Principles for Avoiding Private Business Use in Research Contracts

University Bond Counsel has developed these "Principles for Avoiding Private Business Use in Research Contracts" that establish parameters for ensuring that research agreements remain within safe harbor provisions. 

  1. The University can always agree to a non-exclusive royalty-free license (a “NERF”) with an individual sponsor or group of sponsors, including the federal government. Contracts with Federal entities that contain standard, Bayh-Dole invention rights do not cause private business use.

  2. Only in single sponsor circumstances are exclusive licenses to the sponsor (or an entity specified by it) allowed and then only if fair market value is charged. Fair market value is determined at the time of the license in question. We believe that exclusive licenses are much more likely than non-exclusive licenses to cause private business use and, therefore, extra care should be taken to make sure that exclusive licenses satisfy these principles. In determining whether a particular research project has only a single sponsor, contributions by the University to the research project can be ignored.

  3. Where the only licenses provided are non-exclusive, it is fine to charge different sponsors differently. The key language point in the IRS guidance is that the safe harbor applies so long as no one is allowed anything BETTER than a NERF. It is not better than a NERF to have a non-exclusive license that costs something. There is no requirement that multiple sponsors or any non-sponsors be treated consistently in terms of cost, but any different or inconsistent treatment of non-sponsors has to be entirely at the discretion of the University. (See the fifth Principle below.)

  4. Consistent treatment among all licensees, whether sponsors or non-sponsors, is not required. There are no limitations on the terms of individual licenses granted to non-sponsors. The IRS has ruled, however, that in some circumstances an agreement that grants broad rights to a research institution’s present and future intellectual property may cause that private business to be a private business user of the facilities in which the research developing the intellectual property was performed. This does not impact agreements with invention management organizations (such as WARF) relating to existing inventions.

  5. The University must be careful to guard against contractual provisions with sponsors which limit the University’s discretion over what to charge non-sponsors. Sponsors are allowed to know at the beginning what they will be charged, but sponsors cannot dictate to the University what the University will charge others.

  6. It is important for the University ultimately to be in control of the manner in which the research is performed. For this purpose, the University will be treated as in control, even in the context of a committee or board with industry members, so long as the University has the final say by way of a veto right, a “tie-breaker” vote or other effective majority control.