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Intellectual Property Patent Licensing and Transactions

The Dark Side of Licensing: How to Prepare for the Audit

The audit clause itself is not something to be feared. It is a necessary means for the licensor to protect its interests and to guard against unscrupulous licensees. But it is a mistake to think that the clause is there solely to prevent malfeasance.

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In the classic movie When Harry Met Sally, Harry says, “When I buy a new book, I always read the last page first. That way, in case I die before I finish, I know how it ends. That, my friend, is a dark side.” At the beginning of any licensing relationship, things always seem rosy and full of potential. We talk about royalties, advances, and guarantees with the dream of a relationship that will be enduring and fulfilling for both licensor and licensee. But licensees would do well to heed the advice of young Harry by giving in to their dark side and looking to what lies at the end of the story. Because what may be waiting for them there is an audit for which they are ill prepared.

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