Updated Centers of Excellence Program Guideline Changes - December 2006
Return of Grant Provisions

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Policies and Procedures Update for the Centers of Excellence Program
Addressing Changes to Statute from Senate Bill 112
during the 2006 Legislative Session

The 2006 legislature passed a bill updating the Centers of Excellence Statute (SB 112) which called for GOED (The Governor’s Office of Economic Development) to develop policies and procedures to determine whether a return of grant would be required under certain circumstances.  This document excerpts the relevant statutory language and the policies and procedures called for.

Background and Statute Excerpts

Below is cited the section of the statute most impacted by the 2006 SB 112.

63-38f-704.

58 63-38f-704. Administration -- Grants.

59 (1) The Governor's Office of Economic

60 Development shall administer this part.

61 (2) (a) The office may award grants to the various colleges and universities in the state

62 for the purposes of this part.

63   (b) The governor's Office of Economic Development shall develop a process to

64   determine whether a college or university that receives a grant under this part must return the

65   grant proceeds if the technology that is developed with the grant proceeds is licensed to a

66   licensee that:

67    (i) does not maintain a manufacturing or service location in the state from which the

68    licensee or a sublicensee exploits the technology; or

69    (ii) initially maintains a manufacturing or service location in the state from which the

70    licensee or a sublicensee exploits the technology, but within five years after issuance of the

71    license the licensee or sublicensee transfers the manufacturing or service location for the

72    technology to a location out of the state.

The process referred to in 63-38f-704 part 2(b), outlined in this document, will apply to all colleges and universities that receive a grant for the commercialization of a specific technology through the Centers of Excellence program and that receive proceeds from the licensing of that same technology supported by the Centers of Excellence program.  Proceeds include royalties, proceeds from equity participation in the spinout/licensee, milestone payments and other proceeds as a result of the license.

Should a company or business receive a direct grant to advance the commercialization of a technology developed at a Utah college or university, the same policies of pro-rata payback based on time in the state will apply, but there will be no other deductions.  The company will be solely responsible for the grant funds they received directly.

The intent of the legislature in passing SB 112 in the 2006 legislative session and thereby authorizing these policies and procedures is to reinforce the Centers of Excellence’s objective to strengthen Utah’s economy.  These changes intend to accomplish this by recycling back into economic development those revenues that stem from licenses of technologies supported by the Centers of Excellence program and, by extension, the taxpayer, when, for whatever reason, those licenses do not result in meaningful job creation and economic development in the state of Utah. 

It is important to note that the “return of grant” from Universities is not intended to come directly from the University’s existing budget or resources, nor directly from the licensee (company), nor to interfere in business decisions of either the university or licensee, but will be paid by the licensing university out of licensing proceeds received from the licensee over the course of the term of the license.  It is also important to note that the intention is for the State to receive a share of these proceeds over time, after certain expenses incurred by the university are reimbursed.

Policies and Procedures for the Centers of Excellence Program when a COE supported technology is licensed or moved out of state and a  “return of grant” is to be evaluated.

Definitions

1. Business Team and Business Team Member Consultants– Seasoned business executives and entrepreneurs who are recruited by the Centers of Excellence program on a program-wide basis to provide insight and business assistance to a Center under direct contract from the COE program.

1. Center (or Center of Excellence) – a university team including a Center Director (the “P.I.” or “Principal Investigator”) and other researchers and students as appropriate, which has applied to the state Centers of Excellence program and has received outside funding, such as corporate or Federal funding, for specific research deemed to be of commercial value and which is undergoing the transition from university research towards commercially viable product with the support of the Centers of Excellence program.
   
2. COE Contract – The contract that is enacted between the Centers of Excellence program of Utah’s Governor’s office of Economic Development and the university for the purpose of advancing the technical maturity of the technology proposed by a Center of Excellence team. 
   
3. COE Review Committee – A committee consisting of a quorum of the non-University affiliated members of the State Advisory Council on Science and Technology (SAC) and a quorum of the non-University affiliated members of the GOED Board convened for the purpose of reviewing any questions or concerns related to these policies and procedures.
   
4. Certain Direct Costs of the Universities – Costs which are specific to the commercialization Center in question and which include:  Patent development and prosecution costs for the Center in question – but will not include costs of the TCO itself, but will include payments to outside law firms to conduct this work and other direct investments into developing the technology in question such as the direct cash costs, but not in-kind expenses, of a VIP or Technology commercialization grant or similar program.
   
5. Exclusive license – a License to a university-developed technology that IS exclusive to one licensee and is NOT available other potential licensees.
   
6. GOED Board – Governor’s Office of Economic Development Board – a group of appointed volunteer Utah citizens who advise the Governor and GOED on economic development issues.
   
7. Grant – funds allocated to a Center, under a contract with the university that houses that Center, to mature technology invented in the Center and help it prepare to go to market.
   
8. Licensing Proceeds – the proceeds that are paid to the university as a result of the license and which includes, but is not limited to:  royalties and other ongoing licensing fees, milestone fees paid by the licensee, value of any equity stake in the licensee that is held by the university as a result of the license and related licensing activities.
   
9. Manufacturing or service location in the state from which the licensee or a sublicensee exploits the technology – This includes any facility, office or group of employees (example, telecommuters) in the state with the objective of developing, using, selling or otherwise “exploiting” the technology. The intent of this description is that the technology is generating a substantial portion of the overall jobs within Utah.  A company that is acquired but maintains a substantive manufacturing or service location in Utah will not be deemed to have moved out of state.
   
10. NON-exclusive license – a license to a university-developed technology that is not exclusive to one licensee and is also available on fair terms to other potential licensees.
    
11. State Advisory Council on Science and Technology (SAC) – A group of appointed volunteer citizens who advise the Governor and the State Science Advisor on matters of science and technology in the State of Utah.
    

Return of Grant Conditions if the Technology is licensed out of state OR if the licensee is moving the technology and jobs out of state less than 5 years from the license issuance.

A.  No Grant Return is Required - Conditions under which NO return of the grant is required even if the technology is moved out of state in less than 5 years.

• The licensee that is located out of state or is moving out of state has a NON-exclusive license to the technologies from the Center because a Utah-based company could have the opportunity to license the technology.

• The Technology from the Center was licensed in multiple fields of use and at least a “substantive” portion of the value of the Center’s technology was licensed in Utah.  If there is a disagreement about “substantive”, then the Director, in partnership with the University, will review this with the COE Review Committee and make a determination.
  

B.  Pro-Rata Return of the Grant out of License Proceeds: 

Conditions under which only a portion of the grant may be required to be returned.

• The licensee that is located out of state or is moving out of state has an exclusive license, but has operated in good faith with genuine positive economic impact in Utah for at least 12 months based on the criteria below. 
• The Grant return by the university should be pro-rated based on the number of years in state.  The percentage of the Grant to be returned would be calculated as follows:  Subtract the “number of years in state” from 5 years and then divide by 5 = pro-rata percentage.
• In addition, if the licensee had created a high number of “quality jobs” during the preceding year(s) in the state, the Review Committee can further reduce the required pro-rata payback at their discretion.  The Review Committee should assume that if the company had created approx 140 job-years (1 employee for 1 year), they will have approximately returned “dollar for dollar” back to the state on a $500,000 investment from the COE program.  Quality jobs are those that, on average, pay at least double the average county annual wage (approximately $65k/year in Salt Lake County for 2006 which is approximately the current average of a COE job).

Calculation of Grant Return

C. The method for calculating the grant return, for ANY grant repayment or pro-rata repayment, will proceed as follows

• The COE program will determine the total amount of funding allocated to the Center in question, which will include the total of
• Funding granted and paid directly to the University for the Center under a COE contract
• The pro-rata calculations set forth in B. will be applied to determine the total grant or pro-rata grant repayment.
• The University will identify the total licensing revenue stream for the Center in question, separately identifying “past, current and expected future licensing proceeds”.  These streams will include the total of:
• Up front fees paid by the licensee and expected to be paid by the licensee
• Milestone fees paid by the licensee and expected to be paid by the licensee
• Royalties and other ongoing and future licensing fees paid by the licensee and expected to be paid by the licensee
• Value of any equity at liquidation or exit (note that if the grant repayment begins before equity liquidation or exit, then the equity will be identified, but the value will be confirmed for the purposes of grant repayment only at liquidation or exit)
• The University will identify certain “current and past direct costs” that are specific to the Center in question which include:
• Patent development and prosecution costs for the Center in question – these will not include costs of the TCO itself, but do include payments to outside law firms to conduct this work.
• Other direct investments into developing the technology in question such as the direct cash costs of a VIP or Technology commercialization grant or similar university grant program
  

• The return of the grant or a portion of the grant will be based on the following formula:
• The university will keep all proceeds of the license until the current and past direct costs are repaid
• Once the current and past direct costs have been repaid by the proceeds of the license, then the university will “share back” with the State Centers of Excellence program, as a default rate, 50% of the licensing proceeds received by the university, as they are delivered to the university. 
• If, however, a university has invested substantially more funds in the development of the technology than the COE grant has contributed, the university can present information documenting this investment to the Review Committee, which will then adjust the state’s repayment share commensurate with the relative investment size. 
• As an example:  If the university, out of university assets, non-State contributions and resources, had invested $4 million in the development of the technology, and the COE Grant was $450,000, then the State’s “share-back” of the ongoing licensing proceeds would be approximately 10% of the proceeds as they are received by the university..  
• Items that are appropriate to include in evaluating the university’s investment in the technology include: 
• Deferred overhead charges, where overhead is permitted to be charged, but is voluntarily waived when participating in the COE program.
• Physical space, lab space and equipment and other Property Plant and equipment that contributed to the development of the technology that are developed solely by the university (such as through capital campaigns, donations, tuition etc).
• P.I. Salary that is paid by the university that is not covered by a grant or contract.
• Compensation to other team members that is paid by the university that is not covered by a grant or contract.
• Industry or Corporate grants and contracts that are sponsored research contracts that fund in whole or in part the development of the technology subject to these provisions.
• Items that are not appropriate to include in evaluating the university’s investment in the technology include :
• Federal grants and contracts that help pay for the development of the technology (this is Federal investment, not university nor state investment).
• No payment will be required if the university does not actually receive the expected proceeds.  These repayments to the state are due annually.
• The repayment is only for future received payments after the move that triggers these procedures.  Any previously received payments are not considered in the repayment process.
• These payments to the state will continue until the earlier of: 
• The total of the COE funding into the technology from part C.1. has been repaid OR
• The Total of the pro-rated portion of the COE investment in the technology from part C.1. has been repaid (if applicable) OR
• The payments to the University have been exhausted and no more licensing proceeds will be received by the university AND the university’s equity position has been liquidated and the appropriate percentage of the proceeds has been paid to the State.
• If a license is terminated by the University, such as for default or violation of other license terms, then no future repayment of grant proceeds to the State is required.  If the technology is then licensed to another out of state licensee, that license is subject to the return of grant terms that had been approved under these policies and procedures. 
• Review Committee Function:
• The COE Review Committee’s responsibility is to verify the accuracy of the information that they evaluate under these policies and procedures, to interview relevant individuals as needed and to otherwise independently calculate and determine the elements of the return of grant, in conjunction with the Center Director and the university.

Contract Administration

D. Policies and Procedures become part of University/State Contract:  When a new Center is approved and a new contract is created, a copy of the then-approved policies and procedures shall be included in the contract in an appendix (or shall be deemed to have been so included).  The policies and procedures governing that Center of Excellence will be those approved and included at the time of the initial Center grant.  If policies and procedures of the program change during the life of a Center (often up to 4 years in length), only those at the initial grant will be in effect for that Center and its technologies. 

E.  “Grandfathering of Existing Centers of Excellence”  -  Centers of Excellence whose contracts were initially executed on or before the 2005-06 fiscal year (that is, before the 2006 Legislative session that passed the statutory changes calling for these policies and procedures), will not be subject to the return of grant provisions, as these provisions were not in statute when the contracts for the 2005-06 fiscal year (or earlier) were executed. 

            1.  Centers which are ongoing in the program have their contracts amended only for contract duration and total value and the terms of the contract are not generally changed during the life of the Center, up to 4 years.

            2.  This provision provides consistency for all universities so that they know the terms and conditions under which they apply to and enter into the Centers of Excellence program.

F.  Return of Grant Mechanism:  If a repayment under these policies and procedures is made, it will be deemed a refund of grant proceeds under the contract originally executed between the COE program and the university.  Funds so received will be then managed by the COE program under then current policies and procedures.