121 Fed. Cl. 492
Fed. Cl.2015Background
- Dynetics, an engineering firm, sued the United States for denial of claimed research tax credits under I.R.C. § 41 for work on many contracts; the parties presented seven sample contracts for the court to resolve the "funded research" question on summary judgment.
- The Treasury regulation disqualifies QREs to the extent research is “funded” either (1) where payment is not contingent on research success, or (2) where the performer retains no substantial rights in the results.
- The seven sample contracts include a mix of contract types (cost-plus-fixed-fee; firm-fixed-price level-of-effort; time-and-materials; subcontracts; a NASA cooperative agreement subcontract) with varying FAR clauses (inspection, payment, patent/security provisions).
- Dynetics primarily argued (a) a course of dealing made payment contingent on successful results and (b) specific inspection/warranty/termination/undefinitized-contract clauses placed it at financial risk of nonpayment; it also argued it retained substantial rights on some contracts.
- The government argued the contracts (and incorporated clauses) show Dynetics would be paid regardless of research success and that for two contracts Dynetics retained no substantial rights (so the research was funded).
- The Court granted the government’s motion and denied Dynetics’ cross-motion: it held Dynetics’ expenses were funded because Dynetics did not show payment was contingent on success and, for UAH01 and NT001 (Task Order 169), Dynetics lacked substantial rights in results.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether payment was contingent on success (Treas. Reg. § 1.41-4A(d)(1)) | Dynetics: course of dealing, inspection/rejection/warranty clauses, termination/undefinitized-contract risk and business uncertainty show it bore failure risk and payment depended on successful results | Government: contracts and incorporated FAR clauses provide for payment regardless of research success; alleged course of dealing is parol evidence and unsupported; business/termination risks are not the contingency the regulation addresses | Court: Payment was not contingent on success; Dynetics failed to rebut contract text and could not rely on parol evidence; summary judgment for government on funded-research question |
| Whether course of dealing can alter written contracts | Dynetics: long-term practices created a shared understanding that Dynetics bore failure risk | Government: parol evidence rule bars altering clear contracts; no admissible evidence of mutual understanding | Court: Contracts are not ambiguous; parol evidence inadmissible; Dynetics failed to prove a mutual course of dealing |
| Whether certain inspection/warranty clauses (AF007, AR005, AR009, AMS01, BOE12, UAH01) shifted failure risk to Dynetics | Dynetics: incorporated inspection/warranty language (or missing clauses, hybrids, deliverables, reperform obligations) put it at risk of nonpayment | Government: inspection clauses do not equate to nonpayment on unsuccessful research; reperform provisions generally allow cost recovery (often without profit), FFP-LOE buys effort not results; other alleged clauses are business risks, not contingency on success | Court: Inspection/warranty/termination/undefinitized arguments unpersuasive; CLAUSES did not create contingency of payment on research success; risks identified were not the regulatory test |
| Whether Dynetics retained substantial rights in research results (Treas. Reg. § 1.41-4A(d)(2)) for UAH01 and NT001 (Task Order 169) | Dynetics: retained rights in non-patentable results (UAH01) and could reuse models/skills/severable outputs despite DD254 security controls (NT001) | Government: UAH01 vested all intellectual property produced in performance to the University; NT001’s DD Form 254 and security provisions preclude Dynetics’ free use or transfer of results — no substantial rights | Court: Dynetics failed to carry its burden; UAH01 vested broad IP rights in the University; DD Form 254 and task order restrictions prevented substantial rights in Task Order 169; held Dynetics retained no substantial rights on those contracts |
Key Cases Cited
- Fairchild Indus., Inc. v. United States, 71 F.3d 868 (Fed. Cir. 1995) (contract terms showing contractor bore risk of producing specified products supported finding payment contingent on success)
- Lockheed Martin Corp. v. United States, 210 F.3d 1366 (Fed. Cir. 2000) (substantial-rights inquiry must be made by reference to the contracts themselves; external statutory restrictions outside the agreement are irrelevant)
- Metric Constructors, Inc. v. NASA, 169 F.3d 747 (Fed. Cir. 1999) (ambiguity exists only if multiple reasonable interpretations fall within a zone of reasonableness)
- Barron Bancshares, Inc. v. United States, 366 F.3d 1360 (Fed. Cir. 2004) (parol evidence rule and contract interpretation principles)
- Bubble Room, Inc. v. United States, 159 F.3d 553 (Fed. Cir. 1998) (presumption of correctness of IRS determinations in refund suits; taxpayer bears burden to rebut)
- Interstate Gen. Gov’t Contractors, Inc. v. Stone, 980 F.2d 1433 (Fed. Cir. 1992) (patent ambiguities construed against contractor; contractor has duty to inquire)