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Uncovering Necessary Licensee Financial Information

Information requested from a licensee during a royalty inspection (commonly referred to as an “audit”) is sometimes not available or not willingly provided by a licensee. The reason may be an interpretational issue within the license agreement, an unwillingness to disclose unreported licensed sales or other issues. As an alternative to demanding or threatening the licensee with termination, the internet may be a valuable tool in locating corroborating licensee financial information.

General financial information can be obtained from the licensee’s website, which can include operational territories and product lines. Such information assists in determining whether the licensor’s licensed products have been reported. Information from a website can be further used to evaluate the completeness of financial information provided by the licensee. For example, a license agreement may authorize the manufacturing and distribution of licensed products in all territories of the world, but only US sales were reported to the licensor. If the licensee’s website discloses that it has manufacturing and distribution facilities in the US, Asia and Europe, and the licensor’s licensed products are being manufactured in foreign facilities, the auditor can question foreign activity using the licensee’s website as evidence.

Specific information filed with the Securities and Exchange Commission (SEC) can be obtained for U. public companies. SEC information helps to determine a licensee’s corporate structure, foreign subsidiaries and financial information. This can ultimately lead to more focused questions regarding the licensor’s licensed products. If a licensee has not reported licensed product sales to the licensor in foreign territories, then an auditor can estimate licensed product sales by using the SEC financial information. In countries outside of the US, information can also be obtained from organizations similar to the SEC. In some countries, information is available for both public companies and companies that are planning to go public. Financial statement footnotes may also contain information that might not otherwise be disclosed by the licensee.

Caution must be exercised in evaluating internet information. However, when the information comes from reliable sources the possibilities are excellent to help licensors recover unpaid royalties.