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The Sticky Story of Paddington Bear and the Royalty Distribution Litigation

When Paddington Bear took tea with Her Late Majesty the Queen during her platinum jubilee celebrations, a developing High Court dispute concerning the proper interpretation of a clause in a royalty distribution agreement (RDA) is unlikely to have featured in their conversation.

The owner of intellectual property rights in the much-loved bear entered into the RDA with a company which was thereby entitled to a 10 per cent share of the owner's net income generated by the worldwide exploitation of the character's merchandising rights. The focus of the dispute was an audit clause in the RDA which was meant to enable the company to check that the payments it received were correct.

Following a hearing which would have given Paddington rather more than a marmalade sandwich to chew on, the Court ruled that, on a true interpretation of the clause, the company was entitled to appoint a professional to carry out audits of the owner's relevant affairs which may involve a period of more than two years, but which must be carried out at a frequency no greater than once every two years. The auditor must be independent of both sides and have no commercial interest in the outcome of the audit.

The company is not itself entitled to inspect documents disclosed by the owner to the auditor and, in his reports, the auditor is only permitted to pass on to the company information relevant to the question of whether it has received all sums due to it under the RDA. The Court gave further rulings on such matters as the copying of documents, the redaction of legally privileged passages and whether particular agreements or business records fell within the scope of the audit clause.