Licensing Advice from Chris Muggleton

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Royalty Submissions & Payments(Posted: 02-03-2009)

By Chris Muggleton

Hello!

This month we are going to discuss the topic of “Royalty Submissions & Payments”.  Given that Royalties are the lifeblood of any Licensing business I cannot stress enough how important it is for both Licensees and Licensors to accurately monitor the royalties that are due.

Over the last few months there has been much debate about whether the recent economic conditions will give rise to Licensees, intentionally or not, inaccurately reporting the royalties owed, including delaying the payments due.  This could be due to staff cuts or resource constraints at the Licensee which may lead to incorrect royalty declarations, or the temptation to delay royalty payments in order to manage the Licensee’s cash flow.

As in our previous articles we will limit our discussions to the “mythical” Standard Merchandise License Agreement i.e. for every unit sold of product bearing the intellectual property of the Licensor, a percentage of that sale price must be paid as a royalty. And that for each calendar quarter (sometimes known as the Royalty Reporting Quarter) the Licensee must submit a declaration listing the product sales made and the associated royalties owed.

It is imperative that any Royalty Submission and Payments clause incorporates the following:

·         When the royalty declaration is to be submitted; this is usually between 15 and 30 days after the end of the reporting quarter;

·          The type of information that is to be included in the declaration; for example:  product/stock codes; territory of the sale; customer; quantity sold; gross selling price; discounts; net selling price; currency of the sale; royalty rate and royalties due;

·         That a declaration still needs to be submitted even when there have been zero sales in the reporting quarter;

·         The exchange rates to be used for those sales made not in the contract currency;

·         Sales made to Licensee Affiliated or Licensor entities;

·         When the royalty payment is to be made, i.e. whether payment is due with the declaration or on receipt of an invoice from the Licensor.

·         The rate of interest to be applied to late payment of any royalties due.

Obviously there are a number of steps that Licensors and Licensees can take to ensure that royalties are declared and reported accurately.

For Licensors, we would advise the following:

·         Ensure that you design a good Royalty Declaration Template for your Licensees to report under and insist that this is completed and submitted electronically;

·         Make sure that whoever is monitoring the royalty declarations, has easy access to the original contracts, so they may check royalty rates, Territory, Licensed Articles etc.;

·         Check the maths!. We cannot emphasise this mantra enough. Just because the Licensee has clearly totalled the royalties due, does not mean that the maths is correct or the excel sheet it was prepared on was formatted and cast correctly;

·         Install good systems in place. This does not necessarily mean spending thousands on royalty monitoring software. Take advice from experts like us or our competitors.

For Licensees, we would advise the following:

·         Ensure that the person compiling the royalty declaration understands the mechanics of the License Agreement and is aware that royalties are due on all sales of Licensed Articles;

·         Check that Licensed Articles are correctly identified as such in the sales reports. Each year we perform audits where Licensed Articles have been incorrectly classified. Check that all product codes (or SKUs) have been accounted for;

·         Errors do happen, and to mitigate these, conduct regular internal audits/reviews. Check that everything that should have been declared has been declared. The penalties of not doing this, such as the cost of the Licensor’s recoverable Audit Fees and interest charges should motivate you to do this on an annual basis.

Obviously we have only just scratched the surface in this small space.  However do feel free to get in touch should you require any further explanation. I can be reached at chris@licensingadvice.com

Next month I will discuss the fun world of Audits and Records.

Chris