Are Patent Costs Allowable?

Are Patent Costs allowable in F&A Rates & Indirect Cost Rate Agreements? They may be.

The Bayh-Dole Act (BDA) of 1980 forms the foundation of ownership rights of intellectual property arising from Federal Government funded research. However, BDA is largely misunderstood by the various Government Agencies as well as Government auditors.

Federal Acquisition Regulation (FAR) 31.205-30 states that “patent costs are allowable to the extent that they are incurred as requirements of a Government contract.” And one of the key requirements of the BDA calls for your small business to file for patent protection if you wish to retain title on any subject invention discovered during your research!

Our experience negotiating patent and other intellectual property-related costs including licensing costs during the indirect rate negotiation process differs greatly between the Department of Defense (DoD) and the National Institutes of Health (NIH) auditors.

DoD Contracts

The DoD Small Business Innovation Research (SBIR) Program solicitation describes the Contractor´s patent rights and the U.S. government´s rights in the use of the patent. Section 5.8 of the solicitation states:

The Government receives a royalty-free license for its use, reserves the right to require the patent holder to license it in certain limited circumstances, and requires that anyone exclusively licensed to sell the invention in the United States must normally manufacture it domestically.

This requirement creates the royalty-free license for the use of patents developed under the SBIR contract. The wording in the solicitation however will not guarantee that these costs will be acceptable to the Government´s auditor!

We have found that one of the keys to our ability to recover patent costs for our clients is to work with them on the front end to make sure that several FAR clauses pertaining to patent rights are negotiated into the terms and conditions of the award. By referring to these FAR clauses, we have found it easier to educate DCAA of the link between your contract and the applicability of BDA.

What Kind of Patent Costs are Allowable?

The costs for the preparation of the invention disclosure report, searching the art in preparation for invention disclosure and the filing and prosecuting of the patent are allowable if the costs pertain to an invention the contractor conceived or first actually reduced to practice under a government contract containing the appropriate FAR clause.

However, be forewarned, our research on the TRW and Boeing court cases suggest that your company will need to have revenues from overseas in order to recover foreign patent cost filing fees.

What about NIH Grants?

Companies that receive awards from the National Institutes of Health (NIH) are not as fortunate as DoD contractors. NIH has taken a firm position that patent costs are not required by the SBIR program thus making these costs unallowable unless prospectively negotiated in your provisional indirect rate agreement.

According to JP Kim, Director and Policy Officer for the Division of Extramural Inventions & Technology Resources, “Nowhere in the NGA or the grant/contract solicitations does it state the NIH requires the grantee/contractor to patent inventions that result from their SBIR/STTR award”.

Kim further explains “while the Bayh-Dole Act does provide the SBIR funding recipient the opportunity to take title/ownership and elect title in the inventions that it develops under an SBIR award, this is not considered NIH making a requirement to patent. IF the SBC chooses to take title/ownership, then they must seek patent protection within 1 year of electing title. But of course, it is their decision as to whether they take title or not and thus as to whether they would seek patent protection or not”.

Conclusion

The inclusion of several FAR clauses pertaining to patent rights can be negotiated into the terms and conditions of your Contract award greatly increasing the likelihood that DCAA will find your reasonable costs to be allowable.

NIH Grantees need to enter negotiations with lowered expectations and will need to proactively project patent and licensing costs into their indirect cost proposal and fight for them during the negotiation process.

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Edward G. Jameson, CPA

www.jamesoncpa.com