31.205-37
Royalties and other costs for use of patents
Royalties and patent costs are generally allowable only if the government does not already have rights and the patent is valid, enforceable, and necessary for contract performance.
Overview
FAR 31.205-37 addresses the allowability of royalties and other costs associated with the use of patents in government contracts. It outlines when such costs are allowable, specifies exceptions, and provides guidance on evaluating the reasonableness of royalty payments, especially in cases involving related parties or agreements made in anticipation of or after contract award. The regulation also limits allowable royalties for patents formerly owned by the contractor and references the use of advance agreements for clarity on cost treatment.
Key Rules
- Allowability of Royalties and Patent Costs
- Royalties or amortization costs for patents necessary for contract performance are generally allowable, unless the government already has free use rights, the patent is invalid, unenforceable, or expired.
- Exceptions to Allowability
- Costs are unallowable if the government has a license, the patent is invalid or unenforceable, or the patent has expired.
- Reasonableness of Royalties
- Special scrutiny is required for royalties resulting from less-than-arm’s-length bargaining, such as payments to affiliates or agreements made in anticipation of government contracts.
- Royalties on Formerly Owned Patents
- Allowable royalties for patents formerly owned by the contractor cannot exceed the cost that would have been allowed if the contractor had retained ownership.
- Advance Agreements
- Contractors and contracting officers are encouraged to use advance agreements to clarify the treatment of patent-related costs.
Responsibilities
- Contracting Officers: Must determine the allowability and reasonableness of patent-related costs and ensure compliance with exceptions.
- Contractors: Must ensure patent costs claimed are allowable, reasonable, and properly documented, especially in related-party transactions.
- Agencies: Should provide oversight and may require advance agreements for clarity.
Practical Implications
- This section ensures the government does not pay for patent rights it already possesses or for invalid/expired patents, and prevents abuse in royalty arrangements. Contractors must carefully document and justify patent-related costs, particularly in complex or affiliated transactions, to avoid disallowance.