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9 Legal Issues and Agreements “Conducting research with foreign partners can take a wide vari- ety of forms. Sometimes this involves conducting research in the United States with foreign partners; other times it may involve field research, setting up limited business operations, or even establishment of a new campus overseas. This panel will discuss the legal issues related to these various scenarios. The speakers will discuss registration and memo- randa of understanding with foreign governments and governmental approvals. It will also cover legal agreements and documents used to facilitate particular business activities, such as payment of taxes, real estate issues, and employment requirements. The panel will cover methods used by institutions to incorporate legal review into ongoing operations. In addition, the panel will discuss the research funding opportunities and challenges presented by the European Union’s 7th Framework Program.” (Workshop Agenda) 9.1 COLLABORATIVE MECHANISMS: PROS AND CONS OF VARIOUS APPROACHES FOR U.S. UNIVERSITIES1 Jamie Lewis Keith, Vice President and General Counsel at the University of Florida, discussed legal and contract issues that arise in inter- In this section and other sections summarizing presentations, views and opinions are 1 attributed to the presenter unless stated otherwise. 63
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64 CORE ELEMENTS OF INTERNATIONAL RESEARCH COLLABORATION national research, mainly from the viewpoint of U.S. universities. Clearly, these are not the drivers of the research endeavor, but they can undermine the primary objectives if they are not effectively addressed. Several issues affecting the reputational, financial, operational and legal risks of the endeavor and how best to structure the administrative and legal vehicle for the intellectual program should be decided at the out- set of the collaboration. To begin with, it is critical to determine whether the parties’ objectives and expectations are realistic, understood, and aligned, or at least compatible. It is also important to have a clear sense of the activities that will be undertaken in the foreign locale, since this will drive tax and regulatory compliance requirements and liabilities that apply to the endeavor. In addition, the U.S. entity needs to understand the juris- dictions, laws, and processes of the overseas locale and whether they are predictable or whether local officials enjoy wide discretion. Finally, there is a need to ensure that negotiations are conducted with somebody who actually has the legal and political authority to close the transaction and who will be there for the duration of the relationship, or at least until the endeavor is well-established. Ms. Keith explained some options for structuring the administrative and legal mechanisms to carry forward the research endeavor. Although the term “partner” may be used in casual parlance to indicate a close relation- ship, in most cases it is best to avoid creating a formal, legal partnership. A legal partnership carries with it 100 percent joint and several liability of each partner to the other for torts, debts, contracts and other liabilities of the endeavor. The foreign government might create a new, single-purpose cor- poration to contract with the U.S. university, particularly if it is investing a considerable amount of money. It is often easier politically and practically for a foreign government to fund a corporation organized locally and allow that entity to fund the U.S. university. Alternatively, the U.S. university and foreign university might be the co-creators and members of the new corporation if there is a joint commitment to a long-term relationship with adequate funding. This can be helpful since the corporation provides lim- ited liability to the members. On the other hand, corporate formalities can add a level of bureaucracy that faculty find burdensome and unnatural. For example, the faculty working on the research endeavor of the new entity may have to attend board meetings, pay attention to using the correct title, stationery and business cards, and so forth. Typically, it is not worth creat- ing a formal legal entity unless there is a large amount of money involved, a long-term commitment, and a high level of certainty that the relationship
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65 LEGAL ISSUES AND AGREEMENTS will be successful. For example, MIT and Cambridge University set up a separate entity to undertake a collaborative program that totaled $100 mil- lion over several years. Another option is something called a “service blocker corporation.” In this case, the U.S. university would create a corporation on its own in the foreign country or the United States, without a foreign partner, in order to limit legal or tax liability. This mechanism can be useful in jurisdictions where enforcement of the laws is unpredictable or subject to considerable discretion, or where the political situation is unstable, presenting heightened risks. The service blocker corporation may be willing to take on greater risks than the university, and the corporation, if properly formed, operated and governed, insulates the university’s assets from tax, regulatory and other legal and financial exposures. Of course, the university will be closely identified with the corporation and will continue to be exposed to reputational risk. One of the familiar models is a research collaboration agreement. This is an attractive option when there is some foreign government funding, and when the U.S. university is collaborating with an existing university or group of universities. Many times the foreign government prefers to fund an entity in its own jurisdiction because it is difficult to send money directly to the United States in any significant amount. Sensitivities may arise when the foreign university is to receive significant funding from its government and is then expected to flow a majority of the funding to the U.S. university. The U.S. university needs to ensure that the funding it receives will be available and adequate, which requires a clear understand- ing of the relationship between the foreign entity and its government. It is also important to ensure that the collaboration does not become a de facto partnership, by being clear about the nature of the relationship both in the express provisions of the agreement and in describing the relationship to third parties and to the public. Ms. Keith pointed out that some universities have actually established foreign campuses or research institutes to provide a long-term, robust multi- cultural opportunity for students and faculty, while they maintain a close association with the primary institution. There are a variety of mechanisms to do this. One is for the U.S. university to actually own or lease facilities and employ the personnel. This may not be possible under the laws or cus- toms of some jurisdictions. Also, this structure involves some special risks and burdens. There is a need to ensure that the entity follows foreign laws in areas such as human resources, environmental protection, and real estate, for example. Considerable local expertise is essential. In addition, if the
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66 CORE ELEMENTS OF INTERNATIONAL RESEARCH COLLABORATION endeavor ends, whether in an orderly, planned manner or under emergency circumstances, it is critical to factor in the need to abandon valuable assets and to address long-term contractual commitments in the foreign locale. It is important to pre-arrange contingency plans, security, and protections for assets and personnel to the greatest extent possible. Another approach, which presents fewer financial, operational and compliance risks, is for the foreign entity to own or lease facilities and em- ploy the people, while the U.S. university enjoys approval or veto rights on key personnel, administrative systems that affect the research endeavor, and the design and specifications for the facilities. The U.S. university would have the responsibility under the agreement to operate and have appropri- ate control of the research program. The foreign entity would participate in, and could also have appropriate control of, the research endeavor, and would have responsibility for performing administrative duties, employing staff, and ensuring compliance with the jurisdiction’s regulatory and other legal requirements. Establishing a foreign campus may involve long-term and very substan- tial financial obligations. If the U.S. university is dependent on a foreign government or entity to fund those obligations, it may be necessary to require the funding entity to secure a demand letter of credit issued by a bank in a neutral country to secure its funding commitments. Although joint degree-granting programs are not a focus of this discus- sion, Ms. Keith reviewed several aspects of these. The degree program may be an add-on to the research endeavor or free-standing. These initiatives work best when there is some commonality in the quality of institutions, faculty and students. The curricula should also have some commonality or complementary elements. Each institution will need to ensure that its admission and appointment standards are met and that it has discretion for admission and appointment decisions. It may be difficult to commit faculty to be present in another country for an extended period of time, so it is important not to over-commit. In addition to traditional methods, the institution may want to consider distance learning and other options. 9.2 RISK AREAS AND KEY CONTRACT PROVISIONS IN INTERNATIONAL COLLABORATIONS Ms. Keith then reviewed risk areas that should not dissuade under- taking a research initiative but need to be managed appropriately for the endeavor to be a success, as well as key contract provisions. Obviously, the
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67 LEGAL ISSUES AND AGREEMENTS university’s reputation is its most valuable asset. Therefore, it is critically im- portant to protect that reputation in the endeavor. One of the biggest repu- tational risks is misunderstanding the objectives of one’s collaborator. Does the U.S. university share the same objectives as the foreign government and university? Are the objectives and expectations feasible and realistic? Is there wider support in the country outside the current government, or is the project dependent on a particular champion and more broadly viewed as controversial? It is very important to be clear about expectations and not to over promise. For example, the U.S. university cannot change the foreign jurisdiction’s economy and probably cannot adapt some approaches to fit foreign norms. The university can share what it has done successfully, can undertake joint research and education, and provide advice, but the foreign jurisdiction must have the responsibility for adapting the information pro- vided to its own context. As a practical matter, it is important to recognize that most foreign governments require their laws to govern the contract. A public institution in the United States might have similar restrictions. Silence as to the govern- ing law of the contract may be the only practical solution. In such event, the common law of “choice of law” will determine the governing law if there is a contract dispute. When another jurisdiction’s law governs the contract, it is important to have counsel who is expert in those laws. There are some foreign and U.S. laws that have to govern, even if the governing law of the contract is that of a particular jurisdiction. So, for instance, in the general governing law provision, there will always be a carve-out for export controls and trade sanctions because these apply to U.S. institutions wherever they operate. Also, the laws of the jurisdiction in which activities are undertaken will govern those activities; an institution’s home laws may also govern the activities, making it necessary to satisfy both sets of laws. Tax liability can be a hidden cost that should be considered in ad- vance. It is not only a question of whether or not the collaboration involves activities that could be taxable in a foreign jurisdiction, but also whether tax accounting and filings are required in the foreign country. This can be a significant administrative undertaking and involve substantial costs for record-keeping, accounting and legal advice and procedures. Where foreign taxation can be avoided without undermining core objectives of the endeavor, it is worth the planning time and effort to avoid the cost. Some- times taxation in another country is triggered by the contract being signed in the foreign jurisdiction. This is one reason why it is always better to sign the legal document at home, even if there is also a ceremonial signing in the
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68 CORE ELEMENTS OF INTERNATIONAL RESEARCH COLLABORATION foreign country. Maintaining a foreign bank account, possessing a foreign office or residence, or undertaking research that generates intellectual prop- erty interests can all lead to tax liability. Many times tax treaties will have an exemption for educational activities. Tax, accounting and filing costs must be allocated to the foreign collaborator or the funding for the endeavor must be adequate to cover the core program activity costs as well as the costs associated with tax compliance. And, of course, individuals from the U.S. university who actually go abroad and spend enough time there may be subject to individual personal taxation. A citizen of a foreign country may be subject to automatic taxation there upon undertaking activities for his or her U.S. employer there. The U.S. university may need to supplement the salary of faculty and staff who are working in the foreign jurisdiction to address added tax liability. Ms. Keith went on to identify payment provisions as a potential risk. Currency fluctuations, or restrictions on the amount of dollars that can be sent out of the country or brought into the country, can affect available funding for the research collaboration. Reporting and accounting required by U.S. government agencies is embedded in U.S. university practices but may differ considerably from what is required by a foreign government. It may be possible to specify in the contract that the university will provide the same level of reporting and accounting to the foreign government as is provided to the U.S. government. The U.S. university also needs to allow for an adjustment in the scope of work if it turns out that funding is not adequate to the task, since obtain- ing additional funding might be difficult. In the European Union, there is a prohibition against governments providing what is called “state aid” to enti- ties that would distort their market advantage. If foreign support violates the state aid rules, a clawback provision of EU law may require repayment. Sometimes it is necessary to get an opinion on state aid from an expert, to establish a contingency fund and to include a footnote about the claw back provision and opinion in the financial statements. Termination and dispute resolution provisions are also important. The goals are to protect the institution’s reputation and to provide the least con- troversial way to get out of the agreement if the relationship is not working well. It is usually a good idea to provide for no-cause terminations that have a fairly long lead time, as well as carve-outs for terminations that have to be undertaken quickly (such as when that is necessary to comply with law). Ms. Keith stated that sometimes it is a good idea to create a one-year pilot project to explore the mutual interest, expectations, and objectives of
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69 LEGAL ISSUES AND AGREEMENTS the parties and to initially express the common program objectives at a high level. That relationship can end automatically without penalty at the end of the year unless the entities actually take the affirmative step to extend it. It is easier politically to take an affirmative act to extend a successful relation- ship than to take an affirmative act to terminate a relationship that is not working well. In the dispute resolution provisions, it is usually a good idea for each party’s president or other senior officer to lead informal dispute resolution before more formal processes are pursued. There might be an obligation under the contract to spend 30, 60, or 90 days at that level trying to resolve a dispute before going to the next level. If an informal resolution is not reached, providing for arbitration may be preferable to lawsuits in a for- eign court. It is important to pick a neutral jurisdiction such as Singapore, London or Switzerland, and specify the rules governing arbitration. Arbi- trators with extensive experience in arbitrating university research disputes should be engaged. The contract should also provide for enforcement of the arbitral decision in any court of competent jurisdiction and the agreement of both parties to venue in such courts. The contract for a foreign or other substantial collaboration is impor- tant to the success of the endeavor, and considerable planning and analysis is necessary to structure a relationship in a practical manner. The effort is worthwhile because the approach must be both implementable and effective in the real world, as well as reasonably managing the reputational, financial, operational and legal risks of the endeavor to the parties. William Ferreira, Attorney at Law, Hogan Lovells LLP, continued the discussion of contract provisions and managing international risks. Mr. Ferreira identified international employment as an important area. International programs often require university staff to live and work overseas. These universities should have a fundamental understanding of how foreign employment law applies to them. Employment-related disputes are among the most common type of lawsuit against U.S. universities abroad. As a gen- eral rule, host country employment law applies to the employment of foreign nationals and U.S. expatriates assigned to positions overseas. Unless an excep- tion applies, the core employment relationship—compensation, minimum wages, benefits, work hours, income tax withholding, vacation, workplace health/safety, dismissal, severance pay—is subject to foreign law. Foreign law may be substantially more protective of employee rights than U.S. law. It may seem convenient to engage overseas staff, especially foreign nationals, as “independent contractors” or “consultants” as opposed to
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70 CORE ELEMENTS OF INTERNATIONAL RESEARCH COLLABORATION employees, in order to avoid involvement with host country employment laws, overseas payroll, and withholding foreign income taxes. However, most countries will look to substance rather than form and disregard the in - dependent contractor or consultant designation if the arrangement between the parties suggests that an employment relationship exists. Generally, the analysis used to distinguish between employees and independent contrac- tors is similar to the well-known U.S. analysis. Independent contractor arrangements under which the contractor receives employee-like benefits, such as paid vacation, or under which the contractor must adhere to a per- sonnel manual or similar policies are suspect. To misclassify employees as contractors exposes an institution to host country liabilities such as payment of back taxes and social security withholdings, retroactive local benefits, vacation and holidays, and penalties. The U.S. institution should take this issue very seriously and retain adequate foreign law expertise. With respect to immigration, in many jurisdictions, U.S. expatriates may lawfully enter a country and stay for up to ninety days before a special visa is required. However, the fact that a person’s entry is lawful does not necessarily mean that the person may work in the country. Proper work authorization, such as a work permit or other nonimmigrant visa, often is required, and both developed and developing countries now take assertive approaches to immigration-related requirements. Mr. Ferreira related the experience of a U.S.-based NGO operating in Africa that was given a heavy fine because its local employees did not have valid work permits. Mr. Ferreira observed that U.S. government funding for research and development work overseas continues to be available. Federal grantor agen- cies have begun scrutinizing these and other federal projects with greater frequency. Institutions have poured significant resources into federal research compliance programs in the United States, but compliance obligations are no less important when the project occurs overseas. The university’s operat- ing structure overseas is very important for federally-funded programs. The nature of the relationship between the university and, for example, its separate wholly owned entity operating overseas, can have a profound effect on cost recovery and particularly on F&A (facilities and administrative) cost recovery. Other issues to consider involve foreign subawards. Some agencies limit F&A recovery for foreign entities. Others do not. Also, some countries might have strict rules governing the disposition of assets such as equipment and vehicles when the project is completed. If these assets are federally- funded and carry their own disposition requirements under the award, the situation can become complex.
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71 LEGAL ISSUES AND AGREEMENTS Conflicts of commitment for faculty can also arise in overseas work. In addition, difficult cost allowability questions often arise on overseas federal projects. For example, some federal sponsors do not consider foreign value- added tax (“VAT”) payments to be reimbursable under their awards. This forces grantee universities to pursue time-consuming and uncertain appli- cations for foreign VAT exemption. And even those sponsors that do not explicitly prohibit VAT charges might not allow all of them if, say, a VAT exemption was available but the university did not pursue it. Federal officials consider foreign subawardees to be high-risk organiza- tions, for many reasons. Foreign entities are typically unfamiliar with the normal U.S. federal research compliance obligations. Taking a federal award and flowing down all of the provisions to a foreign subawardee may not work, and relying on some of the popular templates for foreign subawards may not be in the university’s interest. Subrecipient monitoring overseas requires time and resources, trips overseas, and plain language explanations of what the subrecipient should do to comply with the terms of the award. Mr. Ferreira then went through a federal audit report of a university’s grant program overseas, and some of the audit findings. The audit found weaknesses in procurement processes (e.g., not checking foreign vendors against the U.S. government’s debarred, suspended, and specially designated nationals list). The audit also found that subrecipient monitoring was not occurring. Another finding was that the institution could not provide detailed documentation to support salary and equipment charges at the foreign site. Foreign entities may have rudimentary time-keeping systems. One issue raised during the discussion following the panel talks was the combination of limitations on F&A cost recovery and the time and expense required to adequately monitor foreign subawards. Is it possible for U.S. institutions to adequately monitor foreign subawards given the amount of cost recovery that is allowed? Is this issue a significant barrier to collaboration that U.S. agencies should attempt to ameliorate? Another participant pointed out the potential additional problem for U.S. institu- tions of program officials and contract officials in U.S. agencies having different expectations regarding foreign subaward monitoring. Also, while the discussion focused on U.S. universities, U.S. agencies may also be chal- lenged by monitoring requirements for programs in which they make direct grants to foreign entities. It is very important, even outside the U.S. federal context, to understand the types of audits that the foreign counterpart is subject to under U.S. or foreign regulations. If these audits are not sufficient to secure the integrity
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72 CORE ELEMENTS OF INTERNATIONAL RESEARCH COLLABORATION of the relationship with a foreign institution, then the U.S. university could consider implementing its own audit requirements. Human and animal research overseas is also a tricky area. Mr. Ferreira noted that the pharmaceutical industry often collaborates with U.S. insti- tutions on foreign clinical research. This is a very complex topic, but a few general points are important to remember. First, both the U.S. and foreign regulations apply in this area. In the United States we are familiar with the “Common Rule” and 45 CFR Part 46 (DHHS, 2011) for DHHS-sponsored research. In places like Bangladesh, a Bangladeshi governmental body technically must approve human subjects research by any foreign entity operating such research in Bangladesh. For legal, practical, and other reasons, it is usually a good idea to have a foreign IRB (institutional review board) take a look at the research even if a U.S. IRB has granted approval. DHHS has stated that any federally-funded research at a foreign site has to comply with the U.S. Common Rule. This creates a number of obligations with respect to IRB membership, expertise, informed consent, and tissue banking. Foreign entities may be unaware of these requirements. A second point is that cultural sensitivities are critical, especially with regard to clinical research in developing countries. It is essential to have personnel involved who understand the cultural sensitivities. Regarding patient care issues, it can take considerable time and effort to ascertain the rules and regulations in a foreign country that apply in areas such as credentialing health professionals entering the country. Often, local lawyers are not familiar with these rules, and may not know where to look to find the answers to questions. Therefore, significant lead time is required to actually understand what is required for your institutional clinical personnel to be able to begin treating people or conducting other medical activity. Animal research can also raise complicated issues overseas. Any foreign entity that is conducting DHHS-sponsored animal research will have an Office of Laboratory Animal Welfare Statement of Compliance on file. Foreign collaborators may promise to comply without being able to fulfill their commitments. Mr. Ferreira explained that the shipment of tissues, samples and bio- logical materials is also very complicated. These are heavily regulated in the United States by multiple agencies as well as abroad. Specialized expertise is required when shipping anything that is alive (e.g., an insect or a plant), anything that is toxic, anything that is alcohol-related, or anything that is a “select agent” as defined by Centers for Disease Control.
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73 LEGAL ISSUES AND AGREEMENTS The U.S. government maintains a complex set of “antiboycott” laws designed to discourage, and in some circumstances prohibit, U.S. organi- zations from supporting or participating in boycotts of friendly countries, or furthering or supporting the boycott of Israel as sponsored by the Arab League and certain other countries. Under these laws, the receipt of a request, whether verbal or written, to further a boycott may need to be reported. These laws are very easy to break. For example, agreements to refuse or actual refusal to do business with or in Israel or with a blacklisted company could constitute a violation. The Foreign Corrupt Practices Act (FCPA) is also relevant, but might not be on the radar of some institutions. There has recently been a sig- nificant uptick in Department of Justice enforcement actions in this area. The anti-bribery provisions of the FCPA broadly prohibit giving, offering, or promising anything of value to any foreign official for the purpose of obtaining or retaining business or any other advantage. Universities may have the perception that they cannot run afoul of FCPA because they are a nonprofit and do not deal with elected government officials, but this is actually not the case. There are a number of plausible scenarios under which universities can encounter the FCPA. 9.3 INTERNATIONAL COLLABORATION AND THE EUROPEAN COMMISSION’S 7TH FRAMEWORK PROGRAM Astrid-Christina Koch, Science Counselor for the Science, Tech- nology and Education Section at the Delegation of the European Commission (EC) in Washington, DC, works on strengthening trans- Atlantic research cooperation and promoting networking and mobility of researchers. She discussed collaboration in the context of the EC’s 7th Framework Program (FP7), a 53 billion € program that began in 2007 and runs through 2013. The Lisbon Treaty of 2009 explicitly mentions science and technology advancement as an objective of the European Union. There are several rationales for the EC to support trans-Atlantic re- search collaboration, including the imperative of solving global problems and the need to build better networks of researchers and institutions. The EC has a science and technology agreement with the United States origi- nally signed in 1998 and renewed several times since. There is an annual meeting of the Joint Consultative Group associated with the agreement. Most collaboration under the agreement is within the context of FP7. FP7
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74 CORE ELEMENTS OF INTERNATIONAL RESEARCH COLLABORATION is open to international partners, with U.S. partners mainly supported by their own funding sources. Dr. Koch discussed mechanics of collaboration, focusing on the Grant Agreement (GA). Signing the GA is necessary for contracting with the EC. The GA includes the Technical Description of Work (Annex I), General Conditions (Annex II), and Specific Provisions for funding schemes. There are other annexes, mainly forms. The Consortium Agreement spells out the relationship among the partners, and most of the legal issues are covered there. Some of the terminology used by the EC differs from what is common in the United States. A “beneficiary” is an entity that is part of the GA, whether or not it is receiving funding. The “coordinator” could be the person who did all the paperwork, but most of the time corresponds to a principal investigator in the United States. Several important principles are embodied in the GA. The EC generally does not become an owner of intellectual property generated by collabora- tive research. Intellectual property ownership is covered in the Consortium Agreement. The GA is aimed at “providing (a) minimum self-sustainable framework while allowing participants flexibility to determine additional rules specific for their cooperation.” “Special clauses” that have been devel- oped by the EC can be inserted into the grant agreement. Some of these ad- dress issues in U.S. law that would prevent U.S. entities from legally signing the standard GA. There are also provisions for subcontracting, sanctions, and arbitration. There are special simplifying provisions for participants not receiving funding from the EC. The annual call for the FP7 is published in July and closes in November or December. There are currently about 200 projects with U.S. partners. The EC is working to make the program even more accessible to U.S. par- ticipants. Having three EU partners is required for funding, so the easiest way to participate is to connect with an existing partnership. REFERENCE DHHS (U.S. Department of Health and Human Services). Federal Policy for the Protection of Human Subjects (‘Common Rule’). See http://www.hhs.gov/ohrp/humansubjects/ commonrule/index.html (accessed February 2011).