FAR 27.202-2—Notice of Government as a licensee.
Plain-English Summary
FAR 27.202-2 tells contracting officers how to handle solicitations when the Government is already obligated to pay a patent royalty under an existing license agreement and the licensed patent may apply to the prospective contract. The section covers three related topics: giving offerors notice of the Government’s license, identifying the patent number and royalty rate, and requiring offerors to disclose whether they are the patent owner or a licensee under that patent. Its purpose is to make competition fair and pricing transparent when a royalty cost may affect the Government’s total acquisition cost. In practice, this rule helps the Government avoid hidden or duplicated royalty charges, compare offers on an equal basis, and determine whether an offeror’s price should be adjusted upward for royalty costs or reduced when the offeror already holds a lower-cost license. It is especially important in procurements where patented technology is likely to be used and royalty obligations could materially affect evaluated price.
Key Rules
Give notice of existing license
If the Government must pay a royalty because of an existing license agreement and the contracting officer believes the patent will apply to the procurement, the solicitation should inform prospective offerors of that license. This notice puts bidders on alert that royalty costs may be part of the Government’s acquisition cost structure.
Identify the patent and royalty rate
The notice should include the patent number and the royalty rate stated in the license. These details allow offerors to understand exactly which patent is involved and what royalty burden the Government is already carrying.
Require patent status disclosure
The solicitation should require each offeror to state whether it is the patent owner or a licensee under the patent. This disclosure is needed so the Government can determine whether the offeror’s pricing already reflects the royalty or whether an additional royalty cost must be considered.
Adjust evaluated price for royalties
If an offeror is not the patent owner or a licensee, the Government may evaluate the offer by adding an amount equal to the royalty. This prevents an artificially low evaluated price when the Government will have to pay the royalty separately.
Negotiate lower royalty-based pricing
If an offeror is licensed under the same patent at a lower royalty rate, the Government may negotiate a price reduction. This recognizes that the Government should not pay more than necessary when the offeror’s own royalty obligation is lower than the Government’s existing license cost.
Responsibilities
Contracting Officer
Determine whether the Government is obligated to pay a royalty under an existing license agreement and whether the patent is likely applicable to the procurement. If so, include notice of the license, patent number, and royalty rate in the solicitation, and require offerors to disclose patent ownership or license status so the Government can evaluate or negotiate price appropriately.
Prospective Offerors
Review the solicitation notice and disclose whether they are the patent owner or a licensee under the patent. Offerors should be prepared for the Government to evaluate their price with a royalty adjustment or to negotiate a lower price if they hold a lower-cost license.
Government Evaluators/Source Selection Team
Use the disclosed patent status and royalty information to evaluate offers on a comparable basis. Where appropriate, add the royalty amount to evaluated price or support negotiations for a price reduction when an offeror has a lower royalty rate.
Agency
Maintain awareness of existing patent license obligations that may affect acquisitions and support contracting officers with accurate license, patent, and royalty information so solicitations and evaluations reflect the Government’s actual cost exposure.
Practical Implications
This section is mainly about price fairness: without the notice and disclosure, the Government could compare offers that do not reflect the same royalty burden.
A common pitfall is failing to identify that a patent may apply to the requirement early enough to include the notice in the solicitation.
Another risk is incomplete or inaccurate royalty information; if the patent number or rate is wrong, the evaluation may be distorted and negotiations may be based on bad data.
Contracting officers should make sure the solicitation asks the right question about patent ownership or license status, because that information drives whether the Government adds royalty cost or seeks a reduction.
Offerors should not assume the royalty issue is irrelevant just because they are not the patent owner; their license status can directly affect evaluated price and negotiation outcomes.
Official Regulatory Text
(a) When the Government is obligated to pay a royalty on a patent because of an existing license agreement and the contracting officer believes that the licensed patent will be applicable to a prospective contract, the Government should furnish the prospective offerors with- (1) Notice of the license; (2) The number of the patent; and (3) The royalty rate cited in the license. (b) When the Government is obligated to pay such a royalty, the solicitation should also require offerors to furnish information indicating whether or not each offeror is the patent owner or a licensee under the patent. This information is necessary so that the Government may either- (1) Evaluate an offeror’s price by adding an amount equal to the royalty; or (2) Negotiate a price reduction with an offeror when the offeror is licensed under the same patent at a lower royalty rate.