Implementing a Royalty Compliance Program Presentation to the Federal Laboratory Consortium...
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Transcript of Implementing a Royalty Compliance Program Presentation to the Federal Laboratory Consortium...
Implementing a Royalty
Compliance Program
Presentation to the
Federal Laboratory ConsortiumMid-Atlantic Regional Meeting
September 15, 2005
3
Post-license considerations
How to… Maximize revenue from negotiated financial
terms
Maintain a good licensee relationship
Protect your IP rights
4
License process
Identify IP (patent) Get approval to out-license Research possible licensees Contact and sell idea to target Negotiate terms
Monitor / collect royalty
R&DR&D Prosecute Patent Application
Prosecute Patent Application
Pay Maintenance Fees
Pay Maintenance Fees
5
Post-license considerations
How to maximize revenue from negotiated financial terms? Avoid misinterpretation Avoid unintentional human errors
How to maintain a good licensee relationship? Minimize misunderstanding and improve trust
How to protect your IP rights? Licensor continues to assert IP rights even
after the license
7
Royalty compliance program systems / procedures
Flexibility Clear language Specific reporting requirements Agreed upon reporting policy Continued communication Desk audits On-site compliance audits
8
Flexibility
Include internal accounting representatives
Update the agreement as accounting systems change
9
Clear language in agreementDefinitions
BE SPECIFIC!Sales Amount billed or invoiced on sales of licensed products, technology,
process, etc. Where applicable, sales need to include lease or rental payments
Credits / Charges – Flat % rate vs. actual Customary quantity, trade or cash discounts actually taken if stated
separately on the bill or invoice. Beware of total corporate discount experience vs. actual product line discount
Amounts repaid or credited by reason of return Freight expense between the Licensee and its customers, to the
extent it is not charged to or reimbursed by the customer. Beware of total corporate freight deduction vs. actual freight incurred
10
Clear language in agreement Grants
Licensor hereby grants to Licensee, subject to the terms and conditions herein, an exclusive/non-exclusive license, under the Licensed Patents to make, have made…
Disclose the name and location of the sub-contractor Bind the sub-contractor to all of the terms and
conditions Ensure all audit rights extend
11
Clear language in agreementAudit paragraph
Specify rights:
To audit, at least annually To audit for “completeness” of royalty
report To receive electronic files To inspect books and records
12
Clear language in agreementAudit paragraph
Right to inspect books and records should include but not be limited to:
Invoice registers and original invoices Sales analysis reports Accounting general ledgers Sub-license and distributor agreements Price lists, catalogs and marketing materials Audited financial statements and or income tax
returns Sales tax returns Inventory records Shipping documents Commission reports Purchasing documents
13
Clear language in agreementLate or underpaid royalties
Should bear interest Simple vs. compound Rate and source
Threshold for Licensee to bear audit fees and expenses:
>5% -- entire cost >2%-5% -- 50% cost
14
Specific reporting requirementsRoyalty reports
Attach royalty report template to the license agreement. Royalty report should include: Product identification Units sold Unit price Extended sales dollars Royalty rate Extended royalty dollars due Foreign currency conversion rate, if applicable Information detailed by country of sales origin /
manufacturing location
15
Specific reporting requirementsForeign currency translation
Multi-nationals generally convert local currencies to home country of Licensee before converting to US dollars even if agreement calls for conversion to US dollars based on the country in which the sale occurred
Specify: How calculation should be made or as
customary in licensee business Source of rates
16
Agreed upon reporting policy for the Licensee
Specify period covered by royalty report and when each is due
Detailed procedures
17
Continued communication with a Licensee
Consider yourself their bank; they owe you money Need open lines of communication at various
levels Decision maker Person preparing royalty report
Annually, distribute a Licensee questionnaire Who calculates royalties due? Do they have the agreement? What procedures are performed in calculating royalties? Is a second review performed? Etc.
18
Desk audits
With each payment: Historical payment trend analysis Overall company health analysis Industry trend analysis Math check Follow up on all questions Communicate, communicate, communicate
19
Royalty compliance audit for all Licensees
The confirmation that a license/contract is being complied with, including: Payments Research milestones Advertising, or Any other clause that allows itself to be tested by an
independent party
What is a royalty compliance audit?
20
Identify Licensee for
royalty review
Prepare Licensee for
review – work plan,
documents, timing
Field WorkReview Licensee product listings, books and
records, royalty calculations, interviews, process review, etc.
Report findings to Licensor and communicate to Licensee –
exceptions and improvements
Collect background data
(external/internal) to understand
license agreement and relationship
Royalty audit process
22
Red flags: there may be errors in the royalty report if…
Change in the person preparing royalty report New products launched Selling product in new territories New manufacturing facility Licensee has been acquired or has merged Licensee is having financial difficulty
23
More red flags: there may be errors in the royalty report if…
Accounting systems change Royalty reports are progressively late Licensee’s sales of the covered product are not in
line with the industry Humans are involved in report preparation
25
Common findingsErrors discovered
Clerical math Conversion rates Omission of new products
developed Transfer pricing to affiliates Controls not in place to ensure data
accuracy Misinterpretation Arbitrary interpretations
Unintentional
Intentional
26
The cost of royalty reporting errors
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
Prior Period 2001 2002 2003 2004
Audit Fees & Expenses
Interest
Unreported Product Line(and license misinterpretation)
Unreported Geographic Region(and license misinterpretation)
Reported
Royalties
27
Why have a royalty compliance program?
To maximize revenue negotiated To maintain a good licensee relationship To ensure compliance To demonstrate intent to protect rights
28
Speakers
Karen H. Wang, CPA, CVASenior Vice President
(410) [email protected]
Judy Ann Byrd, CPA, CIRAVice President(410) [email protected]
Intellectual Property Management & Finance1637 Thames Street
Baltimore, MD 21231www.ipmf.com