Attorney-at-Law

MAKE OR BREAK

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Now both cases I cite are orders, not precedential.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.

  1. Where in the MBJ order does it say that all the contracts at issue were fixed price? And if that were true, why wasn’t Judge Goeke’s order mentioned in Holmes’ order?

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  2. Unfortunately the link I provided to the opinion does not work, and a docket search does not provide the text either. Therefore I cannot cite to the text of the opinion. Perhaps one of the online research outfits will post it, if they can find it. As for citing orders, they are expressly not precedential except as law of the case; see Rule 50(c).

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  3. This language is at the bottom of page 5 or the order: “MBJ relies heavily on the argument that it entered into fixed-price or lump-sum agreements with its clients . . .”

    However, this language is found on page 6: “MBJ’s argument on this motion relies heavily on the undisputed fact that the agreements between it and its clients are fixed-fee or capped-price contracts.”

    At no point does Judge Holmes explicitly state that the 14 contracts being reviewed are fixed price contracts (unlike Judge Goeke in the Populous order where the five contracts being reviewed were specifically identified as fixed price agreements).

    Based on the language above, couldn’t the 14 MBJ contracts all be capped-price contracts, like those found in Geosyntec? Its also interesting that Judge Holmes only cites the Geosyntec appellate decision, which only addressed two capped price contracts and did not address fixed price contracts.

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    • Mr Martin,sorry I thought you were referring to Judge Lauber’s 1/11/12 opinion. In any case, orders are only precedent in the case in which they were issued (the “law of the case” doctrine); see Rule 50. As for Judge Holmes’ rationale, without reviewing the contracts themselves in each case, I couldn’t tell.

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