Who Can Audit? Navigating Contractual, Statutory, and Negotiated Royalty Audit Rights

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:

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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)
  
  

2. Publishing Industry

• 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
  
  

3. Technology and Software

• 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)
  
  

4. Pharmaceuticals and Biotech

• 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)
  
  

5. Media and Broadcasting

• 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)
  
  

6. Consumer Products and Brands

• 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)
  
  

7. Manufacturing and Engineering

• Machinery patent holders (for specialized equipment)

• Industrial process licensors

• Engineering design firms (licensed designs)

• Industrial design patent holders

• Licensing firms for manufacturing patents
  
  

8. Agriculture and Biotechnology

• 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)
  
  

9. Sports and Gaming

• 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)
  
  

10. Fine Art and Design

• 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)
  
  

11. Education and Non-Profit Sector

• 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)
  
  

12. Energy and Utilities

• Oil and gas patent holders

• Renewable energy patent holders (e.g., solar or wind technology)

• Utility companies (licensed technology for infrastructure)
  
  

13. Fashion and Apparel

• Fashion designers

• Textile manufacturers (for licensed patterns or designs)

• Footwear designers (licensed technology in sportswear or casual shoes)
  
  

14. Automotive and Transportation

• 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)

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How are Audit Rights are Gained?

There are five ways to gain audit rights:

1. Contractual
2. Statutory
3. Negotiated
4. Unilateral
5. 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.

Trademarks: Your Introduction to Powerful Protections for Business and Consumers

In the bustling bazaar of modern commerce, trademarks, service marks, and trade secrets are the guardians of brand identity and innovation. Whether your client dreams of launching the next Spotify or safeguarding their boutique's unique logo, understanding these tools is vital for success and security.

From choosing a winning trademark to assessing damages when infringement strikes, here’s a basic overview (thought, not legal advice - contact me if you need a referral to legal counsel) of how to fortify your client’s brand for the long haul.

What's in a Name? Trademarks and More.

At their essence, trademarks (often referred to as "Marks" in legal agreements) identify the source of goods, while service marks signify the origin of services. Similarly, trade dress encompasses the overall visual appearance of a product or its packaging, including elements like shape, color, design, and texture, that signals its source to consumers. While these assets can be extraordinarily valuable to a brand, helping it stand out in a crowded marketplace, their primary purpose is consumer protection. They ensure that consumers can confidently identify and purchase products or services from the source they trust, reducing confusion and enhancing reliability - whether through a clever logo, a distinctive sound, or even a signature shade of color. For example:

• The Target bullseye is an instantly recognizable logo.
  
  
• The Skype ringtone is a registered sound mark.
  
  
• Tiffany & Co.’s "robin egg blue" is a registered color trademark.

Bottom Line: Distinctiveness is key in trademark law. The USPTO places trademarks on a spectrum from fanciful to generic. The more original and creative, the stronger the protection.

Here’s How We Dissect Distinctiveness

• Fanciful: Coined terms like "Kodak" or "Verizon."
  
  
• Arbitrary: Real words with unrelated meanings, such as "Amazon" for e-commerce.
  
  
• Suggestive: Names that hint at features, like "Greyhound" for a bus service.
  
  
• Descriptive: "Best Buy"—requires proof of acquired distinctiveness.
  
  
• Generic: "Smartphone"—cannot be trademarked.

Bottom Line: Encourage clients to aim for fanciful or arbitrary marks whenever possible to avoid the pitfalls of weaker protections.

The Secret Sauce: Trade Secrets

While trademarks make a splash in the spotlight, trade secrets prefer to stay in the shadows. These can include formulas, methods, or insider knowledge that provide a competitive edge - think the recipe for KFC chicken or the Coca-Cola formula.

Ensuring trade secrets remain under lock and key requires vigilance. To protect these assets, businesses should:

1. Limit access to key personnel
   
   
2. Use NDAs and robust confidentiality agreements
   
   
3. Regularly audit to confirm compliance and update their protection policies

A well-guarded trade secret can deliver competitive advantages that are both invaluable and enduring.

Guarding the Crown Jewels: Trademark and Trade Secret Strategies

When helping clients protect their intellectual property, remember: proactive steps save time and money. Here’s how to build a strong defense:

• Trademark Searches: Dig Before You Plant A clearance search is essential before filing a trademark application. Start with a simple Google search and a visit to the USPTO database. If the name passes initial scrutiny, invest in a professional clearance search (services like Corsearch or Markify can help).
  
  
• Smart Filing Strategies Educate clients on the two main trademark application types:
• Intent-to-Use (1B): Reserves rights for future use, giving startups flexibility
• Use-Based (1A): Requires proof of actual use in commerce, such as product photos or transactional evidence

Maintaining Protection Trademarks aren’t “set it and forget it.” They require renewal every 10 years and proof of use within five years of registration. Help your clients stay vigilant to ensure their rights remain active.

Damages Done Right

When a trademark is infringed or a trade secret misappropriated, the financial repercussions can be significant. That’s where damage assessments become critical. From calculating lost profits to determining unjust enrichment, precise analysis is key to a strong case—or defense.

For instance, I help attorneys build a compelling claim for or robust defense against the following:

• Actual Damages/Lost Profits: Quantify how sales were diverted due to confusion or theft.
  
  
• Unjust Enrichment / Disgorgement: Analyze how much the infringer benefited financially.
  
  
• Reasonable Royalties: Determine what a fair licensing agreement might have looked like.

My experience as a forensic accountant ensures your calculations are thorough and persuasive, supporting your clients’ positions with authority.

From Bazaar to Boardroom

Finally, remind clients that a trademark is more than a name; it’s a promise of quality, reputation, and trust. Encourage them to think expansively, not just protecting their current offerings but anticipating future growth. A clothing line today might blossom into a full lifestyle brand tomorrow.

Investing in intellectual property is a strategy for resilience and longevity, not merely a legal checkbox. Don’t just help your clients survive the competitive marketplace - help them thrive. With the right strategy, their brand can become iconic, their trade secrets impenetrable, and their legal defenses unassailable. Or at least the odds can be improved.

And in this realm of rights and registrations, the right expert is your most valuable ally, to help hold licensees and infringers accountable to their respective agreements and the law.  For example, I conduct royalty audits of trademark licensees, such as merchandise companies. I also have formed expert opinions, submitted reports and testified to help the USTPO and Federal Courts reach fair rulings on mark disputes. Call me for for referrals to trademark attorneys or expert consulting services at (424) 248-8866, or visit my firm's website for more details or to clear conflicts.