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Benny Lava

Trademark Costs Allowable?

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Hello All,

I was wondering, are costs for the creation, filing and prosecution of trademarks allowable? Let's assume that they are not required by any Government contract, and may or may not concern goods/services associated with Government contracts. I didn't find anything in the FAR strictly allowing or disallowing these costs, so I was hoping someone could provide some guidance. Thanks,

Benny

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Without having all the details, I?ll just point back to this:

FAR 31.201-2 -- Determining Allowability.

(a) A cost is allowable only when the cost complies with all of the following requirements:

(1) Reasonableness.

(2) Allocability.

(3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances.

(4) Terms of the contract.

(5) Any limitations set forth in this subpart.

You say, ?Let's assume that they are not required by any Government contract, and may or may not concern goods/services associated with Government contracts.?

If they?re not required by a contract, and not associated with a contract, again, without all the details, I?d be inclined to say they?re not allocable and therefore not allowable.

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I would look at 31.204-4© - I think trademark expenses could meet that allocability test. Also, 31.205-30 - I would group trademarks with patents.

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I would look at 31.204-4? - I think trademark expenses could meet that allocability test. Also, 31.205-30 - I would group trademarks with patents.

Whynot, why would you group trademarks with patents? They are not at all the same thing. Patents, copyrights, and data rights concern limits on the use of intellectual property. A trademark is a sign or indicator used by an entity to identify certain products/services to consumers.

The cost of trademarks is not specifically covered by the FAR Part 31 cost principles. That said, however, I would think that the cost of trademarks would be covered by 31.205-1.

"(a) ?Public relations? means all functions and activities dedicated to?

(1) Maintaining, protecting, and enhancing the image of a concern or its products; ....

"(f) Unallowable public relations and advertising costs include the following:

(1) All public relations and advertising costs, other than those specified in paragraphs (d) and (e) of this subsection, whose primary purpose is to promote the sale of products or services by stimulating interest in a product or product line (except for those costs made allowable under 31.205-38(B)(5)), or by disseminating messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company?s products or services."

Given the foregoing, I would classify such costs as unallowable.

Hope this helps.

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I'm not sure what "costs for... prosecution of trademarks" means, so I have no opinion as to their allowability. I presume that those of you who have offered an opinion as to the allowability of that cost do know. Maybe you can fill us in.

As for the costs for "creation" and "filing," I presume that means the cost of design and of registering the trademark with the U.S. Patent and Trademark Office.

I searched court and board decisions and found no case dealing with the allowability of costs associated with trademarks. I also searched treatises such as Government Contract Costs & Pricing, by Manos, and found nothing.

I do not consider the costs of designing and registering a trademark to be public relations costs. FAR 31.205-1 lists the following among unallowable public relations costs:

(f) Unallowable public relations and advertising costs include the following:

(1) All public relations and advertising costs, other than those specified in paragraphs (d) and (e) of this subsection, whose primary purpose is to promote the sale of products or services by stimulating interest in a product or product line (except for those costs made allowable under 31.205-38(B)(5)), or by disseminating messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company’s products or services.

(2) All costs of trade shows and other special events which do not contain a significant effort to promote the export sales of products normally sold to the U.S. Government.

(3) Costs of sponsoring meetings, conventions, symposia, seminars, and other special events when the principal purpose of the event is other than dissemination of technical information or stimulation of production.

(4) Costs of ceremonies such as—(i) Corporate celebrations and (ii) New product announcements.

(5) Costs of promotional material, motion pictures, videotapes, brochures, handouts, magazines, and other media that are designed to call favorable attention to the contractor and its activities.

(6) Costs of souvenirs, models, imprinted clothing, buttons, and other mementos provided to customers or the public.

(7) Costs of memberships in civic and community organizations.

(8) Costs associated with the donation of excess food to nonprofit organizations in accordance with the Federal Food Donation Act of 2008 (Pub. L. 110-247) (see FAR Subpart 26.4).

Designing and registering trademarks do not seem to fall into any of those categories. A trademark might be is used in advertising and public relations, to be sure, but a trademark, in and of itself, is not advertising or a form of public relations. A trademark is intellectual property and an identifiable intangible asset. It is used to identify a business or its products or services. I would consider the costs of designing a trademark and registering it with the U.S. Patent and Trademarks Office to be an indirect cost allocable as a G&A expense. Registering a trademark is not the same as "promoting" a business or a product or service. The cost of designing and registering trademarks is not expressly unallowable (the word trademark does not appear in FAR Part 31). If anything, the cost of designing and registering a trademark seems closer to "selling cost," see FAR 31.205-38, than to advertising and public relations. FAR 31.205-38 makes the following selling costs allowable as provided:

(B) Selling activity includes the following broad categories:

(1) Advertising. Advertising is defined at 31.205-1(B), and advertising costs are subject to the allowability provisions of 31.205-1(d) and (f).

(2) Corporate image enhancement. Corporate image enhancement activities, including broadly targeted sales efforts, other than advertising, are included within the definition of public relations at 31.205-1(a), and the costs of such efforts are subject to the allowability provisions at 31.205-1(e) and (f).

(3) Bid and proposal costs. Bid and proposal costs are defined at 31.205-18 and are subject to the allowability provisions of that subsection.

(4) Market planning. Market planning involves market research and analysis and general management planning concerned with development of the contractor’s business. Long-range market planning costs are subject to the allowability provisions of 31.205-12. Other market planning costs are allowable.

(5) Direct selling. Direct selling efforts are those acts or actions to induce particular customers to purchase particular products or services of the contractor. Direct selling is characterized by person-to-person contact and includes such efforts as familiarizing a potential customer with the contractor’s products or services, conditions of sale, service capabilities, etc. It also includes negotiation, liaison between customer and contractor personnel, technical and consulting efforts, individual demonstrations, and any other efforts having as their purpose the application or adaptation of the contractor’s products or services for a particular customer’s use. The cost of direct selling efforts is allowable.

Design and registration of trademarks could be considered part of economic planning, covered in FAR 31.205-12 as follows:

31.205-12 Economic planning costs.

Economic planning costs are the costs of general long-range management planning that is concerned with the future overall development of the contractor’s business and that may take into account the eventual possibility of economic dislocations or fundamental alterations in those markets in which the contractor currently does business. Economic planning costs are allowable. Economic planning costs do not include organization or reorganization costs covered by 31.205-27. See 31.205-38 for market planning costs other than economic planning costs.

I see no reason to consider the costs of designing and registering a trademark to be unallowable. In any case, I couldn't find any reference to the cost of designing and registering trademarks in FAR, court and board decisions, and any treatise that would lead me to conclude that such costs are unallowable, so there doesn't seem to be a problem about it. They are legitimate business costs, so why conclude that they are unallowable?

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I do not think trademark costs are covered anywhere specifically by the FAR, but I have always treated them as a cost of doing business which would make them allowable, but not necessarily allocatable to a specific contract. I believe they are covered by FAR 31.205-28-Other Business Expenses, subparagraph (g). Accordingly, I have always put those costs in a G&A pool and DCAA has never taken exception to them.

Per FAR 31.203-Indirect Costs

(d) Section 31.205 does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable. The determination of allowability shall be based on the principles and standards in this subpart and the treatment of similar or related selected items.

Trademark costs are costs incurred in doing buisness. Just as you have to pay for a business license, pasy to register your company name with the Statein which you are working, and obtaining occupancy licenses etc.

My approach is that if the FAR does not prohibit them and they are a cost incurred by a reasonable business person, they are an allowable cost.

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Vern,

I find it interesting that you spend a lot of time quoting 31.205-1 but omit any discussion of the definition of "public relations" which I would assert covers a trademark which is used to protect the branding of an entity's products. Also "prosecuting a trademarK" is pretty self-evident, is it not? It is the effort of applying for and receiving a recognized and officially registered trademark. Prosecute as in "make an effort to attain".

Of course you and the others are correct that there is nothing directly on point, which is why one needs to analogize to another principle. I chose 31.205-1 but others have made different analogies. Who's to say, outside of a court of law, who's made the best analogy?

To loul,

I'm confused by the notion that such costs would be allowable but not allocable to a specific cost objective. Are you saying, then, that they are allowable G&A expenses? Are you familiar with the various cases pertaining to allocability, including Boeing North American, FMC, and (more recently) Teknowledge and BearingPoint?

Look, I'm not necessarily against that position. If you paid me I would make that argument with a straight face and mean it sincerely. I just think an auditor or IG could make a strong case that such costs are not in fact "necessary" as much as they are beneficial to the contractor. When Lockheed Martin registers "We never forget who we're working for" how does the Government benefit? Why does LM feel having such a catchphrase is desirable? Would the company get as many contracts if it didn't have such a catchphrase?

Again, one could make the argument that such costs are those that would be incurred by a prudent businessperson in the conduct of a competitive business; however, I would be uncomfortable using that as a counter argument should DCAA or whomever assert that such costs were unreasonable, unallowable, and/or unallocable because there is no beneficial nexus between the cost and a Government contract. The recent court decisions in this area have been going against the contractors more often than not....

Maybe it's just me.

H2H

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Trademarks, like patents and copyrights are intellectual property, and help protect the government from receiving counterfeit products and services.

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Vern,

I find it interesting that you spend a lot of time quoting 31.205-1 but omit any discussion of the definition of "public relations" which I would assert covers a trademark which is used to protect the branding of an entity's products. Also "prosecuting a trademarK" is pretty self-evident, is it not? It is the effort of applying for and receiving a recognized and officially registered trademark. Prosecute as in "make an effort to attain".

Of course you and the others are correct that there is nothing directly on point, which is why one needs to analogize to another principle. I chose 31.205-1 but others have made different analogies. Who's to say, outside of a court of law, who's made the best analogy?

Alright, I'll discuss public relations. First, I don't know what "prosecuting a trademark" means. But as someone who has actually registered a trademark, I would not consider "prosecuting" to mean the same as "filing" for a trademark. But whatever.

You are focusing on the language about "maintaining, protecting, and enhancing the image of a concern or its products." The key word to focus on is "image." Considering the ordinary sense of "public relations" and the context of the cost principle, which includes advertising, and considering the descriptions of the expressly unallowable costs described in paragraph (f), which center on "promoting the sale of products or services by stimulating interest in a product or product line," I maintain that while a trademark may be used in public relations, the design and registration of a trademark is not, in and of itself, an act of public relations.

To seek a trademark is not to promote an "image," although the trademark may become associated with an image in the course of time. The function of a trademark is to protect the identity of a business, product, or service from identify theft by competitors. In that sense it is more analogous to a patent than to public relations. A trademark is a kind of license, granted by the government, not an advertisement or promotion. Public relations is the activity of reaching out to the public. To register a trademark is not reaching out to anybody other than the Patent and Trademark Office. It seems to me a reach to call the act of registering a trademark an act of public relations.

One more thing. A cost need not fit into one of the cost principles in FAR 31.205. See FAR 31.204(d): "Section 31.205 does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable." So my final argument is this: The cost or designing and registering ("filing") a trademark is not a public relations cost. It is the cost of designing and registering a trademark. That being the case, if it's reasonable in nature and amount, directly or indirectly allocable, consistent with CAS, consistent with the terms of the contract, and not expressly or mutually agreed to be unallowable, then why isn't it allowable?

Is that enough discussion?

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Is that enough discussion?

Thanks Vern. I only wish our DCAA auditors had your discernment.

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H2H:

I'm making an argument. That doesn't mean I'm right. I called a colleague who knows a lot about cost allowability, and he thought the costs in question are simply allowable costs of doing business. He thought that the closest analogy was selling cost. It had never occurred to him to consider them public relations costs. He knew of no case in which the allowability of the costs had become an issue. Neither of us is sure what would happen if DCAA disallowed the costs as public relations costs. I don't think they'd win, but doesn't mean they wouldn't.

If I were a contractor I would include the costs in my billings and wait to see what happened. They would probably be too small to attract much notice. A trademark doesn't cost a lot.

Vern

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In the Lockheed Martin example from H2H. LM treats trademarks as an intangible assets with indefinite useful life and realizes their amortization expense - see page 68 of their 2008 annual report.

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In the Lockheed Martin example from H2H. LM treats trademarks as an intangible assets with indefinite useful life and realizes their amortization expense - see page 68 of their 2008 annual report.

Whynot, that speaks to the GAAP accounting treatment but not to the cost allowability.

Also, it's interesting that LM would assert that the trademark has an "indefinite useful life" because I would have thought (perhaps naively) that one needed to establish a finite useful life in order to amortize a cost. In order to create an amortization expense, one divides the asset value by the number of periods of useful life to calculate a fixed amount per period. I would have thought that having an indefinite life in the denominator would be like dividing by zero. I guess that's why LM doesn't hire me to do their accounting!

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