Royalties on Patents and Audit Rights
By Lance Winslow
Many inventors come up with a great idea and wish to sell this idea to another company in trade for royalties for use of their patent. This makes sense because the inventor does not have to start his own company and go thru all the risks to build the device and can sit back in his home workshop and come up with his next invention or innovation. Often these inventors when making an agreement do not put in the contract that they want audit rights to the company’s books which will be mass producing and bringing to market this innovative invention that they thought of.
Recently I was asked by a think tanker; “I need more insight on the audit rights you talked about?”
Well if this company starts selling your invention, how will you know how many they sold? So how can you tell if they are being honest with you about the amount of royalties (per unit sold) monies you will receive? If they are giving you per unit stipend then you would need to be sure that they told you of "ALL" actual sales, whether they were from the Internet, mail order, infomercial or in retail stores.
You see the music industry does similar things to make sure the artists get paid. So does the insurance industry as many times the risk is gauged by the amount of gross income for exposure calculations. If the totals are in error or misrepresents then the artist, insurance company or you the inventor gets ripped off. This is why I advice that you put into your contracts when selling your idea, simple audit rights so you get paid what they agreed too. Think on this in 2006.
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