Academic Industry Collaboration in Federal Grants and Cooperative by MikeJenny


									                                                   Research Management Review, Volume 18, Issue 1
                                                                            Spring/Summer 2011

       Academic-Industry Collaboration under
     Federal Grants and Cooperative Agreements:
            Financial, Administrative, and
               Regulatory Compliance

                                William F. Ferreira
                               Hogan Lovells US LLP


Federal sponsorship of collaboration between academic institutions and industry is on the rise.
Many government programs emphasize cooperation between universities and the commercial
sector as a means to merge basic and applied research, promote economic development, and
enhance knowledge dissemination. The intersection between academia and industry on federal
research projects yields financial, administrative, and regulatory complexities related to cost
accounting, program income, audits, equipment, transparency, the distinction between
subawards and sub-contracts, and other items. This article discusses foundational compliance
issues associated with participation of for-profit firms in grants and cooperative agreements.

INTRODUCTION                                        different but important subject: the financial,
                                                    administrative, and regulatory challenges in
    Academic-industry interaction has
                                                    federally funded academic-industry
received considerable attention in recent
years. A lot of attention has focused on
                                                        When institutions and companies
conflicts that arise when commercial
                                                    collaborate on research projects, often these
organizations support and fund research or
                                                    projects are funded by the industry
services provided by, or to, an academic
                                                    participant. But academic-industry
investigator.1 This article focuses on a
                                                    cooperation is not funded exclusively by

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                                                                              Spring/Summer 2011

industry. The federal government                      Services (DHHS). Upon notice that DHHS
recognizes the value of these collaborations          would fund the proposal, Company ABC
and has demonstrated a growing                        engaged counsel to negotiate these terms
willingness to fund them.                             for the project:
     In today’s research environment, for-                 • A 10% fee charged to the grant, as a
profit firms increasingly partner with                         condition to Company ABC serving
colleges, universities, and research                           as a subgrantee to the prime grantee
institutions on scientific projects. These                     university.
collaborations grew under the American                     • Direct reimbursement of various
Reinvestment and Recovery Act of 2009,                         Company ABC indirect costs.
which opened new doors to industry                         • Company ABC to have sole
participation in grants for energy research,                   discretion over income generated
broadband development, and medical                             with grant funding (i.e., program
research, among other areas. Academic-                         income).
industry collaborations also have grown as                 • Confidentiality of all Company ABC
more government funds become available                         research results.
for “translational” research, that is, studies             The problematic nature of these terms is
designed to turn scientific discovery into            apparent to the seasoned research
practical application. The congressional ban          administrator. Not only would the terms
on earmarks to for-profit companies is                contravene federal grant policies, but there
another factor that makes academia—with               is also some question about whether the
its relatively steady stream of federal               terms are legally permissible.
funds—an ever more attractive research                     Broad challenges associated with
partner (Chronicle of Higher Education, 2010).        academic-industry collaborations are
     Strong ties between institutions and             already familiar to the research community.
industry are not new; however, the infusion           This article highlights special compliance
of federal funds into these relationships has         issues associated with federally funded
increased in quality and quantity. The                projects, and focuses on financial,
research community is well-acquainted                 administrative, and regulatory issues. The
with the strings attached to government               article begins with an inventory of models
grants for research. Yet for-profit firms may         for industry participation in federal
find this terrain unfamiliar, long experience         research awards. Next, it provides examples
in research and development                           of specific compliance matters. Finally, it
notwithstanding.                                      identifies additional subjects not unique to
     Take, for example, “Company ABC” (a              government-funded collaborations but
pseudonym) that teamed with a university              nonetheless relevant to them.
to apply for a medical research grant from                 The items discussed in this paper are
the U.S. Department of Health and Human               basic compliance issues that arise when two

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sectors—for-profit and nonprofit—combine             probably not “legal” partners), by splitting
to undertake federal research. By its nature,        research responsibility, clinical sites, and
this paper comes into contact with myriad            grant funds. On the other end of the
items and provides only a “nutshell”                 spectrum might be a research institute that
treatment of each. Although the paper                contracts out a small set of commercial
covers a broad spectrum of subjects, it does         services under a grant to a local high-tech
not exhaust, even remotely, the compliance           firm; collaboration could be minimal and
particulars and peculiarities that arise in          the firm may not be identified in the grant
academic-industry relationships. Every               application. Somewhere in the middle could
subject identified here warrants further             be a paid consultative relationship between
consideration in the context of particular           an academic laboratory and a commercial
collaborations. The author designed this             organization on a particular issue in a
paper to serve as a reminder of principles           federal project. There are many variations to
and concepts that prompt day-to-day                  each of these arrangements.
judgment in academic-industry                            As the examples suggest,
relationships funded by grants and                   “collaboration” need not be a joint
cooperative agreements.                              undertaking in which a university and a

FORMS OF COLLABORATION                               firm undertake truly cooperative scientific
                                                     activity. Rather, academia looks to industry
    Academic-industry interactions take
                                                     for a variety of commercial goods and
various forms. Collaborations may involve,
                                                     services that are critical to the research
for example, industrial affiliate programs;
                                                     mission, and sometimes these relationships
clinical trial agreements; research
                                                     are also deemed “collaborations”. Perhaps
equipment loans; material transfer; spinoff
                                                     the most common form of industry
companies; research parks; joint ventures;
                                                     participation in grants and cooperative
consortia; and consultations. These
                                                     agreements is for a company to serve as a
arrangements reflect the diverse missions
                                                     “contractor” to a prime academic awardee.
and expectations that each entity brings to
                                                     The word “contract” is a term of art in
the collaboration.
                                                     federal grants lexicon; it refers to an
    In federally funded collaborations, an
                                                     agreement between a prime awardee and a
observer could “follow the federal money”
                                                     third party through which the prime
and learn a lot.2 For example, on one end of
                                                     awardee procures routine commercial
the spectrum, a biotechnology company
                                                     goods or services for the sponsored project.
and a medical school might together, or as
                                                     (This paper uses the word “contract” and
part of a consortium, apply to an agency for
                                                     “sub-contract” synonymously.)
an interdisciplinary clinical research grant;
                                                         This is in contrast to a “subaward”,
both the company and the medical school
                                                     which is another term of art. A “subaward”
could be true project “partners” (though
                                                     refers to an agreement between a prime

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awardee and a third party through which             flow of funds to the commercial sector. A
the prime awardee transfers federal                 simplistic and often-used question at the
financial assistance to the third party for         outset of a federally funded relationship
substantive scientific activity under the           between a prime awardee institution and a
sponsored project.                                  company is this: will the company’s
    When an academic institution is the             relationship with the institution be one of
prime awardee under a grant or cooperative          true research collaboration, or one of
agreement, the characterization of a                vendor-customer? If the former, then
commercial firm as either a “contractor”, on        normally a subaward is issued to the firm. If
the one hand, or a “subawardee”, on the             the latter, then normally a sub-contract is
other, has a profound effect on compliance          issued. The reality is that relationships
obligations. The next section provides a            between institutions and commercial
more expansive explanation of the                   entities are multifaceted arrangements that
distinction between contractors and                 take any number of shapes and are difficult
subawardees.                                        to categorize neatly. Relevant sources of
    Note that casting a company as either a         guidance follow, and even this guidance is
contractor or a subawardee is not intended          not conducive to mechanical application in
to imply that companies are always                  each situation.
subordinate to the academic institution.                Office of Management and Budget
Commercial firms often are eligible to be           (“OMB”) Circular A-110 (codified at 2 C.F.R.
direct, prime recipients of competitively           Part 215) and the DHHS Grants Policy
awarded grants and cooperative                      Statement recognize a general distinction
agreements, especially in Recovery Act              between a “subaward” and a “contract” (or
programs.3 Nevertheless, it is increasingly         sub-contract) under an award:
common for companies to be subawardees                      A subaward is the transfer of
under federal research grants and                           financial assistance for substantive
cooperative agreements. As explained                        programmatic work under the
below, many of the compliance issues                        federal award; it does not include
associated with commercial subawardees                      the procurement of commercial
will be one and the same for commercial                     goods and services from a vendor.4
prime awardees. Thus, both prime
recipients and subrecipients will benefit                  A contract is a grantee’s agreement
from the distinctions drawn in this section.               with a third party in order to

THE DISTINCTION BETWEEN                                    procure commercial goods and
                                                           services for a project.5
SUBAWARDEES AND CONTRACTORS                            The Federal Demonstration Partnership
    Research awards to academic
                                                    (“FDP”) Statement on Subawards
institutions almost always involve some
                                                    (September 18, 2000) also provides

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guidance.6 The FDP interprets a subaward                      (1) has its performance measured
to be an arrangement “in which two (or                            against the federal award’s
more) qualifying legal entities/institutions                      objectives;
are working collaboratively on a sponsored                    (2) can make, and has responsibility
project. Each institution has its own                             for, substantive programmatic
principal investigator/project director;                          decisions;
however, one of the collaborating                             (3) has responsibility for complying
institutions takes on the role of prime                           with applicable federal program
awardee with the sponsoring federal                               compliance requirements; and
agency” (Federal Demonstration                                (4) uses the federal funds to carry
Partnership, 2000, p. 1). The FDP Statement                       out its program’s objectives as
also notes that a subawardee “is conducting                       compared to providing goods or
its own scope of work and is not providing                        services for a grantee’s program.
goods or services, such as simply executing               In contrast, characteristics indicative of a
lab tests or constructing experimental                “contract” relationship between an
instrumentation. In a subaward situation,             academic institution and a firm are when
the principal investigator/project director of        the firm:
the subrecipient may be a co-author on                        (1) provides the goods and services
publications or the subrecipient may seek                         to the institution within normal
patent protection for inventions and                              business operations;
otherwise function in much the same                           (2) provides similar goods or
manner as if the award came directly from a                       services to many different
federal sponsor” (Federal Demonstration                           purchasers;
Partnership, 2000, p. 2).                                     (3) operates in a competitive
     To distinguish between subawards and                         environment;
contracts, the substance of the relationship                  (4) provides goods or services that
between the two entities is more important                        are ancillary to the operation of
than the form of agreement.7 Cognizant of                         the federal program; and
this admonition, which is stated clearly in                   (5) is not subject to compliance
OMB Circular A-133, the research                                  requirements of the federal
community often uses guidance drawn                               program.
from Circular A-133, as follows.8                         Admittedly, these traditional
     Characteristics reflective of a                  distinctions between subawards and
“subaward” relationship between an                    contracts have eroded over time as
academic institution and a firm include               academic-industry interactions take new
those where the firm:                                 and diverse forms. For purposes of
                                                      compliance obligations, however, the
                                                      distinction remains significant. The

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implication of the distinction is described in        are furnished to ensure that such materials
the next section.                                     and services are obtained in an effective

IMPLICATIONS OF THE                                   manner and in compliance with the
                                                      provisions of applicable Federal statutes
CONTRACTOR/SUBAWARDEE                                 and executive orders.”9 Included among
DISTINCTION                                           these standards are requirements for the
Commercial Entities that are                          prime awardee to ensure “open and free”
“Contractors”                                         competition in the selection of a contractor;
    Conventional wisdom suggests this:                maintain written procurement standards;
One way to limit the compliance obligations           release clear and accurate solicitations;
of companies that participate in federal              include a preference for firms that offer
research, and to limit the subrecipient               products and services that conserve natural
monitoring obligations of academic                    resources, protect the environment, and are
institutions that award federal funds to              energy efficient; include a preference for
those firms, is to make an appropriate                small businesses, minority-owned firms,
determination that the company is a                   and women’s business firms; undertake and
contractor and not a subawardee. By and               document cost or price analysis in
large, the conventional wisdom holds true.            connection with every contract; and
Contractors generally are not tethered to             document a justification for lack of
award programmatic requirements; are not              competition when competitive bids or offers
subject to the financial and administrative           are not obtained.7
pre-award and post-award requirements of
OMB Circular A-110; are allowed, unlike
                                                      “. . . the prime awardee is
most subawardees, to make a profit from
their work under grants and cooperative
                                                      expected to flow down, and the
agreements; and have few obligations in               selected contractor is expected to
regard to cost accounting, property                   comply with, all applicable laws
accountability, procurement processes,                and regulations listed in
audits, and project reports.                          Appendix A of OMB Circular A-
    It would be a mistake, however, to
assume that agreements with contractors
under grants and cooperative agreements
                                                           Second, the prime awardee is expected
are no different from other contracts to
                                                      to flow down, and the selected contractor is
procure goods and services in the
                                                      expected to comply with, all applicable laws
commercial marketplace.
                                                      and regulations listed in Appendix A of
    First, OMB Circular A-110 prescribes
                                                      OMB Circular A-110. (“All contracts,
standards applicable to the prime awardee’s
                                                      awarded by a recipient including small
selection of a contractor. “These standards
                                                      purchases, shall contain the following

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[Appendix A] provisions as applicable.”)8            Commercial Entities that are
Included among these provisions are laws             “Subawardees”
on equal employment opportunity,                         To deem a company a subawardee
lobbying, construction, environmental                under a federal award presents critical
protection, and intellectual property.               compliance obligations. Generally, funds
    Third, some sponsors apply specific              provided to subawardees retain their full
public policies and appropriations law               federal character. For-profit subawardees
mandates to contractors under federal                are expected to comply with almost all the
awards. As an example, the DHHS and NIH              pre-award and post-award requirements set
Grants Policy Statement collectively identify        forth in OMB Circular A-110, as well as
over forty public policy obligations that,           sponsor policies and procedures that
based on the nature of the contractor’s work,        supplement the same. For instance, DHHS’s
may apply to commercial contractors under            implementation of Circular A-110, at 45
grants and cooperative agreements.9 Some             C.F.R. Part 74, specifically applies to DHHS
examples include the following:                      grants and subawards to “commercial
    ● Public Health Security and                     organizations”.13 The difficulty is that
        Bioterrorism Preparedness and                commercial firms seldom are familiar with
        Response Act: regulates the use or           Circular A-110’s provisions on management
        procurement of select agents and             of funds, program income, property
        toxins.10                                    accountability, procurement processes,
    ● Pro-Children Act: imposes                      intellectual property, and audits, and few
        restrictions on smoking in facilities        such firms have the financial or
        where federally-funded children’s            administrative controls in place to swiftly
        services are provided.11                     comply with such provisions.
    ● Restrictions on Abortions: prohibits               Some sponsors maintain separate
        use of federal funds for abortions.12        policies and regulations that apply to for-
    These and other federal policies may             profit awardees and for-profit subawardees.
seem peculiar to contractors who view                The U.S. Department of Defense (DoD), for
themselves as routine vendors in the                 example, issues “Administrative
commercial marketplace. However, these               Requirements for Grants and Agreements
policies demonstrate that, on some level, the        with For-Profit Organizations”. These
government holds these contractors to a              provisions apply to all direct awards and
higher standard than that which would                subawards to for-profit firms.14 These
otherwise apply in the commercial                    special regulations are not entirely
marketplace.                                         consistent with the provisions of OMB
                                                     Circular A-110. For example, DoD indicates
                                                     that for-profit firms must prepare
                                                     “monthly” personnel activity reports (e.g.,

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time and effort reports) to support salary                 At first glance, this arrangement would
and wage charges to awards.15 Circular A-              appear to permit a company to avoid
110 does not speak to effort reporting, and            compliance infrastructure, maintain a
the cost principles applicable to educational          profile on important federal projects, and
institutions, OMB Circular A-21, would not             thereby enhance the company’s reputation.
require monthly effort reports for all                 It may also leave open the possibility of co-
personnel. DOD changes or supplements                  authorship or generation of intellectual
several other familiar A-110 grant                     property.
administration requirements.                               However, to use this strategy as a means
    Note that some private firms are                   to avoid compliance often is unavailing.
reluctant to make the representations and              Many requirements apply to a firm’s
certifications that federal sponsors expect            involvement in federally sponsored
subawardees—even for-profit                            research, regardless of the direct or indirect
subawardees—to make. These certifications              receipt of federal funds. Consider these
include the “assurances” enumerated in                 examples:
Standard Form 424B, which pertain to                       • Financial Conflicts of Interest (FCOI):
compliance with myriad statutes and                            The Public Health Service (PHS)
policies, including nondiscrimination laws,                    regulations that address financial
human subjects regulations, and laboratory                     conflicts of interest apply to
animal welfare.16 Noncompliance with these                     recipients of federal research funds,
laws or a false certification of compliance                    and also to each “Investigator” that
can generate serious consequences for the                      participates in the research.17 Thus, if
prime awardee and the subawardee,                              a commercial firm’s personnel
including potential False Claims Act                           participate in the research as
liability.                                                     “investigators”—i.e., they are
To Receive—or Not to Receive—                                  responsible for the design, conduct,
Federal Funds                                                  or reporting of research—then the
    Some companies ask this question: Can                      firm’s investigators may be subject
we continue to participate in a federal                        to parts of the FCOI regulation,
project and also remain free of the foregoing                  which generally require disclosure
compliance obligations if we avoid the                         of financial conflicts of interest and
direct or indirect receipt of federal funds? In                steps to manage, reduce, or
other words, can the company serve as an                       eliminate a conflict.18 Ordinarily, a
uncompensated collaborator or consultant                       prime awardee would flow down
on an academic institution’s government                        the FCOI regulation through its
funded project and legally avoid these                         subaward agreement, and obligate
obligations?                                                   the subawardee to abide by the
                                                               prime institution’s FCOI policies, or

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    require the subawardee to make                         as medical information, even where
    certain assurances on conflicts of                     there is no direct intervention or
    interest.19                                            interaction with a subject, and even
•   Research Misconduct: Regulations                       in some circumstances where the
    that govern research misconduct in                     information is coded and not
    federal projects apply to                              immediately identified with a
    “allegations” of research misconduct,                  human subject.
    regardless of whether the accused or               • Animal Research: The PHS Policy on
    the accused’s employer receives                        Humane Care and Use of
    federal funds.20 When there is a                       Laboratory Animals applies to “all
    nexus to a federal project, an                         PHS-conducted or supported
    allegation against a company’s                         activities involving animals, whether
    employee may trigger an inquiry, a                     the activities are performed at a PHS
    requirement to resolve the allegation                  agency, an awardee institution, or
    in accordance with applicable                          any other institution and conducted
    regulations, and a requirement to                      in the United States, the
    report the investigation to the                        Commonwealth of Puerto Rico, or
    sponsor.                                               any territory or possession of the
•   Human Subjects: As a general                           United States.”22 The actual receipt
    principle, federal research that                       of federal funds by the organization
    involves human subjects is subject to                  engaged in animal activity under a
    the “Common Rule” (45 C.F.R. Part                      federal project is not a precondition
    46). The Common Rule may apply in                      to application of the requirement.
    some situations in which a firm                    Several other regulatory items, such as
    participates in research but does not          intellectual property policies, follow this
    receive federal funds. Companies               general pattern.
    may be familiar with Food and Drug                 The balance of this article focuses on
    Administration (FDA) regulations               selected compliance obligations associated
    that cover clinical research related to        with for-profit firms that serve as
    investigational drugs and devices.             subawardees on government grants and
    However, the Common Rule is not                cooperative agreements, or as direct
    identical to the FDA regulations.21            recipients of such funds.23
    The Common Rule defines human                  Prohibition on Profit
    subjects research more broadly than                Companies have obligations to
    the clinical investigations covered by         shareholders and others to show a return on
    FDA regulations. For example, the              the investment of time and effort in research
    Common Rule often applies to                   and development. In contrast, almost all
    analysis of private information, such          federal sponsors explicitly prohibit payment

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of “profit” or “fees” to commercial                            permitted by a program solicitation
recipients and subrecipients that participate                  and only to the extent that it does
in a federal grant, except under specific and                  not exceed the amount negotiated by
authorized conditions.                                         the Grants and Agreements Officer
                                                               and specified in the award letter”
“. . . almost all federal sponsors                             (National Science Foundation [NSF]
                                                               Proposal and Award Policies and
explicitly prohibit payment of
                                                               Procedures Guide, p. V-12).
“profit” or “fees” to commercial
                                                           • “Fee or profit or other increment
recipients and subrecipients that                              above cost may not be paid on
participate in a federal grant,                                Department of Commerce financial
except under specific and                                      assistance awards [grants] unless
authorized conditions.”                                        there is statutory authorization to do
                                                               so. Requests for fee or profit by
   For example:                                                recipients of any type should be
   • “HHS policy allows the payment of                         referred to [Commerce] for review”
       fee on SBIR/STTR grants, but HHS                        (Department of Commerce Grants
       will not provide profit or fee to any                   Manual, chap. 9).
       other type of recipient under any                   • “Grants and cooperative agreements
       other grant program. A fee may not                      may not provide for the payment of
       be paid by a recipient to a                             fee or profit to recipients or
       subrecipient/consortium participant,                    subrecipients, except for awards
       including a for-profit organization.                    made pursuant to the Small Business
       However, a fee (profit) may be paid                     Innovation Research or Small
       to a contractor [e.g. vendor]                           Business Technology Transfer
       providing routine goods or services                     Research programs” (Department of
       under a grant in accordance with                        Energy Financial Assistance Rules, 10
       normal commercial practice” (HHS                        C.F.R. § 600.318).
       Grants Policy Statement, II-30).                    These policies may come as an
   • “Except for grants awarded under                 unwelcome surprise to companies with
       the SBIR/STTR programs, under an               little experience in federal research projects.
       NIH grant, no profit or fee will be            Firms that build profit and fee into labor
       provided to a for-profit organization,         charges or otherwise “load” their billing
       whether as a grantee or as a                   rates may need to disconnect elements of
       consortium participant” (NIH Grants            cost from their standard charge schedules.
       Policy Statement, p. IIB-248).
   • “Payment of fees (profit) are
       allowable only if specifically

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Cost Accounting Principles and                         direct activities, indirect activities, and
Systems                                                included in the base to which indirect costs
    Institutions of higher education and               are allocated (emphasis in original). Some
nonprofit organizations are quite familiar             for-profit firms are surprised to learn that to
with the cost accounting principles of OMB             serve as a direct awardee or subawardee
Circulars A-21 and A-122, respectively. In             under a grant demands this type of
many cases, these institutions have                    accounting infrastructure.
accounting systems centered around, and                     Note that the FAR cost principles are
tailored to, tracking reasonable, allowable,           not fully consistent with the OMB Circular
and allocable costs. These costs are                   cost principles that apply to educational
identified with unique accounting codes                and non-profit institutions. For instance, the
and institutional policies define appropriate          FAR cost principles permit for-profit
documentation for each cost. However, few              awardees to incur “precontract costs” to the
commercial organizations have systems that             extent such costs would be allowable if
are designed to track costs in this manner,            incurred after the effective date of the
unless the company is a prior recipient of             award.25 This is in contrast to the Circular
cost-reimbursement government contracts.               A-21 cost principles, which indicate that
    Commercial firms are subject to the Cost           “Costs incurred prior to the effective date of
Principles for Commercial Organizations in the         the sponsored agreement, whether or not
Federal Acquisition Regulation (“FAR”) at              they would have been allowable thereunder
48 C.F.R. Part 31. It can be expensive and             if incurred after such date, are unallowable
time-consuming for a firm to newly                     unless approved by the sponsoring
establish the accounting infrastructure                agency.”26
needed to comply with the FAR cost                          Also, recovery of indirect costs under
principles and other financial requirements            grants and cooperative agreements can be a
applicable to the receipt of federal funds.            challenge for commercial firms. Indirect
    Take, for example, the documentation of            cost recovery usually is based on a
salary and wages charged to grants. The                negotiated indirect cost rate. For-profits that
NIH makes clear that cost accounting for               already receive government awards may
commercial firms means that these firms                have a negotiated indirect cost rate with
must document salaries and wages charged               specific agencies.27 Such rate agreements,
to grants “by maintaining a labor                      unlike nonprofit rate agreements, may
distribution system for all employees                  contain highly confidential commercial and
regardless of function. The labor                      proprietary information; often they will not
distribution system must account for total             be released to a collaborator entity or even
hours and charge direct and indirect labor             to a prime awardee. When a for-profit firm
to the appropriate cost objectives”24 in order         has no indirect cost rate or other known
to accurately identify labor costs charged to          general and administrative rate upon award,

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special difficulties may arise. In these                generates the revenue, usually program
situations, if the firm is to be reimbursed for         income must be reported to the sponsor
indirect costs, potential options, among                agency. More importantly, the government
others, would be for the firm to: (a)                   regulates the use of the revenue, which can
negotiate a rate with the sponsor agency, if            make commercial organizations
it is otherwise eligible to have a rate                 uncomfortable. In general, sponsors will
agreement; (b) negotiate an appropriate rate            require one, or a combination, of these uses
with a prime awardee, based on the FAR                  of program income:
cost principles; or (c) establish some other                • Additive use: program income is
agreement with the sponsor agency or                            added to the award funds and must
prime awardee about reimbursement of                            be used to further the award
indirect costs.                                                 purposes.
Program Income                                              • Deductive use: program income is
    Numerous grants and cooperative                             deducted from the government’s
agreements have the potential to generate                       total share of costs under the award.
“program income”, and the likelihood of                     • Matching use: program income is
program income may increase when a                              applied toward an awardee’s cost
commercial firm collaborates with a                             share requirements.29
nonprofit institution. Broadly, any revenue                 Ambiguous program income situations
generated directly by a grant-supported                 are plentiful when commercial
project, program, or activity, potentially is           organizations participate in federal research.
program income. Circular A-110 defines                  For example, if both government funds and
program income as “gross income earned                  private funds are contributed to produce a
by the recipient that is directly generated by          revenue-generating event in the course of a
a supported activity or earned as a result of           project, are all the revenues considered
the award”.28 Examples of program income                program income? Or could a percentage of
include fees for services performed; charges            revenue remain with the firm? Some
for the use or rental of real property,                 sponsors permit proportional distribution,
equipment, or supplies acquired under the               but not all do.
federal award; the sale of commodities or                   Three additional observations on
items fabricated under the award; and                   program income are important to
license income on patents and copyrights. A             commercial firms. First, recipients have no
classic example of program income is                    obligation to the government for program
admission fees charged to participants for a            income earned after the end of the project
workshop or conference sponsored by an                  period, unless the award terms and
award.                                                  conditions provide otherwise.30 Second, if
    Even though program income may be                   authorized by the sponsor agency, the costs
maintained by the organization that                     incidental to the generation of program

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                                                                              Spring/Summer 2011

income may be deducted from gross income              to equipment purchased or fabricated with
to determine program income, provided                 NSF grant funds by a small business or
these costs have not been charged to the              other commercial firm will vest in the
award.31 In other words, program income               government. Such equipment will be
can be “net” income. Finally, although                acquired and used in accordance with [NSF
program income includes royalties and                 Conditions for Acquisition and Use of
other income earned from a copyrighted                Equipment] and [NSF Property
work, patents, trademarks, or inventions,             Management Standards].”35 Commercial
typically such income is exempt from the              organizations should not assume, therefore,
program income requirements, though it is             that property acquired under a project will
subject to the other intellectual property            be unencumbered by federal requirements.
terms of the award.                                   Audits and Access to Records
Federally Funded Equipment                                Commercial firms involved in federal
    Rules on ownership, management, and               research sometimes are surprised to learn of
disposition of equipment purchased with               the government’s sweeping audit rights.
grant assistance may be different for                 Any company, as a direct or indirect
nonprofit and for-profit organizations. The           recipient of award funds, automatically
Federal Grant and Cooperative Agreement               agrees to the authority of the federal
Act of 1977 permits agencies to vest title to         sponsor, the U.S. Inspector General, the U.S.
grant-funded equipment in nonprofit                   Comptroller General, and any of their
organizations without further obligation to           authorized representatives, to have timely
the government.32 Such property is                    and unrestricted access to the company’s
considered “exempt property”—it is                    books, documents, papers, or other records
generally excused from the equipment                  pertinent to the award.36 The government’s
management and accountability rules set               rights include access to the firm’s personnel
forth in Circular A-110.33                            for discussion related to such records, and
    However, a commercial organization                these rights are not limited by the record
has much less flexibility when it acquires            retention period, which generally is three
equipment under federal awards or                     years from the date of submission of the
subawards. Such equipment is “nonexempt               final financial report under the award. For-
property” and, unless otherwise specified in          profit firms that are unaccustomed to
the award, subject to a spectrum of                   federal business may be uncomfortable with
acquisition, use, management, and                     such broad audit and interview rights.
disposition requirements, which include a             Academic institutions, on the other hand,
requirement to mark, tag, and segregate the           have long had policies and procedures that
equipment.34 Some agencies reserve title to           are consistent with the government’s rights.
equipment purchased by commercial                         If an academic institution wanted to
organizations. NSF is one example: “[T]itle           appraise the financial or other risk of

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                                                                              Spring/Summer 2011

engagement with a specific subawardee,                Intellectual Property
normally the institution could review the                 The multiple intellectual property
subawardee’s annual Circular A-133 audit              complexities in academic-industry
report, which is publicly available.37 This           collaboration are worthy of coverage in
risk assessment is considered a component             their own articles. For example, ownership
of a prime awardee’s subrecipient                     of IP, protection of background IP, and
monitoring obligations. However, Circular             rights to research data are particular
A-133 does not apply to for-profit                    challenges, as is the question of material
organizations, and prime awardees must                transfer. Research institutions and
look elsewhere to conduct an assessment of            commercial firms may be constrained,
for-profit subawardees.38                             under federal law, from agreeing to terms
     Audit requirements for commercial                that otherwise are customary in the broader
firms vary between federal agencies. For              marketplace. This section highlights a few
example, DHHS requires for-profit firms to            fundamental observations in regard to
have a non-federal audit if the firm, during          federally funded inventions.
its fiscal year, expended a total of $500,000             Collaboration between academia and
or more under one or more DHHS awards,                industry arguably is written into the Bayh-
as a direct recipient and/or as a                     Dole Act, which imposes an obligation on
subrecipient. The firm either may have: (1) a         research institutions to commercialize
financial-related audit, in accordance with           government funded inventions.42 Nonprofit
Government Auditing Standards,                        inventors and their institutions fulfill this
commonly known as the “Yellow Book”, or               “duty to commercialize” through license
(2) an audit that meets the requirements              relationships with industry.43
contained in Circular A-133.39 Even when                  The Bayh-Dole Act, by its own terms,
the firm does not meet the $500,000                   did not apply to for-profit firms that were
threshold for the mandatory audit, the                not small businesses. However, in response
firm’s “records must be available for review          to increasing commercial sector concerns
by appropriate officials of Federal                   about this lack of uniformity, a 1983
agencies.”40 Academic institutions that work          Presidential Memorandum and a 1987
with for-profit subawardees must flow                 Executive Order extended Bayh-Dole to all
down the appropriate audit terms and                  for-profit organizations, to the extent
secure compliance with the same. Also note            permitted by law.44 As such, inventions by
that pursuant to HHS policy, foreign                  companies that are conceived or first
subawardees—whether for-profit or not—                actually reduced to practice in the
are subject to the same audit requirements            performance of experimental, development,
as for-profit organizations.41                        or research work under a grant or
                                                      cooperative agreement may be retained and
                                                      protected by the company, subject to certain

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                                                                               Spring/Summer 2011

government rights and various inventor                     •   Share royalties collected on a subject
obligations.45 The company must track and                      invention with the inventor;
report inventions, and maintain a system to                • Use royalties or income earned to
ensure that the government obtains its                         support scientific research or
rights (Henderson & Smith, 2002).46                            education; and
    The government’s rights to inventions                  • Attract small business licensees.49
include a nonexclusive, nontransferable,                   Other obligations unmistakably apply to
irrevocable, paid-up worldwide license to              for-profit firms. Among these is the
practice or have practiced for or on behalf of         preference for U.S. manufacture of
the United States the invention throughout             inventions. Unless a waiver is obtained
the world.47 This is commonly known as                 from the sponsor agency, products that
“government-purpose” rights. The sponsor               embody the invention or that are produced
agency also maintains “march-in” rights,               through use of the invention must be
which allows the government to step into               manufactured substantially in the United
the shoes of the patent-holder and grant               States.50 This preference presents a
additional “compulsory” licenses to the                challenge to firms that have relationships
invention upon investigation and certain               and agreements with foreign manufacturers,
findings. Grounds for march-in include a               often in countries where manufacturing is
finding that such action is “necessary to              inexpensive. The penalty for omission to
alleviate health or safety needs which are             comply with this requirement could be
not reasonably satisfied” by the patent-               steep—e.g., “march-in”—though it is
holder, its assignees, or licensees.48 The             unclear whether in this context a march-in
government has not exercised these rights              ever has occurred.
with any frequency, if at all, but the                     On February 28, 2011, the United States
existence of the right must be understood              Supreme Court heard oral arguments on the
by commercial organizations that                       question of whether a university’s statutory
participate in grants and cooperative                  right under the Bayh Dole Act in inventions
agreements.                                            under federally funded research can be
    It would not appear, under the                     terminated unilaterally by an individual
regulations that implement the Bayh-Dole               inventor through the inventor’s separate
Act, 37 C.F.R. Part 401, that companies are            agreement with a third party company that
subject to all the same obligations familiar           purports to assign the inventor’s rights to
to nonprofit institutions, such as the                 that company. The outcome of the case,
obligation to:                                         known as Bd. of Trustees of Stanford
    • Seek approval from the sponsor                   University v. Roche Molecular Systems, Inc.,
        agency prior to assignment of an               may considerably affect how research
        invention;                                     institutions and companies secure

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assignments from individuals who work on              under Exemption #4. However, agency
federal projects.51                                   grant and cooperative agreement officials
Transparency and Open Government                      have been known to be less receptive to
    The current presidential administration           Exemption #4 and less likely than their
asserts a “commitment to creating an                  procurement counterparts to withhold
unprecedented level of openness in                    records from public disclosure. Commercial
Government.”52 In this regard,                        organizations would be wise to proactively
organizations that participate in federal             and thoroughly identify, mark, document,
research have developed a heightened                  and support the confidential nature of
sensitivity to protection of confidential             sensitive information that is used in federal
information that is generated, used, or               research.
submitted in a federal project. Generally,                Two relatively new laws also contribute
commercial firms have much more to lose               to heightened disclosure requirements:
from the unanticipated disclosure of                       • The Federal Funding Accountability
proprietary and confidential business                         and Transparency Act of 2006
information.                                                  (“FFATA”) requires disclosure, on a
    New policies related to the Freedom of                    single publicly accessible website, of
Information Act (“FOIA”)53 have caused                        all entities and organizations that
concerns among companies that participate                     receive federal funds and
in grants and cooperative agreements. The                     payments.55 Through this website,
Justice Department has directed agencies to                   the public—including a firm’s
adopt a heavy presumption in favor of                         competition—now have broad
information disclosure, even for                              insight into federal awards secured
information that technically falls within the                 by commercial firms, and insight
scope of a FOIA Exemption.54 Broadly,                         into the partnerships and
FOIA requires federal agencies to disclose                    collaborations that commercial firms
records requested in writing by any person.                   form with academic institutions.
Agencies may withhold information                          • The Recovery Act (ARRA)56 contains
pursuant to nine statutory FOIA                               several transparency and
exemptions. One exemption is for “trade                       accountability requirements. A firm
secrets and commercial or financial                           that participates in an ARRA project
information obtained from a person and                        should anticipate the public
privileged or confidential”, otherwise                        disclosure of project data, as well as
known as Exemption #4. Quintessentially                       firm-related information, including
sensitive information—such as an                              the names and compensation of the
organization’s technical methodology and                      firm’s top officers.57 Furthermore,
price data, the release of which would cause                  grantees and subawardees that
competitive injury—typically is protected                     participate in ARRA projects must

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                                                                               Spring/Summer 2011

       “promptly refer to an appropriate                   ●   Third party reimbursement
       inspector general any credible                      ●   Liability, indemnification, and
       evidence that a principal, employee,                    warranties
       agent, contractor, sub-grantee,                     ●   Gifts or loans of equipment
       subcontractor, or other person has                  ●   Tax-exempt bond-financed facilities
       submitted a false claim under the                   ●   University-affiliated research parks
       False Claims Act or has committed a                 ●   Equipment loans
       criminal or civil violation of laws                 ●   Commercialization
       pertaining to fraud, conflict of                    ●   Personnel sharing
       interest, bribery, gratuity, or similar             ●   Research subject injury
       misconduct involving those                          ●   Visiting scientists
       funds.”58 This affirmative obligation               Collectively, these issues suggest that to
       to disclose misconduct is a                     nourish and expand academic-industry
       complicated and tricky legal                    interaction is a delicate process. This should
       scenario for any organization, and              not imply, however, that such programs
       especially for a company.                       must meet with skepticism and pessimism.

CONCLUSION                                             Rather, alliance between academia and
                                                       industry is imperative in the modern
    The foregoing issues are merely
                                                       research environment. Current economic
illustrative. From these examples, though,
                                                       conditions and other pressures on corporate
perhaps research professionals can draw
                                                       budgets have companies paying increased
practical inferences on issues likely to arise
                                                       attention to opportunities for federal funds.
when for-profit firms participate in grants
                                                       University-industry compacts are on the
and cooperative agreements. Other
                                                       rise, and the government has shown
important issues that fall under the rubric of
                                                       willingness to support them with grants
academic-industry collaborations include,
                                                       and cooperative agreements. As these
without limitation, the following59:
                                                       relationships grow, alertness to the
    ●   Publication and rights in data
                                                       compliance matters entailed is today a
    ●   Material transfer agreements
                                                       permanent endeavor for research
    ●   Export control and fundamental
    ●   Confidentiality, nondisclosure, and
    ●   Conflicts of interest and
    ●   Faculty consulting agreements

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                                                                               Spring/Summer 2011


1. On May 21, 2010, the U.S. Department of Health and Human Services (DHHS) issued
proposed rules on the identification and management of financial conflicts of interest. The
proposed rules enhance the present financial conflict of interest management and reporting
requirements for Public Health Service (PHS) grant recipients. See 75 Fed. Reg. 28687. The final
rule is expected in 2011.
2. “Following the federal money” also could be deceptive. For many reasons, as described in
this article, a commercial entity might forego federal funding and still cooperate as an
uncompensated participant in a federal project.
3. Federal sponsors make a variety of grants available to commercial entities. For example, the
U.S. Department of Commerce’s Broadband Technology Opportunities Program (BTOP) made
grant funds available to for-profit entities to support the deployment of broadband
infrastructure. See The Department of Energy makes grant funds
available to for-profit entities for education, outreach, and modernization of electricity delivery
systems, renewable and efficient energy research and development, and a variety of other
research programs. See The Food and Drug
Administration (FDA) makes grant funds available to for-profit companies for specialized drug
and device research. See
4. See DHHS Grants Policy Statement (GPS) II-78 (2007); NIH Grants Policy Statement (GPS), p.
I-25 (2010).
5. See DHHS GPS App. B-4; NIH GPS, p. I-12.
6. The Federal Demonstration Partnership (FDP) is a broad association of federal agencies,
universities, and research organizations that work to streamline the administration of federally
sponsored research. Materials can be found at
7. OMB Circular A-133 includes this caution in the course of presenting characteristics
indicative of a subawardee versus a vendor. § __210(d).
8. See OMB Circular A-133 § __210(b).
9. Circular A-110 §__.40-48; 2 C.F.R. § 215.40-48.
10. Circular A-110 §__.40-48; 2 C.F.R. § 215.40-48.
11. Circular A-110 App. A; 2 C.F.R. § 215 App. A.
12. See Exhibit 3 in the HHS GPS and Exhibit 4 in the NIH GPS.
13. HHS GPS, p. II-9; NIH GPS, p. IIA-8.
14. HHS GPS, p. II-5; NIH GPS, p. IIA-8.
15. HHS GPS, p. II-6; NIH GPS, p. IIA-9.
16. 45 C.F.R. § 74.1.

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17. Department of Defense Grant and Agreement Regulations (DoDGARS), 32 C.F.R. §
18. 32 C.F.R. § 34.11(a)(4) (“The recipient shall have a system to support charges to Federal
awards for salaries and wages, whether treated as direct or indirect costs. Where employees
work on multiple activities or cost objectives, a distribution of their salaries and wages will be
supported by personnel activity reports which must: (i) Reflect an after the fact distribution of
the actual activity of each employee. (ii) Account for the total activity for which each employee
is compensated. (iii) Be prepared at least monthly, and coincide with one or more pay periods.”)
19. See Standard Form 424B,
20. 42 C.F.R. § 50.602. The Public Health Service is a branch of DHHS that includes the National
Institutes of Health (NIH) and other federal agencies. Note that FCOI regulations are on the
verge of being revamped and reissued. See supra note 1.
21. 42 C.F.R. § 50.605. “Investigator” means “the principal investigator and any other person
who is responsible for the design, conduct, or reporting of research funded by PHS, or proposed
for such funding. For purposes of the requirements of this subpart relating to financial interests,
‘Investigator’ includes the Investigator's spouse and dependent children.” 42 C.F.R. § 50.603.
22. 42 C.F.R. § 50.604.
23. 42 C.F.R. § 93.102.
24. 21 C.F.R. § 50, 56.
25. PHS Policy, available at
26. The U. S. Departments of Defense and Energy have special authority to award TIAs to for-
profit entities. See supra note 4. Some, but not all, of the compliance issues associated with
grants and cooperative agreements will apply to TIAs.
27. “Time and Effort Reporting for Commercial Organizations,” NIH Office of Acquisition
Management and Policy. See
28. FAR 31.205-32. In practice, however, many agencies will restrict or limit the incurrence of
precontract costs.
29. OMB Circular A-21 J.36; 2 C.F.R. § 200 App. A J.36. In practice, many grantor agencies
permit educational institutions to exercise “expanded authorities” that allow for the incurrence
of pre-award costs.
30. For example, the NIH Division of Financial Advisory Services (DFAS), Office of Acquisition
Management and Policy (OAMP), negotiates indirect cost rates with commercial organizations
for purposes of grants and contracts awarded to for-profit entities. See NIH Manual Chapter
7610 dated 9/11/2006.
31. OMB Circular A-110 § __.2(x); 2 C.F.R. § 215.2(x).
32. OMB Circular A-110 § __.24(b); 2 C.F.R. § 215.24(b).
33. OMB Circular A-110 § __.24(e); 2 C.F.R. § 215.24(e).
34. OMB Circular A-110 § __.24(f); 2 C.F.R. § 215.24(f).
35. 31 U.S.C. § 6306.
36. Equipment management and disposition conditions are established in OMB Circular A-110 §
__.34; 2 C.F.R. § 215.34.
37. OMB Circular A-110 § __.34; 2 C.F.R § 215.34.

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38. NSF Proposal and Award Policies and Procedures Guide, Pg. IV-4.
39. OMB Circular A-110 § __.53(e). See also 45 C.F.R. § 74.26(d)(2).
40. See
41. “Since this part [Circular A-133] does not apply to for-profit subrecipients, the pass-through
entity is responsible for establishing requirements, as necessary, to ensure compliance by for-
profit subrecipients. The contract with the for-profit subrecipient should describe applicable
compliance requirements and the for-profit subrecipient’s compliance responsibility. Methods
to ensure compliance for Federal awards made to for-profit subrecipients may include pre-
award audits, monitoring during the contract, and post-award audits” OMB Circular A-133 §
42. 45 C.F.R. § 74.26(d); HHS GPS Pg. II-90.
43. 45 C.F.R. § 74.26(d) (2).
44. Bayh-Dole University and Small Business Patent Procedures Act of Dec. 12, 1980, Pub. L. No.
96-517, 94 Stat. 3015-3028 (codified as amended at 35 U.S.C. §§ 200-211, 201-307 (1994)).
45. See Memorandum to the Heads of Executive Departments and Agencies: Government
Patent Policy, Pub Papers 248 (Feb. 18, 1983) and Executive Order 12591.
46. With respect to work that is subject to copyright protection, normally a firm may freely
copyright works developed under a federal grant or cooperative agreement. The sponsor
agency receives an automatic, royalty-free right to reproduce, publish, or otherwise use the
work for Federal purposes, and to authorize others to do so. OMB Circular A-110 §__.36(a); 2
C.F.R. § 215.36(a).
47. 35 U.S.C. § 202(c)(4); 37 C.F.R. § 401.14.
48. 35 U.S.C. § 203(a); 37 C.F.R. § 401.14(j).
49. 37 C.F.R. § 401.14(k).
50. 37 C.F.R. § 401.14(i).
51. Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems Inc., 583
F.3d 832 (Fed. Cir. 2009), cert. granted, 178 L. Ed. 2d 368 (2010).
52. White House Memorandum for the Heads of Executive Departments and Agencies,
Transparency and Open Government, Jan. 21, 2009, available at
53. 5 U.S.C. § 552.
54. Office of the Attorney General, Memorandum to the Heads of Executive Departments and
Agencies, Freedom of Information Act, Mar. 19, 2009, available at
55. Pub. L. 109-282,120 Stat. 1186 (Sept. 26, 2006).
56. Pub. L. 111-5, 123 Stat. 115, 215 (Feb. 17, 2009).
57. See Section 1512 of the Recovery Act. Also, see Office of Management and Budget,
Memorandum For The Heads Of Departments And Agencies, Implementing Guidance for the
Reports on Use of Funds Pursuant to the American Recovery and Reinvestment Act of 2009,
June 22, 2009, available at
58. See endnote 57 for applicable references.

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59. Many other papers and resources address academic-industry collaborations. For example,
see the Council on Governmental Relations brochure on University-Industry Relations,
available at, and see the National Academies
Government-University-Industry Research Roundtable (GUIRR), available at

                                     LITERATURE CITED

Chronicle of Higher Education. (2010, July 18). New earmark limits make universities desired
       partners, but some just say no.
Federal Demonstration Partnership. (2000).
Henderson, J. A., & Smith, J. J. (2002). Academia, industry, and the Bayh-Dole Act: An implied
       duty to commercialize. Center for Integration of Medicine and Innovative Technology.
       Last available at

                                    ABOUT THE AUTHOR

William F. “Bill” Ferreira is an attorney with Hogan Lovells in Washington, DC. He provides
advice to recipients of government grants and contracts, including small and large businesses,
colleges, universities, and nonprofit organizations. A significant portion of his practice involves
representation of colleges, universities, and other organizations engaged in research,
development, and other sponsored activity, both in the U.S. and overseas. Bill has worked with
numerous organizations on matters involving audits, investigations, and disputes with the
federal government regarding costs and administration of contracts, grants, and cooperative
agreements. He regularly advises organizations on cost allowability and cost accounting;
compliance with federal procurement laws and OMB Circulars; flowdown obligations; rights to
intellectual property; federal information security requirements; and agency-specific policies
addressing the financial and administrative management of grants and contracts. Bill also
advises clients on the drafting and negotiation of a wide range of contractual instruments,
including subawards and subcontracts, teaming agreements, nondisclosure agreements, and
other unique contractual arrangements.


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