Founded by a former IRS Agent

Founded by a former IRS Agent

Licensing—Clarity is Key

November 4, 2014

Licensing—Clarity is Key

Getting the maximum financial benefits of your intellectual property depends on clearly defined contract terms.

New licensing partnerships are exciting, and represent the starting point of receiving the monetary value for your ideas that you always knew was possible. Oddly enough, it is the lack of specificity of financial language in many license agreements we have seen over the years that end up costing licensors a lot of money in terms of licensing or royalty fee income.

In calculating royalties due to the licensor, legitimate disputes can occur over what is “reasonable” and “customary”, and what represents an industry “standard.” For example, your agreement may state that a reasonable amount of returns is allowable to the licensee as a deduction, but what might be reasonable to one party, may not be to another – or to you.

Establishing a percentage or monetary cap on deductions alleviates this concern.

Another consideration is specifically defining the kinds of deductions that can be taken. If a marketing expense is deductible, what represents a qualifying “marketing” expenditure? Terms that clearly indicate the activities allowed, and that are specific to your royalty bearing products are desirable, if not imperative.

The absence of an interest provision is another area where licensors leave money on the table. Errors in royalty payment calculations can and do happen, and once they are discovered – often through royalty compliance audits– then what? The licensee may fully cooperate in paying their past due amounts, but without an interest provision in your agreement, a benefit goes to the licensee in the form of an interest free loan – with your money.

The objective of a license agreement is to monetize your intellectual property. The clearer the contract language over financial terms, the better.

It’s time to schedule an appointment with Pogosian Nazaryan & Company.