Royalty Audit Attorney for Toys, Games & Video Games
Protecting Inventors, Designers, Developers, Publishers, and Entertainment Companies Through Royalty Audit Representation
Are you receiving the royalty payments you are actually owed?
If you licensed a toy, board game, trading card game, video game, mobile app, collectible, or other entertainment property to a manufacturer or publisher, you are placing tremendous trust in the company responsible for calculating and paying your royalties.
Unfortunately, royalty underpayments happen more often than many creators realize.
Whether the issue is an accounting error, improper deductions, unreported international sales, hidden digital revenue, or a disagreement over how royalties should be calculated, a properly conducted royalty audit can uncover substantial amounts of unpaid compensation.
At Vondran Legal®, we represent creators, inventors, licensors, intellectual property owners, game developers, entertainment companies, and licensees in royalty audit matters throughout the United States.
What Is a Royalty Audit?
A royalty audit is an examination of a licensee's books and records to determine whether royalty payments have been calculated correctly under a licensing agreement.
Most sophisticated licensing agreements contain provisions allowing the licensor to inspect or audit financial records.
These audit clauses often allow examination of:
- Sales records
- General ledgers
- Manufacturing reports
- Inventory reports
- Distribution records
- Returns and allowances
- Digital sales reports
- Foreign subsidiary records
- E-commerce sales
- Promotional sales
- Wholesale pricing
- Transfer pricing documentation
- Licensing sub-agreements
- Royalty statements
- ERP accounting systems
- Retail reporting
- Platform revenue reports
The objective is simple:
Determine whether the licensee has fully complied with its contractual royalty obligations.
Toy Industry Royalty Audits
The toy industry generates tens of billions of dollars annually.
Products often involve multiple intellectual property rights, including:
- Character licenses
- Celebrity licenses
- Sports licensing
- Entertainment properties
- Movie tie-ins
- Television properties
- Children's brands
- Designer toys
- Plush toys
- Action figures
- Collectibles
- Educational toys
- STEM products
- Electronic toys
Many products are sold through:
- Amazon
- Walmart
- Target
- Costco
- Sam's Club
- Independent retailers
- International distributors
- Direct-to-consumer websites
Every sales channel creates another opportunity for accounting discrepancies.
Board Game Royalty Audits
Independent game designers frequently license successful games to publishers.
Examples include:
- Strategy games
- Family games
- Educational games
- Cooperative games
- Party games
- Card games
- Tabletop games
- Miniature games
- Role-playing games (RPGs)
- Collectible card games (CCGs)
- Trading card games (TCGs)
Royalties may be based upon:
- Wholesale revenue
- Net sales
- Gross receipts
- Units sold
- MSRP percentages
- Escalating royalty rates
- Milestone payments
- Minimum guarantees
Each formula creates opportunities for disputes.
Video Game Royalty Audits
Modern video games generate revenue from dozens of different sources.
Royalty provisions may include compensation based upon:
- Physical game sales
- Digital downloads
- DLC (Downloadable Content)
- Expansion packs
- Battle passes
- Subscription revenue
- Season passes
- In-game purchases
- Cosmetic items
- Virtual currency
- Advertising revenue
- Esports licensing
- Merchandise
- Streaming rights
- Cloud gaming
- Mobile game purchases
- International distribution
- Platform incentive payments
Many agreements drafted years ago never contemplated today's digital economy.
As a result, disagreements frequently arise regarding:
- What qualifies as "Net Revenue"
- Whether platform fees are deductible
- Treatment of refunds
- Currency conversion
- Subscription allocations
- Bundled products
- Promotional giveaways
- Cross-platform accounting
- International revenue allocation
Common Royalty Audit Issues
Our firm reviews virtually every aspect of royalty accounting.
Common issues include:
Underreported Sales
Sometimes sales simply never appear on royalty statements.
Examples include:
- International distributors
- Foreign subsidiaries
- Affiliate companies
- Marketplace sellers
- Promotional channels
- Liquidation sales
Improper Deductions
Many agreements permit certain deductions.
Others do not.
Improper deductions may include:
- Marketing expenses
- Freight
- Insurance
- Warehousing
- Platform fees
- Advertising
- Chargebacks
- Promotional discounts
- Customer incentives
Incorrect Royalty Rates
Escalating royalty provisions frequently become complicated.
For example:
- 5% first 100,000 units
- 7% next 500,000 units
- 10% thereafter
Improper application of these tiers can create significant underpayments.
Hidden International Revenue
International licensing often involves:
- Foreign distributors
- Affiliate sales
- Currency exchange
- Import/export pricing
- Customs valuations
These transactions deserve careful scrutiny.
Transfer Pricing
Related-party transactions sometimes occur below market pricing.
If royalties are calculated from artificially reduced transfer prices, licensors may receive substantially less than they should.
Digital Revenue Allocation
Today's digital economy creates entirely new royalty questions.
Examples include:
- Game subscription services
- Streaming platforms
- Cloud gaming
- Digital bundles
- Cross-platform packages
- Promotional subscriptions
How should revenue be allocated?
The answer depends upon the contract.
Toy Licensing Agreements Frequently Audited
Our office reviews licensing agreements involving:
- Action figures
- Dolls
- Building toys
- Educational products
- Outdoor toys
- Electronic games
- Plush products
- Children's books
- Licensed apparel
- Halloween costumes
- School supplies
- Home décor
- Collectibles
- Limited edition products
Entertainment Franchises
Many toys derive value from famous entertainment properties.
Examples include licensing involving:
- Motion pictures
- Television shows
- Anime
- Comic books
- Superheroes
- Sports leagues
- Colleges
- Musicians
- Influencers
- YouTubers
- Social media personalities
Each licensing arrangement presents unique royalty issues.
Video Game Development Agreements
Royalty provisions appear in many different contracts.
Examples include:
- Publisher agreements
- Developer agreements
- Independent studio agreements
- Engine licensing
- Character licensing
- Music licensing
- Celebrity likeness agreements
- Voice actor participation
- Revenue-sharing agreements
- Esports agreements
Signs You May Need a Royalty Audit
You may wish to consult an attorney if:
- Royalty payments suddenly decline
- Sales appear inconsistent with market success
- Statements become less detailed
- The company refuses supporting documentation
- New digital revenue streams emerge
- Foreign sales appear unusually low
- Significant new product launches occur
- Major retailers begin carrying the product
- Products become viral
- Streaming or subscription revenue increases
- Acquisitions or mergers occur
- Accounting practices suddenly change
What Records Are Typically Reviewed?
Depending upon your audit rights, records may include:
- General ledger
- Sales journals
- ERP systems
- SAP records
- Oracle accounting systems
- Inventory reports
- Manufacturing reports
- Shipping records
- Distributor invoices
- Amazon reports
- Shopify reports
- Steam reporting
- Nintendo reporting
- PlayStation reporting
- Xbox reporting
- Mobile app store reports
- Foreign subsidiary accounting
- Tax records
- Bank deposits
- Credit memos
- Return reports
How Royalty Audits Are Conducted
Every agreement is different.
A typical audit may involve:
Step One: Contract Review
We analyze:
- Royalty definitions
- Audit rights
- Notice provisions
- Confidentiality
- Time limitations
- Cost-shifting provisions
- Material breach clauses
Step Two: Pre-Audit Investigation
We gather publicly available information regarding:
- Product launches
- Retail availability
- Investor reports
- Press releases
- Digital rankings
- Market performance
Step Three: Notice of Audit
If appropriate, formal notice is provided pursuant to the contract.
Step Four: Financial Examination
An experienced royalty auditor or forensic accountant may review available books and records to identify discrepancies.
Step Five: Negotiation
Many disputes resolve without litigation.
Potential resolutions include:
- Back royalties
- Interest
- Audit cost reimbursement (if provided by contract)
- Revised accounting procedures
- Future reporting obligations
- Contract amendments
Step Six: Litigation or Arbitration
When necessary, we assist clients in pursuing breach of contract claims, accounting claims, declaratory relief, arbitration, mediation, or other available remedies.
Why Royalty Audits Matter
Even relatively small accounting errors can become substantial over many years.
For example:
- 2% understatement over ten years
- Improper deductions
- Missing foreign sales
- Unreported digital revenue
The cumulative effect can be significant.
Industries We Serve
Our royalty audit practice includes:
- Toy companies
- Game publishers
- Board game designers
- Mobile game developers
- Independent video game studios
- Entertainment companies
- Animation studios
- Character licensors
- Sports licensing
- Music licensing
- Consumer products
- Collectibles
- Apparel licensing
- Merchandising programs
- Digital entertainment
Frequently Asked Questions
How often can I conduct a royalty audit?
That depends on the audit provision in your licensing agreement. Many agreements allow audits annually or once during a specified accounting period, subject to notice requirements and contractual limitations.
What if the contract does not include an audit clause?
Even without an express audit right, there may be other contractual or legal remedies available depending on the governing law and the facts of the dispute. An attorney can evaluate whether a claim for breach of contract, accounting, or other relief may be appropriate.
Who pays for the audit?
Many agreements require the licensor to pay the initial cost, but shift the expense to the licensee if an underpayment exceeds a specified percentage. The answer depends entirely on the language of the contract.
Can I audit foreign sales?
Potentially. The answer depends on how the agreement defines the records subject to inspection and whether affiliates, subsidiaries, sublicensees, or international distributors fall within the scope of the audit rights.
What if I think digital revenue is being excluded?
Digital revenue is one of the fastest-growing areas of royalty disputes. Whether downloads, subscriptions, in-game purchases, or other digital income must be included depends on the specific royalty provisions negotiated by the parties.
Can royalty disputes be resolved without filing a lawsuit?
Yes. Many disputes are resolved through negotiation, mediation, or arbitration after the parties exchange information or complete an audit. Litigation is often a last resort.
Why Choose Vondran Legal®?
Royalty disputes often involve a unique intersection of contract law, intellectual property, entertainment law, licensing, accounting principles, and litigation strategy. At Vondran Legal®, we understand how licensing agreements are structured and how royalty provisions operate across the toy, gaming, entertainment, and technology industries.
Our services may include:
- Contract interpretation and risk assessment
- Royalty audit clause analysis
- Coordination with forensic accountants and royalty audit professionals
- Pre-audit strategy and notice preparation
- Negotiation of audit scope and document production
- Royalty dispute resolution
- Breach of contract claims
- Mediation and arbitration
- State and federal litigation, where appropriate
If you believe your royalty payments do not reflect the true commercial success of your licensed products, an experienced legal review can help determine whether an audit or other contractual remedies are warranted.
Contact Vondran Legal® to discuss your toy, game, or video game royalty audit matter and explore your legal options under your licensing agreement.
