In Uncategorized on 11/19/2020 at 18:16

That’s the question for Section 41 research credits. Is the risk of failure of the research for which credit is sought on the researcher? Is no one else paying for it?

I thought Judge Goeke gave us an answer, for which see my blogpost “Putting the ‘Fun’ in ‘Unfunded,'”12/9/19. There Judge Goeke was concerned with the researcher retaining rights to the products of the research, rather than a work-for-hire situation. The contracts there were fixed-price, and that was enough for Judge Goeke.

But Judge Mark V Holmes thinks otherwise, in Meyer, Borgman & Johnson, Inc., Docket No. 7805-16.  With tables, yet.

Yes, the MBJ contracts (including three unsigned but substantially-performed contracts) were all fixed-price, so MBJ bore the risk of failure of its research to produce commercially-viable results.

But the scanty caselaw has another component: it’s not only the risk of failure, but also the risk that MBJ underpriced the costs it would incur in doing successful research.

Judge Holmes gives two timely examples: Drug wholesaler contracts with manufacturer to develop and deliver 100 million shots of a new, FDA-and- EU-approved anti-viral vaccine at a fixed price: no approved vaccine, no pay. Risk of failure of research on manufacturer. But if same wholesaler contracts with same manufacturer to deliver 100 million shots of generic polio vaccine at a fixed price, risk is on manufacturer for underpricing costs of manufacturing, not research.

And here’s MBJ’s problem.  Their contracts don’t set forth standards which research must meet. Boilerplate compliance-with-law language doesn’t get it.

“Contract provisions like quality assurance procedures, specific barometers for success, and mechanisms for inspection, evaluation, and acceptance show that payments made under the contracts were contingent on the success of the research required under the contract. MBJ’s contracts don’t have such provisions.

“After reviewing all of the contracts and their relevant provisions, we hold that there is no genuine dispute that the payments to MBJ was not contingent on the success of research, and whatever financial risk they imposed on MBJ was not the financial risk that its research would fail. These contracts were funded by MBJ’s clients, and produce no section 41 credits.”  Order, at pp. 8-9. (Citation and footnote omitted).

Now both cases I cite are orders, not precedential. But think about them for your next Section 41 case.

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