Agenda

1. Increasing and Protecting royalty IncomeRoyalty auditing – “The reality behind the myth”GETTING THE MOST FROM A LICENCE PORTFOLIO International Conference – Paris Licensing in a Controversial Environment

2. Agenda • Post licence Management • overview, problems and benefits • practical tips to good licence management • audits as a part of licence management 2. Audits • What is the perspective to audits for European entities?; - What are the risks of implementing an audit strategy?; - How do they work, and what are the costs? 3. Managing the licensing Portfolio – the Licensor’s approach 4. Summary International Conference – Paris Licensing in a Controversial Environment

3. IP Assets Need Managing • Each of us own some physical assets – maybe a house or flat. • We all spend time and money looking after these assets. • We do this because we know that a house/ car etc. will not maximise its value unless we look after it. • The key message of these presentations is that we need to manage our licences to get the most out of them. International Conference – Paris Licensing in a Controversial Environment

4. Licence Management - Overview Licensing contracts • Licensor is passive only granting permission • Licensee is active accepting all commercialisation responsibilities Licensor expectations • It’s taken a lot of hard work to get here little extra effort needed • This is when the money comes in with little extra effort • I can depend on the licensee to report and pay the correct amounts Reality • Audits report that 90% of royalty licences underpay • This is a global problem and crosses all technologies • Over four years one organisation recovered- $19M. International Conference – Paris Licensing in a Controversial Environment

5. Economic Cash now. Audit settlements range from€7k to€16m Cash in the future. due to better management. Profit. No costs associated with extra revenues Shareholder value Corporate/Legal Sarbanes Oxley – corporate obligations. Proper management of assets. Better understanding of licence agreements. Amend boiler-plate clauses. • Licensing Execs. & Operations • Internal due diligence and protection • Potential returns to meet budgets • Provides lessons for future negotiations; • Develops & maintains relationship with licensees- not a “sunk” relationship What do I gain from licence management? International Conference – Paris Licensing in a Controversial Environment

6. What should I do? Three options Nothing • My boss will never notice • What budget will be missed? Follow a reactive policy • If something comes to my attention I’ll deal with it. Follow a pro-active plan • Sounds interesting but have been too busy to think about it • Give me some practical tips • Where does audit fit in? International Conference – Paris Licensing in a Controversial Environment

7. Pro-active Licence Management? Six steps to a healthy portfolio Basics • Credit control • License monitoring system – financial and non-financial • Visibility to the licensee – have they met you? • Ability to react to events And also • An understanding of the risks of each licence • Audit strategy based around these risks International Conference – Paris Licensing in a Controversial Environment

8. Practical tips – the basics Get control of credit control • Make sure they know what they should be collecting • Royalties, interest,downpayments, milestones • Are they passing information on to you? How good is your licence monitoring system? • Royalties, guaranteed sums • Non-date milestones • Expiry dates • Changes in royalty, options etc Make sure the licensee knows who you are • These are the guys making you money not taking it International Conference – Paris Licensing in a Controversial Environment

9. Risk Assessment and audit Purpose of Risk assessment • The aim of risk assessment is to work out which licensees are most likely to be underpaying • Depending on the outcome you can decide how best to deal with this e.g. carry out an audit • It should help you earn money by taking the right steps at the right time • It should help you keep costs down by avoiding unnecessary audits International Conference – Paris Licensing in a Controversial Environment

10. Risk Assessment and audit Issues integral to the licence Complex technology • Licensed Product Definition Product development • New lines • New uses Contracts misunderstood or not relevant • “Make use and sell“ • Compound products • Complex royalty provisions e.g. choice of royalty International Conference – Paris Licensing in a Controversial Environment

11. Risk Assessment and audit External Licensee Issues • Big organisations more likely to underpay than small ones • Changes in people • Restructurings, acquisitions and mergers • Relocations • Systems “upgrades” International Conference – Paris Licensing in a Controversial Environment

12. Risk Assessment and audit Practical Issues Size • High earning licences – risk of significant revenue loss Time • How long since we last audited? • Limitations – how far back can I collect royalties? • Audit Restrictions – how far back can I check? Expiry • Key patents – technological; should they still be paying? • Key patents – geographical; which territories are still infringing? Royalty Payment History • Late payers • Lumpy royalties International Conference – Paris Licensing in a Controversial Environment

13. Hopefully you can now stratify your licences High risk – high potential loss High risk – low potential loss Low risk – high potential loss Low risk – low potential loss And decide on the right measures A letter – easy sets out your position in writing and very cheap A phone call – a gentle reminder and very cheap A visit – an opportunity to sort out problems normally quite cheap An audit – a proper review, not cheap but effective and usuallyl very lucrative Proportionate Response International Conference – Paris Licensing in a Controversial Environment

14. What is an audit and what will it achieve? An audit • Process to achieve a given aim – ensure licence is complied with • Audit Guidelines – allow broad lines of enquiry • An element of contract law • Varies in effort and cost depending on licence Outcomes • Money – audit yields 10-45% sometimes higher (16,000%) • One licence over 95% of royalties came from audit • Equalise the relationship between licensor and licensee • Enable the licensor to maximise the value of the licence • Provide comfort and protection internally that the assets of the entity are being protected; • Send a message to other licensees – we take income protection seriously. International Conference – Paris Licensing in a Controversial Environment

15. Two final tips Reacting to Issues • Make sure you have a system in place to react to information. • Experience of a couple of nightmare scenarios where the licensor failed to react and lost €ms Early Stage Audits • You don’t come back with much money but you save a fortune later on. • You develop a relationship with the relevant people • You prevent disputes/litigation later on • Early stage audits are probably cheaper • You get your money when you should ITS ALL EASY COMPARED TO EVERYTHING ELSE • Royalty audit is best business model in IP International Conference – Paris Licensing in a Controversial Environment

16. Level of awareness on “audits”@ LES Paris • European and Nordic Perception • Agreements are very short – 3 pages • Recognise, that parameters are very wide and subject to challenge @ future date – focus on deal now, most of them “will be fine”. • Main issues surround a possible take-over of licensor who may have different strategy. • Individuals not aware that audits were actually carried out (even though, included in agreement). • Trusting relationship. • That the IP management responsibilities are not segregated from business units (BASF, Nestle)– But, who will take the lead? • Non aggressive approach to licensing (Thomson)- can mean a similar approach to post deal management. Knowing what you know now, do you still have the same perspective? International Conference – Paris Licensing in a Controversial Environment

17. Issues surrounding commencement of an audit • Commercial • Relationship issues – positive and negative- What are they? • Professionalism & business ethics, familiarity – audit is normal, if you don’t what’s the message? • Trust :(do you check your cash at the cash point or bank statement for interest charges – people and systems change) • If a non-exclusive arrangement, consider auditing a number of licensees – they do not feel specifically targeted. • Select your auditors that share your approach- a long term proactive relationship- knowledge based • Issues of negligence – internal, 3rd party • Internal budgets • Every year there seems to be an incremental budget for revenues – how do you achieve this? • Be seen to be protecting all aspects of IP portfolio. • Time and resource • An effective audit will need dedicated internal time and a budget – bye in from the top. • External and other costs • External auditors costs • Independent legal or technology opinions, travel costs to negotiate settlements. International Conference – Paris Licensing in a Controversial Environment

18. Audit clause- start on the right footing • The word audit • Access to • Relevant records, locations, subsidiaries, sub-contractors & relevant parties Relevant employees • To review all Licence grant activities: • All disposals- (use, or otherwise disposed off, manufacture, lease) • All manufacturing sites & all sub licensees (or sites where they have the rights to “have made”) • All information relating to the use of the licensed products • To gather information by • The right to take copies of documents • The right to question people • Things to water down • The period under review should ideally have no limitation • Remember companies normally required to keep records for six years • Limited period of review does not limit liability for debts • Choice of auditor • Ideally no choice • Conflicts of interest governed by audit firms’ ethical standards • Other clauses to think about • Costs of the audit recovered – only if findings > 5 % • Interest on all underpayments – COMPOUND, monthly • Penalties - the Inland Revenue charges them International Conference – Paris Licensing in a Controversial Environment

19. Preparation for the audit? • Legal , Technical and business review • License grant - what are the rights licensed • Interpretation issues ( precedence and legal) • The IPR covering the licensed product (What constitutes an infringing activity?) • Internal review • Sensitivities on the assignment • Review and document - internal file - any impact on the audit ? • Market and competitor data • Copies of returns. International Conference – Paris Licensing in a Controversial Environment

20. Audit schedule & timeframes • Timelines • Audit initiation letter – response time between 2 weeks and 2 months, correspondence and getting on site; • Site audit – do the royalty payments tie in with the obligations? Communications, access, relationship • Final report • Negotiation (slightly overlaps with the above) • Whole process can last between six months and two years BUT try going to court. Rolling programme to audit – recognise this as a long term business activity. International Conference – Paris Licensing in a Controversial Environment

21. The costs of an audit Costs will vary and depend on the following: • The choice of auditor – consider very carefully (significant IP specific issues) • The remuneration method • The complexity of the agreement and sites to visit Organizational preferences: • Large Corporates - Usually on hourly charge basis; • SME and “Governmental” organisations - Hybrid basis – mixture of lower hourly rates and contingent fees • Individuals (and sometimes multi- nationals) - Full contingent fees (issues of conflicts) Types of costs: • Contingent fees • Hourly rate charges (there will be variances on these rates) • In Europe €25K to € 50K • In the US € 30K to € 60K • In the Far East € 50K to € 75K International Conference – Paris Licensing in a Controversial Environment Slide No. 21

22. Points to take away • All assets need maintenance to maximise value • Post-licence management is an added value function • A strategy for licence management and audit is important • for maximising value • properly maintaining assets • avoiding accusations of negligence • If you sit on your rights you lose them • Many problems can be rectified by simple actions • Audits are the best and most cost effective method in some cases International Conference – Paris Licensing in a Controversial Environment