Frequently Asked Questions
- Does it matter if the NERF license is commercial or an internal research use license?
No. The fact that a sponsor is granted a commercial NERF license does not constitute private business use of the bond financed facility where the research is being conducted.
- Does agreeing to an upfront royalty range, technology fee, one-time license fee, or royalty cap for an exclusive license in the research agreement cause the activity to result in private use?
If the campus, through consultation with its respective Authorized Licensing Office (“ALO”), agrees that the royalty range (or other consideration) in the research agreement represents the “fair market value” of the anticipated and pre-identified invention at the time the technology becomes available, then the royalty range (or other consideration) in the research agreement likely does not cause the activity to result in private use. The “fair market value” should be justified and documented by the campus accordingly.
- Will a research consortium agreement fail to meet the requirements the safe harbors if one of the consortium members receives an exclusive license, subject to all consortium members providing their consent?
Yes. Only in single sponsor circumstances are exclusive licenses allowed without causing the research activity to result in private use. Granting an exclusive (or co-exclusive) license to one (or several) sponsor(s) in a multi-sponsor consortium agreement falls outside the safe harbors, even if all other members in the consortium consent to the arrangement. The determining factor is not whether consortium members provide consent, but whether the agreement explicitly enables any member to receive a license that is more exclusive than a NERF license.
- Is a present grant of a NERF license in a research agreement (e.g. “University hereby grants sponsor”) considered pre-pricing of the invention?
According to Principle One, a NERF license is always allowed. The pre-pricing guidelines apply to licenses that are more exclusive than NERF licenses.
- Does agreeing to a time-limited, fixed-fee option agreement or letter of intent in the research agreement cause the activity to result in private use?
Option agreements and letters of intent are short-lived arrangements intended to allow a potential licensee to evaluate its interest in a license agreement. Option agreements and letters of intent in research agreements that do not pre-price the full value of an exclusive license would not cause the activity to result in private use.
- Is a material provider considered a single or multi-party sponsor, where the underlying research is funded by another party?
In most cases, the material provider and funding sponsor are two different parties. Each would be considered a multi-party sponsor and the rules for cooperative research sponsors apply to both parties (i.e., neither party can receive a license more exclusive than a NERF license without creating a private business use). However, University bond counsel has advised that there may be less risk of creating a private business use when there is a very close nexus between the material provider’s material and the invention to which the material provider will receive exclusive rights (e.g., inventions that “necessarily use or necessarily incorporate” the provided material).
In some cases, if the funding sponsor does not require use of a specific third-party’s material and UC determines which third party material will enhance or improve the outcome of the activity, then the material provider may be considered a single sponsor with respect to the material transfer agreement, and the funding sponsor may be considered a single sponsor with respect to the funding agreement. Thus, the option to negotiate an exclusive license to the material provider (or to the funding sponsor) under this scenario may not cause the MTA (or the funding agreement) and related research activities to fall outside the safe harbors.
If the sponsor of the research agreement and the material provider are the same entity, such entity would also be treated as a single sponsor.
- What if the University grants a funding sponsor a NERF license and also grants a non-sponsor a royalty-bearing, non-exclusive license? Would this cause the activity to result in private use?
If the terms of the non-sponsor’s license are controlled entirely by the University and not the sponsor, the answer is no. Under this Principle, there is no requirement that non-sponsors be treated consistently in terms of the financial provisions of a license if the non-sponsor’s terms are controlled by the University. (See also Principle #4).
- Does a provision in a single sponsor research agreement granting the sponsor a time-limited option to negotiate an exclusive license to all fields of use for inventions conceived and reduced to practice in the performance of the research agreement constitute “granting broad rights” as described in Principle Four?
No. A broad grant of rights refers to the grant of rights to inventions made outside the performance of the research agreement. Pipelining of future inventions or the grant of licenses to background intellectual property are examples of broad grants of invention rights.
- Does a “most favored nations clause” or “right of first refusal” (e.g., requiring the University not to license an invention to a non-sponsor on financial terms more favorable to the non-sponsor than the terms last offered to the sponsor without first providing the sponsor the right to elect such more financially favorable terms) run afoul of this Principle?
So long as the financial terms last offered to the sponsor are determined by the cognizant ALO to be “fair market” value, the most favored nations clause should not cause the research activity to result in private use. The “fair market” value of the invention must be justified as being reasonable under the specific facts and circumstances of each case as of the date the technology is available and documented by the campus.
- Does the establishment of an Advisory Board that is tasked with setting up the overall technical agenda for the work to be performed and overseeing the research progress cause the activity to result in private use?
The answer depends on the composition and voting structure of the Advisory Board. If University members of the Advisory Board have the collective ability to determine the research to be performed and the manner in which it is to be performed, the establishment of the Advisory Board will likely not cause the activity to result in private use. If non-University members of the Advisory Board have the collective ability to make the final decision as to which projects receive funding or how the project will be performed, the establishment of the Advisory Board will likely cause the activity to result in private use.
Sponsor-initiated clinical trials involve protocols that are written by the sponsor. Would lack of control over a clinical trial protocol cause the activity to result in private use?
UC Bond Counsel has developed different guidelines for clinical trials. Patient care activities conducted by UC at its facilities are not considered private business activities.
- Does a visitor’s research activities on campus constitute private business use even if the research agreement provides the University with title to any inventions made by the visitor while using bond financed facilities
Yes. A visitor’s research activities using bond-financed facilities constitutes a private business use regardless of how inventions are handled because use of bond financed property by any third party (i.e., by any non-University personnel) is treated as a private business use. The campus will need to identify all visitor research activities for reporting in the annual private activity questionnaire (PAQ).
- Is use of bond financed facilities for bona fide “recharge activities” covered under the safe harbors?
Under §141 of the Internal Revenue Code of 1986, Basic research is defined as any original investigation for the advancement of scientific knowledge not having a specific commercial objective. For example, product testing supporting the trade or business of a specific nongovernmental person is not treated as basic research. For purposes of the ‘86 Tax Act, University Bond Counsel opined that any research, including applied research, performed by the University is considered “Basic research.”
If a recharge activity involves non-University personnel using bond financed facilities to conduct their own activities, such activity is not considered basic research and the safe harbor provisions do not apply. Use of bond financed facilities by non-University personnel is considered private business use and should be reported in the PAQ. Capital Planning/Budget may determine that “general public” or “incidental” use exception(s) apply.
Incidental use by private parties is permitted if (1) the space used is not financed for the principal purpose of providing that space for use by the private parties’ users (use of the space must be incidental to use by the University); and (2) user rates are either (a) negotiated at arm’s length and are fair market rates, and a term limited to 50 days per user for the term of the contract, including all contract extension and renewal options, or (b) negotiated at arm’s length and a standard, uniform pricing model for all users is used, and a term limited to 100 days per user for the term of the contract, including all contract extension and renewal options.
- Can the University agree to assign joint title to a material provider for an invention made solely by the University and still be within the safe harbors?
No. A specific requirement under the safe harbor provisions is that title to any patent or other product incidentally resulting from the basic research lies exclusively with the qualified user (e.g., University). (See Rev. Proc. 2007-47, §6.03(3)). Agreeing to joint title in a MTA for a sole University invention made in a bond-financed facility puts the research activity outside the safe harbors. If a material is jointly owned because it is jointly created, such joint ownership under property law does not constitute private business use.
- Does giving up title to inventions under a penalty clause, for example, in an MTA constitute private business use?
No. A penalty clause granting the material provider either title or an exclusive license option to a resulting University invention is considered a separate arrangement triggered by a breach of contract on the part of the University. The granting of such rights are not considered part of the research activity and thus not subject to the Tax Act requirements.
