New Research Agreement Guidelines Specify Bayh-Dole Rights Not Private Business Use
On June 26, 2007, the Internal Revenue Service issued Revenue Procedure 2007-47, which provides new safe harbor guidelines under which a research agreement will not result in private business use of facilities financed with qualified 501(c)(3) bonds. This revenue procedure modifies and supersedes Revenue Procedure 97-14, making two very favorable changes. Revenue Procedure 2007-47 provides that, if certain requirements are satisfied, the rights of the Federal Government and its agencies mandated by The Patent and Trademark Law Amendments Act of 1980, as amended, 35 U.S.C. §200 et seq. (2006) (the “Bayh-Dole Act”) will not result in private business use by the Federal Government or its agencies of bond-financed property used in research performed under research agreements. This revenue procedure also modifies the guidelines on cooperative research agreements to include industry or federally sponsored research agreements with either a single sponsor or multiple sponsors.
Revenue Procedure 2007-47 is effective for any research agreement entered into, materially modified, or extended on or after June 26, 2007. Additionally, borrowers may apply this revenue procedure to any research agreement entered into prior to June 26, 2007.
If the research agreement satisfies the requirements described below applicable to either (i) industry- or federally sponsored research agreements or (ii) corporate-sponsored research, the research agreement will not result in private business use of bond-financed facilities.
Industry- or Federally Sponsored Research Agreements
In General. A research agreement relating to bond-financed property used pursuant to an industry- or federally sponsored research arrangement must satisfy the following requirements:
(i) a single sponsor must agree, or multiple sponsors must agree, to fund governmentally performed basic research;
(ii) the borrower must determine the research to be performed and the manner in which it is to be performed (for example, selection of the personnel to perform the research);
(iii) title to any patent or other product incidentally resulting from the basic research must lie exclusively with the borrower; and
(iv) the sponsor or sponsors are entitled to no more than a nonexclusive, royalty-free license to use the product of any of that research.
Basic research means 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 for-profit entity is not treated as basic research.
Federal Government Rights Under Bayh-Dole Act. In applying the new operating guidelines to federally sponsored research, the rights of the Federal Government and its agencies mandated by the Bayh-Dole Act will not cause a research agreement to fail to meet the above guidelines, provided that the requirements of clauses (ii) and (iii) above are met, and the license granted to any party other than the borrower to use the product of the research is no more than a nonexclusive, royalty-free license. For example, the existence of march-in rights (as described below) or other special rights of the Federal Government or the sponsoring Federal agency mandated by the Bayh-Dole Act will not cause a research agreement to fail to meet the above requirements, provided that the borrower determines the subject and manner of the research, the borrower retains exclusive title to any patent or other product of the research, and the nature of any license granted to the Federal Government or the sponsoring Federal agency (or to any third party for-profit entity) to use the product of the research is no more than a nonexclusive, royalty-free license.
Although the rights of the Federal Government and its agencies mandated by the Bayh-Dole Act will not cause a federally sponsored research agreement to fail the requirements of Revenue Procedure 2007-47, that protection from private use may not be absolute. The revenue procedure’s special rules regarding the Federal Government’s Bayh-Dole mandated rights do not address the situation where a third party actually receives more than a nonexclusive, royalty-free license even if such license or other rights are the result of the Federal agency’s march-in rights. Currently, it’s unclear whether the Federal Government’s exercise of its Bayh-Dole rights would be treated as a deliberate action by the borrower potentially resulting in private use. Until that issue is resolved, borrowers must keep in mind the conditions under which the Federal Government can exercise its march-in rights under 35 U.S.C. §203.
Background Regarding Bayh-Dole Act. The Bayh-Dole Act generally applies to any contract, grant, or cooperative agreement with any Federal agency for the performance of research funded by the Federal Government. The policies and objectives of the Bayh-Dole Act include promoting the utilization of inventions arising from federally supported research and development programs, encouraging maximum participation of small business firms in federally supported research and development efforts, promoting collaboration between commercial concerns and nonprofit organizations, ensuring that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise, and promoting the commercialization and public availability of inventions made in the United States by United States industry and labor.
Under the Bayh-Dole Act, the Federal Government and sponsoring Federal agencies receive certain rights to inventions that result from federally funded research activities performed by nonsponsoring parties pursuant to contracts, grants, or cooperative research agreements with the sponsoring Federal agencies. The rights granted to the Federal Government and its agencies under the Bayh-Dole Act generally include, among others, nonexclusive, nontransferable, irrevocable, paid-up licenses to use the products of federally sponsored research and certain so-called “march-in rights” over licensing under limited circumstances. The term “march-in rights” refers to certain rights granted to the sponsoring Federal agencies under the Bayh-Dole Act to take certain actions, including granting licenses to third parties to ensure public benefits from the dissemination and use of the results of federally sponsored research in circumstances in which the original contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the product of that research. The general purpose of these rights is to ensure the expenditure of Federal research funds in accordance with the policies and objectives of the Bayh-Dole Act.
The safe harbor guidelines for corporate-sponsored research in Revenue Procedure 2007-47 are the same as the guidelines in Revenue Procedure 97-14. A research agreement relating to bond-financed property used for basic research supported or sponsored by a corporate sponsor will not result in private business use if any license or other use of resulting technology by the sponsor is permitted only on the same terms as the borrower would permit that use by any unrelated, nonsponsoring 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 borrower 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 nonsponsoring party for those same rights.
For further information regarding this memorandum, please contact one of the Jones Day healthcare finance attorneys listed below or your principal Jones Day healthcare contact.
Lynn Leland Coe
Gerald M. Griffith
John F. Bibby, Jr.
David J. Kates
Michael J. Mitchell
Richard K. Tomei
Daniel J. Bacastow
Robert L. Capizzi
Valerie Pearsall Roberts
S. Louise Rankin
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