Audit rights are critical for ensuring transparency and accountability in royalty agreements. These rights, often negotiated into contracts, allow rightsholders to examine a counterparty’s records to verify that royalty payments are accurate and aligned with the agreed terms.
This post has two sections:
- Examples of Parties with Audit Rights
- Discussion of How Audit Rights are Gained
Who Has Audit Rights?
Here’s a list of examples various types of royalty audit rights holders across a range of industries:
1. Music and Entertainment Industry
- Songwriters
- Composers
- Music publishers
- Recording artists
- Record labels
- Performing rights organizations (PROs) like ASCAP, BMI, and SESAC
- Film and TV composers
- Film production companies
- Movie studios
- Streaming service content providers
- Background musicians and vocalists
- Collecting societies (e.g., SoundExchange)
- Book authors
- Illustrators
- Literary agents
- Book publishers
- Academic authors
- Journal editors
- Digital textbook publishers
- News syndicates
- Magazine publishers
- Scriptwriters
- Photographers and visual artists in published works
- Software developers
- Application developers
- Software licensing firms
- IT services companies (for SaaS or software-as-a-service products)
- Gaming studios (for video game licensing)
- Patent holders in tech (e.g., for software algorithms or hardware designs)
- Semiconductor companies (licensing chip designs)
- Drug inventors
- Pharmaceutical companies (patent holders for drugs or processes)
- Research institutions (for technology transfer or licensed patents)
- Biotech firms with patented genetic material or methods
- Hospitals and universities (for clinical trial IP)
- Television production companies
- Radio show creators
- Cable network owners
- Satellite radio companies
- Podcast creators
- News syndicates
- Digital news aggregators (for content syndication royalties)
- Online video creators (licensed content on streaming platforms)
- Brand owners (for licensed brand use)
- Trademark holders
- Franchise owners (for brand usage royalties)
- Apparel companies (licensed designs or branding)
- Cosmetic companies (licensed formulas or trademarks)
- Toy companies (for IP associated with licensed characters)
- Machinery patent holders (for specialized equipment)
- Industrial process licensors
- Engineering design firms (licensed designs)
- Industrial design patent holders
- Licensing firms for manufacturing patents
- Seed developers and patent holders (e.g., genetically modified organisms)
- Agricultural equipment designers
- Fertilizer or pesticide formula patent holders
- Agricultural research companies (technology transfer licensing)
- Professional athletes (for licensed name/image/likeness usage)
- Sports leagues (for broadcast and merchandise rights)
- Video game athletes and personalities (for in-game likeness royalties)
- Fantasy sports platforms
- eSports organizations and players (name, brand, or likeness royalties)
- Visual artists (royalties for print sales or digital reproduction)
- Graphic designers (licensed artwork)
- Fashion designers (licensed apparel or accessories)
- Sculptors and painters (for public installations or limited reproductions)
- Art foundations (for posthumous licensing of works)
- Universities and colleges (for licensed research IP)
- Academic journal authors and researchers
- Educational content creators (for textbook or online course royalties)
- Non-profit organizations (for branded materials or research patents)
- Oil and gas patent holders
- Renewable energy patent holders (e.g., solar or wind technology)
- Utility companies (licensed technology for infrastructure)
- Fashion designers
- Textile manufacturers (for licensed patterns or designs)
- Footwear designers (licensed technology in sportswear or casual shoes)
- Automotive companies (for patented engine designs or features)
- Electric vehicle (EV) technology patent holders
- Automotive component suppliers (e.g., patented airbags, sensors)
- Transportation infrastructure licensors (e.g., specialized railway tech)
How are Audit Rights are Gained?
There are five ways to gain audit rights:
- Contractual
- Statutory
- Negotiated
- Unilateral
- Imposed via Litigation
- Contractual and Statutory: When a contract includes audit provisions, these clauses are usually detailed and specifically crafted to outline the extent, frequency, and scope of a royalty compliance examination (also known as a "royalty audit"). However, audit rights are not always contractual; in some cases, they’re statutory, meaning they’re provided for by law.
In the United States music industry, for example, certain statutory audit rights are established to safeguard artists and rights owners. On the federal level, legislation grants rights to audit organizations such as the Mechanical Licensing Collective (MLC), which collects and distributes mechanical royalties. California offers another layer of protection by granting recording artists a statutory audit right, ensuring that they can confirm the accuracy of their royalty payments. These statutory rights provide a layer of protection that exists independently of any contract, giving rightsholders a clear, legally-backed path to seek transparency and accountability. - Negotiated: But what if there’s neither a contractual nor a statutory royalty audit right? For some rightsholders, the absence of explicit audit rights can seem like a significant obstacle to verifying the accuracy of royalty payments. However, the lack of a formal right doesn’t automatically prevent an audit. In my work as a royalty auditor, alongside client legal counsel, I often negotiate terms with counterparties to secure audits for clients, even in the absence of clear contractual or statutory rights. This negotiation process is particularly valuable, as it allows both parties to agree on terms that can ultimately clarify and verify royalty flows while maintaining good business relations.
Additionally, it’s worth noting that a rightsholder can always request a royalty audit, regardless of the contractual provisions - or lack thereof. While the counterparty is under no legal obligation to comply without an audit clause, initiating this conversation can sometimes lead to an agreement on audit terms. The willingness of a counterparty to cooperate can be influenced by various factors, including their desire to maintain a strong working relationship with the rightsholder, avoid future disputes, or set a standard of transparency. In some cases, the audit request itself demonstrates a rightsholder’s commitment to thorough oversight, which can encourage cooperation. - Unilateral: When full cooperation is not possible, a royalty audit can still be pursued to some degree. There is a spectrum in the depth of audit work that can be performed, and some meaningful analysis can be accomplished with limited data. Audits may range from comprehensive, detailed investigations - often requiring full access to the counterparty’s financial records and systems - to more limited, targeted analyses based on available data or public information. For instance, if a counterparty declines to cooperate, a rightsholder may conduct an independent analysis using secondary sources, such as third-party sales data, market reports, or other relevant metrics. Although this approach doesn’t provide the full assurance of a cooperative audit, it can still offer valuable insights.
This spectrum of auditing options highlights the flexibility available to rightsholders in verifying royalties. Even if a counterparty refuses to provide documentation, some audit techniques can be applied unilaterally. For instance, digital tools and analytical software can identify potential discrepancies in reported royalties by analyzing trends in sales, streaming, or usage data available from third parties. While these unilateral audits (sometimes known as "desk audits") may not be as exhaustive, they serve as a viable method for spotting irregularities and potentially initiating further discussions with the counterparty. - Imposed via Litigation: While most royalty audits are completed and settled without litigation, and some enter litigation in order to achieve resolution on royalty audit claims, from time to time as auditors, we conduct audits within the context of ongoing litigation, where we obtain records through subpoenas and document production and serve as expert witnesses at trial or arbitration. Clients do this when the counterparty is uncooperative, but it can be much more expensive than completing and settling an audit pursuant to contractual provisions out-of-court.
Ultimately, the pursuit of a royalty audit - whether it’s contractual, statutory, negotiated, unilateral, or in the context of litigation - plays an essential role in protecting a rightsholder’s interests. Clear, enforceable audit rights offer the strongest security, but even without them, there are practical methods to achieve oversight and transparency.
If you are interested in auditing a counterparty - or find yourself defending an audit from a rightsholder - please start by calling my firm at (424) 248-8866 or messaging us here to run a conflict check, so that we can discuss what approach best empowers you or your client.
