It’s no surprise that licensing your IP in the semiconductor industry without regularly assessing compliance could lead to revenue leakage. What may be surprising, however, is that the majority of this leakage isn’t due to “bad actors” among your licensees but rather honest companies struggling to navigate a complex landscape.

In my 15 years of experience in IP compliance within this industry, I’ve observed that the challenges licensees face in accurately reporting IP usage and royalties often stem from several key factors:

1. Complexity of Cross-Functional Collaboration

Accurately tracking and reporting IP usage requires seamless coordination across multiple teams:

• Execution: The team responsible for signing the agreement.
• Implementation: The technical team utilizing the IP.
• Reporting: The finance or IP team tracking usage and royalties.

Challenges are compounded by the product development timeline, which typically spans 6–12 months (or longer) after the agreement is signed. During this period, turnover, system changes, and evolving priorities often create gaps in reporting.

2. Intricacies in Contractual Terminology

Royalty reporting is rarely a straightforward task. Factors such as:

• Average sales price (ASP) terms, including allowable and disallowable deductions.
• Royalty floors, ceilings, and volume-based tiering.
• Variations in royalty rates due to product characteristics or IP combinations.

These nuances frequently lead to misinterpretations. Similarly, definitions of “Licensed Product” can vary between agreements, causing further confusion.

3. Organizational Changes

Mergers, acquisitions, and divestitures can introduce disruptions in IP tracking and reporting. Turnover in personnel, shifting responsibilities, and transitioning systems often result in compliance gaps.

4. Supply Chain Complexities

Issues such as:

• Tracking IP when design service providers are involved.
• Calculating ASP in related-party transactions.

These add yet another layer of difficulty for licensees.

5. Evolving Semiconductor Product Types

The rapid evolution of semiconductor products often outpaces the terms in existing license agreements. For example:

• Royalty implications for Multi-Chip Modules, System-in-Package designs, or chiplets.
• ASP calculations for products distributed as part of an end-product versus standalone.

These scenarios highlight why a robust and proactive IP compliance program is essential for semiconductor IP providers.

The Value of Compliance

While compliance challenges may seem daunting, the good news is that addressing them doesn’t require uncovering intentional violations. Instead, it’s about collaborating with your valued customers to ensure contract terms are accurately followed. This approach benefits both parties by:

1. Resolving Issues Early: Identifying reporting discrepancies before they escalate into significant disputes or unexpected financial burdens.
2. Clarifying Contract Terms: Aligning on ambiguous clauses and updating agreement templates to preempt future misunderstandings.
3. Ensuring Fairness: Reinforcing a level playing field where all licensees contribute their fair share, eliminating any competitive advantage for “free riders.”

Building the Right Compliance Program

A well-structured compliance program should be tailored to your organization’s size, complexity, and resources. When properly designed, it can:

• Operate cost-efficiently, with recovered revenue funding the program itself.
• Address risks across your licensee portfolio, from major accounts to smaller licensees.

Partnering with an experienced audit provider who understands the nuances of semiconductor terminology, supply chains, and risks is crucial. At Connor, we are the global leader in IP compliance and are ready to collaborate on developing best practices tailored to your organization’s needs.

‍