licensee will promptly reimburse Licensor for such fees and expenses
* The cynic’s view of licensing: Licensors lie and licensees cheat.
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Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
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