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Martin concluded that “[t]he right to from performance of the research rather designs, builds, and delivers software
use the research results, even without than substantial rights in the research. technology solutions, claimed that it was
the exclusive right, is a substantial Ultimately, the court concluded that entitled to summary judgment because
right,” clarifying that a contractor is not Dynetics had the burden to show that it (1) each of its sample projects satisfied
required to retain all rights to retain had substantial rights in the research and the risk standard; (2) the substantial-
substantial rights. its arguments were not persuasive. rights standard is procedurally invalid
The court observed that the cost- Another contract with a university under the Administrative Procedure Act
recovery recoupment provisions only involved research for patentable and (APA) and substantively invalid under
applied when Lockheed Martin in- nonpatentable technology. The govern- an analysis consistent with that in Chev-
tended to sell products or sell or license ment argued that Dynetics did not ron USA Inc. v. Natural Resource Defense
technology developed specifically for have substantial rights in the research Council, Inc., 467 U.S. 837 (1984); and
the government to other parties. The due to language in the contract, stating (3) even if it were valid, each of the ap-
court ruled that these provisions did that all the rights of the work belonged proximately 24 sample projects analyzed
not restrict Lockheed Martin’s right to to the university. Dynetics conceded satisfied the substantial-rights standard.
manufacture the specific products, simi- that it may not have substantial rights Perficient contended that the risk
lar products, related technology, or the in all of its work for the university but standard was satisfied for the sample
right to unrestricted use of the results argued that it had substantial rights in projects because each client paid for a
of the research in its own business, such the nonpatentable technology. The court product rather than for Perficient to
that Lockheed Martin retained the right disagreed, citing broad language in the undertake research. In support of its
to use its research without paying for contract that vested “other intellectual claim, Perficient asserted that certain
that right. property rights” in the university. provisions in the contracts — requir-
The substantial-rights standard was A more recent case, Populous Hold- ing the client to review and inspect the
also litigated in Dynetics, Inc., 121 Fed. ings, Inc., No. 405-17 (Tax Ct. 1/16/20) deliverables, allowing the client to test
Cl. 492 (2015). Dynetics, an engineer- (stipulated decision entered), addressed the deliverables for functionality, and
ing firm, filed amended tax returns the substantial-rights standard and allowing the client to accept or reject
for three tax periods seeking a refund payment for future use of the research. the deliverables — demonstrated that
resulting from research credits related to Populous Holdings, an architectural Perficient was delivering a solution to
work performed on more than 100 con- design service, entered into multiple a client’s technical issue and not to un-
tracts, of which seven sample contracts contracts for design work. In each of dertake research. Perficient did not chal-
were reviewed the contracts, the client retained owner- lenge the validity of the risk standard in
Aspects of the terms evaluated in ship of the documents and any models its motion.
certain of these sample contracts are produced. Populous was free to use any The IRS disputed Perficient’s char-
relevant to the Perficient and Grigsby design details that were repetitive but acterization of its project agreements as
cases. For example, one required the was restricted from using project-specific product contracts and contended that
attachment of a DD Form 254, Depart- design details. The contracts did not 22 of the sample projects constituted
ment of Defense Contract Security Clas- require Populous to pay its clients for funded research. The IRS argued that
sification Specification, which dictates use of the research. Citing Lockheed the master agreements governing Per-
the security level and characteristics of a Martin, the court determined on sum- ficient’s project contracts required more
specific research project. Security provi- mary judgment that Populous retained than just end products. In reference to
sions in the Form 254 placed a variety of substantial rights in the research because another sample project where payment
limitations on the use of the intelligence no provisions within the contracts pro- depended solely on the passage of a
information contained in the results of hibited Populous from using the related specified amount of time, the IRS dis-
the research. Dynetics asserted that it research technology in its business and tinguished Perficient’s facts from those
retained the right to use the results of the agreements did not require Populous in Fairchild where Fairchild did not have
the research, in part because of the skills to pay its clients to use the research in a right to retain advance payments until
and advancements it developed while future projects. after client acceptance. The IRS main-
working on the contract. Citing Regs. tained that a taxpayer’s right to payment
Sec. 1.41-4A(d)(2), the court stipulated Perficient and validity of the cannot only depend on the passage of a
that it was not clear how the skills and substantial-rights standard specified time but must also depend on
advancements Dynetics developed were In the Perficient case, Perficient Inc., a post-inspection approval and accep-
anything other than incidental benefits a technology services company that tance process. Further citing two of the

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