When royalties are underreported: what it costs to be wrong
Underreported royalties are a breach of the licence, not a regulatory violation. The audit clause, the definition of "net sales" and the remedy for underreporting sit in the contract you signed. Acting late costs you evidence and leverage, not just money. Sales records age, staff turn over, and the limitation clock keeps running regardless of when you notice the gap.
The basis
A royalty obligation is created by the licence agreement, not by an EU regulation. The audit right, the definition of "net sales" and the remedy for underreporting are terms the parties negotiated and signed. Where the licensed right is itself protected under EU law — a trade mark, a patent, software, a database — that protection concerns the right being licensed. It says nothing about how the royalty is reported or checked.
Before the audit right is invoked, ownership of the underlying work should be beyond doubt. Where When the assignment is unsigned but performed: what it costs is still an open question, that question is resolved first. A licensee facing an audit will look for exactly that gap in the chain of title.
What changes in practice
Once underreporting is suspected, three things move at once: the evidence available to prove it, the leverage you hold in any negotiation, and the clock on any claim. Delay affects all three, and it affects them in different directions.
| Response | Effect on evidence | Effect on leverage |
|---|---|---|
| Wait for the next report | Sales records age and get overwritten | Licensee sets the pace of disclosure |
| Send an informal query | Puts the licensee on notice; memories firm up | Signals the issue without committing to audit |
| Invoke the audit clause formally | Locks a scope and a date for review | Shifts the burden of explanation to the licensee |
| Litigate without an audit first | Relies on discovery, which is slower and costlier | Removes the cheaper contractual step from the sequence |
The audit clause exists to avoid the last row in that table. Used early, it is usually the cheapest way to establish whether a discrepancy is a clerical error or a pattern.
What to do now
- Pull the licence agreement and isolate the audit and reporting clauses. The definition of "net sales" matters more than the headline royalty rate.
- Recalculate the reported figures against whatever independent data you already hold: shipment records, platform statements, distributor confirmations.
- Document the gap in writing, with dates, before raising it with the licensee directly.
- Send the file to a partner once the discrepancy is documented. A first read normally arrives within the hour, in office hours.
- Decide, with that advice, whether to invoke the audit clause formally or open an informal query first.
Who decides, and on what evidence
Under most licence agreements, the auditor named in the clause — often an independent accountant — decides the size of the shortfall, working from the licensee's own books. Disputes about that finding normally go to whichever forum the contract names: arbitration, or the courts of the governing law.
Where the licensed asset is a tokenised right rather than a conventional one, enforcement against the holder follows a different route; see When enforcement is sought against a holder in practice for that mechanism.
The evidence that carries weight is documentary: sales ledgers, distribution agreements, platform statements. Correspondence that explains a discrepancy after the fact carries less weight than the underlying records themselves.
If your situation is different
The audit mechanism is broadly the same across licence types, but what sits behind the royalty differs.
- If the licensed asset is software, the underlying program is protected under Directive 2009/24/EC. The reporting obligation itself still comes from the licence, not from that directive.
- If the licensed asset is a database, the sui generis right follows Directive 96/9/EC. The royalty audit clause remains a separate, contractual matter.
- If the licensed asset is a registered EU trade mark, the mark itself is governed by Regulation (EU) 2017/1001 (EUTMR). If that mark is also under active opposition, a parallel clock is running — see An opposition deadline is running trade mark what it costs to miss, separately from the royalty question.
What this page does not resolve
This page does not calculate the size of a shortfall, and it does not draft an audit notice. It does not replace a reading of your specific licence, since audit clauses vary widely in scope, notice period and cost allocation.
Verified
Reviewed 2025. Legal context checked against Directive 2009/24/EC, Directive 96/9/EC and Regulation (EU) 2017/1001 (EUTMR), each as published in the Official Journal of the European Union. The audit mechanism described here follows standard licence drafting practice rather than any single statute, since royalty reporting is a contractual matter in every jurisdiction we work in.
Related situations
A related failure pattern is An audit clause is refused IP licence what it costs when the licensee blocks the audit outright, rather than merely disputing the figures.
Frequently asked questions
What is the first step when royalties are underreported?
Recalculate the reported figures against independent data you already hold, then document the gap in writing before approaching the licensee.
Which deadline is already running?
The limitation period on the underlying claim generally starts running from the underreporting itself, not from the date you discover it. The audit clause may carry its own separate notice period, set out in the licence.
Who decides, and on what evidence?
The auditor named in the audit clause decides the size of the shortfall, working from the licensee's books. Disputes about that finding go to whichever forum the licence names.
A licence dispute rarely improves with delay. Set out the discrepancy, gather the records, and get a partner's first read before deciding how to proceed.