Most Favored Nations Damages Claims

During my decades of experience, I have made thousands of audit claims in connection with so-called “MFN” (i.e., Most Favored Nations) clauses.

As examples, many mechanical reproduction licenses for musical works and film profit participation agreements with talent contain MFN clauses, as do many licensing and other agreements.  As part of certain royalty audits, it is my job to quantify damages for non-compliance with this standard agreement provision.

Although counterparties cooperate to various degrees, my approach is generally to request the information – such as agreements with third parties, rate files and accountings - in order to ascertain whether a counterparty has complied with its commitment to pay rates to our firm's client(s) that are equally favorable compared to those agreed or paid to other relevant parties. If my team and I find that a counterparty failed to comply with a most favored nations provision, we utilize actual or estimated rates to quantify reportable royalties from which we deduct royalties reported (or claimed elsewhere in our audit or expert report).

How Long Does a Royalty Audit Take?

Too Long!

Good and true royalty audits take greater than one year to complete and settle. Only once in a great while is an audit opened and closed in less than a year.

Why so long?

• We must wait in the queue at various counterparties - it can take us longer than six months to commence an audit (previously known as "fieldwork")
• It can take us six months to two years to complete an audit because of a multitude of factors beyond our control (warehouse fires, anyone?)
• It can take over six months to receive an initial audit response - again, there is a queue
• Settlement discussions can take another six months or longer - it takes time and money for the parties to reach agreement
• If the parties don't settle, litigation can take years and cost a fortune, so more commonly settlement talks and tolling agreements are extended and the parties take their time to settle

In other words, do not hang your hat on an inflexible timetable for your audit and do hire an attorney who is an expert in tolling agreements to preserve your rights. Please ask if you need a referral to such legal counsel.

In summary, there are tactics to expedite audits, but in general, audits take too long.

Why Your Forensic Accountant May Not Provide Services on a Contingency Basis (i.e., Compensated on a Percentage or Commission of Client Recoveries)

As a forensic accountant, I almost never perform work on a contingency or deferred fee basis for several reasons, including:

1. It introduces some apparent conflicts (e.g., whether we take an aggressive approach for short term gains at the expense of a profitable counterparty-client relationship)... not to mention, who is our client anyway? It is often not one of the parties to a case.
2. It often compromises our ability to provide timely service since we have to prioritize other work to ensure we have the cash to pay our employees for their work
3. Our work will likely be inadmissible in court since contingency accountants or auditors have a financial stake in the outcome of the case 
4. For most of our clients, because they have a great deal of assets at stake, usually it is most cost-effective to engage us on our standard hourly basis
5. On the other hand, it is not profitable for us to accept very small contingency matters
6. There are lenders to clients who need to borrow money to afford legal costs - search "litigation financing" to learn more about this. 

If this fee structure doesn’t work for you, I completely understand. It does not work for everyone.