Managing a licensing office in a post-COVID-19 world presents unprecedented challenges. While there are numerous issues confronting licensing offices, there are several potential responses and strategies to help mitigate the damaging effects while still maximizing licensing revenue and interactions with licensees and business partners.
Confronting the Issues
The elephant in the room right now is all of the budgetary constraints licensing offices are facing. Unfortunately, much like the response to the virus itself, there is not a single silver bullet that will resolve all of these issues. However, there are some relatively simple measures which can help an office navigate the landmines inherent in this situation.
The two primary areas of difficulty that offices are facing are budgetary restrictions and, the flip side of this, the difficulties that their Licensees are facing.
The budgetary issue is an old saw: there is (and was) never enough money set aside in budgets to conduct all of the compliance procedures that most offices would like to implement. This situation has taken that concern and amplified it exponentially. So what is a licensing office to do?
The first step is to perform a triage on their licensing portfolio. Questions to be asked during this process include:
- What level of communication exists with the Licensee?
- Has this changed over the last few months?
- Does the Licensee operate in an industry that may be unscathed or are they severely impacted by Covid-19?
- Has the Licensee changed (or eliminated) the personnel responsible for interacting with the licensing office?
Answering these questions can help the licensing office prioritize the licensing agreements that need immediate attention. This will also help the licensing office with their internal projections regarding future revenue streams and staffing levels and can help them determine which relationships need to be escalated to senior management for more strategic discussions.
But remember, all Licensees should be part of the review as even those that appear to be handling the current situation with aplomb could be struggling behind the scenes.
After the triage has been conducted, each licensing office should have a frank cost/benefit discussion about how their compliance program should be executed (or perhaps implemented) going forward. If there is an existing audit program and budget, how has this been impacted by the issues outlined above? Based on the results of this assessment, a course of action should be set for each Licensee.
Some of the options that licensing offices have at their disposal include the following:
- Instituting a regular review of the reporting statements that are provided
- Verifying and maintaining a contact list for each Licensee, including identifying who has responsibility for preparing the monthly, quarterly or annual royalty statements
- Scheduling check in calls at standardized intervals to ensure that the licensing office gets early notice of any change in status of the Licensee
The goal of the triage process is to identify problems or potential issue to insure they are dealt with quickly and hopefully informally to help minimize the time, effort and cost of rectifying the situation.
All of the information obtained from the preceding should inform the decision about whether further compliance procedures are needed. These compliance procedures can range from an internal high-level review/audit to a regular external royalty audit. But in between these two are several alternatives which might be appropriate.
- Desk-top Audit: This is basically a more in-depth version of the internal review mentioned previously. The advantage of this is that this can be a low cost way to both gain comfort that the books and records of the Licensee are being properly maintained and that the contract is being adhered to by the Licensee in conformity with the expectations and contractual understanding of the Licensor.
- Contingent Fee Arrangement: Another approach could be soliciting a contingent fee arrangement for a royalty audit. There are several versions of how this can be set up, including a 100-percent contingent fee or a hybrid arrangement where a lower fee is charged in exchange for a lower contingent percentage of any recovery. There are a couple potential drawbacks to this approach in that the auditor may not be able to testify should the audit wind up in litigation as well as the potential for the Licensor to lose out on total recoveries since these are shared with the auditor. However, given the current budgetary constraints most licensing offices are operating under, this may be an approach that makes sense for an office that is resource constrained.
Finally, the goal of any compliance program is to increase the compliance with the terms of the licensing agreement, both for a particular Licensee and for the licensing portfolio as a whole.
One way to achieve this goal is to pay particular attention to how licensing arrangements are set up at the outset. GHJ has found that one way to do this is to institute a “welcome package” with new Licensees. This consists of having a detailed walk through of the licensing agreement with the Licensee and to then compare the requirements of the contract to the current capabilities of the Licensee, both from a systemic and personnel perspective. It is better to find issues at this time, than to let them go undiscovered for years and allow a small issue to grow into a difficult and expensive situation for both parties.
If you have any questions or would like to discuss any of the issues presented above, please contact Royalty and Licensing Practice Leader Todd Sigler at GHJ.