31.205-37 Royalties and other costs for use of patents.
(a) Royalties on a patent or amortization of the cost of purchasing a patent or patent rights necessary for the proper performance of the contract and applicable to contract products or processes are allowable unless -
(1) The Government has a license or the right to a free use of the patent;
(2) The patent has been adjudicated to be invalid, or has been administratively determined to be invalid;
(3) The patent is considered to be unenforceable; or
(4) The patent is expired.
(b) Care should be exercised in determining reasonableness when the royalties may have been arrived at as a result of less-than-arm's-length bargaining; e.g., royalties -
(1) Paid to persons, including corporations, affiliated with the contractor;
(2) Paid to unaffiliated parties, including corporations, under an agreement entered into in contemplation that a Government contract would be awarded; or
(3) Paid under an agreement entered into after the contract award.
(c) In any case involving a patent formerly owned by the contractor, the royalty amount allowed should not exceed the cost which would have been allowed had the contractor retained title.