When royalties are underreported: what to do first
Underreported royalties are almost always a breach of the reporting clause, not of the royalty rate itself. The first step is to fix the affected reporting period in writing, request the underlying sales or usage data behind the figure, and check whether an audit or verification right in the licence is still open before any deadline in that clause runs out.
What the obligation rests on
The duty to report royalties correctly sits inside the licence, not in a public register. Where the licensed right is registered — a trade mark, a design, a patent — the register confirms who owns the right. It says nothing about how royalties are calculated, reported or verified. That question is answered by the contract, and where the contract is silent, by the governing law the parties chose.
This matters because two clocks can run at once: the clock the licence sets for a royalty audit, and the clock the applicable law sets for bringing a claim once a shortfall is discovered. The two do not always match, and missing the shorter one narrows what a court or auditor can later look at.
What changes in practice
A confirmed shortfall changes three things. It reopens the question of interest on the unpaid amount if the licence provides for it. It can trigger a right to audit that would otherwise sit dormant. And, in a repeated or deliberate shortfall, it can support termination of the licence for breach, subject to any cure period the licence gives the other side.
None of this depends on the size of the shortfall being large. A small, repeated discrepancy in a monthly report is treated the same way as a single large one, because the breach is the failure to report accurately, not the amount involved.
What to do first
- Pull the licence and read the reporting clause together with the audit or inspection clause — they are usually meant to work as one mechanism.
- Set out the shortfall in writing to the licensee, naming the affected period and the figures in dispute.
- Request the sales ledger, usage log or third-party statement that the royalty report should have been drawn from.
- Check any notice period or frequency limit on the audit clause before invoking it — some clauses allow only one audit per year.
- Preserve the correspondence and the original reports; they become the evidence base if the matter goes further.
- Instruct counsel before sending a formal demand if the licensee disputes the figures or refuses access.
Who decides
Who resolves the dispute depends on what the licence provides and on how far the disagreement has moved. A named independent auditor can settle a straightforward reporting error. A refusal to cooperate moves the matter to whatever forum the dispute clause names.
| Situation | Who typically decides | Evidence usually needed |
|---|---|---|
| Audit clause available and unused | Independent auditor named in the licence | Sales ledger, usage logs, reporting history |
| Audit clause refused or blocked | Court or arbitral tribunal under the licence's dispute clause | Correspondence refusing access, the clause itself |
| No audit clause in the licence | Court or arbitral tribunal applying the governing law | Contract, invoices, third-party sales data |
| Licensee insolvent or unreachable | Insolvency practitioner or receiver | Proof of claim, licence, outstanding statements |
Where the evidence includes personal data — a sales agent's individual figures, for instance — the same lawful-basis test applies as elsewhere on the site: see our Legitimate interest assessment overview and the evidence we use for that check.
Where this overlaps with other rights
A royalty dispute rarely stays isolated to the licence alone. If a linked trade mark filing is also contested, treat that timeline separately: our note on An opposition deadline is running trade mark sets out the clock that applies there.
Ownership questions can surface on the same file, particularly where the licensed material was produced externally. Where an agency withholds the underlying assets, the sequence starts differently — see When an agency keeps the design files: what to for that starting point.
Where the licensed asset sits inside a token, the ownership question changes shape again; the relevant entry point is What to do first in this situation explained.
What this page does not cover
This page does not calculate the underreported amount, does not draft the demand letter, and does not choose the forum for you. It also does not cover reporting duties that come from statute rather than contract, such as renewal or annuity payments tied to a registered right's own upkeep. Each of those needs the specific licence and the specific register entry in front of us.
Verified
Reviewed: 4 March 2025. The correct sequence depends on the wording of the individual licence and on the governing law the parties chose; no single public register applies to a royalty reporting dispute, so no register citation sits on this page.
Related reading
If the licensee refuses to open its books at all, the starting point is different — see An audit clause is refused IP licence.
FAQ
What is the first step when royalties are underreported?
Send written notice fixing the shortfall period and request the sales or usage data behind it before invoking any audit clause.
Which deadline is already running?
Any limitation period the licence sets for royalty claims, and any notice window on the audit clause, usually starts from the report date rather than from the date the shortfall was discovered.
Who decides, and on what evidence?
Whoever the dispute clause names — an independent auditor, a court, or an arbitral tribunal — decides on the sales ledger, usage log and reporting history behind the disputed figure.