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International Conference – ParisLicensing in a Controversial Environment
1. Post licence Management – overview, problems and benefits– practical tips to good licence management– audits as a part of licence management
2. Audits– What is the perspective to audits for European entities?;- What are the risks of implementing an audit strategy?;- How do they work, and what are the costs?
3. Managing the licensing Portfolio – the Licensor’s approach
4. Summary
International Conference – ParisLicensing in a Controversial Environment
Licensing contracts• Licensor is passive only granting permission• Licensee is active accepting all commercialisation responsibilities
Licensor expectations• It’s taken a lot of hard work to get here little extra effort needed• This is when the money comes in with little extra effort• I can depend on the licensee to report and pay the correct amounts
Reality• Audits report that 90% of royalty licences underpay• This is a global problem and crosses all technologies• Over four years one organisation recovered- $19M.
International Conference – ParisLicensing in a Controversial Environment
External Licensee Issues• Big organisations more likely to underpay than small ones• Changes in people• Restructurings, acquisitions and mergers• Relocations• Systems “upgrades”
International Conference – ParisLicensing in a Controversial Environment
An audit• Process to achieve a given aim – ensure licence is complied with• Audit Guidelines – allow broad lines of enquiry• An element of contract law• Varies in effort and cost depending on licence
Outcomes• Money – audit yields 10-45% sometimes higher (16,000%)• One licence over 95% of royalties came from audit• Equalise the relationship between licensor and licensee• Enable the licensor to maximise the value of the licence• Provide comfort and protection internally that the assets of the entity are being
protected; • Send a message to other licensees – we take income protection seriously.
International Conference – ParisLicensing in a Controversial Environment
Reacting to Issues• Make sure you have a system in place to react to information.• Experience of a couple of nightmare scenarios where the licensor failed to
react and lost €ms
Early Stage Audits• You don’t come back with much money but you save a fortune later on.• You develop a relationship with the relevant people• You prevent disputes/litigation later on• Early stage audits are probably cheaper• You get your money when you should
ITS ALL EASY COMPARED TO EVERYTHING ELSE• Royalty audit is best business model in IP
International Conference – ParisLicensing in a Controversial Environment
• Commercial– Relationship issues – positive and negative- What are they?– Professionalism & business ethics, familiarity – audit is normal, if you don’t what’s the
message?– Trust :(do you check your cash at the cash point or bank statement for interest charges –
people and systems change)– If a non-exclusive arrangement, consider auditing a number of licensees – they do not feel
specifically targeted.– Select your auditors that share your approach- a long term proactive relationship-
knowledge based– Issues of negligence – internal, 3rd party
• Internal budgets• Every year there seems to be an incremental budget for revenues – how do you achieve this?• Be seen to be protecting all aspects of IP portfolio.• Time and resource
– An effective audit will need dedicated internal time and a budget – bye in from the top.• External and other costs
– External auditors costs– Independent legal or technology opinions, travel costs to negotiate settlements.
International Conference – ParisLicensing in a Controversial Environment
Audit clause- start on the right footing• The word audit• Access to
– Relevant records, locations, subsidiaries, sub-contractors & relevant parties Relevant employees • To review all Licence grant activities:
– All disposals- (use, or otherwise disposed off, manufacture, lease)– All manufacturing sites & all sub licensees (or sites where they have the rights to “have made”)– All information relating to the use of the licensed products
• To gather information by– The right to take copies of documents– The right to question people
• Things to water down
− The period under review should ideally have no limitation
− Remember companies normally required to keep records for six years
− Limited period of review does not limit liability for debts
− Choice of auditor
– Ideally no choice
– Conflicts of interest governed by audit firms’ ethical standards
• Other clauses to think about
– Costs of the audit recovered – only if findings > 5 %
– Interest on all underpayments – COMPOUND, monthly
– Penalties - the Inland Revenue charges them
International Conference – ParisLicensing in a Controversial Environment
• Legal , Technical and business review– License grant - what are the rights licensed– Interpretation issues ( precedence and legal)– The IPR covering the licensed product (What constitutes an infringing
activity?)
• Internal review– Sensitivities on the assignment– Review and document - internal file - any impact on the audit ?– Market and competitor data – Copies of returns.
International Conference – ParisLicensing in a Controversial Environment
Costs will vary and depend on the following:• The choice of auditor – consider very carefully (significant IP specific issues)• The remuneration method• The complexity of the agreement and sites to visit
Organizational preferences:
1. Large Corporates - Usually on hourly charge basis;2. SME and “Governmental” organisations - Hybrid basis – mixture of lower hourly
rates and contingent fees3. Individuals (and sometimes multi- nationals) - Full contingent fees (issues of
conflicts)
Types of costs:
a) Contingent feesb) Hourly rate charges (there will be variances on these rates)• In Europe €25K to € 50K• In the US € 30K to € 60K• In the Far East € 50K to € 75K
Slide No. 21
The costs of an audit
International Conference – ParisLicensing in a Controversial Environment