The law firm of Slocum & Boddie, P.C. combines the expertise of a large firm with the personal service of a small firm. The firm’s practice is concentrated in the areas of government contracts and grants, real estate financing, corporate law and civil litigation of commercial matters.

The act of contracting and the law of contracts is pervasive in our society. However, contract law interacts with and overlaps all other legal disciplines. Separate coverage is the norm for law schools in specialized contractual areas such as agency, partnerships, employment law, and intellectual property transfer. Yet each of these topics regularly becomes the sticking point in research contract negotiations. Therefore, to understand even the basic characteristics, uses, and issues which arise in research contracting, at least a cursory knowledge of "mercantile" law is required.

When "contract" law is mentioned, the classic mental picture most people have is John Houseman teaching offer, acceptance, and mutuality in "Paper Chase." However, these "elements of contract," while crucial, are so standard as to be routine. The problems come when contract law overlaps other areas. A partnership is a contract between business owners, a license agreement is a contract to use certain property, an indemnification agreement is a contract to protect one party from loss. Contract law today encompasses issues from bankruptcy to torts and from choice of law to warranty. This text cannot begin to provide the legal underpinnings for a contract negotiator working with complex agreements. While this section identifies the areas which require study, competent counsel is necessary for good contracting.

The primary areas of the law to be concerned with in negotiating research contracts are:

• Basic contract law.

   

• Agency.

   

• Business organizations (corporate and partnership law).

   

• Negligence--product liability and insurance law.

   

• Intellectual property law.

   

• Public contract law and administrative procedures.

   

• Bankruptcy.

   

• Anti-trust.

   

• Civil procedure.

   

The text which follows and the clauses discussed in each part are molded by the complex interplay of each legal area listed above.

These legal areas dictate the clauses to be used, the rights of the contracting parties and others under those clauses, the role of Government in private contracts, and the value of the end results to the contracting parties.

One reason so many areas of the law apply to contracts is that there are many types of contractual agreements. As discussed earlier, consulting agreements, partnerships, subcontracts, and purchase orders for supplies all fall into this category. The common element in each is a reasonably specific purpose and the concept of mutuality of enforceable promises. The particular aspects of the arrangement then dictate the form of agreement most appropriate. Some of the most common factors and the resulting agreements are set out in Exhibit 1.

EXHIBIT 1

The variety possible within each subcategory is almost endless. The issues that arise in each subcategory and some of the contractual provisions that address these issues are covered in succeeding sections.

Most of the universities and many of the companies involved in research contracting are not free to contract at will. Tax exempt status, licensing, federally mandated research protocols, required means of competition, permissible affiliations--all are subject at least some of the time to state or federal laws. In addition, even the most carefully crafted contract clause may be voided in bankruptcy or modified by laws related to the authority of Government agents. The use of simple disputes resolution procedures may be foreclosed by federal law or problems with sovereign immunity.

Research contract negotiators and administrators must carefully review the effect of such state and federal legislation and regulation on any contract arrangement. (Other agreements are also affected by this, of course, but the greatest burden is in the contracting area.) For those used to federal contracting, it is important to remember that private contracts are not governed by any one set of laws. Instead, the laws of one or more states will govern as determined by a complex set of rules which themselves vary from state to state. Further, the court system which has jurisdiction is not always the same as the laws which govern the contract.

As can be seen by the preceding discussion, any review of contractual agreements is subject to caveats and conditions galore. However, recognizing these substantial variations, the remainder of this section discusses each major type of contractual agreement.

A review of SRA's Guide to University-Industry Research Agreements (SRA, 1984) and the articles in the SRA Journal and elsewhere indicates that there is a somewhat standardized format for research contracts. This is a matter of functional resemblance, not style or convention. Research (and other) contracts tend to look alike because the same topics must be covered.

Every contract should include provisions concerning the following:

• Identification of the parties.

   

• Work to be done or property to be transferred.

   

• Period of performance.

   

• Consideration/financial arrangement.

   

• Control of the work/interface provisions.

   

• Use of other party's property, name, data, etc. (including patents, etc.).

   

• Extra-contractual liability (including issues relating to insurance and to third parties).

   

• Provisions relating to disputes resolution.

   

If a central topic is not covered, the parties run the risk of a court inserting into the agreement language to cover the issue or even declaring the agreement to be a nullity.

The contract may well include additional provisions covering a multitude of other topics, but these are what define the species within the contract genus. In addition, many contracts include "recitals" or statements of intent and explanation. These, however, do not have the legal force of actual contract clauses.

Some of the contract clauses to be used are discussed in succeeding sections. However it is imperative that negotiators remember that the statement of work to be done is a part of the contract even when it is incorporated by reference, as is commonly done. If a contract has been chosen as the form of agreement, the statement of work should be reasonably precise (if broad exploratory research with no firm objective is being funded, an assistance document should be the vehicle of agreement).

The particular issues to be addressed in a work statement will vary with the nature, purpose, size, and complexity of the work to be performed. At a minimum, however, every work statement should:

• Give a precise statement of objectives.

   

• Identify the work to be performed.

   

• Set parameters by which the desired scope of work can be defined and by which progress and results can be measured.

   

• Require some defined "end product" and some tangible form of progress/compliance reporting.

   

A work statement for a level-of-effort type requirement should specify:

• Kind of personnel (labor categories) required to perform the work and any qualification requirements (e.g., education, experience, certification).

   

• Nature of work.

   

• Required deliverables.

   

In writing the final version of the statement, elements may need to be combined or rearranged in individual sections to fit particular circumstances. The main objective should be to arrange and present the elements in a manner that:

• Is logical and readable.

   

• Emphasizes the most important elements.

   

• Conveys exactly what is required of the contractor.

   

While consulting agreements, partnerships and joint ventures, and license agreements all conform to the basic anatomy of contract, each has special attributes related to the peculiar nature of the relationship that is created. These attributes may involve additional sections or particular "twists" to the basic contractual language.

Most agreements with individuals are consulting arrangements between a company and a university faculty member. However, such agreements might also arise when a university needs advice on the organization of a research foundation or on the tax consequences of a proposed research partnership. In any of these or other agreements with individuals, the basic contractual structure may be modified substantially because of the problem of avoiding the creation of an employment situation.

Employers and employees are subject to a series of tax and work protection laws. While these laws are not meant to apply to independent consultants, companies and individuals have repeatedly tried to use the consulting arrangement to avoid withholding, overtime, or unemployment compensation requirements. As a result, state and federal legislators and regulators have defined employment in the broadest possible way, making even legitimate consulting arrangements more difficult to establish.

The difficulty is compounded by state or university restrictions on non-civil service employment for state university faculty, by state and federal conflict of interest restrictions, and by the competing objective of many companies to assure the "loyalty" of consultants.

To address these problems, the drafter of a consulting agreement should include specific language, crafted in light of state and federal labor laws (and conflict provisions, where applicable) that preserves the independent status of the consultant.

The business sections of the nation's newspapers are filled with stories of junk bonds and leveraged deals. In the research area, equivalent talk is about R&D limited partnerships. Investors provide the funds, a research institution gets the funding to do major projects, and new products and processes tumble out without a company being forced to mortgage its assets for an uncertain future. The scenario sounds perfect for industry-university cooperation; however, the actual story is a bit more complicated. This is because partnership law is complex, tax law (which is a primary consideration in R&D partnerships) is horrendously complex, and securities law is a Gordian knot made of hardened steel cable.

To a great extent, partnership law derives from agency law. Each partner is considered an agent of every other partner. Thus, the agency concepts of imputed knowledge and responsibility for acts done within the scope of the partnership relationship will apply.

Partnership law is distinct from agency law in an important way. A partnership is based upon a voluntary contract between two or more competent persons who agree to place some or all of their money, effects, labor, and skill in business with the understanding that there will be a proportional sharing of the profits and losses among them. An agent can be compensated from business profits but does not agree to bear the ordinary business losses and has no ownership interest in the business.

In the past, attempts to formulate a concrete definition of the term partnership have caused endless controversy among judges, lawyers, and members of the business community. Partnership is defined by the Uniform Partnership Act (passed by most states) as "an association of two or more persons to carry on as co-owners a business for profit." Therefore, two essential elements of a partnership are (1) a common ownership interest in a business, and (2) sharing profits and losses of the business.

University administrators may already be cringing, seeing challenges to the university's tax exempt status if it enters into such a relationship. However, this is only the beginning.

R&D partnerships are a special kind of organization called a limited partnership. The limited partnership is a creature of statute. Most states have adopted some form of the Uniform Limited Partnership Act (UPLA), which codifies the law of limited partnerships. Limited partnerships are frequently used in the context of commercial investment. A person willing to purchase the financial interest in a business might not want any management responsibility or personal liability for partnership debts. The limited partnership form meets this need since only the general partner(s) must have unlimited liability. In this case, the general partner assumes management responsibility of the partnership and takes full personal liability for all its debts. A limited partner contributes cash (or other property) and owns an interest in the firm but undertakes no management responsibilities and is not personally liable for partnership debts beyond the amount of his or her investment.

Now additional problems arise. If the university is a general partner, it takes on unlimited liability. A limited partner is in the arrangement for investment only, so the university normally does not fit in that category. What sounded like a good idea, now seems not to be designed with the university in mind. A peek into the tax and securities issues will convince those few hopeful souls who would still like to find the university directly involved in R&D partnerships.

The Internal Revenue Service makes its own definition of many terms, one of them being R&D. In fact, it makes several definitions. These definitions make it very difficult to structure an R&D partnership to take advantage of the R&D tax credit or even to obtain a normal deduction for expenses. Adding in a not-for-profit organization as a partner makes the situation next to impossible.

Finally, to the extent that a wide range of limited partner investors will be solicited, state and federal securities laws produce an exponential increase in complexity. (A recent "simple," publicly traded R&D partnership has been reported to have taken over a year to structure, with several very high priced lawyers and accountants working on the deal continuously.)

The message should be very clear. Universities may properly undertake cooperative activities with industry, but most if not all universities should not become literal partners with business.

This is not to say that a university may not undertake research work on behalf of an R&D partnership. Such work, done under contract, is no different from a normal research contract with a corporate sponsor.

The university may even participate in the income that results from its work for an R&D partnership. Again, it does this in the same way with either a corporate or partnership sponsor--through licensing.

Just as partnership law involves agency and contract law, the law of license agreements intertwines contract law with the law of "intellectual property." This thorny hybrid must be addressed if industry-university "technology transfer" is to occur.

Howard Bremer, patent counsel for the Wisconsin Alumni Research Foundation has said, "The universities have been engaged in technology transfer for most of their existence although that specific term may not have been applied to their activities" [SRA Journal, Fall, 1985, p. 55]. However, until recently, most universities transferred technology by casting it out gratis. Later in Mr. Bremer's article, he gives the reason for the change to what he calls "controlled" transfer. He says, "[I]t is well understood  .  .  . that big money is to be had" by both industry and universities. As he says, the common denominator is ownership or control of intellectual property through patents and licensing.

The license agreement itself (or any research contract which incorporates licensing provisions) will follow a format modified from that discussed for basic research contracts. This is because of the law of intellectual property and the nature of a license.

In the absence of a statute, inventors have no exclusive right to the use of their own inventions. If the invention is voluntarily disclosed, anyone may use it with impunity. To encourage technological progress, the federal Government has changed the common law rule.

The patent laws provide for a period of exclusive rights in inventors. However, determining whether a discovery is patentable can be difficult. The discovery must be "novel" and not "obvious." Abstract ideas, mathematical formulae, and the like are not patentable.

The patent belongs to the inventor although inventors frequently assign their rights to an employer as a condition of their employment contract. Even if there is no provision in the employment contract concerning patents, an employer might be entitled to a "shop right" which permits an employer the royalty-free use of the invention for purposes of his or her regular business. If an inventor does not seek a patent within a year of making his or her invention known to the public, he or she loses the opportunity to obtain a patent. Furthermore, if the inventor markets the invention for more than a year, he or she loses the opportunity to obtain a patent even if the inventor took precautions not to place the discovery in the public domain. These rules are to stop the inventor from prolonging the day when the public is entitled to free use of the invention.

The remedy for infringement of a patent by a private party is "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty from the infringer, together with interest and costs as fixed by the court." The court has discretion to award up to triple damages. Injunctions against infringement can be obtained except against the United States. Patents are presumed valid but a defendant is free to challenge whether the patent was properly issued. The statute of limitations for patent infringement is six years.

The patent process can be exceedingly complex and expensive. Patent specifications must contain sufficient information on the invention to enable one learned in the art to practice the invention. Prudent inventors hire experienced attorneys to prepare the applications. Obtaining a patent takes a minimum of a year from the day of filing and often takes twice that long. Approximately 50 percent of all patent litigation that proceeds to judgment results in the patent being ruled invalid. Nevertheless, if the invention has commercial potential, the exclusive right to market the invention for seventeen years may be well worth the expense and effort of pursuing the tortuous patent process.

In addition to patents, industry-university agreements may cover copyrights, especially where computer software is involved.

Creators or owners of "original works of authorship fixed in any tangible medium of expression" can obtain limited protection for their intellectual property through the copyright laws of the United States. The statutory requirement that the work be "original" does not mean that the creation must be unique or unusual. All that is necessary is that the work can be traced to the intellectual labor of the author.

The copyright laws do not protect ideas, procedures, methods, systems, processes, concepts, principles, discoveries, or devices. Copyrights safeguard only the expressions of authors. Even though others may use the ideas or information from a copyrighted work, they may not duplicate descriptions, explanations, or illustrations.

Copyright protection is available for both published and unpublished works. Section 106 of the Copyright Act generally gives the owner of the copyright the following exclusive privileges:

• To reproduce the copyrighted work in copies or phonorecords.

   

• To prepare derivative works based upon the copyrighted work.

   

• To distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.

   

• In the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly or to display the work.

   

The Act provides explicit guidance on determining the ownership of copyrights. The title to a copyright vests initially in the author or authors of the work except where the author has produced a "work made for hire." This exception arises under two circumstances. The first is where the work is prepared by an employee within the scope of his or her employment. The second is where the work is specifically ordered or commissioned for use if "the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire." In the case of a work made for hire, the employer or the person for whom the work was prepared is considered the author for purposes of copyright laws. Ownership of a copyright can be transferred through the laws of intestate succession. Ownership of a copyright is distinct from the ownership of any material object on which the intellectual property is embodied. Therefore, a person who purchases a copyrighted novel or phonorecord is permitted to transfer ownership of the material item without infringing the copyright.

Violation of the exclusive rights of copyright ownership (e.g., violation of a patent) is called "infringement." The owner may bring a lawsuit for infringement, recovering attorney's fees and obtaining an injunction, as well as damages. The owner must elect either actual damages including the infringer's profits, or statutory damages. Statutory damages are determined by the court and can range from $250 to $50,000. If the infringer is a nonprofit educational institution that had reasonable grounds to believe that the infringement was within the scope of the fair use doctrine, the statutory damages are only $100. Also, it should be noted that under some circumstances, violation of the copyright laws can be a criminal offense.

In addition to patents and copyrights, license arrangements may also cover trade secrets, usually not as the item licensed, but as property of the company provided to the university to further the research.

Unlike patents and copyrights, trade secrets are not the subject of extensive federal legislation. Trade secrets have evolved from a common law perception of minimal business ethics. The Restatement of Torts insightfully comments that an exact definition of a trade secret is not possible. Therefore the drafts of the Restatement settled for the following working definition:

Any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.

Each of the fifty states is free to develop its own law on trade secrets. Adding to the confusion is that the common law origin of trade secrets can be traced to three distinct legal theories: contracts, quasi-contracts, and confidential relationships.

Although trade secret protection extends to ideas, the coverage is less than perfect. In essence the secret is protected only by contractual arrangement or by equitable considerations related to a contractual agreement. Thus, if a competitor obtains the secret legitimately, the trade secret owner has no right of action.

Whether patents, copyrights, or trade secrets are the subject matter, the negotiators must also understand what the agreement to be reached does and does not do.

A license is a mere permission to make use of the patented invention, copyrighted work, or trade secret. In effect, it is a waiver of the right to sue for infringement. A licensee does not acquire legal title to the property and may not maintain an independent action involving the title.

An exclusive license gives the licensee the right to use the intellectual property free from any infringement suit and the right to exclude all others. A nonexclusive license merely grants a privilege of protection from infringement claims by the owner.

Licensing agreements are purely contractual in nature and, as such, are governed by the usual rules applicable to contracts. Thus, although the terms of a particular agreement may raise federal questions, state law controls the interpretation of the agreement. (See, however, Bremer Research Applications and Technology Transfer, SRA Journal, Fall 1985.)

A license that is granted may be extended to all uses or may be limited to the use in a specific field. An employer who has a shop right in his employee's invention does not have the right to grant licenses under the employee's patent on the invention, but an employer or other "author" of a work made for hire has all rights in a copyright.

Licenses for patents and copyrights vary somewhat. Because most R&D licenses will involve patents, only that form is discussed below. For research contracts, the matters covered earlier should be merged into the items discussed in this section.

The opening section of a license agreement should assign a date to the agreement, identify the parties, and provide information by means of recitals or the like as to the nature of the transaction. Recitals can be omitted in favor of a separate paragraph or article dealing with the background of the agreement.

Following the opening paragraph, definitions of terms that are basic to the license agreements should be set forth.

Counsel for a patent owner granting an exclusive license may often desire to reserve some rights of continued use of the transferred invention. Such rights will not be implied from the license grant itself; they must be expressed.

In the case of nonexclusive licensing, difficulties may arise if there is a chance that exclusive rights may have been previously granted in respect to some of the licensee's patents that are contingently, although remotely applicable to the field proposed to be nonexclusively licensed.

Counsel for a licensee should consider inclusion of a nonassertion clause for assurance that the licensor has no other patents relevant to the licensed subject matter. Such clause is drafted to the effect that the licensor will not assert against the licensee any claims for infringement based on the manufacture, use, or sale of any apparatus made by the licensee under the license agreement.

The licensor may desire that a grant-back requirement be included in the license agreement. Under a grant-back, the consideration for the license includes a cross-license under related patents of the licensee, whether present or future. In drafting such a clause, however, the industrial draftsman must be extremely cautious of antitrust problems. In some areas even exclusive license agreements may raise the possibility of antitrust involvement. In today's environment, failure of the licensor to include sublicensing rights in the patent rights transferred, or the granting of exclusive licenses for particular fields of business may give rise to possible antitrust allegations, even against the university.

The terms of the granting clause should be carefully drafted to adequately describe the legal character of the license being extended and the definition of the subject matter included. In complex agreements, terms such as "subsidiaries," "licensed patents," "licensed products," and the like should be carefully defined in a separate paragraph or article dealing with definitions. Particular care should be given to decisions as to whether improvements that may be developed by the licensor subsequent to the effective date of the license agreement should be included within the scope of the grant. If improvement inventions are to be included in the agreement, the precise definition of the term "improvement" should be spelled out.

Consideration for licensed patent rights can be paid according to a variety of methods. For example, a lump sum may be paid at or soon after the date of execution of the agreement. Usually, a license agreement provides for payment of royalties, which are incremental payments apportioned in some way to the extent of use of the licensed inventions. Of critical importance to the determination of royalties is the royalty base. Attention should be given to providing adequate information for determining such a base. In addition, the agreement should provide for reporting and accounting by the licensee.

The licensee may be required to pay a specified minimum for the privilege of keeping the license active. It may be desirable that such minimum royalty provisions take effect only after the second or third year of the license to permit the licensee to get into production before being burdened with significant costs.

No formal language is required for a license concerning a patented article, and such a license need not be recorded.

As a general rule, license agreements must be drafted with a view toward the special licensing goals of each party. There will ordinarily be no single form that is entirely appropriate for any particular agreement.

In a study reported in Research Management ("University-Industry Relationships," January-February, 1984), Donald Fowler identified one of the significant issues in industry-university agreements as industry attempts to "control what research the university does in the field of the proposed university-industry relationship." (See also Atkinson, "University Industry Research Agreements: Major Negotiation Issues," SRA Journal, Fall 1985.)

There are several ways to "control" the research, beginning with the statement of work (SOW) itself. As Mr. Atkinson points out, both parties may have reason to want a broad SOW and also to want a narrow one. The narrow SOW holds the university scientist "in check" but also limits the scope of any company rights to discoveries. A broad SOW gives the university leeway but also gives the company great rights to any discoveries made.

Going beyond the statement of work, there are several "standard" contract clauses which may be used to (1) limit industrial control, (2) assure the right to industry technical direction, or (3) define the extent of financial control given to industry. The first clause establishes the "independent contract" status. The second provides for some direction by the company, although less than allowed under federal contracts. Financial controls are discussed later in this chapter.

Under almost all circumstances, both parties will not want to establish an agency relationship where one party can act in the other's name. Therefore, except in partnership/joint venture arrangements (which should be rare) a clause such as the following should be used:

INDEPENDENT PARTIES

The parties agree that each is independent, and not a partner, joint venturer, or agent of the other. The employees of each party shall not be deemed the employees of the other party for any reason whatsoever. Neither party shall have any right or authority to commit the other, incur any obligation on behalf of the other, or represent to any person or entity that any such authority exists.

This clause, or one of the many similar clauses, should cause no controversy in any grant or contract, or even in consulting agreements. In cooperative agreements that resemble partnerships, the parties should specifically set out any exceptions under which one party might commit the other.

More of a problem is the acceptable extent of "technical direction." The SRA Guide to University-Industry Research Agreements discusses this issue in some detail and provides sixteen different clauses for use in different situations. Several of these combine the independent parties concept with technical direction provisions, but generally separate clauses are better because even where a company may provide technical direction, the parties remain independent. Other clauses in the SRA Guide include anti-assignment and key personnel considerations which should also be separated out in most agreements.

The primary driver in selecting the extent of technical direction should be the same as in selecting the basic form of agreement. That is, in grants there should be little, if any, right of direction; in contracts for basic research only, only minimal direction; and in contracts for applied research and development of actual products, more comprehensive company rights. In cooperative agreements, the best method of assuring satisfactory direction is joint selection of a project manager or management team to provide on-going coordination/supervision. (See, e.g., Clause 13 on page 20 of the SRA Guide.) Sample clauses for the other situations mentioned are provided below.

RESEARCH SUPERVISION

The conduct of the research funded under this agreement shall be under the full control and supervision of (the university/the principal investigator). All experimental work, all computation and reduction of results, preparation of results for presentation or publication shall be under the sole guidance of the principal investigator. If at any time the (university/principal investigator) determines that the research should be redirected (he/she/it) may cause such redirection, and so notify the sponsor. To the extent set out in the termination clause, the sponsor may decline to continue funding the research as redirected.

TECHNICAL DIRECTION

The research under this contract shall be under the control and direction of the (university/principal investigator). However, sponsor shall have the right to monitor the conduct of the research through review of progress reports, to consult with the (principal investigator/research team), and to witness performance of actual work under this contract. Sponsor may propose redirection of the research within the scope of the present statement of work at any time, which redirection shall be accepted by the (principal investigator/research team). Sponsor's proposals for redirection which are beyond the scope of the present statement of work shall be presented to the university (contract administrator/office of sponsored programs/etc.). Upon presentation of a proposal, the parties will make a good faith effort to agree on any necessary changes in the scope of the statement of work.

SUPERVISIONAL CHANGES (From SRA Guide, pg. 18)

Performance of the work shall be supervised by the (university) under the general monitoring of a project manager as designated by (sponsor). (Sponsor) may, at any time, designate a new or alternate project manager upon written notification to the (university)  .  .  . (and in the changes in work section)  .  .  . (sponsor) may, at any time, by written order to the (university), make changes within the general scope of the work, including but not limited to (a) revising or adding to the work or deleting portions thereof, or (b) revising the period or schedule of performance.

 

Commentators have routinely identified patent issues as one of the most problematic in industry-university relationships. However, Mr. Fowler's study, cited earlier, concludes that:

Interestingly, while universities placed industry patent policies relatively high on their list of "most significant" impediments [to successful agreement], industry tended to point its finger primarily at federal laws governing innovations and patents arising out of Government-sponsored work rather than at university patent policies.

This is somewhat misleading since, as Mr. Bremer writes in his SRA Journal article (cited earlier):

 .  .  . the Government is an ever present factor in the research function of the universities since it still finances, directly or indirectly, much of the research done in the United States, and, in particular, the basic research.

 

Thus, of the total of $9.6 billion of expenditure for academic R&D in 1985, about $6.5 billion came from the federal Government while only $485 million was obtained from industry. Of the total federal obligations for basic research of about $7.6 billion:

 

• 48% is distributed to universities and colleges.

   

• 8% to industry.

   

• 27% to federal intramural laboratories.

   

• 11% to federally funded research and development centers.

   

• 6% to nonprofit research institutes.

   

It can readily be seen that as the consequence of such extensive funding, the shadow of the Government falls across the university-industry relationship and can have a profound effect upon that relationship and the disposition of rights to intellectual property arising under that relationship. In fact, as a practical matter, the pervasiveness of federal funding in the universities should have us thinking not simply in terms of a university-industry relationship, but further in terms of a university-industry-government relationship.

Directly related to the patent issue is the question of publication of research results. The importance of this issue to universities is widely recognized, even in industry. The SRA Guide includes several causes which balance the university’s right to publish with the need to delay publication when needed to obtain patent protection. The Guide also discusses requirements to hold corporate proprietary data confidential. However, this area requires further discussion.

The research agreement binds only the university and the company or companies that are signatories. However, the group of persons who may have access to company confidential information includes faculty members, university administrative staff, technicians, and graduate (and perhaps even undergraduate) students. These persons may not have any legal (as opposed to moral) obligation to preserve confidentiality unless specific agreements are signed by them.

While asking the principal investigator to enter into a non-disclosure agreement does not present major problems, similar requirements for support staff and graduate students may be the cause of vociferous protests and, as a practical matter, unenforceable. Instead of trying to require such arrangements, universities should consider instituting a university-wide policy requiring non-disclosure of confidential information generally. The violation of university policy and the resulting academic-or-employment-related sanctions which may be imposed are logically of greater concern to those staff members and students that might be involved with a contractual agreement with a "faceless corporation."

As the SRA Guide states, because the federal Government dictates detailed payment and financial administration terms and procedures for universities, there is a tendency to mimic these procedures in industry-university agreements, even though industrial sponsors are not used to them and may not even care about the minutiae of the university’s finances. On the other hand, many industry sponsors apparently balk at payment of the entire university overhead burden. Because of these factors, a cursory review of the federal contract financing system and the use of that system as a model is a logical point for discussion of the financial issues in industry-university agreements.

Federal policy on the appropriate type of contract is logical and provides a good guide for private agreements. The Federal Acquisition Regulations provide at 48 Code of Federal Regulations (CFR) 35.006:

 

1. Because the absence of precise specifications and difficulties in estimating costs with accuracy (resulting in a lack of confidence in cost estimates) normally precludes using fixed-price contracting for R&D, the use of cost-reimbursement contracts is usually appropriate (see Subpart 16.3). The nature of development work often requires a cost-reimbursement completion arrangement (see 16.306(d)). When the use of cost and performance incentives is desirable and practicable, fixed-price incentive and cost-plus-incentive-fee contracts should be considered in that order of preference.

    

    

2. When levels of effort can be specified in advance, a short-duration fixed-price contract may be useful for developing system design concepts, resolving potential problems, and reducing Government risks. Fixed-price contracting may also be used in minor projects when the objectives of the research are well defined and there is sufficient confidence in the cost estimate for price negotiations. (See 16.207.)

    

    

3. Projects having production requirements as a follow-on to R&D efforts normally should progress from cost-reimbursement contracts to fixed-price contracts as designs become more firmly established, risks are reduced, and production tooling, equipment, and processes are developed and proven. When possible, a final commitment to undertake specific product development and testing should be avoided until –

    

    

   1. Preliminary exploration and studies have indicated a high degree of probability that development is feasible and

       

       

   2. The Government has determined both its minimum requirements and desired objectives for product performance and schedule completion.

       

Similar considerations suggest that cost-reimbursement procedures are normally appropriate for grants, although a level-of-effort type statement of work will be customary.

Further guidance comes from 48 CFR 16.303 which prescribes that the university should have an expectation of substantial compensating benefits before it is asked to take a cost-sharing contract.

The federal Government also prescribes detailed accounting procedures and cost principles (See OMB Circular A-21) and payment provisions. For many universities, the payments are made by letter of credit draw-downs since, as the SRA Guide notes, most universities cannot borrow working capital nor charge loan interest as an expense. A similar procedure may be advantageous for private agreements, providing quick payment to the university without tying up corporate funds in advance payments.

Related to many of the financially oriented clauses is the question of audit. Under Government agreements the sponsoring agency, specialized audit agencies such as the General Accounting Office, and the Defense Contract Audit Agency, and even congressional investigators have substantial rights to audit not only for expenditures, but also internal management systems, patent administration, personnel actions, and property management. For the most part, both parties in private agreements will balk at such broad powers being granted to anyone, including private accounting firms. Further, few companies want to become involved in the internal details of a university's accounting system.

In many cases the pervasive nature of the federal grant and contract process provides a simple solution to any question of cost accounting or allocations. Since most universities do undergo federal audit, the results of the federal auditors' work can be used for private agreement purposes. For example, in payment related clauses, the allowable overhead may be set at the same level allowed by the federal Government, which is determined by audit. For most purposes, this kind of reference to a federal standard removes any need for private audit rights.

One area in which the university may demand audit rights is sales based on copyright or patent royalties. Most companies do not object to such audit rights because the scope of any audit is limited.

Occasionally, where the parties are dealing with proprietary software, there will be a need to provide for audit of the "source code." This situation arises when trade secret software is being acquired for support of a project or used in the research work. The legal protection available for software is very imperfect, allowing a competitor to "duplicate" the programs without violation of copyright laws by rewriting the program instructions (code). Therefore, many software vendors take great pains not to disclose a human-readable version of the software. When a buyer wants software, it gets only a machine-readable version.

The problem with this procedure is, first, that software vendors go bankrupt frequently, leaving the buyer with a program that it cannot update or correct. Second, when experimental equipment is the subject of the research contract, the investigators must have access to the source code to fully understand the relationships between the hardware and the software.

A common response to this problem has been the "source code escrow." This is the deposit of the human readable software with an independent third party, releasable only under defined circumstances. Commonly chosen as escrow agent is an attorney or bank. Obviously, these agents don't know and will not accept responsibility for determining if what is deposited is correct. In some cases, the answer has been a data "audit" by another third party or by representatives of each party. Where a third party is used, a bond or "errors and omissions" coverage should be required.

The clauses below are samples only. As discussed above, most audit requirements are satisfied by governmental reviews. (NOTE: Where Government funds or property are flowing through to one of the parties to a private agreement, the Government audit clauses may be mandatory.)

AUDIT

At any time before final payment, the sponsor may have the university's invoices or vouchers and statements of cost audited. The sponsor shall have access to university books and records only upon reasonable notice and at such times and places as may be agreed to by the parties. Any payment may be (1) reduced by any amounts found by the auditor not to constitute allowable costs or (2) adjusted for overpayments or underpayments made on preceding invoices or vouchers.

ACCOUNTING

 

1. Sponsor agrees that at all times during the existence of this Agreement, it will keep accurate books of account and other records that shall contain all information relating to the license or use of _________________ [licensed product]. Sponsor agrees that these books of account and other records shall be kept in accordance with the procedures of the Financial Accounting Standards Board and carefully preserved for at least seven (7) years.

    

    

2. Sponsor agrees that it will furnish university with a written statement within thirty (30) days following the close of each fiscal quarterly period showing the amount of royalties due for that period. This statement will show in reasonable detail, licenses, installations, transfers, or other use of [licensed product], and the names and addresses of the customers to whom made.

    

    

3. Sponsor hereby grants to university or its duly accredited representative, including any accredited certified public accountant or [e.g., attorney] selected by university who shall be reasonably acceptable to sponsor, the right to inspect the [e.g., sales records] and the applicable books of account of sponsor for the purposes of ascertaining or confirming the accuracy of the statements rendered, and of assuring the number of [licensed products] in use. The cost of these inspections shall be borne by [sponsor or university]. University shall keep confidential any and all information relating to the identity of sponsor's customers except to the extent that sponsor reveals to others such information for marketing purposes.

    

Fortunately, disputes which rise to the level of legal action are very rare in research agreements. However, one of the functions of any agreement is to cover the "what ifs" of the relationship. Unlike the federal system, there is a plethora of disputes resolution schemes available to private parties. Of course, the particular dispute resolution procedures available are bounded by the circumstances of the parties. For instance, many state institutions are required by law to use state disputes procedures or forums.

In the absence of state or federal mandates, the choice of procedures is essentially between arbitration, either binding or non-binding, and litigation in a court. [As noted by William W. Park in "Arbitration of International Contract Disputes" (The Business Lawyer, Vol. 39, p. 1783, August, 1984), arbitration may be the only mutually acceptable procedure in international contracts.]

Many non-lawyers are enamored of arbitration because it is allegedly quicker and less expensive than litigation. However, arbitration's speed and money-saving features may be gained at the expense of completeness of the decision. In addition, there are indications that arbitration has evolved into a more complicated process that parallels litigation in cost and time.

Whether or not arbitration is chosen, certain choices must still be made. The first of these is the "choice of law." The governing law for a contract or grant can vary tremendously. For example, where a contract was made between a Texas company and a Mississippi company for performance in Louisiana, the governing law could be that of any of the three states. In addition, the parties can agree to have the law of another state or country apply if there is a rationale basis for the selection. For instance, the companies might agree to use New York law if both companies were subsidiaries of New York companies.

The forum should also be specified in every agreement. If arbitration is used, the rules of an arbitral institution (e.g., the American Arbitration Association or the International Chamber of Commerce) should be specified, or a detailed discussion of procedural ground rules should be included for ad hoc arbitration. If the courts will be used, the parties should specify the court(s) which will be available.

The parties may have to consider waiver of sovereign immunity (not an easy decision for a state institution) or a "direct action" clause under which insurers may be sued instead of the sovereign (and therefore immune) organization.

Where any part of an arbitration award may be payable by the federal Government, the parties should agree to require detailed findings of fact and conclusions of law to support the decision when arbitration is used. Otherwise, the Government officials may require that the case be relitigated under federal disputes procedures.

Where the parties are in the position of prime and subcontractor under a federal contract, generally arbitration should not be used for claims related to the federal contract. Instead, disputes can "flow through" the prime to the contracting officer and the board of contract appeals. If this procedure is not used, the prime faces the possibility of owing the subcontractor but not being able to collect from the Government.

The clauses that follow are adapted from many sources and cover various options in dispute resolution.

VENUE OF ACTIONS

Any and all suits for any and every breach of this contract may be instituted and maintained in any court of competent jurisdiction in the County of ______________, State of ____________.

PLACE OF SUIT

Any action at law, in equity or judicial proceedings for the enforcement of this contract or any provision thereof shall be instituted only in the courts of the State of ______________.

GOVERNING LAW

It is mutually understood and agreed that this contract shall be governed by the laws of the State of _______________, both as to interpretation and performance.

CONTROLLING EFFECT OF RULES,

REGULATIONS AND CUSTOMS OF EXCHANGE

All orders for the purchase and sale of any article are received and executed with the distinct understanding that actual delivery is contemplated and is in accordance with and subject to the rules, regulations and customs of exchange upon which the order is to be executed and the requirement of its board of directors and all amendments that are made thereto and that the party giving the order so understands and agrees.

PROVISION BARRING

EQUITABLE REMEDIES

This agreement shall not be specifically enforceable in equity by either party; nor shall any injunction be applied for or issued at the instigation of either party in case of dispute or alleged breach of this agreement, and the injured party shall have only his right of action for full damages at law.

SEVERABILITY

It is understood and agreed by the parties hereto that if any part, term, or provision f this contract is by the courts held to be illegal or in conflict with any law of the state where made, the validity of the remaining portions or provisions shall not be affected, and the rights and obligations of the parties shall be construed and enforced as if the contract did not contain the particular part, term, or provision held to be invalid.

ARBITRATION

Any controversy or claim arising out of, or relating to this contract or the breach thereof, shall be settled by arbitration, in accordance with the rules then obtaining of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereof.

 

1. Any disputes arising under this subcontract solely between the sponsor and university shall be governed by the law of the State of . However, if the issue in dispute is not covered by (state) law, the (state) court shall apply the federal law, i.e., decisions of the federal courts, regulations and statutes. Any litigation under this subcontract, if commenced by the sponsor, shall be brought in a court of competent jurisdiction in the State of .

    

    

2.  
   1. If a decision on a question of fact is issued by the contracting officer under the prime contract Disputes clause and the decision relates to this subcontract, said decision, if binding upon the sponsor under the prime contract, shall also be binding upon the sponsor and university with respect to this subcontract. However, if the university is affected by such decision and if the sponsor elects not to appeal such decision under the Disputes clause of the prime contract, the sponsor shall notify the university promptly. After receipt of such notice by the university, if the university submits a timely request to the sponsor to appeal such decision, the sponsor shall file an appeal. If the sponsor appeals such decision, whether at its election or at the university's request, any decision upon such appeal, if binding upon the sponsor under the prime contract, shall be binding upon the sponsor and the university as it relates to this subcontract. Appeals under the Disputes clause of the prime contract do not preclude consideration of questions of law in connection with decision(s) referenced above.

       

       

   2. For any claims to be submitted under B.1 above in excess of $50,000, the university shall certify to the sponsor, as to its portion of the claim, that: (a) the claim is made in good faith, (b) the supporting data are accurate to the best of the university's knowledge and belief, and (c) the amount requested accurately reflects the subcontract adjustment for which the university believes the Government is liable.

       

       

   3. If any such appeal is denied or otherwise decided adversely to the university's interest, or if the university is otherwise adversely affected by any decision made by any representative of the Government on any question of fact and/or law arising under the prime contract which is also related to this subcontract, from which an appeal under the Disputes clause in the prime contract is not available, said decision, if binding upon the sponsor under the prime contract, shall in turn be binding upon the sponsor and the university with respect to such question as it relates to this subcontract; provided, however, if the university is adversely affected by any such decision, and if the sponsor elects not to bring suit against the Government with respect to such decision, the sponsor shall notify the university promptly. If the university submits a timely request to the sponsor to bring suit against the Government, the sponsor shall start such suit. If the sponsor brings suit against the Government with respect to any such decision, whether at its election or at the university's request, a final judgment in any such suit, if binding upon the sponsor under the prime contract shall in turn be binding upon the university and the sponsor under this subcontract with respect to the question decided as it relates to this subcontract.

       

       

   4. If any such appeal or suit is taken or brought by the sponsor, whether at its election or at the university's request, the university shall assist the sponsor in its prosecution thereof in every reasonable manner and the university shall be afforded reasonable opportunity to participate in the prosecution thereof to the extent that the university's interest may be affected. To the extent requested by the sponsor, the university shall prosecute for the sponsor any appeal or suit taken or brought at the university's request and, in such event, the sponsor shall assist the university in every reasonable manner. All costs and expenses incurred by the university and the sponsor in prosecuting any appeal or suit taken or brought solely at the university's request shall be paid by the university. Where possible, the sponsor shall in good faith consult with the university concerning the presentation to the contracting officer or other cognizant representatives of the Government of the questions referred to in paragraphs 1. and 3. above to the extent they may affect the university's interest.

       

       

   5. If as a result of any decision or judgment which is binding upon the university and the sponsor, the sponsor is unable to obtain reimbursement from the Government under the prime contract for, or is required to refund or credit to the Government any amount with respect to any item of cost or fee for which the sponsor has reimbursed the university, the university shall, on demand, promptly repay such amount to the sponsor.

       

       

   6. The rights and obligations herein shall survive completion of and final payment under this subcontract.

       

    

3. Provided, however, the university shall not be bound by any such contracting officer's decision, appeal board's decision, or judgment if such is not determinative of an obligation imposed upon the university under this subcontract or any amendment hereto.

    

    

4. Pending the resolution of any dispute, the university shall proceed as directed by the sponsor in writing.

    

Part of any agreement today, and as a practical matter, part of almost any activity is the risk of a lawsuit. A consumer may allege that a product has injured person or property. A competitor may allege patent infringement. A patient may allege negligent medical treatment. The list can go on virtually forever.

The immediate result of such allegations is usually legal fees and court costs. Ultimately, if accepted by a jury or court, the cost of such an allegation may be a multi-million dollar judgment that can bankrupt a company or strain the resources of a university.

The standard response to such risk is to obtain insurance against liability. However, as the costs of liability insurance skyrocket, a second response is usually to try to shift liability to other parties.

The allocation of risks can be one of the most difficult areas of negotiation in any agreement. When the agreement is with a public institution or even a private not-for-profit university, the issues become even more complex.

Clauses in this area cover several topics. The first relates to requirements that the parties follow particular safety, health, manufacturing, or other risk prevention procedures. These clauses may aid an "innocent" party in shifting blame.

Clauses requiring specific insurance coverage are commonly used to assure that everyday risks are covered. In the industry-university setting, the costs of such coverage for the university should be specifically dealt with since insurance costs may not be fully recoverable as indirect costs under federal contracts. (The federal Government limits insurance costs since it indemnifies cost-reimbursement contractors for some losses.)

Many agreements will need to cover procedures for obtaining liability waivers from third parties (e.g., patients in drug testing and experimental subjects).

Each of the parties will usually want indemnification against certain risks.

Finally, in light of the recent use of the bankruptcy statutes to avoid tort claims, the parties may craft clauses that provide a liability "reserve" that will not be subject to attachment or cross insurance clauses to assure that insurance covers the solvent party against which claims are not stayed.

As awareness of the potential for profitable arrangements with universities has grown in the commercial world, so too have academics been drawn to the "filthy lucre" of Wall Street. Professors and even graduate students have taken equity positions in commercial organizations, often without considering all the issues that arise. Even universities themselves are not immune. Harvard University considered establishing a "subsidiary" for biotechnology.

However, as Laurie Garrett has said, "There are problems." [SRA Journal, Fall 1985].

The problems are straightforward. First, to what extent should universities and faculty members compete with (1) their sponsors, and (2) private business generally? Second, how can the university avoid the loss of open debate and a free exchange of ideas while cooperating with sponsors to whom privacy is money?

The SRA Guide provides several clauses in Chapter VIII regarding publication, but the issue of competition has not been addressed squarely. While the federal tax code and various state laws generally militate against competition by universities with for-profit organizations, there is no federal law prohibiting such activities.

Does this mean that industry must worry about the organization of a State U. Chemical and Women's Wear Company? Not likely, say the academics. However, competition need not come out at the manufacturing stage. The problem can crop up simply because most universities are organized by discipline. Imagine the attitude of two sponsors who read about two independent discoveries at their friendly university. One scientist, a chemist, has invented a new and important synthetic fiber made from the sponsor's patented chemical. A second scientist in the Agricultural Studies Department, working with the Cotton Council, simultaneously announces a breakthrough that makes cotton one-tenth as costly as it had previously been. Each sponsor might be less than fully satisfied with the university.

Intra-university conflicts, while related to the issue of competition, have been a subject of much debate. Unfortunately, there has not emerged any real consensus as to a solution.

One response has been to restrict faculty consulting--with the result that some of the most creative faculty members have simply left the university. Other universities and several states have required disclosure statements--a step in the right direction, but not the answer for individual agreements.

While covenants not to compete and warranties against organizational conflicts of interest are common in industry-to-industry agreements, it may be so difficult to reach agreement upon equivalent clauses that no language will be included in many industry-university agreements. Instead, industry will have to simply accept the bad with the good. The clauses below are crafted as compromises, but the authors expect less than a friendly response to even such diluted clauses. In fact, the more popular clause may be a disclaimer of any responsibility such as the last clause sets out below.

DISCLOSURE OF CONFLICTS

University shall use its best efforts to disclose activities by the university to sponsor which are determined to be detrimental to sponsor's present commercial interests in the following areas: .

The university shall not be liable for failure to disclose any detrimental activity, nor shall the disclosure (by the university or others) of such activity provide any basis for actions for breach of contract or for return of any funds paid under this agreement. However, sponsor shall have the right to discontinue its support upon receipt of such a disclosure by the university if the sponsor gives thirty (30) days' notice of discontinuance and pays for all work completed through the date of discontinuance of support. This clause does not apply and university makes no representation or warranty related to the independent consulting activities of faculty, staff, or students.

COMPETITION

University as a public institution is not in competition with sponsor. However, the university reserves the right to engage in research, undertake sponsored research, and enter into agreements of any kind allowed under state law [and which do not generate unrelated business income as defined in the Internal Revenue Code] with any other organization whether or not said organization is in competition with sponsor. Sponsor acknowledges that it has reviewed the lists of university agreements and sponsors provided to it.

ORGANIZATIONAL CONFLICTS OF INTEREST (GENERAL)

 

 

1. The university warrants that, to the best of its knowledge and belief, and except as otherwise disclosed, there are no relevant facts which could give rise to organizational conflicts of interest.

    

    

2. The university agrees that, if after award, an organizational conflict of interest with respect to this contract is discovered, an immediate and full disclosure in writing shall be made to sponsor which shall include a description of the action which the university has taken or proposes to take to avoid or mitigate such conflicts.

    

DISCLAIMER OF ANY WARRANTY RELATED TO CONFLICTS OF INTEREST

University specifically disclaims that it has made or is making any warranty that its activities are not in conflict with the interests or business of sponsor. Sponsor understands and agrees that the activities of the faculty, staff, and students of the university are not such that the university can represent that it, its faculty, staff, or student body is not in conflict. Accordingly, the university is not liable for any damage, loss, or competitive harm that may come to sponsor because of any activity by the university, its faculty, staff, or any student.

Subcontract No. __________________

CONTRACTOR:

SUBCONTRACT WITH:

SUBCONTRACT NO.:

PRIME CONTRACT NO.:

TYPE OF SUBCONTRACT:

EFFECTIVE DATE OF SUBCONTRACT:

PROGRAM:

 

1. STATEMENT OF WORK

    

   The Subcontract will provide engineering, technical and related support services in performance of the substantive tasks defined in the Statement of Work which is appended hereto as Attachment I and incorporated herein as though set out in full.

    

2. FINANCIAL TERMS

    

    

   1. This is a cost-plus-fixed-fee contract for the work described in Section I hereof as follows:

       

      Estimated Cost$

      Fixed Fee$

      Total Estimated Cost Plus Fixed Fee$

       

   2. The Subcontractor shall be reimbursed for overhead hereunder in accordance with its rates as agreed between the Subcontractor and its cognizant Federal auditor.

       

       

   3. Payment of fixed fee shall be in accordance with Attachment IV, General Provision , provided, however, references to fee withholdings are deleted.

       

       

   4. Payment shall be made to the Subcontractor based on invoices submitted pursuant to Section V-I, and in accordance with Attachment IV General Provision entitled "Allowable Cost, Fixed Fee and Payment." The Subcontractor agrees that it will submit invoices to the Contractor at least once every thirty (30) days. The Subcontractor shall be paid on such invoices within seven (7) working days after receipt by the Contractor of the payment by the Government of the amount of the Subcontractor's invoice; provided, that the Contractor shall invoice the Subcontractor's expenditures no later than the next invoice submitted by the Contractor to the Government after receipt of the Subcontractor's invoice.

       

    

3. DELIVERY SCHEDULE

    

   The work described in Section I hereof shall be performed during the period from the effective date of this subcontract through the end of the Prime Contract to enable the Contractor to meet the delivery requirements of the Prime Contract, subject to the provisions of Section V E(5). [See also Section V, Paragraph E(6), concerning the option to extend.]

    

4. GENERAL PROVISIONS

    

    

   1. Attachments. The following attachments to this subcontract are hereby incorporated by reference as though set forth in full:

       

      Attachment IIIStandard Terms and Conditions (Form STC)

      Attachment IVPrime Contract Provisions Incorporated by Reference

      Attachment VDisputes

       

   2. Changes to this Agreement. Except to the extent allowed by the General Provisions, Attachment IV, this agreement shall be modified only in writing with the mutual agreement of the parties. Changes to any terms and conditions of this subcontract shall be made only by the President of the Contractor, or his or her delegee, in writing.

       

       

   3. Project Direction. The Subcontractor shall be under the general technical cognizance of Program Manager . The Program Manager will receive, for the Contractor, reports and the materials called for in this subcontract, and will represent the Contractor in the technical phases of this subcontract.

       

    

5. SPECIAL PROVISIONS

    

    

   1. Receipt of Proposal. The Subcontractor hereby acknowledges that it has received a copy of the Contractor's proposal entitled , Proposal No. , dated . Any reference in this subcontract to any portion of such proposal shall incorporate such reference as though fully set forth herein.

       

       

   2. Legend on Documents. In addition to any other information, all written documentation prepared under this subcontract shall bear the following legend: "Prepared under Subcontract No. ." The Subcontractor shall mark reports in accordance with Prime Contract Special Provision , when and as directed by the Contractor.

       

       

   3. Reports. Subcontractor shall prepare progress and financial reports, in the form specified by the Prime Contract Exhibits (Form ) attached to the Prime Contract, which are incorporated herein by this reference, to the extent and when directed by the Contractor.

       

       

   4. Receipt of Referenced Documents. The Subcontractor acknowledges that it has received a copy of all documents referenced in this subcontract.

       

       

   5. Prime Contract Special Provisions. With regard to the following special provisions of the prime contract at Section thereof, the following is provided:

       

    

   1. Prime contract Special Provision , "Government Property for the Performance of this Contract," is incorporated herein as stated.

       

       

   2. Prime contract Special Provision , "Federal and Military Specifications and Standards and Other Documents listed in the Department of Defense Index of Specifications and Standards," is incorporated herein as stated.

       

       

   3. Prime contract Special Provision , "Data Item Descriptions (DIDs)," is incorporated herein as stated.

       

       

   4. The Subcontractor covenants that it has reviewed prime contract Special Provision , "Level of Effort." The Subcontractor understands that its performance under this subcontract agreement, in conformance with the following level of effort provision, is necessary for the Contractor to comply with the requirements of the prime contract.

       

       

      1. Subject to the provisions of the "Limitation of Cost" clause, Attachment IV, General Provision , the estimated level of effort for the performance of this portion of this subcontract shall be total man-hours of direct labor at an average rate of approximately hours per month. The man-hours are distributed as follows:

          

         LotLabor-hours (Per Year)

          

      2. The estimated composition of the total man-hours of direct labor is as follows:

          

         ESTIMATED MAN-HOURS EFFORT (PER YEAR)

         ClassificationMan-hours

         Program Manager/Technical Director
         Senior Systems Engineer
         Systems Specialist
         Senior Avionics Integration Engineer
         Operations Research Analyst
         Airborne Systems Engineer
         Aeronautical Systems & Structural
         Specialist
         Engineer
         Associate Engineer
         Senior Program Analyst
         Program Analyst
         Clerical
         Illustrator
         

          

      3. It is understood and agreed that the rate of man-hours per month may fluctuate in pursuit of the technical objective provided such fluctuation does not result in the utilization of the total man-hours of effort prior to the expiration of the term specified in the clause entitled "Term of Contract" (Special Provision ), and it is further understood and agreed that the number of hours of effort for any classification may be utilized by the subcontract in any other direct labor classification if necessary in the performance of the work.

          

       

   5. Prime contract Special Provision , "Term of Contract," is incorporated as written.

       

       

   6. Prime contract Special Provision , "Option to Extend the Term of the Contract." The parties, being mindful of the option provisions of the prime contract Special Provision , agree that this subcontract shall be for the initial period set forth in section , paragraph above, and is renewable by the Contractor as follows:

       

       

      1. First option year: The subcontract term may be extended for one year from its ending date if this option is exercised in writing, deposited in the mails, or otherwise actually delivered, to the Subcontractor within five (5) working days after the Contractor's receipt of the exercise of the option set forth in prime contract paragraph , by the Contracting Officer. The estimated cost-plus-fixed fee for this option year is .

          

          

      2. Second option year: The subcontract term may be extended for a second one year term from the ending date of the first option year if this option is exercised in writing, deposited in the mails, or otherwise actually delivered to the Subcontractor within five (5) working days after the Contractor's receipt of the exercise of the option set forth in prime contract paragraph by the Contracting Officer. The estimated cost-plus-fixed-fee for this option year is .

          

         The option years, if exercised, must be exercised sequentially (i.e., the second option year shall not be exercised unless the first option year is exercised). Additionally, the option to extend must be exercised by the Contractor if and to the extent that the option under Special Provision is exercised by the Contracting Officer.

          

      3. Prime Contract Special Provision , "Substitution of Personnel." The provisions of paragraphs through are incorporated herein as stated. The word "offeror" as used in these paragraphs means the Subcontractor. The term "Contracting Officer's Technical Representative (COTR)" means the Project Manager of the Contractor and the COTR.

          

          

      4. Prime contract Special Provision , "Reference (Insurance-Liability to Third Persons)," is incorporated herein as stated, provided, however, that the word "Congress" remains unchanged.

          

          

      5. Specific Indemnification. The Subcontractor shall defend, indemnify and hold Contractor harmless from any claims, demands, suits or judgments, including court costs and attorney's fees, as a result of the following:

          

          

         1. In the event any cost or fee included in Contractor's prime contract is reduced by the U.S. Government in accordance with the provisions of the clause entitled "Price Reduction for Defective Cost or Pricing Data" because cost or pricing furnished by the Subcontractor was not current, complete or accurate, or because of any failure on the part of the Subcontractor to comply with or because the subcontract is in violation of the provisions of the "Cost Accounting Standards" clause, if applicable to this subcontract; or (b) any subcontract cost is reduced by the Government pursuant to the clause entitled "Allowable Cost, Fixed Fee and Payment"; or (c) because the Subcontractor failed to comply with or is in violation of any of the provisions of the "Disputes Act of 1978," Public Law 95-563, 41 U.S.C. 601, et seq., with respect to any claim made by the Subcontractor pursuant to the clause entitled "Disputes" included under this Subcontract.

             

             

         2. This clause is not in diminution of the Contractor's rights under Standard Terms and Conditions .

             

          

      6. Definitions. As used herein, the following terms shall have the meanings set forth below, unless otherwise specified herein:

          

          

         1. The term "prime contract" means the Government Prime Contract between the Contractor and the United States of America (hereinafter called the "Government"), contract no. .

             

             

         2. In the incorporated provisions from the prime contract set forth in this subcontract, any reference to "Government," "Contracting Officer," or the like shall mean the Contractor herein, and any reference to the "Contractor" or the like shall mean the Subcontractor herein, and the term "contract" shall mean this subcontract, except as otherwise provided. However, references to "Government policy" or the like shall retain its original meaning.

             

             

         3. For the purposes of the Changes Clause, Attachment IV, General Provision , the term "Specification" shall include the Section I Statement of Work and any specifications incorporated by reference.

             

             

         4. "Data" means recorded information, regardless of form or characteristics.

             

          

      7. Changes to Attachment III, Standard Terms and Conditions.

          

       

      1. Standard Term and Condition Paragraph . The indemnity obligation set forth in the second sentence also shall apply to the Contractor. The duty of indemnity shall be to the extent that the actions of the indemnitor causes costs or loss to the other party.

          

          

      2. Standard Term and Condition Paragraph . The present provision is denominated paragraph (a), and a new paragraph (b) is inserted, which shall be paragraph (a) with the identity of the parties reversed.

          

       

   7. Invoices. An invoice shall set forth prime and subcontract identification data, and total direct labor cost and hours expended, other direct costs and fee, in the general format set forth in Attachment II. This format shall be altered at the request of the Contractor when the Contractor is complying with instructions from the Government. Each invoice certifies by its submittal that all costs are accurately reflected and that direct labor and indirect costs rates used in the billing are those currently approved by the Subcontractor's cognizant Federal auditor.

       

       

   8. Audit and Examination of Records; Nondisclosure of Cost Data. Notwithstanding any provision of this subcontract to the contrary, nothing herein shall grant to the Contractor the right to examine or audit the personnel or financial books or records of Subcontractor, or the right to receive, inspect or examine any disclosure statement or accounting procedure of Subcontractor. It being specifically understood and agreed that any such audit, examination or inspection shall only be conducted by authorized representatives of the United States Government in accordance with provisions of this subcontract and applicable laws and regulations. It is further provided that the Subcontractor is not required to reveal its direct labor rates or indirect cost rates to the Contractor, but the Subcontractor shall submit information to the Government upon request of the Government or the Contractor.

       

       

   9. Covenant Against Hiring. Neither party to this subcontract shall, during the term hereof and for one year thereafter, hire any employee of the other party assigned to work under this subcontract without the consent of the employing party.

       

    

6. EXECUTION

    

    

   1. The date of execution of this subcontract is .

       

       

   2. Regardless of where executed by the Contractor, this subcontract is acknowledged to have been made in and in any dispute hereunder the laws of that jurisdiction shall apply; provided, however, that when the dispute deals with the issues of Federal Government contract law, that law shall apply.

       

   CONTRACTORSUBCONTRACTOR

    

   Title Title

   ATTACHMENT I

   STATEMENT OF WORK

    

   1. The Subcontractor shall perform the work required herein in order to enable the Contractor to meet the prime contract Statement of Work, identified below. In the performance of this Statement of Work, the Subcontractor shall have reference to the following documents in determining the methods of performance. Should the Subcontractor feel that there is any conflict between this Statement of Work and any document next listed, it shall immediately notify the Contractor. The Subcontractor acknowledges receipt of each of the documents next listed.

       

       

      1. Prime Contract Statement of Work, Section of Prime Contract No. .

          

          

      2. Contractor's Proposal No. , dated .

          

       

   2. The Subcontractor shall perform the following services. Line Items used below correspond with the Line Items of the Prime Contract at Sections :

       

      Line Items

      ATTACHMENT II

      INVOICE FORMAT

      [Use Subcontractor's standard invoice form.]

      SUBCONTRACT NO.:

      PRIME CONTRACT NO.:

      PERIOD COVERED:

      DATE OF INVOICE:

       

      1. Direct Labor$

          

         Total Hours Expended

          

      2. Other Direct Costs$

          

          

      3. Fee$

          

         Total Requested$

      The certification of accuracy contained in Subcontract Section V-I is incorporated.

      ATTACHMENT III

      STANDARD TERMS AND CONDITIONS

       

      1. Entire Agreement. This subcontract agreement constitutes the entire agreement of the parties and the same may not be amended or modified orally. All understandings and agreements heretofore had between the parties are merged in this subcontract agreement, which alone fully and completely expresses their understandings.

          

          

      2. Waiver; Partial Invalidity. Failure of either party to exercise any power or right granted hereunder shall not constitute a waiver of that party's right thereafter to demand compliance with the terms hereof and if any clause or provision hereof is determined by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced by reason of any rule of law or public policy, that clause or provision shall be deemed severable from the remaining provisions of this subcontract and all other conditions and provisions shall remain in full force and effect and binding on the respective parties to this subcontract.

          

          

      3. Notice. All notices to be given to the parties hereto shall be in writing unless otherwise stated and shall be properly given when personally delivered to the specified address and left with a responsible person or when sent by registered or certified mail addressed to the parties at their respective addresses herein below given, or to such other address as either party shall have notified the other, in like manner, to be its proper business address. The date of notice shall be deemed, when notice is mailed, to be the date of mailing so long as the Postal Service certifies actual delivery; a refusal of a registered or certified mail notice shall constitute actual delivery hereunder.

          

          

         1. To the Contractor:

             

             

         2. To the Subcontractor:

             

          

      4. Counterparts. This subcontract may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

          

          

      5. Captions. The captions of this Subcontract are for convenience and reference only and in no way define, describe, extend, or limit the scope or intent of this agreement or the intent of any provision hereof.

          

          

      6. Independent Contractor, Indemnity. It is understood and agreed between the parties that the Subcontractor is, and shall be in all events, an independent contractor and nothing contained herein shall be construed as constituting the Subcontractor as an agent, partner, employee, or legal representative of the Contractor for any purpose whatsoever. The Subcontractor shall indemnify the Contractor and hold the Contractor harmless from all claims, demands, liabilities, actions, suits, or proceedings asserted or claimed by third parties and arising out of the performance of this subcontract, including all costs associated therewith, and Subcontractor agrees to undertake the cost of defending the same.

          

          

      7. Successors. This subcontract shall be binding upon and inure to the benefit of the parties, their respective successors, personal representatives, and assigns.

          

          

      8. Variation in Nouns or Pronouns. All nouns or pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, neuter, singular, or plural, as the identity of the parties or their personal representatives, successors, or assigns may require.

          

          

      9. Government Prime Contracting Officer Approval. This Subcontract shall not be effective until the Government Prime Contracting Officer has approved it. The Contractor shall advise the Subcontractor of such approval within five (5) working days after its receipt.

          

          

      10. Bankruptcy. The filing of a voluntary petition by or an involuntary petition against the Subcontractor in bankruptcy, notice of which Subcontractor shall furnish Contractor within five (5) days of Subcontractor's knowledge thereof, shall entitle the Contractor to consider this Subcontract breached. If the petition is not discussed within ten (10) days of Contractor's written notice to Subcontractor that it will consider this contract terminated for such breach, Contractor may terminate the Subcontract forthwith.

           

      ATTACHMENT IV

      PRIME CONTRACT PROVISIONS INCORPORATED BY REFERENCE

       

      1. The Contractor and Subcontractor agree that each of the following clauses contained in the provisions of the Contractor's prime contract are incorporated herein by reference and are made a part hereof as though set forth herein in full. The incorporated clauses are preceded by a clause number, the Subcontractor is cautioned to observe the alterations made in several clauses. These clauses are set forth on the following pages, and pages through of the prime contract. The Subcontractor agrees to be bound by the incorporated clauses and to comply therewith. The Subcontractor further agrees to insert or incorporate by reference or otherwise all of such clauses in its subcontracts and to require all subsequent lower-tier subcontractors to do likewise, insofar as such clauses so require.

          

          

      2. The Subcontractor acknowledges that it has received or otherwise possesses all of the clauses herein specified.

          

          

      3. Any inconsistency between the clauses incorporated herein:

          

          

         1. And those set forth in full in the subcontract schedule shall be determined in favor of the schedule provision.

             

             

         2. And those set forth in the Standard Terms and Conditions (Form STC) shall be determined in favor of these provisions.

             

      ATTACHMENT V

      DISPUTES

       

      1. If any matter in dispute under this subcontract may properly be submitted for a decision under the "Disputes" clause of the prime contract, such matter shall be so submitted by the Contractor to the prime contract Contracting Officer for decision. Nothing herein or hereby referenced shall be construed as giving the Subcontractor a direct right to appeal a decision of the Contracting Officer under the "Disputes" clause incorporated in the prime contract. Any decision of the Contracting Officer under the prime contract that relates to this subcontract shall be final and conclusive and binding upon the Subcontractor. Provided, however, upon written request by the Subcontractor to appeal such decision received by not less than fifteen (15) days before the expiration of the period of appeal under the "Disputes" clause of the prime contract.

          

          

      2. The decision of the Administrative Board of Contract Appeals (or other board or agency) or U.S. Claims Court which has cognizance over the appeal brought pursuant to subparagraph (a) hereof, shall be conclusive and final and binding upon the parties hereto, subject to any right of judicial review by a court of competent jurisdiction. The Contractor shall have the right to determine whether the appeal is filed at a Board of Contract Appeals or the U.S. Claims Court.

          

          

      3. Any appeal brought by the Contractor on behalf of the Subcontractor as provided under paragraph (a) hereof shall be at the expense of Subcontractor. The Subcontractor agrees to fully cooperate with the Contractor in the prosecution of such appeal and shall be responsible for the presentation of all evidence, facts and data and for furnishing witnesses, documents and certifications required by the Contract Disputes Act of 1978, Public Law 95-563, 41 U.S.C. 601, et seq., and the prime contract. Any failure by the Subcontractor to fully cooperate with the Contractor in the prosecution of such appeal or to promptly make payment for any expenses, including any legal fees and costs incurred by the Contractor in connection with such appeal, may be the basis for terminating such appeal and the parties shall be then conclusively bound by the decision of the Contracting Officer or, in the event of an appeal to the Board of Contract Appeals or U.S. Claims Court, then by the decision of such Board or Court.

          

          

      4. The Subcontractor agrees that as to any dispute arising under the terms of the prime contract for which the Contracting Officer has made a final decision and which is subject to the "Disputes" clause of the prime contract, its right of appeal shall be limited to the procedures set forth in subparagraphs (a), (b) and (c) above. In the event that an appeal is not otherwise available under this clause pursuant to the terms of the "Disputes" clause of the prime contract, the remedies, rights and liabilities of the parties hereto shall be those available in the court of competent jurisdiction of the State of or in arbitration if arbitration is provided for herein.

          

          

      5. Pending any final decision in arbitration or of a dispute hereunder or a judgment by any court of competent jurisdiction, the Subcontractor shall proceed diligently with the performance of the subcontract and in accordance with written direction of the contract.

          

          

      6. Notwithstanding any provision of the clause, the liability of the Contractor, if any, to the Subcontractor shall not exceed such final decision or adjudication.

          

          

      7. In the event that the Subcontractor fails to reimburse the Contractor for any expense or cost for which the Subcontractor is obligated to make payment under this clause, the Contractor shall have the right to set-off such costs against any sums otherwise due the Subcontractor under the subcontract.