We invited royalty auditor, Cedar Boschan, to talk a little bit about something we all care about — getting more money for our clients:
Ramping up your entertainment or IP practice? Looking for a way to differentiate yourself in the job market? Do you want to transform the trajectory of your career and become a power player? Take a page from the rulebook of entertainment attorneys: Secure a bigger share for clients and build an elite reputation and a loyal clientele. No matter what your area of practice, getting more money for your clients will always be appreciated. Although I’m a royalty auditor, and therefore, I work with entertainment attorneys in particular, the rules are the same for all types of practices. Negotiating better contingent compensation provisions is the first key to helping you recover more money for your clients.
When it comes to negotiating accounting provisions, consult with a trusted royalty auditor as you red-line definitions and provisions related to royalty calculations, accounting due dates, objections and audit clauses. Such a consultant can offer insights regarding royalty and profit participation calculation and accounting provisions. Here are some additional points that she can help you navigate:
1. Clear and Simple Definitions of Contractual Terms
A licensee will not account correctly to your clients when its staff cannot understand the accounting provisions. Inviting an accountant to weigh-in on definitions, especially those relating to Net Sales, Gross Sales, or Adjusted Gross Revenue (including any deductions or other amounts that can be charged to your client) is key to your understanding of how the language you draft may be interpreted.
2. Objections and audit periods
Recently, an attorney asked me why I focused on the objections clause in his client’s accounting provision – instead of the audit clause – to determine the period subject to our client’s royalty compliance audit. In fact, there is little point in auditing anything to which the client no longer has a right to object. This particular client’s objection provision was not favorable. It stated something along the lines of “Statements of account will be binding unless your written objection is received within two years of the date that the statement is due. Such written objection must cite the specific basis therefore.” This clause potentially requires us to issue an audit report before we conduct an audit of a two year period. The bottom line is: many attorneys do not realize that the objection clause may limit the audit period. Thus, the longer the objection period, the better it is for the licensor or creator of the subject material (four years is better than two).
3. Applicable laws
Laws vary by state and territory, so it is important to appreciate the impact that local laws can have on the contract you are negotiating. For instance, if a recording contract is subject to California state law, your artist client may have audit rights pursuant to state law, regardless of the terms of the contract. Applicable state laws may also have this can impact an auditor’s calculations of interest due, foreign tax withholding and other claims. Further, in the event of a dispute, you may wish to ensure that the contract is subject to US law and not that of another territory.
4. Not all audit clauses are created equal
but they can be some of the provisions that require the least negotiating leverage to change. Here are some important points to consider when negotiating an audit clause
a. Scope of the audit (can an auditor review manufacturing and digital distribution agreements and records, or just “sales” records)? This can make an enormous impact on the audit procedures and results.
b. Who will pay for the audit? When representing licensors, I suggest including a clause that requires the licensee to pay for an audit that discloses an underpayment. This is standard in many industries, but less common in the entertainment industry.
c. Who can conduct an audit? Many audit clauses require an independent CPA to conduct an audit, even though an author may be better off hiring an experienced auditor who may or may not be a CPA or an attorney – and who will focus on finding underpayments to the client , not over-payments (so strike “independent” as well as “CPA” if possible). Since my firm has both CPA and non-CPA auditors, so this isn’t usually a problem for us. Also, some audit clauses require than the auditor not be engaged on a contingency basis. Although most reputable auditors work on an hourly, not contingency basis, times are changing and if I were a creator or licensor, I would not want any restrictions on who I can hire and on what basis.
The above may help transactional attorneys negotiate a more favorable agreement for their clients, in order to lay the groundwork for maximizing profits down the road. Unfortunately, as we will learn in part two of this three-part series, having a great contract is not enough.
Next week we will cover how to enforce compliance, which is something that can be done even if you have a lousy contract with which to work. Both transactional attorneys and litigators can gain a lot by reading about compliance enforcement from an auditor’s perspective, so please check in next week for “How To Recover Your Client’s Fair Share Part II: Enforce Licensee Compliance.”
In the meantime, do you have any experiences to share about audit or accounting provisions? Confess: Do you usually go with boilerplate language proposed by the other side, or do you spend a lot of time negotiating these points? Do you have questions about any of the terms frequently found in accounting provisions? Have you worked with an auditor to negotiate contingent compensation matters? Let us know!
Cedar Boschan’s royalty audit firm Hurewitz, Boschan & Co. LLP serves those with intellectual property rights interests. The firm focuses on royalty, participation and other contract compliance audit consulting services. It also provide litigation support (such as damage theories and expert witness testimony), administration and statement preparation, and forensic investigations. Cedar can be reached at email@example.com or (310) 882-6381.