Grant Money Doesn't Come Free: How to Keep Your Company Out of Trouble When Using Federal Funds

During the economic downturn, such a wealth of economic opportunities may seem like easy money. However, it is important that both experienced and new grantees understand that these grants are a far cry from free money. Below is a rundown of some things that leasing counsel may find surprising about the terms and conditions of the grant that a business might hope to receive under the Recovery Act. This list is especially critical for grant neophytes, particularly for-profit companies making their first foray into the grants world.

A Grant Is Not a Contract

A grant is a mixture of terms, laws, and federal agency guidance. Unlike a contract, where the explicit terms control the relationship of the parties, a grant is a collection of statutory and regulatory requirements held together by a grant agreement. That is, the agreement itself does not tell the whole story. This fact was recognized by the Supreme Court long ago in Bennett v. Kentucky, 470 U.S. 656 (1985), where the Court rejected Kentucky's argument that the doctrine of contra proferentem (i.e., ambiguities are construed against the drafter, here Congress) applied to federal grant programs and instead held that the federal agency's interpretation of arguably ambiguous grant terms controlled. “Unlike normal contractual undertakings, federal grant programs originate in and remain governed by statutory provisions expressing the judgment of Congress concerning desirable public policy.”

Thus, grant agreements are a patchwork of terms and conditions found in a number of places. The heart of the agreement is the statutory purpose, “public policy” as stated by the Court, which is found not in the agreement, but in the program's authorizing statute. Then, Congress may, as it did with the Recovery Act, add additional terms through an appropriations act. Next, there are applicable regulations and agency guidance. As a final component, there may be special terms and conditions just for the award made to your organization. To conduct a proper legal analysis of an issue arising under a federal grant, you must locate and review all of these sources prior to reaching any conclusions or risk missing an important element of an issue.

To raise the stakes a bit higher, the Recovery Act provides for very strict oversight of the funds appropriated under the Act. In addition to traditional reporting requirements, which can be challenging enough for some grantees, there are new and frequent reporting requirements for Recovery Act funds, such as a quarterly report (due 10 days after the end of each quarter) on how Recovery funds have been used to create or preserve jobs as well as foster economic development. There is no clear standard for the demonstration of job creation or aid to economic recovery, so there will be questions of how to quantify a “job” (e.g., Is it a position created? What if someone leaves the job and a new person is hired ' is it still one job, or two?).

The Rules Are Not the Same for Everyone

Again, unlike a contract where the rules are specified in the contract and those same rules “flow-down” to subcontractors, under a federal grant different rules apply depending on what type of organization is receiving the funds either as a grant or a sub-grant. There are two general groups of requirements that are subject to this unusual methodology: the cost principles and the grant administration requirements.

For example, all grants and sub-grants are cost-reimbursement instruments. That is, a grantee gets paid its “allowable” cost of undertaking activities in furtherance of the purposes of the grant with no provision for fee or profit. The rules that determine what an allowable cost is for a nonprofit organization are found at 2 C.F.R. part 230, also known as OMB Circular A-122; the rules for a state, local, or tribal government are found at 2 C.F.R. part 225, which is Circular A-87; and for colleges and universities at 2 C.F.R. part 220 (Circular A-21). The costs of for-profit entities are determined in accordance with Part 31 of the Federal Acquisition Regulations.

So, assume your local university receives a grant to develop new batteries, the cost principles applicable to the university's use of grant funds is Circular A-21. Now assume further that the university issues a sub-grant (often know as a subrecipient agreement) to a local nonprofit organization. That organization does not follow the rules in A-21 but instead follows the rules laid out in Circular A-122. Do these different Circulars have different rules? Sometimes yes and sometimes no. But in one crucial area ' time and effort reporting ' the rules differ widely, so it is important to know what rules apply to your organization before starting work.

Similarly but more simply, there are two sets of grant administration requirements. The first is OMB Circular A-110, which applies to nonprofit and for-profit organizations, colleges and universities, hospitals, and a number of other types of organizations. The second is Circular A-102, which applies to state, local, and tribal units of government. While these Circulars can also be found in Title 2 of the Code of Federal Regulations, the “official” version for each federal agency is found in each agency's own regulations. Here again, you should locate the version applicable to your organization's grant before starting work.

A Subgrant Versus a Vendor Agreement

In a nutshell, a subgrant or, more commonly, a subrecipient agreement is an agreement to undertake activities in furtherance of the public purpose underlying the grant. A vendor agreement, in contrast, is an agreement to purchase goods or services with grant funds that will assist a grantee or subgrantee in performing that public purpose. For example, the public purpose of a clean water program administered by the EPA is to have cleaner water for everyone ' the public. Thus, if a state receives a grant from the EPA to improve water quality statewide, it may decide to subgrant some of its federal funds to local municipal governments to improve water at the local level. Thus, the locality is fulfilling the purposes of the statewide grant, only on a smaller scale.

A vendor agreement, on the other hand, would be an agreement to lease and install new water-treatment filters. The purpose of the grant is not to lease filters, but to have cleaner water. Yet that purpose is indeed furthered by leasing and installing the filters.

The distinction between subgrants and vendor agreements is further explained in OMB Circular A-133, Section 210 and is an important one. While grantees have considerable latitude in structuring contracts with vendors in order to get a favorable deal, they do not have similar latitude in structuring subgrants since, as noted in Number 2 above, the OMB circulars apply to subgrants depending on what kind of entity the subgrantee is.

Prepare to Be Audited

Audits are a fact of life for federal grantees. The federal government has virtually unfettered access to grant related books and records at any time. However, the primary means by which federal agencies monitor the use of federal funds is to require an annual outside audit of any grantees that receive federal funds in excess of $500,000. This audit can be paid for from grant funds but must take place in accordance with the provisions of OMB Circular A-133 every year. For-profit entities, as “non-federal entities,” cannot escape these audits. While A-133 does not explicitly apply to for-profit entities, most federal agencies apply the requirements of A-133 to grantees through special terms and conditions added to the grant award.

Further, due to increased manpower and resources of the offices of the inspectors general, Recovery Act grantees are assured of careful oversight during audits and of any and all complaints of fraud, waste, or abuse. The Recovery Act provides millions in additional funding to the offices of inspector general for heightened scrutiny of grantees. For instance, the Act provides the OIG offices more power by allowing them to undertake a “review” in addition to conducting OIG audits and investigations. Further, the Act establishes the broadly empowered Recovery Act Transparency Board, composed of inspectors general; a Web site for concerned citizens to report improper expenditures of recovery funds; and provides expansive whistle-blower protections. Given the outrage that accompanied the bank and automaker bailouts, the government has a vested interest in seeing that public funds are properly managed and likely will investigate any complaint in order to avoid accusations of improper oversight.

Your Intellectual Property Is Not Just Yours

Valuable intellectual property is often created with federal funds. However, under federal laws and regulations, title for that property does not vest solely in its inventor. The Bayh-Dole Act is designed to recoup some of the federal investment in research that results in patents or copyrights. The Department of Commerce regulations codifying Bayh-Dole apply to all inventions “conceived or first actually reduced to practice” in the performance of a federal grant, contract, or cooperative agreement. Even if the government is not the sole source of funding for the intellectual property, the federal government retains an interest in the property.

Bayh-Dole creates a number of requirements for federal funding recipients. The grantee must first disclose its invention to the agency, and then within two years of the invention it must inform the agency in writing that it intends to take title to the invention. Once an election has been made, the grantee has a year to seek patent protection or the title may be forfeited to the federal government. The time limits are rigid and confusing, so the government created iEdison, a database for reporting and tracking inventions. In at least one case, Campbell Plastics Engineering and Manufacturing v. Les Brownlee, 389 F.3d 1243 (Fed. Cir. 2004), a court found that an inventor forfeited its rights to an invention by failing to report the invention in the prescribed manner.

Take Time Now, Save Trouble Later

The bottom line is that the federal government retains an interest in intellectual property created with federal dollars. For all intellectual property, the inventor must grant the federal government a nonexclusive, nontransferable, irrevocable, paid-up license for the patent or copyright. Most powerful, however, are the “march-in” rights created under Bayh-Dole. If an inventor fails to take effective steps to realize practical application of a patent or health and safety concerns arise in relation to consumers, the agency may step in and grant patent licenses to reasonable applicants.

This list is hardly exhaustive, but it does highlight a number of the quirks of the federal grants system. Without question, private companies should take advantage of the unprecedented funding created by the Recovery Act. Before they avail themselves of that funding, however, they must take careful stock of the requirements that accompany every aspect of the grant, from accounting under a grant to intellectual property created with those grant funds. A little preparation can go a long way.

Edward T. Waters is the co-managing partner of Feldesman Tucker Leifer Fidell in Washington, DC, and heads the firm's grants law practice group. He is also the former President of the National Grants Management Association. He can be reached at [email protected].

The American Recovery and Reinvestment Act has already begun to pump billions of dollars into federal grant programs that run the gamut from education to the environment to infrastructure improvement. This unprecedented influx of capital has attracted both long-standing recipients of federal grants ' such as state and local government, colleges and universities, and non-profit organizations ' as well as many newcomers to the federal grant process, including private, for-profit companies.

For example, the Recovery Act appropriates literally billions of dollars for the development of green technologies, including $2 billion for advanced battery projects, $6.7 billion for energy efficiency programs, and $93 million for wind energy projects with an emphasis on research and development. Many of these funds are available on a competitive basis to for-profit companies as well as those long-standing recipients noted above. And that's just the funding available from the Department of Energy. Many other federal agencies also received billions of dollars in Recovery Act funds that will, in turn, be spent through federal grant awards. For instance, the Department of Defense has allocated $300 million for near-term energy-efficiency research and demonstration projects. Additionally, some of the funding allocated to the National Science Foundation will undoubtedly be available for clean-energy research and development (potential applicants can locate programs of interest on a federal Web site, www.grants.gov).

Five Things to Know About a Federal Grant

During the economic downturn, such a wealth of economic opportunities may seem like easy money. However, it is important that both experienced and new grantees understand that these grants are a far cry from free money. Below is a rundown of some things that leasing counsel may find surprising about the terms and conditions of the grant that a business might hope to receive under the Recovery Act. This list is especially critical for grant neophytes, particularly for-profit companies making their first foray into the grants world.

A Grant Is Not a Contract

A grant is a mixture of terms, laws, and federal agency guidance. Unlike a contract, where the explicit terms control the relationship of the parties, a grant is a collection of statutory and regulatory requirements held together by a grant agreement. That is, the agreement itself does not tell the whole story. This fact was recognized by the Supreme Court long ago in Bennett v. Kentucky , 470 U.S. 656 (1985), where the Court rejected Kentucky's argument that the doctrine of contra proferentem ( i.e., ambiguities are construed against the drafter, here Congress) applied to federal grant programs and instead held that the federal agency's interpretation of arguably ambiguous grant terms controlled. “Unlike normal contractual undertakings, federal grant programs originate in and remain governed by statutory provisions expressing the judgment of Congress concerning desirable public policy.”

Thus, grant agreements are a patchwork of terms and conditions found in a number of places. The heart of the agreement is the statutory purpose, “public policy” as stated by the Court, which is found not in the agreement, but in the program's authorizing statute. Then, Congress may, as it did with the Recovery Act, add additional terms through an appropriations act. Next, there are applicable regulations and agency guidance. As a final component, there may be special terms and conditions just for the award made to your organization. To conduct a proper legal analysis of an issue arising under a federal grant, you must locate and review all of these sources prior to reaching any conclusions or risk missing an important element of an issue.

To raise the stakes a bit higher, the Recovery Act provides for very strict oversight of the funds appropriated under the Act. In addition to traditional reporting requirements, which can be challenging enough for some grantees, there are new and frequent reporting requirements for Recovery Act funds, such as a quarterly report (due 10 days after the end of each quarter) on how Recovery funds have been used to create or preserve jobs as well as foster economic development. There is no clear standard for the demonstration of job creation or aid to economic recovery, so there will be questions of how to quantify a “job” (e.g., Is it a position created? What if someone leaves the job and a new person is hired ' is it still one job, or two?).

The Rules Are Not the Same for Everyone

Again, unlike a contract where the rules are specified in the contract and those same rules “flow-down” to subcontractors, under a federal grant different rules apply depending on what type of organization is receiving the funds either as a grant or a sub-grant. There are two general groups of requirements that are subject to this unusual methodology: the cost principles and the grant administration requirements.

For example, all grants and sub-grants are cost-reimbursement instruments. That is, a grantee gets paid its “allowable” cost of undertaking activities in furtherance of the purposes of the grant with no provision for fee or profit. The rules that determine what an allowable cost is for a nonprofit organization are found at 2 C.F.R. part 230, also known as OMB Circular A-122; the rules for a state, local, or tribal government are found at 2 C.F.R. part 225, which is Circular A-87; and for colleges and universities at 2 C.F.R. part 220 (Circular A-21). The costs of for-profit entities are determined in accordance with Part 31 of the Federal Acquisition Regulations.

So, assume your local university receives a grant to develop new batteries, the cost principles applicable to the university's use of grant funds is Circular A-21. Now assume further that the university issues a sub-grant (often know as a subrecipient agreement) to a local nonprofit organization. That organization does not follow the rules in A-21 but instead follows the rules laid out in Circular A-122. Do these different Circulars have different rules? Sometimes yes and sometimes no. But in one crucial area ' time and effort reporting ' the rules differ widely, so it is important to know what rules apply to your organization before starting work.

Similarly but more simply, there are two sets of grant administration requirements. The first is OMB Circular A-110, which applies to nonprofit and for-profit organizations, colleges and universities, hospitals, and a number of other types of organizations. The second is Circular A-102, which applies to state, local, and tribal units of government. While these Circulars can also be found in Title 2 of the Code of Federal Regulations, the “official” version for each federal agency is found in each agency's own regulations. Here again, you should locate the version applicable to your organization's grant before starting work.

A Subgrant Versus a Vendor Agreement

In a nutshell, a subgrant or, more commonly, a subrecipient agreement is an agreement to undertake activities in furtherance of the public purpose underlying the grant. A vendor agreement, in contrast, is an agreement to purchase goods or services with grant funds that will assist a grantee or subgrantee in performing that public purpose. For example, the public purpose of a clean water program administered by the EPA is to have cleaner water for everyone ' the public. Thus, if a state receives a grant from the EPA to improve water quality statewide, it may decide to subgrant some of its federal funds to local municipal governments to improve water at the local level. Thus, the locality is fulfilling the purposes of the statewide grant, only on a smaller scale.

A vendor agreement, on the other hand, would be an agreement to lease and install new water-treatment filters. The purpose of the grant is not to lease filters, but to have cleaner water. Yet that purpose is indeed furthered by leasing and installing the filters.

The distinction between subgrants and vendor agreements is further explained in OMB Circular A-133, Section 210 and is an important one. While grantees have considerable latitude in structuring contracts with vendors in order to get a favorable deal, they do not have similar latitude in structuring subgrants since, as noted in Number 2 above, the OMB circulars apply to subgrants depending on what kind of entity the subgrantee is.

Prepare to Be Audited

Audits are a fact of life for federal grantees. The federal government has virtually unfettered access to grant related books and records at any time. However, the primary means by which federal agencies monitor the use of federal funds is to require an annual outside audit of any grantees that receive federal funds in excess of $500,000. This audit can be paid for from grant funds but must take place in accordance with the provisions of OMB Circular A-133 every year. For-profit entities, as “non-federal entities,” cannot escape these audits. While A-133 does not explicitly apply to for-profit entities, most federal agencies apply the requirements of A-133 to grantees through special terms and conditions added to the grant award.

Further, due to increased manpower and resources of the offices of the inspectors general, Recovery Act grantees are assured of careful oversight during audits and of any and all complaints of fraud, waste, or abuse. The Recovery Act provides millions in additional funding to the offices of inspector general for heightened scrutiny of grantees. For instance, the Act provides the OIG offices more power by allowing them to undertake a “review” in addition to conducting OIG audits and investigations. Further, the Act establishes the broadly empowered Recovery Act Transparency Board, composed of inspectors general; a Web site for concerned citizens to report improper expenditures of recovery funds; and provides expansive whistle-blower protections. Given the outrage that accompanied the bank and automaker bailouts, the government has a vested interest in seeing that public funds are properly managed and likely will investigate any complaint in order to avoid accusations of improper oversight.

Your Intellectual Property Is Not Just Yours

Valuable intellectual property is often created with federal funds. However, under federal laws and regulations, title for that property does not vest solely in its inventor. The Bayh-Dole Act is designed to recoup some of the federal investment in research that results in patents or copyrights. The Department of Commerce regulations codifying Bayh-Dole apply to all inventions “conceived or first actually reduced to practice” in the performance of a federal grant, contract, or cooperative agreement. Even if the government is not the sole source of funding for the intellectual property, the federal government retains an interest in the property.

Bayh-Dole creates a number of requirements for federal funding recipients. The grantee must first disclose its invention to the agency, and then within two years of the invention it must inform the agency in writing that it intends to take title to the invention. Once an election has been made, the grantee has a year to seek patent protection or the title may be forfeited to the federal government. The time limits are rigid and confusing, so the government created iEdison, a database for reporting and tracking inventions. In at least one case, Campbell Plastics Engineering and Manufacturing v. Les Brownlee , 389 F.3d 1243 (Fed. Cir. 2004), a court found that an inventor forfeited its rights to an invention by failing to report the invention in the prescribed manner.

Take Time Now, Save Trouble Later

The bottom line is that the federal government retains an interest in intellectual property created with federal dollars. For all intellectual property, the inventor must grant the federal government a nonexclusive, nontransferable, irrevocable, paid-up license for the patent or copyright. Most powerful, however, are the “march-in” rights created under Bayh-Dole. If an inventor fails to take effective steps to realize practical application of a patent or health and safety concerns arise in relation to consumers, the agency may step in and grant patent licenses to reasonable applicants.

This list is hardly exhaustive, but it does highlight a number of the quirks of the federal grants system. Without question, private companies should take advantage of the unprecedented funding created by the Recovery Act. Before they avail themselves of that funding, however, they must take careful stock of the requirements that accompany every aspect of the grant, from accounting under a grant to intellectual property created with those grant funds. A little preparation can go a long way.

Edward T. Waters is the co-managing partner of Feldesman Tucker Leifer Fidell in Washington, DC, and heads the firm's grants law practice group. He is also the former President of the National Grants Management Association. He can be reached at [email protected].