A post on techno-l raises an interesting question about the AUTM Licensing Survey. The question was “Is a patent reimbursement licensing income.” According to the AUTM definition:
“LICENSE INCOME RECEIVED includes: license issue fees, payments under options, annual minimums, running royalties, termination payments, the amount of equity received when cashed-in, and software and biological material end-user license fees equal to $1,000 or more, but not research funding, patent expense reimbursement, a valuation of equity not cashed-in, software and biological material end-user license fees less than $1,000, or trademark licensing royalties from university insignia. LICENSE INCOME also does not include income received in support of the cost to make and transfer materials under Material Transfer Agreements.”
From the tax reporting standpoint of a corporation, which any university is, it makes no difference what any income stream is called, whether royalties or reimbursement they are all reportable income. The reason why I think each item should be included in licensing income follows:
- research funding: If the research funding is designed to enhance the value of the technology being licensed, and it flows under the licensing contract, I see no reason to exclude it. However, if the research funding is under a research contract with an option to license, then the purpose of the contact is to do research not to do a license, so it would not be licensing income. The difference is in the first agreement there is a license and the research is payment for the transfer of know-how under the license. The university is being paid to apply research know-how (which may be viewed as common law trade secret) as part of the transfer of the technology. Here the trade secret exists in the heads of the researchers and will be used to develop additional trade secret out of the research. The sponsored research is analogous to the know-how consulting in licenses for factory processes and equipment where there are progress payments based on attaining milestones such as the design of the factory, purchase of the equipment, installation of the line and successful test production.... In that case there is a transfer of know-how on how to make the licensed technology work. In the sponsored research tied to a license, there is a transfer of know-how on how to make it work as well.
- patent expense reimbursement: From the standpoint of the university as a corporation, (and all non-profits are corporations) they are taxable income as the original expense was not incurred on behalf of the licensee as an agent for the licensee. (That is why you can pay for gas on a business trip and be reimbursed without tax consequence to you. The expense was actually incurred by your employer, you just happened to loan them the cash. They are repaying the loan without interest, giving them cheap access to capital and a tax deduction.)
- a valuation of equity not cashed-in: The transaction here is not the same as taking cash and buying a stock. When you buy stock, the income used to purchase the stock has already been taxed. Here, however, that income has not been taxed. Rather you are saying you have an asset (the IP) which you are trading for another asset. During this trade you realize a capital gain, that is, what you receive (hopefully) is above the basis in the asset (the dollars the university spent to create it - minus any grants if those were not already declared as income). The incremental amount above the basis is a capital gain. To use an old metaphor, the university is no different than a farmer with seed corn. He can plant it or sell it. If he plants it and nurtures it, as a crop it is worth more than the seed. For a good farmer, there is profit in there. Similarly, you take the faculty ideas (the corn), plant them and nurture them (the R&D), and sell it (the license), hopefully at a profit.
- software and biological material end-user license fees less than $1,000, or trademark licensing royalties from university insignia: This makes no sense on the face of it. If it is a license fee or trademark license royalty, by definition it is a license fee or royalty. If it is either, then by definition it is licensing income.
- income received in support of the cost to make and transfer materials under Material Transfer Agreements: an MTA is a license, what makes it binding is consideration. Ne said pays cash and the other provides the license and sample. The licensor is not an agent of the licensee, they are arms-length parties to a contract. The consideration is therefore, as always, income.
Now whether this discussion reflects current tax law, I cannot say. It has been a while since I was in law school and working on this kind of stuff. That is a question to consulting a practicing tax lawyer on. But it seems logical and the logic or the matter is something we can discuss.
It is my understanding that what the definition reflects is how under many university policies, some licensing income counts for distributions and some does not. But splitting income into reimbursement or royalty or whatever is an internal bookkeeping matter having to do with the distribution of income inside the university not with what is income. Since they all are actually licensing income, bot including them under-reports what is actually occurring.
There is another ramification in all this. At first glance, to the extent universities follow this distinction internally, this is eerily like the situation in Stanford v. Roche – sloppy legal work. The question is whether a professor can be expected to know that this odd definition of licensing income (based on who should get what part of the total income stream) is being used when signing an employment contract. The lesson of Stanford v. Roche is we have to look carefully at the language we use in contracts and policies and adhere to standard legal usage of terms, unless we are very, very explicit that is not the case and we draw the employee’s attention to that fact.
Tootles
Phyl Speser, J.D., Ph.D
CEO, Foresight Science & Technology Incorporated and
VP Membership, Association of University Technology Managers
(c) 401.441.3587, (o) 401.273.4844, ext. 35, (Skype) phyl.speser
(h) 401.441.6678
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