[9/20/18–See this discussion of Rev Proc 2007-47 by the University Industry Demonstration Project–“Public Policy Regarding Industry-Sponsored Research at U.S. Universities.“]
Many public universities use tax-free bonds to construct their research buildings, and when they do, they run afoul of the Tax Reform Act of 1986. That law places a strange set of restrictions on research conducted in these buildings and on the disposition of inventions and “other products” produced in that research. The problem is what are called, generally, “private business use” issues. If a company sponsors research, and expects deliverables, then the whole deal may be classified as private business use. Exceed the private use limit (typically around 10% of the total bond issue) and the tax-free status of the bonds may be revoked. Although the TRA86 is heavily amended with exceptions (so that, for instance, public schools can have vending machines run by private industry), university research administrators have not had any interest in seeking an exception for industry-sponsored research. Why? They want the private business use issues–at least the patent licensing administrators do. Those private business use issues go hand in hand with the misrepresentation of Bayh-Dole.
The IRS regulations on private use of tax-free bonds for research are explained in a “revenue procedure” document, Rev Proc 2007-47 (previously 97-14), which has this charming provision:
If a research agreement is described in either section 6.02 or 6.03 of this revenue procedure, the research agreement itself does not result in private business use.
That is–there is a “safe harbor” from a finding of private business use if:
.02 Corporate-sponsored research. A research agreement relating to property used for basic research supported or sponsored by a sponsor is described in this section 6.02 if any license or other use of resulting technology by the sponsor is permitted only on the same terms as the recipient would permit that use by any unrelated, non-sponsoring party (that is, the sponsor must pay a competitive price for its use), and the price paid for that use must be determined at the time the license or other resulting technology is available for use. Although the recipient need not permit persons other than the sponsor to use any license or other resulting technology, the price paid by the sponsor must be no less than the price that would be paid by any non-sponsoring party for those same rights.
This provision sounds like it was written after consulting university technology licensing managers–“basic” research (why not “fundamental” research?), “competitive price” (what does competition mean here, except that one cannot fund research expecting that funding is itself also payment for the deliverables and that one cannot make the results “open”), and the “price” determined after there’s been an invention disclosure (so, no negotiations at the time of the research grant, even if a sponsor specifies what is to be developed). And the IRS regulations put the federal government in this same category as a non-qualified user, so something must be done with regard to Bayh-Dole, which does set the terms for government license up-front–the federal government does not have to pay a “competitive price” for any inventions made in a project receiving federal support. One effect of Bayh-Dole’s license is to exempt the federal government from being exposed to a claim for “reasonable and entire compensation” for the manufacture and use of an invention subject to patent under 28 USC 1498. One might think, then, that “competitive price” in Rev Proc 47-2007 must mean “reasonable and entire compensation”–the amount that the owner of a patent would be expected to be awarded were it to pursue a claim of infringement against the sponsor of the research.
This one poorly conceived provision in the tax regulations has done more damage than anything I can think of to university-industry collaborations. Continue reading →
