B-186284, JUN 23, 1977

B-186284, JUN 23, 1977

1. CLAIM BY NATIONAL SCIENCE FOUNDATION (NSF) AGAINST ITS GRANTEE, UNIVERSITY OF COLORADO (UNIVERSITY), FOR RECOVERY OF "PUBLISHER'S GRANT" PAYMENTS IS DISALLOWED. "PUBLISHER'S GRANT" PAYMENTS BY PUBLISHING COMPANIES TO UNIVERSITY REPRESENTED INCOME ATTRIBUTABLE TO THIRD EDITIONS OF TEXTBOOKS, TO BE PRODUCED WITHOUT NSF FINANCIAL SUPPORT. RECORD DOES NOT SUBSTANTIATE NSF'S ASSERTION THAT SUCH PAYMENTS WERE DE FACTO ROYALTIES, OR DIVERSION OF ROYALTIES, FOR SECOND EDITION TEXTS DEVELOPED UNDER NSF GRANT. THEREFORE, PAYMENTS ARE NOT SUBJECT TO NSF GRANT CLAUSE REQUIREMENT THAT INCOME BASED ON SALES OF GRANT-SUPPORTED MATERIALS BE REMITTED TO NSF. 2. WITH RESPECT TO NSF'S CLAIM AGAINST UNIVERSITY FOR RECOVERY OF $36,100 IN PAYMENTS BY PUBLISHER TO UNIVERSITY FOR TEXT BIOLOGICAL SCIENCE: PATTERNS AND PROCESSES, RECORD INDICATES THAT $36,100 IN FACT CONSTITUTED PAYMENTS BASED ON SALES OF FIRST EDITION TEXT WHICH WAS SUPPORTED UNDER NSF GRANT, ALTHOUGH PUBLISHER'S OBLIGATION TO MAKE FIRST EDITION ROYALTY PAYMENTS HAD TERMINATED. THEREFORE, SUCH PAYMENTS MUST BE REMITTED TO NSF IN ACCORDANCE WITH GRANT INCOME CLAUSE. THIS IS TRUE EVEN THOUGH PUBLISHER MAY HAVE CLAIM AGAINST NSF FOR REFUND. 3. NSF'S CLAIM AGAINST UNIVERSITY FOR ALLEGED UNAUTHORIZED USE OF NSF "HOUSEKEEPING" GRANTS IS SUSTAINED, SUBJECT TO POSSIBLE REDETERMINATION OF AMOUNT OF UNAUTHORIZED EXPENDITURES. UNIVERSITY CONTENDS THAT "HOUSEKEEPING" GRANTS WERE AS AVAILABLE FOR GENERAL ADMINISTRATIVE SUPPORT AND MAINTAINED RECORDS OF GRANT EXPENDITURES ON THIS BASIS. HOWEVER, ACTUAL LANGUAGE AND BACKGROUND OF GRANT INDICATES THAT IT WAS AVAILABLE ONLY FOR ADMINISTRATIVE COSTS ATTRIBUTABLE TO SERVICING NSF-SUPPORTED MATERIALS. 4. UNIVERSITY'S MISUNDERSTANDING OF SCOPE OF "HOUSEKEEPING" GRANTS CANNOT EXCUSE ITS FAILURE TO MAINTAIN RECORDS CAPABLE OF SPECIFICALLY IDENTIFYING EXPENDITURES FOR AUTHORIZED GRANT PURPOSES. THUS NSF'S CALCULATION OF AMOUNT OF UNAUTHORIZED EXPENDITURES, BASED ON APPLICATION OF FORMULA WHICH HAS RATIONAL BASIS IN THEORY, IS PRESUMPTIVELY VALID. HOWEVER, NSF AND UNIVERSITY MAY READJUST AMOUNT OF CLAIM BASED ON MUTUALLY AGREEABLE METHOD WHICH THEY BELIEVE MORE ACCURATELY REFLECTS AMOUNT OF UNAUTHORIZED EXPENDITURES. 5. NSF'S CLAIM FOR RECOVERY OF "PROFIT" REALIZED BY UNIVERSITY FROM SALE OF "SINGLE TOPIC FILMS" DEVELOPED WITH NSF GRANT SUPPORT IS DISALLOWED EXCEPT FOR $1 PER FILM ROYALTY PAYMENT TO WHICH NSF IS CONCEDEDLY ENTITLED. CONTRARY TO NSF'S ASSERTIONS, RECORD DEMONSTRATES THAT NSF AGREED TO ACCEPT $1 PER FILM ROYALTY IN FULL SATISFACTION OF UNIVERSITY'S OBLIGATION TO NSF UNDER GRANT INCOME CLAUSE. 6. NSF IS ENTITLED TO RECOVER FROM UNIVERSITY INTEREST ACTUALLY REALIZED BY UNIVERSITY FROM TEMPORARY INVESTMENT OF FUNDS WHICH ARE PROPERLY REMITTABLE TO NSF. OF COURSE, NSF CANNOT RECOVER INTEREST EARNED ON FUNDS CONCERNING WHICH ITS UNDERLYING CLAIMS FOR REMITTAL ARE DISALLOWED IN THIS OPINION.

NATIONAL SCIENCE FOUNDATION CLAIM AGAINST UNIVERSITY OF COLORADO UNDER GRANT GE-1321 (BIOLOGICAL SCIENCES CURRICULUM STUDY PROGRAM):

THE NATIONAL SCIENCE FOUNDATION (NSF) HAS TRANSMITTED TO OUR OFFICE, PURSUANT TO 31 U.S.C. 71 (1970) /1/ , A CLAIM WHICH IT ASSERTS AGAINST THE UNIVERSITY OF COLORADO. THE CLAIM RELATES TO A GRANT-- "GRANT GE-1321"-- AWARDED BY NSF TO THE UNIVERSITY IN 1963 AND AMENDED ON MANY OCCASIONS THEREAFTER.

/1/ THIS SECTION PROVIDES:

"ALL CLAIMS AND DEMANDS WHATEVER BY THE GOVERNMENT OF THE UNITED STATES OR AGAINST IT, AND ALL ACCOUNTS WHATEVER IN WHICH THE GOVERNMENT OF THE UNITED STATES IS CONCERNED, EITHER AS DEBTOR OR CREDITOR, SHALL BE SETTLED AND ADJUSTED IN THE GENERAL ACCOUNTING OFFICE."

THE NSF SUBMISSION SUMMARIZES THE BACKGROUND OF THE GRANT AS FOLLOWS:

" * * * GRANT GE-1321 WAS AWARDED TO THE UNIVERSITY OF COLORADO IN JANUARY 1963 FOR SUPPORT OF THE 'BIOLOGICAL SCIENCES CURRICULUM STUDY (BSCS). A MAJOR PURPOSE OF THE BSCS WAS TO DEVELOP A SET OF MODEL MATERIALS FOR HIGH SCHOOL BIOLOGY COURSES. THREE DIFFERENT SECONDARY SCHOOL TEXTBOOKS EVENTUALLY EMERGED FROM THE WORK OF THE BSCS, KNOWN AS THE BSCS 'VERSIONS.' THE FIRST EDITION OF THESE TEXTBOOKS WAS COMMERCIALLY PUBLISHED IN THE FALL OF 1963. BSCS HAS SINCE REVISED AND UPDATED THE THREE BASIC BSCS 'VERSIONS.' A SECOND EDITION OF THESE TEXTS WAS COMMERCIALLY PUBLISHED IN 1968, AND A THIRD EDITION IN 1973. BSCS HAS ALSO PRODUCED ADDITIONAL MATERIALS UNDER NSF GRANT GE-1321, INCLUDING FILMS AND OTHER BIOLOGY TEXTS. RECENTLY THE BSCS SEPARATED COMPLETELY FROM THE UNIVERSITY OF COLORADO AND BECAME INCORPORATED AS THE BIOLOGICAL SCIENCES CURRICULUM STUDY COMPANY."

THE CLAIM RESULTS FROM AN AUDIT CONDUCTED BY NSF WHICH CULMINATED IN AN AUDIT REPORT ISSUED ON AUGUST 1, 1974. THE PURPOSE OF THE AUDIT WAS "TO REVIEW THE INCOME RECEIVED BY BSCS FROM ITS ACTIVITIES AND TO ACCOUNT FOR ITS USE OR ITS RETURN TO THE TREASURER OF THE UNITED STATES, AS PROVIDED BY THE TERMS OF THE GRANT AGREEMENTS AND NSF POLICIES."

THE RECORD BEFORE US CONSISTS ESSENTIALLY OF THE FOLLOWING MATERIALS:

-- NSF'S LETTER TO US, DATED APRIL 6, 1976, TRANSMITTING THE CLAIM.

-- A REPORT BY NSF OFFICIALS CAPTIONED "FINDINGS AND CONCLUSIONS RELATING TO THE AUGUST 1, 1974 REPORT ON THE AUDIT OF INCOME RECEIVED UNDER NSF GRANT GE-1321." THIS REPORT (REFERRED TO HEREAFTER AS THE "NSF FOLLOW-UP REPORT") IS UNDATED BUT WAS APPARENTLY PREPARED SHORTLY AFTER JUNE OF 1975. IT DISCUSSES AND ANALYZES THE AUDIT REPORT.

-- TWO VOLUMES OF MATERIALS, APPARENTLY ASSEMBLED IN CONNECTION WITH THE NSF FOLLOW-UP REPORT, WHICH CONTAINS THE AUGUST 1, 1974 AUDIT REPORT ITSELF AS WELL AS CORRESPONDENCE AND OTHER DOCUMENTS BEARING ON THE CLAIM.

-- AN OCTOBER 13, 1976, SUBMISSION TO US BY PETER C. DIETZE, ESQUIRE, ATTORNEY FOR THE BSCS COMPANY, WHICH RESPONDS TO THE NSF SUBMISSIONS DESCRIBED ABOVE.

-- A LETTER TO US FROM MR. DIETZE, DATED JANUARY 25, 1977, ENCLOSING AND SUMMARIZING STATEMENTS BEARING ON THE CLAIM WHICH HE OBTAINED FROM FORMER OFFICIALS OF NSF AND OF CERTAIN PUBLISHING COMPANIES.

-- A LETTER TO US DATED JUNE 8, 1977, FROM THE NSF DEPUTY GENERAL COUNSEL WHICH COMMENTS ON THE JANUARY 25, 1977, SUBMISSION BY BSCS.

WE NOTE AT THE OUTSET THAT, WITH RESPECT TO THE INTERESTS OF THE FEDERAL GOVERNMENT, THE INSTANT CLAIM IS ASSERTED AGAINST THE UNIVERSITY OF COLORADO AS THE GRANTEE. AT THE TIME THE GRANT WAS MADE, BSCS WAS AN ORGANIZATIONAL UNIT OF THE UNIVERSITY. WHILE BSCS HAS SINCE SEVERED ITS TIES WITH THE UNIVERSITY AND BECOME A SEPARATE ENTITY, OUR CONCERN HERE IS WITH THE ACCOUNTABILITY OF THE UNIVERSITY TO NSF AS GRANTEE, RATHER THAN WITH ANY RIGHTS OR LIABILITIES BETWEEN THE UNIVERSITY AND THE BSCS COMPANY. HOWEVER, WE ALSO NOTE THAT THE BSCS ATTORNEY'S OCTOBER 1976 RESPONSE TO OUR OFFICE HAS BEEN SPECIFICALLY ENDORSED BY THE UNIVERSITY COUNSEL. /2/ ACCORDINGLY, WE ARE SATISFIED THAT THE BSCS ATTORNEY'S RESPONSE TO US ALSO REPRESENTS THE UNIVERSITY'S POSITION FOR PURPOSES OF CONTESTING THE CLAIM.

/2/ SEE LETTER DATED OCTOBER 11, 1976, TO MR. DIETZE FROM RICHARD A. THARP, ESQUIRE, A COPY OF WHICH WAS INCLUDED IN MR. DIETZE'S SUBMISSION TO US.

THE CLAIM ITSELF, AS PRESENTED BY NSF, CONSISTS OF THE FOLLOWING FIVE ELEMENTS:

1. PUBLISHERS GRANTS- $856,000 2. "PATTERNS AND PROCESSES" 36,100 3. UNAUTHORIZED ADMINISTRATIVE EXPENSES 116,914 4. SINGLE TOPIC FILMS 234,769 5. INTEREST (ESTIMATED) 23,714

TOTAL $1,267,497

EACH ELEMENT OF THE CLAIM IS CONSIDERED SEPARATELY HEREAFTER IN THE ORDER PRESENTED BY NSF.

1. PUBLISHER'S GRANTS

THE FIRST ELEMENT IN NSF'S CLAIM CONSISTS OF $856,000 IN SO-CALLED "PUBLISHER'S GRANTS" PAID BY THE THREE "VERSION" PUBLISHERS TO THE UNIVERSITY PURSJANT TO PROVISIONS IN CONTRACTS WITH THE PUBLISHERS FOR PUBLICATION OF THE SECOND EDITIONS OF THE BSCS TEXTBOOK VERSIONS. NSF CONTENDS THAT THE PUBLISHER'S GRANTS CONSTITUTE, IN EFFECT, SECOND EDITION ROYALTIES OR PAYMENTS IN LIEU OF ROYALTIES WHICH SHOULD BE REMITTED TO THE FOUNDATION IN ACCORDANCE WITH THE "INCOME" CLAUSE OF NSF GRANT GE-1321. THE GE-1321 INCOME CLAUSE READS AS FOLLOWS:

"INCOME DERIVED BY THE UNIVERSITY OF COLORADO FROM RENTS OR ROYALTIES OR FROM THE SALE OF BOOKS, FILMS, OR OTHER PROPERTY RIGHTS RELATED TO THE BIOLOGICAL SCIENCES CURRICULUM STUDY ACTIVITIES SHALL BE PLACED IN A SPECIAL ACCOUNT OR DEPOSITED WITH SUCH AGENT AS MAY BE APPROVED BY THE FOUNDATION AND SHALL BE UTILIZED AS DETERMINED BY THE FOUNDATION. SUCH INCOME SHALL BE REMITTED TO THE UNIVERSITY TO BE RETAINED IN SUCH SPECIAL ACCOUNT."

NSF FURTHER CONTENDS THAT WHILE IT APPROVED THE SECOND EDITION CONTRACTS WHICH CONTAINED THE PUBLISHER'S GRANT PROVISIONS, SUCH APPROVAL RESULTED FROM THE GRANTEE'S FAILURE TO FULLY INFORM IT CONCERNING THE NATURE OF THESE GRANTS.

THE UNIVERSITY/BSCS RESPONDS THAT THE GRANTS WERE FIXED, LUMP-SUM PAYMENTS NOT DEPENDENT UPON SECOND EDITION SALES, AND WERE THUS ENTIRELY DISTINCT FROM SECOND EDITION ROYALTIES. THEY ALSO ASSERT THAT COGNIZANT NSF OFFICIALS FULLY UNDERSTOOD THE NATURE OF THE PUBLISHER'S GRANTS WHEN THE SECOND EDITION CONTRACTS WERE APPROVED.

IN PRESENTING THE FOREGOING CONTENTIONS AND RELATED ARGUMENTS CONCERNING THE PUBLISHER'S GRANTS, BOTH PARTIES RELY UPON THE EXTENSIVE FACTUAL BACKGROUND DEVELOPED IN THE RECORD NOW BEFORE US. THE RECORD INCLUDES NUMEROUS DOCUMENTARY MATERIALS WHICH SPAN A PERIOD OF TIME COMMENCING IN 1963, EXTENDING THROUGH EXECUTION OF THE SECOND EDITION CONTRACTS IN 1968- 1969, AND COVERING EVENTS WHICH OCCURRED SEVERAL YEARS THEREAFTER. ACCORDINGLY, IN ORDER TO EVALUATE THE CONTENTIONS OF THE PARTIES, IT IS NECESSARY TO RECITE THE BACKGROUND OF THE PUBLISHER'S GRANT MATTER IN SOME DETAIL.

PART "A," HEREAFTER, OUTLINES WHAT WE CONSIDER TO BE THE ESSENTIAL FACTS OF THE MATTER. EXCEPT AS OTHERWISE NOTED, THESE FACTS ARE NOT DISPUTED BY THE PARTIES. INDEED, THEIR DIVERGENT POSITIONS RELATE LARGELY TO THE INTERPRETATION OF THESE FACTS AND THE CONCLUSIONS TO BE DRAWN FROM THE TOTALITY OF THE CIRCUMSTANCES. PART "B" CONTAINS OUR ANALYSIS AND CONCLUSIONS ON THE PUBLISHER'S GRANTS ELEMENT OF THE CLAIM.

A. FACTUAL BACKGROUND

GENERAL.

AS INDICATED PREVIOUSLY, BSCS DEVELOPED THREE DIFFERENT SECONDARY SCHOOL BIOLOGY TEXTBOOKS KNOWN AS THE BSCS "VERSIONS." EACH WAS PUBLISHED BY A DIFFERENT PUBLISHER, AS FOLLOWS: RAND MCNALLY AND COMPANY (THE "GREEN VERSION"), HARCOURT BRACE AND WORLD, INC. (NOW HARCOURT BRACE JONANOVICH, INC.) (THE "YELLOW VERSION"), AND HOUGHTON MIFFLIN COMPANY (THE "BLUE VERSION"). THESE COMPANIES ARE REFERRED TO COLLECTIVELY AS THE "VERSION PUBLISHERS." THE VERSIONS APPARENTLY REPRESENTED THE ORIGINAL FRUITS OF BSCS' EFFORTS UNDER THE FOUNDATION GRANT GE-1321, WHICH WAS INITIALLY DESIGNED TO FUND THE DEVELOPMENT OF A SET OF MODEL MATERIALS FOR HIGH SCHOOL BIOLOGY COURSES.

THE FIRST EDITIONS OF THE THREE BSCS VERSIONS HAD BEEN SUPPORTED BY THE NSF GRANT AND WERE PUBLISHED IN THE FALL OF 1963. THE FIRST EDITION PUBLISHING CONTRACTS BETWEEN THE UNIVERSITY AND THE THREE VERSION PUBLISHERS SPECIFIED A 20 PERCENT ROYALTY RATE TO BE PAID BY EACH PUBLISHER. HOWEVER, DUE TO FACTORS NOT RELEVANT HERE, THE EFFECTIVE ROYALTY RATES FOR THE FIRST EDITIONS RANGED FROM 13.5 PERCENT TO 15.1 PERCENT OF NET SALES RECEIPTS. ALL ROYALTY PAYMENTS FROM FIRST EDITION SALES WERE REMITTED TO NSF IN ACCORDANCE WITH THE "INCOME" CLAUSE OF GRANT GE-1321, QUOTED SUPRA. THERE WAS NO ARRANGEMENT IN THE FIRST EDITION CONTRACTS FOR ADDITIONAL PAYMENTS BY THE PUBLISHERS TO THE UNIVERSITY.

AS DISCUSSED IN DETAIL HEREAFTER, SECOND EDITIONS OF THE THREE VERSIONS WERE ALSO SUPPORTED BY NSF GRANT FUNDS AND WERE PUBLISHED IN 1968-1969. EACH SECOND EDITION CONTRACT PROVIDED FOR AN 8 PERCENT ROYALTY, TO BE REMITTED TO NSF, AND FOR AN ADDITIONAL LUMP-SUM PAYMENT BY THE PUBLISHER TO THE UNIVERSITY WHICH WAS TO BE RETAINED BY THE UNIVERSITY FOR THE USE OF BSCS. THESE LUMP-SUM PAYMENTS CONSTITUTE THE "PUBLISHER'S GRANTS" WHICH ARE AT ISSUE IN THE FIRST ELEMENT OF NSF'S CLAIM. THIRD EDITIONS OF THE VERSIONS WERE PUBLISHED IN 1973. THESE EDITIONS WERE PRODUCED WITHOUT NSF SUPPORT AND ALL ROYALTIES WERE RETAINED BY THE UNIVERSITY/BSCS.

NEGOTIATIONS BETWEEN BSCS AND NSF CONCERNING THE SECOND EDITIONS.

AS EARLY AS 1964 THE UNIVERSITY SUBMITTED A PROPOSAL TO NSF SEEKING THE FOUNDATION'S SUPPORT FOR REVISED SECOND EDITIONS OF THE BSCS VERSIONS. INITIALLY NSF REJECTED THIS PROPOSAL. THE NSF FOLLOW-UP REPORT STATES, AT PP. 17-18, THAT THIS INITIAL REFUSAL--

" * * * WAS BASED ON THE PHILOSOPHY THAT NSF SHOULD NOT INDEFINITELY PROVIDE SUPPORT TO ONE GROUP OF CURRICULUM DEVELOPERS IN ANY PARTICULAR SUBJECT MATTER AREA. ONCE NSF-SUPPORTED CURRICULUM MATERIALS HAD SERVED THEIR INTENDED PURPOSES AS MODELS, FURTHER DEVELOPMENT AND REVISION BY COMMERCIAL PUBLISHERS WAS ANTICIPATED."

HOWEVER, NSF LATER RECONSIDERED AND AGREED TO SUPPORT THE SECOND EDITIONS. WHILE THE NSF FOLLOW-UP REPORT ATTRIBUTES THIS CHANGE OF HEART TO "BSCS PERSISTENCE," THERE IS AMPLE EVIDENCE IN THE RECORD-- WHICH IS NOT SPECIFICALLY CONTESTED-- THAT NSF'S POLICY WAS TO ATTAIN AN "ORDERLY TRANSITION" FOR PROJECTS SUCH AS BSCS FROM FOUNDATION SUPPORT TO FINANCIAL INDEPENDENCE. FOR EXAMPLE, IN HIS STATEMENT SUBMITTED TO THE BSCS ATTORNEY WITH REFERENCE TO THE INSTANT CLAIM, DR. LAURENCE O. BINDER, A FORMER NSF OFFICIAL, /3/ OBSERVES:

/3/ DR. BINDER WAS NSF'S "PROGRAM DIRECTOR, STUDENT AND CURRICULUM IMPROVEMENT SECTION, PRE-COLLEGE EDUCATION IN SCIENCE." IT IS CLEAR FROM THE NUMEROUS REFERENCES TO DR. BINDER IN THE RECORD THAT HE WAS A KEY PARTICIPANT IN NSF ACTIVITIES CONCERNING THE "PUBLISHER'S GRANTS" AND OTHER ELEMENTS OF THE CLAIM.

"IN THE MID-60'S THE FOUNDATION WAS FUNDING NUMEROUS CURRICULUM PROJECTS * * * . IN EACH CASE THESE PROJECTS WERE CREATURES OF THE FOUNDATION IN THAT THESE PROJECTS WERE STARTED WITH GRANTS FROM THE FOUNDATION AND KEPT ACTIVE WITH OUR SUPPORT. THE FUTURE OF THESE PROJECTS, SOME OF WHICH, LIKE BSCS, HAD DEVELOPED INTO SIZEABLE INSTITUTIONS, BECAME OF GREAT CONCERN TO THE FOUNDATION. THE FOUNDATION COULD NOT BE RESPONSIBLE FOR INDEFINITE FINANCIAL SUPPORT OF THESE PROJECTS. AT THE SAME TIME, A SIZEABLE INVESTMENT OF FEDERAL MONIES, TIME AND ENERGY HAD BEEN MADE WHICH WOULD BE JEOPARDIZED UNLESS A POLICY OF ORDERLY TRANSITION FROM NSF SUPPORT TO FINANCIAL INDEPENDENCE OF THESE PROJECTS WAS ADOPTED.

"THE NSF ADOPTED A POLICY OF ENABLING THE CURRICULUM PROJECTS TO BECOME FINANCIALLY INDEPENDENT WITHOUT, HOWEVER, BRINGING ABOUT TERMINATION OF NSF SUPPORT ABRUPTLY LEST THE EDUCATIONAL SUCCESSES AND THE ABILITY TO CONTINUE ON THE PART OF THE GRANTEES BE PUT IN JEOPARDY. THE MEANS BY WHICH THE FOUNDATION ASSISTED ITS GRANTEES IN THE PROBLEM OF TRANSITION VARIED CONSIDERABLY. * * * "

NEGOTIATIONS BETWEEN BSCS AND NSF CONCERNING THE SECOND EDITIONS APPARENTLY COMMENCED IN EARNEST IN 1965 AND CONTINUED FOR SEVERAL YEARS. DURING THIS PERIOD BSCS WAS ALSO NEGOTIATING WITH THE THREE VERSION PUBLISHERS CONCERNING PUBLISHING CONTRACTS FOR THE SECOND EDITIONS. WITH RESPECT TO THE NEGOTIATIONS BETWEEN BSCS AND NSF, EACH PARTY HAD SEVERAL BASIC CONCERNS. ONE OF NSF'S PRINCIPAL OBJECTIVES WAS TO AVOID FINANCIAL SUPPORT FOR FURTHER BSCS REVISIONS BEYOND THE SECOND EDITIONS. IT HOPED THAT BSCS AND THE PUBLISHERS WOULD ASSUME THE FULL FINANCIAL BURDEN FOR SUCH FURTHER REVISIONS SO THAT NSF COULD DEVOTE ITS RESOURCES TO NEW CURRICULUM VENTURES. NSF WAS ALSO INTERESTED IN ASSURING THAT BSCS AND THE PUBLISHERS WOULD ARRANGE FOR A LIMITED EXCLUSIVITY FOR THE SECOND EDITIONS WITH ROYALTY-FREE LICENSING PROVIDED AFTER A PERIOD OF 4 TO 5 YEARS. FINALLY, NSF WAS CONCERNED WITH THE ROYALTY RATE FOR THE SECOND EDITIONS. BSCS' BASIC POSITION, FOR PURPOSES HERE RELEVANT, WAS THAT IN ORDER FOR IT TO BECOME FINALLY INDEPENDENT OF THE FOUNDATION, IT WOULD HAVE TO OBTAIN SOME FUNDS FROM THE PUBLISHERS FOR ITS OWN USE. THE INITIAL UNDERSTANDING CONCERNING THE NEGOTIATING PROCEDURE FOR THE SECOND EDITION PUBLISHING CONTRACTS WAS THAT BSCS WOULD NEGOTIATE THESE CONTRACTS WITH THE PUBLISHERS, INCLUDING BOTH THE ROYALTY RATE TO BE REMITTED TO NSF AND ARRANGEMENTS FOR ANY ADDITIONAL COMPENSATION FROM THE PUBLISHER TO BE RETAINED BY BSCS. THE BSCS OFFICIALS WERE UNCOMFORTABLE WITH THIS PROCEDURE SINCE IT COULD BE VIEWED AS PLACING THEM IN A CONFLICT OF INTEREST SITUATION. THUS DR. WILLIAM V. MAYER, THE DIRECTOR OF BSCS, STATED IN A DECEMBER 27, 1967, LETTER TO THE NSF'S DR. BINDER:

" * * * I AM IN THE POSITION OF NEGOTIATING WITH PUBLISHERS FOR THE FEDERAL GOVERNMENT. IT IS OBVIOUS THAT THE PUBLISHERS WISH AS LOW A ROYALTY RATE AS POSSIBLE. THEY HAVE SOME GOOD ARGUMENTS ON THEIR SIDE, INCLUDING THE LOSS OF COPYRIGHT PROTECTION THROUGH THE FREE LICENSING AGREEMENT AND THE FACT THAT WE ARE REQUESTING THEM TO ASSUME THE BURDEN OF PHOTOGRAPHIC PERMISSIONS AND ART COSTS WHICH, AS WAS COMMUNICATED TO YOU EARLIER, HAVE PROVEN EXCESSIVE. HOWEVER, I DO NOT WISH TO BE PLACED IN THE POSITION OF HAVING NEGOTIATED, LET US SAY, A FIVE PERCENT ROYALTY FOR THE FEDERAL GOVERNMENT AND THEN SUBSEQUENTLY BEING ACCUSED OF HAVING MADE A MORE GENEROUS ARRANGEMENT WITH PUBLISHERS WORKING WITH THE BSCS ON THE PRODUCTION OF ADDITIONAL BOOKS OR FURTHER EDITIONS OF THE CURRENT CASE. HAVE ASKED THAT THE NATIONAL SCIENCE FOUNDATION ITSELF SET A FIGURE FOR THIS NEGOTIATION WITH PUBLISHERS AND WITH THE CONSUMMATION OF THAT SEQUENCE OF CONTRACTS THE BSCS WOULD FEEL FREE, WITHOUT DEPENDENCE ON THE RATES AGREED UPON BETWEEN THE FEDERAL GOVERNMENT AND THE PUBLISHERS TO MAKE OTHER INDEPENDENT NEGOTIATIONS.

"THEREFORE, I AM WAITING NOW FOR WORDING OF THE FREE LICENSE AGREEMENT AND A ROYALTY FIGURE ACCEPTABLE TO THE NATIONAL SCIENCE FOUNDATION BEFORE PROCEEDING FURTHER."

PRESUMABLY IN RESPONSE (AT LEAST IN PART) TO THIS CONCERN, THE NSF'S DR. KEITH R. KELSON /4/ SENT A FEBRUARY 19, 1968 LETTER TO BSCS' DR. MAYER WHICH ESTABLISHED CERTAIN "GUIDELINES" FOR THE SECOND EDITION CONTRACT NEGOTIATIONS. THESE GUIDELINES SPECIFIED A MINIMUM SECOND EDITION ROYALTY PAYMENT BY THE PUBLISHERS FOR REMITTAL TO NSF OF AT LEAST 15 PERCENT, AND REQUIRED INCLUSION OF A PROVISION TERMINATING THE PUBLISHERS' EXCLUSIVE LICENSES TO PUBLISH THE SECOND EDITIONS AT THE END OF 1973. (AS DISCUSSED HEREAFTER, THE FEBRUARY 19 LETTER ALSO ESTABLISHED GUIDELINES FOR TREATMENT OF ADDITIONAL PAYMENTS OBTAINED BY BSCS FROM THE PUBLISHERS.)

/4/ DR. KELSON WAS ASSOCIATED WITH NSF'S "EDUCATIONAL DIRECTORATE" DURING MOST OF THE 1960'S. FROM 1968 TO 1973 HE WAS ACTING ASSISTANT DIRECTOR OF THE EDUCATION DIRECTORATE. HIS NAME ALSO RECURS THROUGHOUT THE RECORD.

THE RECORD CLEARLY INDICATES THAT NSF RECOGNIZED FROM THE OUTSET THAT A 15 PERCENT MINIMUM SECOND EDITION ROYALTY WAS UNREALISTICALLY HIGH AND WOULD NOT BE ACCEPTABLE TO THE PUBLISHERS. THE MAIN REASONS FOR THIS SEEM TO HAVE BEEN (1) THAT SECOND EDITIONS ARE GENERALLY LESS LUCRATIVE THAN FIRST EDITIONS IN TERMS OF SALES, AND (2) THAT INSISTENCE ON LIMITED FREE LICENSING WOULD FURTHER REDUCE THE PUBLISHERS' PROFITS. NEVERTHELESS, NSF APPARENTLY TOOK THE POSITION THAT THE PUBLISHERS SHOULD HAVE TO ASSUME THE BURDEN OF JUSTIFYING A LOWER ROYALTY RATE.

AS IT TURNED OUT,THE PUBLISHERS DID BALK AT THE 15 PERCENT MINIMUM AND ATTEMPTED THROUGH DIRECT NEGOTIATIONS WITH NSF TO HAVE THE RATE REDUCED. EVENTUALLY, NSF DECIDED TO REMOVE ITSELF FROM DIRECT ROYALTY NEGOTIATIONS. THUS BY LETTER DATED APRIL 5, 1968, THE DEPUTY DIRECTOR OF NSF ADVISED THE PRESIDENT OF THE UNIVERSITY OF COLORADO THAT BSCS SHOULD NEGOTIATE THE ROYALTY RATE AND THAT THE FOUNDATION WOULD NO LONGER INSIST ON THE MINIMUM 15 PERCENT ROYALTY. THIS LETTER ALSO ADVISED THAT THE PUBLISHING CONTRACTS MUST BE SUBMITTED TO NSF FOR REVIEW PRIOR TO THEIR EXECUTION AND THAT THE FOUNDATION WOULD NEED A DETAILED STATEMENT AS TO THE BASIS ON WHICH THE PROPOSED ROYALTY RATE WAS DETERMINED.

RETENTION OF PAYMENTS BY BSCS.

THE MOST CRUCIAL ASPECT OF THE VARIOUS NEGOTIATIONS FOR PURPOSES HERE RELEVANT WAS THE ARRANGEMENTS FOR PAYMENTS BY THE PUBLISHERS TO BE RETAINED BY BSCS. AS NOTED PREVIOUSLY, BOTH PARTIES RECOGNIZED FROM THE OUTSET THAT BSCS WOULD HAVE TO ARRANGE FOR SOME PAYMENTS FROM THE PUBLISHERS TO BE RETAINED BY IT IN ORDER TO ACHIEVE SELF-SUFFICIENCY. INITIALLY BSCS PROPOSED TO THE FOUNDATION SEVERAL TYPES OF SUBSIDIARY ARRANGEMENTS IN ITS CONTRACTS WITH THE PUBLISHERS WHICH WOULD INVOLVE FORMALLY SHARING SECOND EDITION ROYALTY INCOME BETWEEN BSCS AND THE FOUNDATION. HOWEVER, NSF REJECTED ANY DIRECT ROYALTY-SPLITTING ARRANGEMENT ON THE BASIS THAT IT WOULD BE INCONSISTENT WITH THE GE-1321 INCOME CLAUSE.

BSCS THEN DRAFTED SUBSIDIARY AGREEMENTS WITH THE PUBLISHERS UNDER WHICH THE SECOND EDITION ROYALTY RATES PAYABLE TO NSF WOULD BE REDUCED FROM THE FIRST EDITION RATES (STATED AT 20 PERCENT BUT WITH LOWER EFFECTIVE RATES) TO 5 PERCENT. IN ADDITION, THE PUBLISHERS WOULD PAY TO THE UNIVERSITY FOR THE USE OF BSCS "A SUM EQUIVALENT TO THE DIFFERENCE BETWEEN THE CURRENT (FIRST EDITION) ROYALTY RATE AND THAT TO BE SUPPLIED THE NATIONAL SCIENCE FOUNDATION" UNDER THE PROPOSED SECOND EDITION CONTRACTS. HOWEVER, NSF ALSO REJECTED THIS APPROACH AS BEING INCONSISTENT WITH THE INCOME CLAUSE.

DURING THE COURSE OF THE BSCS-NSF NEGOTIATIONS, MUCH WAS SAID CONCERNING THE MEANING AND SCOPE OF THE GE-1321 INCOME CLAUSE. NSF EMPHASIZED ON SEVERAL OCCASIONS, BOTH ORALLY AND IN CORRESPONDENCE,ITS CONSTRUCTION OF THE INCOME CLAUSE AS FOLLOWS: FIRST, THE CLAUSE GENERALLY PROHIBITED THE GRANTEE FROM RETAINING ANY "PROFITS" GENERATED BY MATERIALS DEVELOPED WITH NSF SUPPORT. SECOND, ANY INCOME "DERIVED FROM OR MEASURED BY" SALES OF GRANT-SUPPORTED MATERIALS WOULD HAVE TO BE RETURNED TO NSF. ON THE OTHER HAND, BSCS WAS NOT PRECLUDED FROM RETAINING INCOME WHICH WAS NOT DERIVED FROM OR MEASURED BY SUCH SALES PROCEEDS. THE SCOPE OF THE INCOME CLAUSE WAS MOST SPECIFICALLY DESCRIBED IN THE FEBRUARY 19, 1968 LETTER FROM DR. KELSON TO DR. MAYER WHICH ESTABLISHED SECOND EDITION CONTRACT GUIDELINES:

"ALL PAYMENTS BY THE PUBLISHERS TO BSCS OR THE UNIVERSITY OF COLORADO, THE AMOUNT OF WHICH IS ESTABLISHED BY REFERENCE TO INCOME FROM THE SALE OF THE ORIGINAL OR REVISED EDITIONS, MUST BE PAID TO THE FOUNDATION. WITH RESPECT TO FUTURE REVISIONS, YOU ARE FREE TO ACCEPT ADVANCE ROYALTIES OR OTHER COMPENSATION FOR SERVICES RENDERED."

IT IS CLEAR FROM THE RECORD THAT EVEN BEFORE DR. KELSON'S FEBRUARY 19, 1968 LETTER, BSCS OFFICIALS RECOGNIZED THAT NSF WOULD OBJECT TO ANY SUBSIDIARY ARRANGEMENT WITH THE PUBLISHERS FOR PAYMENTS BASED DIRECTLY ON SALES. THUS, FOR EXAMPLE, IN IDENTICAL DECEMBER 6, 1967 LETTERS TO EACH OF THE THREE VERSION PUBLISHERS, DR. MAYER NOTIFIED THEM THAT THE INITIAL DRAFT AGREEMENT, WHEREBY BSCS WOULD RECEIVE THE DIFFERENCE BETWEEN THE SECOND EDITION ROYALTY RATE PAYABLE TO NSF AND THE FIRST EDITION RATE, WAS VIEWED BY THE FOUNDATION AS AN ILLEGAL "SUB ROSA ROYALTY" SINCE "IT TIES THE SUBSIDIARY FUNDS FOR REVISION AND OTHER PURPOSES SPECIFICALLY TO SALES * * * ." OTHER CORRESPONDENCE INITIATED BY BSCS REFLECTS THE SAME UNDERSTANDING THAT THE PAYMENTS COULD NOT BE BASED DIRECTLY ON SALES.

AT THE SAME TIME, BSCS RECOGNIZED THAT THE SUBSIDIARY ARRANGEMENT WOULD HAVE TO BE "SOMEHOW GEARED TO SALES." THE SOLUTION TO THIS DILEMMA WAS, IN THE VIEW OF BSCS, "A LUMP SUM PAYMENT EXTRAPOLATED FROM SALES AND NOT DIRECTLY RELATED TO THEM TO BE PAID AT PERIODIC INTERVALS DURING THE LIFE OF THE SECOND EDITION." SEE, E.G., LETTER DATED DECEMBER 12, 1967 FROM DR. MAYER TO DR. ARNOLD B. GROBMAN, CHAIRMAN OF THE BSCS EXECUTIVE COMMITTEE (AND FORMER DIRECTOR OF BSCS).

BSCS-PUBLISHER NEGOTIATIONS.

EXTENSIVE NEGOTIATIONS BETWEEN BSCS AND THE VERSION PUBLISHERS TOOK PLACE DURING MOST OF 1968 AND 1969. WHILE THE RECORD BEFORE US RECITES THE HISTORY OF THE NEGOTIATIONS IN GREAT DETAIL, IT IS SUFFICIENT HERE TO SUMMARIZE CERTAIN BASIC FEATURES.

FIRST, WHILE SOME CONSIDERATION WAS GIVEN TO FORMALLY STYLING THE SUBSIDIARY ARRANGEMENTS FOR PAYMENTS TO BSCS AS ADVANCES AGAINST THIRD EDITION ROYALTIES RATHER THAN GRANTS,A LUMP SUM GRANT ARRANGEMENT SEEMS TO HAVE BEEN THE PRINCIPAL FOCUS OF THE NEGOTIATIONS AND WAS THE MECHANISM ULTIMATELY ADOPTED. BSCS' OWN NEGOTIATION "GUIDELINES" FOR THE SECOND EDITION CONTRACTS, AS SET FORTH IN AN ATTACHMENT TO A LETTER DATED JULY 15, 1968, FROM DR. GROBMAN TO DR. MAYER, SUGGESTED A PROPOSED ROYALTY RATE OF 6 PERCENT OF SECOND EDITION SALES TO BE REMITTED IN FULL TO NSF; A "GRANT" FROM EACH PUBLISHER IN AN AMOUNT EQUAL TO 65 PERCENT OF FIRST EDITION ROYALTIES THROUGH 1967, TO BE RETAINED BY THE UNIVERSITY FOR BSCS; AND A 15 PERCENT ROYALTY ON THE THIRD EDITIONS (TO BE PRODUCED WITHOUT NSF SUPPORT) WHICH WOULD BE RETAINED IN FULL BY THE UNIVERSITY FOR BSCS.

IN ESSENCE THESE GUIDELINES PROVIDED THE BASIS FOR THE FINAL CONTRACTS FOR PURPOSES HERE RELEVANT. THE PARTIES ULTIMATELY ARRIVED AT A ROYALTY FOR NSF OF 8 PERCENT OF SECOND EDITION SALES, AND SUBSIDIARY LUMP-SUM GRANT PAYMENTS. THE FINAL GRANT AGREEMENT IN THE RAND MCNALLY CONTRACT PROVIDED AS FOLLOWS:

"THE PUBLISHERS AGREE TO PROVIDE A GRANT OF $225,000 TO THE UNIVERSITY FOR USE OF THE BSCS IN MAINTAINING THE BSCS ADMINISTRATIVE ORGANIZATION, TO PROVIDE POLICY GUIDANCE, CLOSE CONTACT WITH THE BIOLOGICAL COMMUNITY, FEEDBACK COORDINATION, AND OTHER SERVICES INDIRECTLY ATTRIBUTABLE TO THE COSTS OF PREPARING THE THIRD EDITION. THE SAID GRANT SHALL BE PAYABLE IN TEN EQUAL SEMI-ANNUAL INSTALLMENTS OF $22,500 EACH ON MARCH 1 AND SEPTEMBER 1 OF EACH YEAR BEGINNING MARCH 1, 1969."

THE GRANT PROVISIONS IN THE HARCOURT BRACE AND HOUGHTON MIFFLIN CONTRACTS WERE ESSENTIALLY THE SAME, EXCEPT FOR THE GRANT AMOUNTS.

IT IS UNDISPUTED THAT THE GRANT AMOUNTS WERE ARRIVED AT BY CONSIDERATION OF SALES EXPERIENCE, PRIMARILY FIRST EDITION SALES. ALSO, THE PARTIES APPARENTLY ANTICIPATED THAT THE SUM OF EACH PUBLISHER'S SECOND EDITION ROYALTY PAYMENTS PLUS THE GRANT PAYMENTS WOULD APPROXIMATE THEIR RESPECTIVE INVESTMENTS OF EFFECTIVE ROYALTY RATES FOR THE FIRST EDITION, WHICH RANGED BETWEEN 13.5 PERCENT AND 15.1 PERCENT. THUS, WHILE THE ACTUAL CONTRACT PROVISIONS ARE SILENT IN THIS REGARD, BSCS OFFICIALS INDICATED TO EACH PUBLISHER A WILLINGNESS TO REDUCE THIRD EDITION ROYALTIES IF SECOND EDITION SALES FELL BELOW EXPECTATIONS. /5/ FOR EXAMPLE, DR. MAYER STATED IN A NOVEMBER 26, 1968, LETTER TO RAND MCNALLY WITH REFERENCE TO THE GRANT FIGURE:

/5/ IN THEIR STATEMENTS SUBMITTED TO THE BSCS ATTORNEY, PRESENT OR FORMER OFFICIALS OF EACH VERSION PUBLISHER WHO WERE INVOLVED IN THE BSCS SECOND EDITION NEGOTIATIONS DENY THAT THERE WAS ANY SEPARATE AGREEMENT OR UNDERSTANDING CONCERNING A POSSIBLE REDUCTION IN THIRD EDITION ROYALTIES. WHILE THERE WERE NO FORMAL AGREEMENTS TO THIS EFFECT, THE RECORD CLEARLY INDICATES THAT THIS POSSIBILITY WAS AT LEAST INFORMALLY DISCUSSED WITH EACH PUBLISHER.

" * * * THE FIGURE IS DERIVED BASICALLY FROM THE 'NO WINDFALL' CONCEPT OF THE NATIONAL SCIENCE FOUNDATION; THAT IS, THAT NO PUBLISHER SHOULD EXPECT A WINDFALL IN TERMS OF ROYALTY INCOME FROM MATERIALS SUPPORTED BY THE NATIONAL SCIENCE FOUNDATION. THEREFORE, WITH A REDUCTION IN ROYALTY OF APPROXIMATELY 50 PERCENT IN THE CONTRACT FOR THE SECOND EDITION OVER THAT OF THE FIRST, STEPS NEED BE TAKEN TO INSURE THAT NO WINDFALL ACCRUES. RAND, FOR EXAMPLE, IS NOW PAYING AN EFFECTIVE ROYALTY RATE OF 15.1 PERCENT, BASED ON A PRICE OF $6.84 NET (TEXT PLUS LABORATORY) AND A $1.68 PRICE ON THE LABORATORY MANUAL ALONE FOR THE FIRST EDITION. AT 15.1 PERCENT, RAND HAS PAID A ROYALTY OF $481,543 SO FAR ON THE FIRST EDITION. USING THIS FIGURE AND DISCOUNTING ANY FURTHER INCOME THAT MAY ACCRUE TO RAND FROM SALES OF THE FIRST EDITION, THE DIFFERENCE BETWEEN THE 8 PERCENT ROYALTY AND THE CURRENT RATE IS A LITTLE MORE THAN 7 PERCENT. HOWEVER, USING 7/15 OR 46.6 PERCENT OF THE $481, 543 FIGURE, THE GRANT WOULD AMOUNT TO A TOTAL OF $225,000 TO BE PAID OVER A PERIOD OF 5 YEARS OR $45,000 PER YEAR, BEGINNING WITH THE SIGNING OF THE CONTRACT. YOU HAD INDICATED THAT YOU WISHED THIS PAID SEMI-ANNUALLY WHICH WOULD MAKE EACH PAYMENT $22,500.

"WE HAVE ALREADY AGREED THAT THE ROYALTY RATE ON THE THIRD EDITION WILL BE NEGOTIABLE, NEGOTIATIONS, IN PART, TO DEPEND UPON THE SUCCESS OF THE SECOND EDITION. IF SALES OF THE SECOND EDITION FALL BELOW EXPECTATIONS, THEN BSCS WOULD ACCEPT A LOWERED ROYALTY RATE ON THE THIRD EDITION, THUS, COMPENSATING THE PUBLISHER FOR SALES OF THE SECOND EDITION SIGNIFICANTLY LESS THAN THOSE OF THE FIRST UPON WHICH THE GRANT HAS BEEN CALCULATED."

NSF REVIEW OF THE PUBLISHING CONTRACTS.

THE RAND MCNALLY CONTRACT WAS THE FIRST PUBLISHING CONTRACT SUBMITTED FOR NSF REVIEW. IN HIS LETTER TO NSF'S DR. BINDER, DATED NOVEMBER 26, 1968, WHICH FORWARDED THE FINAL DRAFT OF THE RAND CONTRACT, DR. MAYER EXPRESSED THE "HOPE THAT THIS CONTRACT CAN * * * RESULT IN A MODEL THAT CAN BE RAPIDLY ACCEPTED BY THE OTHER TWO VERSION PUBLISHERS." THE DRAFT CONTRACT SUBMITTED TO NSF INCLUDED THE PUBLISHER'S GRANT PROVISION BUT LEFT BLANK THE AMOUNT OF THE GRANT. BY LETTER DATED DECEMBER 20, 1968, NSF NOTIFIED BSCS THAT "THERE IS NO OBJECTION TO THE DRAFT," SJBJECT TO CERTAIN SUGGESTED REVISIONS NOT HERE RELEVANT. ON JANUARY 2, 1969, DR. MAYER FORWARDED TO DR. BINDER A DRAFT OF THE CONTRACT INCORPORATING NSF'S SUGGESTED REVISIONS. A SIGNED COPY OF THE RAND CONTRACT WAS TRANSMITTED TO DR. BINDER ON FEBRUARY 4, 1969. THE AMOUNT OF THE PUBLISHER'S GRANT WAS BLOCKED OUT.

THE MATERIALS SUBMITTED TO US BY NSF PRESUMABLY INCLUDE ALL DOCUMENTS AVAILABLE TO THE NSF AUDITORS WHICH CONCERN THE FOUNDATION'S REVIEW OF THE RAND CONTRACT. THE INTERNAL NSF DOCUMENTS CONTAIN NO DISCUSSION OF THE PUBLISHER'S GRANT PROVISION OF THE CONTRACT. BSCS FILES EXAMINED BY THE AUDITORS CONTAINED A RECORD OF A DECEMBER 31, 1968 TELEPHONE CONVERSATION BETWEEN DR. BINDER AND DR. MAYER WHICH APPARENTLY CONSTITUTES THE ONLY MENTION OF THE RAND PUBLISHER'S GRANT PROVISION, AS FOLLOWS: "'WE SUGGEST THAT PAYMENTS BE MADE EVERY MARCH AND SEPTEMBER WITH PAYMENTS BEGINNING SEPTEMBER * * * ' THIS PERTAINS TO THE GRANT AND THE THIRD EDITION AND THE FOUNDATION HAS NO INTEREST IN THIS. DR. MAYER POINTED OUT THAT WE WANTED THIS IN THERE SO THAT THE FOUNDATION WOULD KNOW THAT THIS HAS NO RELATION TO ROYALTIES ON THE SECOND EDITION." THE NSF AUDITORS COULD FIND NO RECORD OF THIS CONVERSATION WITHIN THE FOUNDATION.

THE ONLY OTHER DOCUMENTS FROM THE NSF REVIEWS OF THE RAND CONTRACT WHICH ARE RELEVANT HERE CONCERN THE ROYALTY RATE. IN A DECEMBER 16, 1968 MEMORANDUM, AN NSF ASSISTANT COUNSEL STATED THAT THE 8 PERCENT SECOND EDITION ROYALTY RATE:

" * * * IS UNREASONABLY LOW. A 12 PERCENT ROYALTY SUCH AS THAT PROVIDED FOR THE THIRD EDITION IN THE NOVEMBER 13, 1968, DRAFT OF THIS CONTRACT WOULD PROBABLY BE MORE APPROPRIATE."

APART FROM THIS AND SEVERAL OTHER MATTERS NOT RELEVANT HERE, THE ASSISTANT COUNSEL STATED THAT "THIS OFFICE DOES NOT OBJECT TO THE PROPOSED AGREEMENT." IN A DECEMBER 20, 1968 MEMORANDUM, DR. BINDER RESPONDED THAT THE 8 PERCENT ROYALTY RATE "SHOULD BE ENTIRELY ACCEPTABLE." HE POINTED OUT THAT THE FIRST EDITION EFFECTIVE ROYALTY RATE WAS ONLY 15 PERCENT (RATHER THAN 20 PERCENT) AND CHARACTERIZED THE REDUCTION FOR THE SECOND EDITION AS A CONCESSION TO THE LIMITED EXCLUSIVITY FOR THAT EDITION.

IN 1969, DRAFT SECOND EDITION CONTRACTS FOR THE OTHER TWO BSCS VERSIONS WERE SUBMITTED TO, REVIEWED, AND APPROVED BY NSF. THE CIRCUMSTANCES RELATING TO NSF'S CONSIDERATION OF THESE CONTRACTS ARE GENERALLY SIMILAR TO THOSE CONCERNING THE RAND CONTRACT AND ADD NOTHING WHICH BEARS ON THE PRESENT ISSUES.

B. ANALYSIS AND CONCLUSIONS

WITH THIS BACKGROUND, WE TURN TO THE RESPECTIVE CONTENTIONS OF THE PARTIES CONCERNING THE PUBLISHER'S GRANTS. NSF'S BASIC CONTENTIONS ARE SUMMARIZED AS FOLLOWS IN ITS SUBMISSION TO US:

" * * * IT IS OUR CONTENTION THAT THE PUBLISHER'S GRANTS WERE, IN EFFECT, ROYALTIES OR PAYMENTS IN LIEU OF ROYALTIES ON THE SECOND EDITION WHICH WAS SUPPORTED BY NSF. THIS POSITION IS BASED ON THE FACTS THAT THE GRANTS WERE SO VIEWED BY THE PUBLISHERS AND THE UNIVERSITY, THAT THEY WERE INTEGRALLY RELATED TO SALES OF THE SECOND EDITION, AND THAT THEY WERE MADE POSSIBLE BY A REDUCTION IN ROYALTIES PAYABLE TO THE UNIVERSITY FOR TRANSMISSION TO THE FOUNDATION (THE SECOND EDITION ROYALTY RATE AT 8 PERCENT WAS SUBSTANTIALLY LESS THAN THE CONTRACT RATE OF 20 PERCENT ON THE FIRST EDITION WHICH WAS ALSO SUPPORTED BY NSF). IN OUR VIEW, THE 'GRANTS' WERE PROPERLY PAYABLE TO THE FOUNDATION UNDER THE (GE-132) INCOME CLAUSE QUOTED ABOVE.

" * * * NSF'S POSITION ON INCOME WAS CLEAR AT LEAST AS OF JANUARY 1968 THAT ANY FUNDS BASED ON SALES OF NSF-SUPPORTED MATERIALS, WHETHER THE SALE BE ACTUAL OR ESTIMATED, CONSTITUTED INCOME AS THAT TERM IS DEFINED IN THE NSF GRANT. THE PUBLISHERS' TOTAL OBLIGATION ON THE SECOND EDITION WAS COMPUTED ON THE BASIS OF A PERCENTAGE PAYMENT (ROYALTIES AND GRANTS) OF APPROXIMATELY 15 PERCENT OF ESTIMATED SALES. THE FACT THAT THE GRANTS DID NOT BEAR A DIRECT RELATIONSHIP TO SALES DOES NOT ALTER THEIR ESSENTIAL NATURE AS 'DERIVED FROM' SALES OF NSF SUPPORTED EDITIONS. FURTHER, THE UNIVERSITY WAS UNDER NO REAL OBLIGATION TO RENDER THE PUBLISHERS ANY ACTUAL SERVICES, AND IN FACT THE BALANCE OF THE GRANT FUNDS WAS USED TO PURCHASE LAND AND CONSTRUCT A BUILDING TO HOUSE BSCS. THE NATURE OF THE GRANT ARRANGEMENTS WAS NOT MADE EXPLICIT IN THE PUBLISHING CONTRACTS AND THE EXTENT OF ACTUAL KNOWLEDGE OF NSF OFFICIALS OF THIS MATTER IS UNCERTAIN. INDEED, THE UNIVERSITY WAS PROVIDED WITH A LONG SERIES OF OFFICIAL NSF POLICY STATEMENTS AND CORRESPONDENCE TO THE EFFECT THAT ALL PROFITS FROM GOVERNMENT-SUPPORTED MATERIALS WERE CONSIDERED AS BELONGING TO THE GOVERNMENT AND THE GRANTEE COULD NOT EXPECT TO RECEIVE A PORTION OF SUCH INCOME FOR ITS OWN PURPOSES. NSF APPROVAL OF THE SECOND EDITION PUBLISHING CONTRACTS MUST BE CONSTRUED IN THIS CONTEXT AND IN THE LIGHT OF THE FAILURE OF THE UNIVERSITY TO FULLY INFORM THE FOUNDATION AS TO THE IMPORT OF THE GRANT PROVISIONS. UNDER THE CIRCUMSTANCES IT IS DIFFICULT TO INFER ACTUAL OR IMPLIED CONSENT BY NSF TO THE PUBLISHERS' GRANT ARRANGEMENTS."

THE RESPONSE ON BEHALF OF BSCS AND THE UNIVERSITY IS SUMMARIZED IN THE BSCS ATTORNEY'S OCTOBER 13 SUBMISSION TO US AS FOLLOWS:

"1. THE NSF IS NOT ENTITLED TO LAY CLAIM TO THE PUBLISHERS' GRANTS, THE RETENTION OF WHICH BY BSCS WAS NOT IN VIOLATION OF THE CONDITION OF THE NSF GRANT GE-1321 OF 1963 THAT ALL INCOME FROM ROYALTY OR FROM THE SALE OF BOOKS BE UTILIZED AS DETERMINED BY THE NSF BECAUSE:

"(A) THE GRANTS (INCOME) CLAUSE SET FORTH IN THE 1963 NSF GRANT LETTER DID NOT PRECLUDE BSCS FROM RECEIVING ANY AND ALL FORMS OF INCOME FROM PUBLISHERS; IT MERELY PRECLUDED BSCS FROM RECEIVING INCOME DERIVED FROM THE SALE OF BOOKS, RENTS OR ROYALTIES WHICH,ACCORDING TO THE CONDITION OF THE GRANT, MUST BE UTILIZED AS DETERMINED BY THE NSF.

"(B) THE NSF OFFICIALS IN CHARGE DURING THE 1960'S ACQUIESCED IN THE BSCS OBJECTIVE TO OBTAIN FUNDS FROM THE PUBLISHERS FOR THE PURPOSE OF ENABLING BSCS TO CONTINUE TO OPERATE AFTER TERMINATION OF SUPPORT BY NSF, PROVIDED SUCH FUNDS WOULD NOT BE ROYALTY INCOME, OR INCOME IN THE NATURE OF ROYALTY, FROM THE FIRST AND SECOND EDITIONS OF THE BSCS VERSIONS.

"(C) THE NSF OFFICIALS WHO IN 1968 AND 1969 APPROVED THE SECOND EDITION CONTRACTS WERE SATISFIED THAT THERE WERE GOOD AND SUFFICIENT REASONS FOR THE LOWER ROYALTY RATE OF 8 PERCENT FOR THE SECOND EDITIONS. THEY WERE COGNIZANT OF THE DISTINCTION BETWEEN ROYALTY PAYMENT, I.E., THE PAYMENT OF 8 PERCENT FROM THE PROCEEDS OF THE BOOK SALES OF THE SECOND EDITION VERSIONS WHICH THE PUBLISHERS AGREED TO MAKE, AND THE PUBLISHERS' GRANTS TO BSCS SET FORTH IN THE SAME CONTRACTS, WHICH CONSTITUTED FIXED, LEGAL OBLIGATIONS BY THE PUBLISHERS TO PAY TO BSCS SUMS CERTAIN, WHETHER ANY BOOKS WOULD BE SOLD BY THE PUBLISHERS OR NOT, AND WHICH OBLIGATIONS THE PUBLISHERS ASSUMED TO ENABLE BSCS TO CONTINUE TO OPERATE AND TO PREPARE THE CONTEMPLATED THIRD REVISION OF THE TEXTBOOKS.

"2. THE APPROVAL BY THE NSF OFFICIALS IN THE LATE 1960'S OF THE SECOND EDITION CONTRACTS IS VALID AND BINDING UPON THE NSF IN 1976 BECAUSE:

"(A) THE MAKING OF THE PUBLISHERS' GRANTS TO BSCS, AS WELL AS THE PURPOSES FOR WHICH SAID GRANTS WERE MADE, WERE STATED IN SAID CONTRACTS IN SPECIFIC TERMS.

"(B) THE NSF OFFICIALS HAD A FULL UNDERSTANDING OF THE PERTINENT FACTS AND THE IMPLICATIONS THEREOF; THEY COULD NOT HAVE ESCAPED SUCH FACTS NOR LACKED A PROPER UNDERSTANDING OF THE IMPLICATIONS THEREOF.

"3. THE CORNERSTONE OF THE BASIS FOR THE PRESENT CONTENTION BY THE NSF IS A DISAGREEMENT BY NSF OFFICIALS IN 1975 WITH DECISIONS MADE BY OFFICIALS OF THE FOUNDATION WHO REPRESENTED THE LATTER SEVEN TO EIGHT YEARS AGO, ON WHOSE ACTIONS AND DECISIONS BSCS RELIED AND HAD REASON TO RELY."

THE CENTRAL ISSUE TO BE RESOLVED IS WHETHER BSCS' RETENTION OF THE PUBLISHER'S GRANTS VIOLATED THE INCOME CLAUSE OF NSF GRANT GE1321. NOTED PREVIOUSLY, THIS CLAUSE IN EFFECT REQUIRED REMITTAL TO NSF OF:

"INCOME DERIVED BY THE UNIVERSITY OF COLORADO FROM RENTS OR ROYALTIES OR FROM THE SALE OF BOOKS, FILMS OR OTHER PROPERTY RIGHTS RELATED TO THE BIOLOGICAL SCIENCES CURRICULUM STUDY ACTIVITIES * * * ."

IN ADDRESSING THIS ISSUE WE EMPHASIZE TWO INITIAL POINTS WHICH ARE NOT CONTESTED BY THE PARTIES. FIRST, THE INCOME CLAUSE DID NOT PRECLUDE BSCS FROM RETAINING ANY PAYMENTS MADE BY THE PUBLISHERS. THE BASIC PROHIBITION WAS AGAINST BSCS RETAINING INCOME OR PROFITS FROM THE SALE OF NSF SUPPORTED MATERIALS. THUS BSCS WAS FREE TO ACCEPT COMPENSATION FOR SERVICES RENDERED WITHOUT NSF SUPPORT OR ADVANCES AGAINST ROYALTIES FOR MATERIALS TO BE DEVELOPED WITHOUT NSF SUPPORT (E.G., THE THIRD EDITIONS OF THE BSCS VERSIONS). SECOND, THE PUBLISHER'S GRANTS NEGOTIATED BY BSCS DO NOT PURPORT BY THEIR TERMS TO BE INCOME FROM THE SALE OF NSF SUPPORTED MATERIALS. EACH GRANT IS ON ITS FACE AN UNCONDITIONAL LUMP-SUM PAYMENT:

" * * * FOR USE OF BSCS IN MAINTAINING THE BSCS ADMINISTRATIVE ORGANIZATION, TO PROVIDE POLICY GUIDANCE, CLOSE CONTACT WITH THE BIOLOGICAL COMMUNITY, FEEDBACK COORDINATION, AND OTHER SERVICES INDIRECTLY ATTRIBUTABLE TO THE COSTS OF PREPARING THE THIRD EDITION. * * * "

ESSENTIALLY NSF'S POSITION IS THAT THE PUBLISHER'S GRANTS ARE NOT IN FACT WHAT THEY PURPORT TO BE. THE FOUNDATION CONTENDS THAT THEY REPRESENT IN EFFECT, SECOND EDITION ROYALTIES OR PAYMENTS IN LIEU OF ROYALTIES BECAUSE:

-- THE AMOUNTS OF THE GRANTS WERE "DERIVED FROM" SALES OF NSF SUPPORTED MATERIALS.

-- THE PAYMENTS REPRESENTED A QUID PRO QUO FOR THE REDUCTION IN SECOND EDITION ROYALTIES FROM THE FIRST EDITION ROYALTY RATES.

-- THE AMOUNTS OF THE PAYMENTS WERE NOT REALLY UNCONDITIONAL LUMP SUM GRANTS SINCE IT WAS CONTEMPLATED BY BSCS AND THE PUBLISHERS THAT THE GRANT AMOUNTS COULD BE ADJUSTED (THROUGH REDUCTIONS IN THIRD EDITION ROYALTIES) IF SECOND EDITIONS SALES FELL BELOW EXPECTATIONS.

-- THE GRANTS WERE VIEWED BY THE UNIVERSITY AND THE PUBLISHERS AS PAYMENTS IN LIEU OF SECOND EDITION ROYALTIES.

-- THE UNIVERSITY HAD NO OBLIGATION TO RENDER SERVICES TO THE PUBLISHERS, AND IN FACT BSCS USED THE GRANTS TO ACQUIRE A NEW BUILDING.

NSF ALSO CONTENDS THAT ITS APPROVAL OF THE PUBLISHER'S GRANTS RESULTED FROM BSCS' FAILURE TO INFORM IT OF THE CIRCUMSTANCES SURROUNDING THESE GRANTS.

FOR THE REASONS STATED HEREAFTER, WE CONCLUDE THAT NSF'S CONTENTIONS MUST BE REJECTED ON THE BASIS OF THE RECORD BEFORE US.

AS NOTED PREVIOUSLY, NSF MADE CLEAR THAT IT INTERPRETED THE GE-1321 INCOME CLAUSE TO COVER PAYMENTS "DERIVED FROM," "BASED UPON," OR "ESTABLISHED BY REFERENCE TO" SALES OF NSF-SUPPORTED MATERIALS. THE UNIVERSITY AND BSCS ACCEPTED THIS INTERPRETATION PRIOR TO NEGOTIATION OF THE FINAL PUBLISHER'S GRANT PROVISIONS AND APPARENTLY STILL ACCEPT IT. THE QUESTION IS WHAT DOES THIS INTERPRETATION REALLY MEAN? BSCS TOOK IT TO MEAN THAT PAYMENTS WERE OBJECTIONABLE ONLY IF THEY WERE TIED DIRECTLY TO ACTUAL SECOND EDITION SALES IN THE SENSE THAT THE AMOUNT OF THE PAYMENTS WOULD DEPEND ON ACTUAL SALES. ACCORDINGLY, WHILE IT IS CLEAR THAT THE PUBLISHER'S GRANT AMOUNTS WERE NEGOTIATED WITH REFERENCE TO PAST AND ANTICIPATED FUTURE SALES EXPERIENCE, BSCS WAS CAREFUL NOT TO DRAFT THE GRANT PROVISIONS SO AS TO HINGE THE PAYMENTS ON ACTUAL SALES. NSF VIEWS THIS APPROACH AS INVOLVING FORM OVER SUBSTANCE, AND INSISTS THAT ITS STATED INTERPRETATION OF THE INCOME CLAUSE EXTENDS TO PAYMENTS WHICH ARE DIRECTLY OR INDIRECTLY RELATED TO SALES. IT FURTHER CONTENDS, IN EFFECT, THAT THE PAYMENTS WERE REALLY VARIABLE AMOUNTS BASED ON ACTUAL SECOND EDITION SALES IN VIEW OF BSCS' WILLINGNESS TO ADJJST THIRD EDITION ROYALTIES IN CASE SECOND EDITION SALES FELL SHORT OF EXPECTATIONS.

WE CANNOT SAY THAT BSCS' INTERPRETATION OF THE INCOME CLAUSE WAS UNREASONABLE. IN OUR VIEW, THE STATED NSF INTERPRETATION OF THE INCOME CLAUSE COULD, AS A MATTER OF COMMON UNDERSTANDING, BE CONSIDERED AS LIMITED TO ARRANGEMENTS FEATURING A DIRECT RELATIONSHIP BETWEEN THE PAYMENTS AND ACTUAL SALES. THIS APPROACH ALSO SEEMS CONSISTENT WITH THE BASIC PURPOSE OF THE INCOME CLAUSE, WHICH IS TO PREVENT A GRANTEE FROM PROFITING FROM THE SALE OF NSF-SUPPORTED MATERIALS. CERTAINLY A PROFIT- SHARING OR DE FACTO ROYALTY ARRANGEMENT WOULD NORMALLY BE CHARACTERIZED BY A PERCENTAGE OR OTHER VARIABLE PAYMENT MECHANISM GEARED DIRECTLY TO ACTUAL SALES, RATHER THAN AN UNCONDITIONAL LUMP-SUM PAYMENT. IN THIS REGARD, NSF'S ARGUMENT THAT THE PUBLISHER'S GRANTS WERE REALLY VARIABLE SINCE IT WAS UNDERSTOOD THAT THEY COULD BE ADJUSTED BY REDUCTIONS IN THIRD EDITION ROYALTIES, PROVES TOO MUCH. BSCS AND THE PUBLISHERS CONTEND THAT THERE WERE NO BINDING OR EVEN INFORMAL UNDERSTANDINGS CONCERNING ADJUSTMENT OF THIRD EDITION ROYALTIES FOR THIS PURPOSE. HOWEVER, EVEN IF THERE WERE, THE RESULT WOULD HAVE BEEN TO REDUCE BSCS' LEGITIMATE THIRD EDITION PROFITS (SINCE NSF DID NOT SUPPORT THE THIRD EDITIONS),RATHER THAN TO DIVERT SECOND EDITION PROFITS PAYABLE TO NSF. AS THE BSCS ATTORNEY POINTS OUT, ANY SUCH ALLEGED ARRANGEMENTS WOULD SUPPORT THE VIEW THAT THE PUBLISHER'S GRANTS WERE IN EFFECT ADVANCES AGAINST THIRD EDITION ROYALTIES WHICH BSCS WOULD HAVE EVERY RIGHT TO RETAIN.

MORE FUNDAMENTALLY, OUR READING OF THE RECORD CONVINCES US THAT BSCS' ARRANGEMENTS FOR THE PUBLISHER'S GRANTS WERE ACCOMPLISHED IN AN ENTIRELY GOOD FAITH AND ABOVE-BOARD MANNER. THE NSF CONTENTIONS TO THE CONTRARY ARE BASED ESSENTIALLY ON INFERENCES WHICH ARE SIMPLY NOT SUPPORTED BY THE EVIDENCE BEFORE US. THE FACT THAT THE PUBLISHER'S GRANT AMOUNTS WERE NEGOTIATED WITH REFERENCE TO PAST AND ANTICIPATED SALES EXPERIENCE FOR THE BSCS VERSION EDITIONS DOES NOT, IN OUR VIEW, NECESSARILY BRING THEM WITHIN THE GE-1321 INCOME CLAUSE AS WRITTEN OR AS EXPLAINED IN THE VARIOUS NSF INTERPRETATIONS. AS DISCUSSED ABOVE, WE BELIEVE THERE ARE SUBSTANTIVE AS WELL AS DISTINCTIONS IN FORM BETWEEN PAYMENTS BASED DIRECTLY ON ACTUAL SALES AND LUMP-SUM AMOUNTS BASED ON NEGOTIATIONS WHICH CONSIDER PREVIOUS SALES EXPERIENCE AS ONE ELEMENT IN DETERMINING THE AMOUNT TO BE PAID. MOREOVER, IT IS DIFFICULT TO IMAGINE HOW ANY PAYMENTS FROM THE PUBLISHERS TO BSCS COULD HAVE BEEN NEGOTIATED WITHOUT REFERENCE TO SALES EXPERIENCE SINCE THE PUBLISHERS OBVIOUSLY WOULD NOT AGREE TO PAYMENTS EXCEEDING THEIR ANTICIPATED RETURN ON THESE INVESTMENTS. /6/ /6/ SEE IN THIS REGARD THE STATEMENTS OF THE FORMER NSF OFFICIALS QUOTED HEREAFTER.

SIMILARLY, NSF'S CONTENTION THAT THE REDUCTION IN SECOND EDITION ROYALTIES WAS A QUID PRO QUO FOR THE PUBLISHER'S GRANTS, OR VISA-VERSA, IS NOT BORNE OUT BY THE RECORD. NSF DOES NOT SPECIFICALLY ALLEGE THAT THE 8 PERCENT RATE NEGOTIATED BY BSCS WAS UNREASONABLY LOW; AND THE RECORD DOES NOT SO INDICATE. WHAT THE RECORD DOES SHOW IS THAT SECOND EDITION ROYALTIES WOULD REASONABLY BE EXPECTED TO BE LOWER DUE LARGELY TO NSF'S INSISTENCE ON THE LIMITED FREE LICENSING PROVISION. AS NOTED PREVIOUSLY, NSF RECOGNIZED FROM THE OUTSET THE LIKELIHOOD OF REDUCED SECOND EDITION ROYALTIES. IT INITIALLY REQUIRED BSCS TO SEEK A 15 PERCENT RATE IN ORDER TO FORCE THE PUBLISHERS TO SPECIFICALLY JUSTIFY LOWER RATES. NSF LATER RESCINDED ITS 15 PERCENT REQUIREMENT. THE ONLY SUGGESTION THAT THE BSCS- NEGOTIATED RATE WAS UNREASONABLY LOW WAS ADVANCED BY THE NSF OFFICE OF GENERAL COUNSEL IN ITS COMMENTS ON THE RAND MCNALLY CONTRACT (AND SUBSEQUENTLY REPEATED WITH RESPECT TO THE OTHER CONTRACTS). DR. BINDER RESPONDED IN HIS COMMENTS ON THE RAND MCNALLY CONTRACT THAT THE 8 PERCENT RATE--

" * * * WAS DETERMINED, IN PART, ON THE BASIS OF LIMITED EXCLUSIVITY AND ALSO AS A RESULT OF STATEMENTS BY FOUNDATION STAFF THAT A CONCESSION OF UP TO A REDUCTION OF 50% IN THE ORIGINAL ROYALTY RATE COULD BE MADE IN RETURN FOR LIMITED EXCLUSIVITY. * * * "

CLEARLY THE NSF ACCEPTED DR. BINDER'S POSITION SINCE THE ROYALTY RATE WAS APPROVED.

IT IS TURE,AS NSF POINTS OUT, THAT THE GRANT AMOUNTS AND ROYALTY RATES WERE RELATED DURING THE SECOND EDITION CONTRACT NEGOTIATIONS BETWEEN BSCS AND THE PUBLISHERS, PARTICULARLY WITH REFERENCE TO THE NEGOTIATING STANCE ADOPTED BY THE PUBLISHERS. FOR EXAMPLE, THE PUBLISHERS WERE NOT INCLINED TO MAKE TOTAL PAYMENTS, IN GRANTS TO BSCS PLUS SECOND EDITION ROYALTIES WHICH WOULD EXCEED THEIR TOTAL PAYMENTS FOR THE FIRST EDITIONS. HOWEVER, THIS FACT ALONE IS NOT SUFFICIENT TO ESTABLISH THAT THE GRANT AMOUNTS WERE NEGOTIATED AT THE EXPENSE OF THE ROYALTY RATES. MOREOVER, SINCE BOTH THE GRANTS AND ROYALTIES WERE PART OF THE SAME NEGOTIATIONS, SOME OVERLAP IN THE NEGOTIATIONS SEEMS INEVITABLE. IT IS PARTICULARLY APPROPRIATE TO EMPHASIZE HERE THAT BSCS PROPOSED TO HAVE NSF NEGOTIATE THE SECOND EDITION ROYALTY RATES FOR THE VERY PURPOSE OF AVOIDING LATER ACCUSATIONS THAT BSCS HAD FAVORED ITS GRANT PAYMENTS OVER THE ROYALTIES. WE TAKE THIS TO BE A SIGNIFICANT DEMONSTRATION OF BSCS'S GOOD FAITH IN THE MATTER. BY THE SAME TOKEN, NSF'S REFUSAL TO ACCEPT THIS PROPOSAL SERIOUSLY UNDERMINES ITS PRESENT OBJECTIONS.

AS NOTED ABOVE, NSF ALSO OBJECTS TO BSCS' USE OF THE GRANT PAYMENTS TO FINANCE A NEW BUILDING. APPARENTLY NSF BELIEVES THAT THIS PROVES THAT THE GRANTS WERE NOT "FOR SERVICES RENDERED." THIS CONTENTION MUST LIKEWISE BE REJECTED. THE PUBLISHER'S GRANTS ARE STATED IN RATHER BROAD TERMS, E.G., "OTHER SERVICES INDIRECTLY ATTRIBUTABLE TO THE COSTS OF PREPARING THE THIRD EDITION." THIS LANGUAGE SEEMS SUFFICIENTLY BROAD TO ENCOMPASS GENERAL SUPPORT OF BSCS; AND THE PUBLISHERS APPARENTLY SANCTIONED THE USE OF THE GRANT FUNDS FOR A NEW BSCS BUILDING. IN ANY EVENT, BSCS' ACTUAL USE OF THE GRANT FUNDS IS ESSENTIALLY IRRELEVANT TO THE QUESTION OF WHETHER THE GRANTS WERE DE FACTO ROYALTIES OR PAYMENTS IN LIEU OF ROYALTIES.

FINALLY, NSF'S POSITION THAT ITS APPROVAL OF THE SECOND EDITION CONTRACTS CONTAINING THE PUBLISHER'S GRANTS WAS BASED ON INSUFFICIENT KNOWLEDGE IS PARTICULARLY WEAK. THIS POSITION IS SPECIFICALLY CONTRADICTED IN STATEMENTS SUBMITTED TO THE BSCS ATTORNEY BY THREE FORMER NSF OFFICIALS WHO HAD SUBSTANTIAL ROLES IN THE BSCS-NSF DEALINGS HERE RELEVANT. THUS DR. BINDER STATES:

"WITH REGARD TO THE PUBLISHERS GRANTS MADE BY THE VERSION PUBLISHERS, PRIOR TO THE ACTUAL SUBMISSION OF THE CONTRACT DOCUMENTS TO MY OFFICE FOR REVIEW AND APPROVAL, THE CONCEPT OF SAID GRANTS AND THE APPROXIMATE AMOUNTS WERE DISCUSSED BETWEEN OUR OFFICE AND BSCS. I AM PUZZLED BY REFERENCES IN THE FINDINGS AND CONCLUSIONS OF THE GRANTS AND CONTRACTS OFFICE TO THE EFFECT THAT I AND OTHERS IN THE EDUCATION DIRECTORATE MIGHT NOT HAVE HAD A COMPLETE UNDERSTANDING OF THE PUBLISHERS GRANTS, WHETHER WITH REGARD TO THE NATURE OF SAID GRANTS, OR THE MANNER IN WHICH THE SAME WERE COMPUTED, OR THE ULTIMATE DOLLAR AMOUNTS.

"I UNDERSTOOD THAT THE PUBLISHERS GRANTS WERE FIXED OBLIGATIONS. YOU MIGHT SAY THEY WERE 'IOU'S' BY THE PUBLISHERS TO BSCS. THE PURPOSES FOR SAID GRANTS WERE SPELLED OUT IN THE CONTRACTS THEMSELVES; THEREFORE, I NEEDN'T HERE ELABORATE. I VIEWED THESE GRANTS TO BE FUNDAMENTALLY DIFFERENT FROM ANY PAYMENT BY PUBLISHERS IN THE NATURE OF ROYALTY OR PAYMENTS TIED TO THE SALES SUCCESS OF THE SECOND EDITIONS. WHILE I WAS NOT DIRECTLY INVOLVED IN THE NEGOTIATIONS BETWEEN BSCS AND THE PUBLISHERS CONCERNING THE SECOND EDITION CONTRACTS, AND THEREFORE DID NOT PARTICIPATE IN THE DISCUSSIONS OVER THE SIZE OF THE PUBLISHERS GRANTS, I RECOGNIZED, AS ANY ONE WOULD WITH A MINIMAL UNDERSTANDING OF THE PUBLISHING BUSINESS, THAT THE AMOUNTS OF THE GRANTS WERE DETERMINED WITH REGARD TO THE SALES HISTORY OF THE FIRST EDITIONS AND PROJECTIONS BY THE PUBLISHERS AND BSCS OF FUTURE SALES OF SECOND EDITIONS AND SUBSEQUENT EDITIONS. THE PUBLISHERS WERE, AFTER ALL, IN THE BUSINESS TO MAKE MONEY AND THEY WOULD THEREFORE NOT UNDERTAKE AN OBLIGATION WITHOUT REGARD TO SALES."

SIMILARLY DR. KELSON OBSERVES IN HIS STATEMENT:

"IN SPITE OF THE SYMPATHY THE FOUNDATION HAD FOR BSCS AND ITS LONG RANGE OBJECTIVE, THE FOUNDATION DID NOT APPROVE OF THE RETENTION BY BSCS OF MONIES WHICH BSCS WAS REQUIRED TO RETURN TO THE GOVERNMENT ON THE BASIS OF GRANT GE 1321. AS WE PERCEIVED IT, BSCS SHOULD NOT RETAIN MONIES WHICH WERE IN THE NATURE OF ROYALTIES ACCRUING FROM THE PUBLICATION OF NSF- SUPPORTED MATERIALS. THE SECOND EDITION CONTRACTS WERE SCRUTINIZED VERY CAREFULLY BY ME AND OTHERS, INCLUDING NSF LEGAL COUNSEL AND THE GRANTS AND CONTRACTS OFFICE, TO MAKE SURE THAT BSCS, IN ITS DESIRE TO BECOME FINANCIALLY INDEOENDENT, HAD NOT TAKEN SUCH STEPS WHICH MIGHT BE INCONSISTENT WITH NSF POLICIES OR REQUIREMENTS CONCERNING THE RETURN OF ROYALTY INCOME. THE MONIES BSCS WOULD AND APPARENTLY DID RECEIVE FROM THE PUBLISHERS BY WAY OF SPECIFIC GRANTS WERE NOT VIEWED TO BE INCOME WHICH MUST BE RETURNED TO THE GOVERNMENT. THE OFFICE OF DR. FONTAINE WHICH ISSUED THE APPROVAL LETTERS FOR THE SECOND EDITION CONTRACTS WAS THOROUGHLY BRIEFED BEFORE BEING ASKED TO SEND OUT THE LETTERS TO BSCS AUTHORIZING THE LATTER TO PROCEED.

"THE INTERPRETATION ADVANCED BY THE GRANTS AND CONTRACTS OFFICE IN SUPPORT OF ITS CLAIM TO THE EFFECT THAT THE PUBLISHERS' GRANTS WERE DISGUISED ROYALTY INCOME, OR GENERALLY, INCOME REQUIRING RETURN TO THE FEDERAL GOVERNMENT, DOES NOT SURPRISE ME. IN REVIEWING THE SECOND EDITION CONTRACTS WE CERTAINLY CONSIDERED THE POSSIBILITY THAT THIS INTERPRETATION COULD BE MADE. WE REJECTED IT BECAUSE THE REASONS FOR MAKING THE GRANTS RELATED TO THE FUTURE RELATIONSHIP BETWEEN BSCS AND THE PUBLISHERS WHICH THE NSF HAD DELIBERATELY DECIDED WAS NONE OF ITS CONCERN IN VIEW OF THE DESIRE TO CEASE FUNDING FURTHER REVISIONS OF THE VERSION TEXTBOOKS. NSF WAS NOT OPPOSED TO BSCS RECEIVING INCOME (OTHER THAN ROYALTY INCOME) FROM PUBLISHERS OR ANY OTHER SOURCE. ON THE CONTRARY, I HAD SPECIFICALLY ADVISED BSCS TO THIS EFFECT IN WRITING ON FEBRUARY 19, 1968. THIS LETTER WAS WRITTEN IN AWARENESS OF AND REFERENCE TO GRANT GE 1321. THAT THE PUBLISHERS, ON THE OTHER HAND, WERE INTERESTED IN REVISIONS OF THE VERSION TEXTBOOKS BEYOND THE SECOND EDITION AND THEREFORE WOULD BE WILLING TO FINANCIALLY SUPPORT BSCS, SEEMED REASONABLE. IT IS COMMON PRACTICE FOR PUBLISHERS TO PROVIDE SUCH SUPPORT TO AN AUTHOR, THE AMOUNT OF SUCH SUPPORT BASED ON ANTICIPATED SALES."

DR. KELSON ALSO STATES:

"THE GRANTS AND CONTRACTS OFFICE CONTENDS THAT BSCS EITHER MISLED NSF OFFICIALS, WITHHELD, OR CAUSED OTHERS TO WITHHOLD RELEVANT AND IMPORTANT FACTS. THIS DID NOT HAPPEN. I DISAGREE WITH THE SUGGESTION THAT BSCS DID NOT DEAL OPENLY, HONESTLY AND FULLY WITH THE FOUNDATION. I PERSONALLY HAVE ALWAYS FELT THAT BSCS WENT THE EXTRA MILE, SO TO SPEAK, TO PUT BEFORE US ALL RELEVANT DATA. AT THE TIME I WAS CONVINCED OUR RELATIONSHIP WAS AN EXCELLENT ONE, ALTHOUGH THE ISSUES BETWEEN THE PARTIES WERE COMPLEX. THE DETAILED ACCUSATIONS IN THE REPORT ARE NOT BASED ON THE FACTS, THE DECISIONS AND THE KNOWLEDGE NSF OFFICIALS HAD WITH RESPECT TO THOSE MATTERS." THE STATEMENT BY THE THIRD FORMER NSF OFFICIAL-- DR. CHARLES A. WHITMER, FORMER HEAD OF THE STUDENT AND CURRICULUM IMPROVEMENT SECTION, PRE-COLLEGE EDUCATION AND SCIENCE-- ENDORSES THE OBSERVATIONS BY DRS. BINDER AND KELSON.

WE FIND NOTHING IN THE DOCUMENTARY RECORD PRESENTED TO US WHICH IS INCONSISTENT WITH THE STATEMENTS OF THESE FORMER NSF OFFICIALS. THE PUBLISHER'S GRANTS PROVISIONS WERE INCLUDED IN THE CONTRACTS APPROVED BY NSF AND WERE NOT EVEN QUESTIONED. THE ONLY ASPECT WHICH SEEMS PUZZLING HERE IS THAT THE AMOUNT OF THE PUBLISHER'S GRANTS WERE LEFT BLANK IN THE DRAFT AND BLOCKED OUT IN THE EXECUTED COPIES OF THE CONTRACTS FURNISHED TO NSF. SINCE THERE IS NO EXPLANATION FOR THIS IN THE RECORD, WE CAN ONLY ASSUME THAT THE AMOUNTS WERE OMITTED IN VIEW OF BSCS' UNDERSTANDING THAT NSF HAD NO INTEREST IN THEM. IT IS TOO SPECULATIVE TO CONCLUDE, WITHOUT FURTHER SUPPORT, THAT HAD NSF KNOWN THE ACTUAL AMOUNTS OF THE GRANTS, IT WOULD HAVE IMMEDIATELY PERCEIVED THE GRANTS AS A SUBTERFUGE AND DENIED APPROVAL OF THE CONTRACTS. MOREOVER, WE HAVE NO REASON TO BELIEVE THAT BSCS WOULD NOT HAVE FURNISHED NSF THE AMOUNTS, AND EXPLANATIONS CONCERNING THEIR DERIVATION, IF IT HAD BEEN REQUESTED TO DO SO. APPARENTLY NSF NEVER MADE SUCH A REQUEST.

THE NSF FOLLOW-UP REPORT JUSTIFIES THE FOUNDATION'S FAILURE TO SPECIFICALLY INQUIRE INTO THE NATURE OF THE PUBLISHER'S GRANTS BY POINTING OUT THAT IT HAD ALREADY CLEARLY ADVISED BSCS OF ITS INTERPRETATION OF THE GE-1321 INCOME CLAUSE, IN RESPONSE TO THE "PERSISTENT DETERMINATION" OF BSCS TO WORK OUT ARRANGEMENTS TYING THE PUBLISHER'S GRANTS TO SALES INCOME. THUS THE REPORT CONCLUDES:

" * * * IT WAS REASONABLE FOR THE FOUNDATION TO ASSUME BASED ON ITS UNDERSTANDING OF THE SITUATION THAT THE PUBLISHERS GRANTS WERE CONSISTENT WITH THE ADVICE FORMALLY RENDERED BSCS BY THE FOUNDATION. ACCORDINGLY, IT IS DIFFICULT TO INFER ACTUAL OR IMPLIED CONSENT BY NSF TO THE PUBLISHERS GRANT ARRANGEMENTS."

EVEN APART FROM THE STATEMENTS BY THE FORMER NSF OFFICIALS THAT THEY WERE IN FACT AWARE OF THE NATURE OF THE PUBLISHER'S GRANTS, THE RATIONALE ADVANCED IN THE FOLLOW-UP REPORT IS NOT PERSUASIVE. NSF'S STATED INTERPRETATIONS OF THE GE-1321 INCOME CLAUSE WERE AT BEST AMBIGUOUS AND, AS NOTED PREVIOUSLY, ACTUALLY SEEM TO SUPPORT BSCS' ACTIONS. IN ANY EVENT, IT SEEMS CLEAR THAT THE BACKGROUND OF THIS MATTER AS VIEWED FROM THE PERSPECTIVE OF THE FOLLOW-UP REPORT-- PARTICULARLY BSCS'"PERSISTENT DETERMINATION" TO NEGOTIATE AN ARRANGEMENT OBJECTIONABLE TO NSF-- WOULD HAVE COMPELLED THE FOUNDATION TO ASSUME THE WORST AND TO GIVE THE PUBLISHER'S GRANTS EXTRA SCRUTINY.

ON THE BASIS OF THE FOREGOING ANALYSIS, WE DO NOT BELIEVE THAT THE PUBLISHER'S GRANTS VIOLATE THE GE-1321 INCOME CLAUSE EITHER AS WRITTEN OR UNDER THE STATED INTERPRETATIONS OF THE CLAUSE PROVIDED BY NSF TO BSCS AT THE TIME; NOR DO THEY VIOLATE ANY OTHER LEGAL REQUIREMENT OF WHICH WE ARE AWARE. MOREOVER, IF IN FACT NSF'S APPROVAL WAS BASED ON INSUFFICIENT INFORMATION, THIS WAS NOT THE RESULT OF ANY MISREPRESENTATIONS, CONCEALMENT, OR LACK OF CANDOR ON THE PART OF BSCS. ACCORDINGLY, THE PUBLISHER'S GRANT ELEMENT OF NSF'S CLAIM MUST BE DISALLOWED IN FULL.

II. "PATTERNS AND PROCESSES"

THE SECOND ELEMENT IN NSF'S CLAIM INVOLVES PAYMENTS BY A PUBLISHER IN THE AMOUNT OF $36,100 FOR THE BSCS TEXT "BIOLOGICAL SCIENCE: PATTERNS AND PROCESSES," THE FIRST EDITION OF WHICH WAS SUPPORTED BY NSF. THE FOUNDATION'S SUBMISSION TO US SUMMARIZES THIS ELEMENT OF THE CLAIM AS FOLLOWS:

" * * * THIS TEXT WAS PUBLISHED IN 1966 AND ROYALTIES PAID BY THE PUBLISHER WERE REMITTED TO NSF THROUGH 1970. THE COMPLICATION IS THAT THE PUBLISHER CONTINUED TO MAKE PAYMENTS TO THE UNIVERSITY DURING THE 'FREE- LICENSING' PERIOD, I.E., WHEN THE UNIVERISTY, AS COPYRIGHT OWNER, HAD AGREED PURSUANT TO THE NSF-APPROVED PUBLICATION AGREEMENT TO LICENSE ANYONE WITHOUT CHARGE. THE UNIVERSITY HAD THEREFORE REGARDED THE PUBLISHERS' PAYMENTS SUBSEQUENT TO THE FREE-LICENSE DATE AS A 'GRANT.' HOWEVER, REGARDLESS OF THE PUBLISHERS' OBLIGATION TO CONTINUE TO MAKE SUCH PAYMENTS, THEY STILL WERE SUBJECT TO THE INCOME CLAUSE OF THE NSF GRANT BECAUSE THEY WERE BASED ON SALES OF THE WORK WHICH NSF SUPPORTED."

THE FIRST EDITION OF "PATTERNS AND PROCESSES" WAS SUPPORTED UNDER NSF GRANT GE-1321. THE SECOND EDITION WAS PREPARED WITHOUT NSF SUPPORT, AND THE SECOND EDITION PUBLISHING CONTRACT (WITH HOLT RINEHART) CONTAINED A PROVISION FOR GRANT PAYMENTS BY THE PUBLISHER TO BSCS. HOWEVER THE TIMING AND AMOUNT OF THE GRANT PAYMENTS WERE NEVER ESTABLISHED AND THUS THE GRANT PROVISION WAS NEVER IMPLEMENTED. WHAT APPARENTLY HAPPENED WAS THAT THE PUBLISHER CONTINUED TO MAKE FIRST EDITION ROYALTY PAYMENTS TO BSCS AFTER ITS OBLIGATION TO DO SO ENDED.

WHILE BSCS SEEMS TO HAVE RETAINED THESE PAYMENTS UNDER THE IMPRESSION THAT THEY REPRESENTED GRANT AMOUNTS, THEY SEEM TO HAVE BEEN IN REALITY CONTINUED FIRST EDITION ROYALTY PAYMENTS. THUS THE NSF FOLLOW-UP REPORT ON THE NSF AUDIT OBSERVES (REFERENCES TO EXHIBITS OMITTED):

" * * * BSCS RECORDS SHOW FIRST EDITION ROYALTY PAYMENTS TO HAVE BEEN CONSISTENTLY MADE BY THE PUBLISHER FROM 1966 THROUGH 1973. THE 'FREE- LICENSE' DATE IS NOT OF DISTINCTION IN THIS RESPECT IN THE BSCS RECORDS EXAMINED BY NSF AUDITORS. THESE RECORDS INDICATE ROYALTY PAYMENTS BY THE PUBLISHER ON THE FIRST EDITION OF 'PATTERNS AND PROCESSES' ON A SEMIANNUAL BASIS AS OF JUNE 30 AND DECEMBER 31. SUCH PAYMENTS COMMENCED AS OF DECEMBER 31, 1966 AND CONTINUED THROUGH DECEMBER 31, 1973. ACCORDING TO THE BSCS RECORDS, $235,788 WAS PAID BSCS IN 8 INSTALLMENTS THROUGH JUNE 30, 1970. THESE PAYMENTS WERE ALL REMITTED TO NSF. $36,100 WAS PAID BSCS SUBSEQUENT TO JUNE 30, 1970 IN 7 INSTALLMENTS. NONE OF THIS WAS REMITTED TO NSF. "FURTHERMORE, THE BSCS RECORDS INDICATE EACH SEMIANNUAL PAYMENT CORRESPONDED WITH A GIVEN NUMBER OF FIRST EDITION COPIES SOLD. TOTAL PAYMENTS OF $271,888 HAD BEEN MADE THROUGH DECEMBER 31, 1973 ON 580,596 COPIES SOLD.

"ADDITIONAL DOCUMENTATION FROM THE PUBLISHER APPEARS TO SUPPORT THE PROPOSITION THAT ALL PAYMENTS TO BSCS BY THE PUBLISHER WERE IN THE FORM OF ROYALTIES. IN A LETTER DATED FEBRUARY 15, 1974 TO MR. FRANK CARLSON, SENIOR NSF AUDIT MANAGER, THE PUBLISHER INDICATED ROYALTIES PAID BSCS THROUGH 1973. THE PAYMENTS WERE SHOWN ON AN ANNUAL BASIS. THROUGH 1970 AND IN 1972 AND 1973 THE PAYMENTS CORRESPOND WITH THE FIRST EDITION ROYALTIES SHOWN IN THE BSCS RECORDS. THERE IS NO INDICATION ANY OF THESE PAYMENTS WERE 'GRANTS.'"

IN CONTRAST TO THE "PUBLISHER'S GRANTS" DISCUSSED IN PART I, SUPRA, IT IS CLEAR THAT THE INSTANT PAYMENTS MUST BE TREATED AS FIRST EDITION ROYALTIES NOTWITHSTANDING POSSIBLE MISUNDERSTANDINGS BY THE PUBLISHER AND BSCS. FACT, THE ATTORNEY FOR BSCS IN EFFECT CONCEDES THE VALIDITY OF THIS ELEMENT OF THE FOUNDATION'S CLAIM:

"IT IS APPARENT THAT THE HISTORY OF BSCS/PUBLISHER TRANSACTIONS PERTINENT TO THIS CLAIM REFLECTS AN ENTIRELY DIFFERENT PICTURE FROM THE BSCS-VERSION PUBLISHERS TRANSACTIONS. IN THE LATTER CASE THE PUBLISHERS AND BSCS MADE A DELIBERATE EFFORT, WHICH WAS FULLY EXECUTED, TOWARD THE ESTABLISHMENT AND PAYMENT OF THE PUBLISHERS' GRANTS. AMOUNTS AND PAY-OUT SCHEDULES WERE METICULOUSLY NEGOTIATED AND REDUCED TO WRITING.

"SUCH CARE WAS NOT EXERCISED IN THE CASE OF THE SECOND EDITION CONTRACT WITH HOLT RINEHART. THE LACK OF DETAILS IN THIS REGARD GIVES THE NSF CLAIM GREATER CREDENCE THAN OTHERWISE MIGHT BE THE CASE. THIS CONSIDERATION HAS LED US TO CONCLUDE, AND WE HAVE SO ADVISED BSCS, THAT THE CLAIM BY NSF IN REGARD TO THIS ITEM CAN PROBABLY NOT BE AVOIDED."

EVEN THOUGH THE PUBLISHER MAY NOT HAVE BEEN REQUIRED OR OBLIGATED TO MAKE THE $36,100 IN ROYALTY PAYMENTS TO BSCS, AS BETWEEN NSF AND BSCS, NSF IS ENTITLED TO THE $36,100, SINCE IT APPEARS FROM THE RECORD THAT THESE FUNDS WERE PAID OVER TO BSCS AS ROYALTY PAYMENTS FROM THE PUBLISHER'S SALE OF NSF SUPPORTED FIRST EDITION TEXTS. UNDER THE GRANT AGREEMENT BSCS IS REQUIRED TO PAY OVER TO NSF ANY INCOME IT RECEIVES FROM THE PUBLISHER AS ROYALTY PAYMENTS FROM SUCH TEXTS. THE FACT THAT THE PUBLISHER MAY HAVE A CLAIM AGAINST NSF OR BSCS FOR THE $36,100 IN ROYALTY PAYMENTS DOES NOT REQUIRE THE CONCLUSION THAT BSCS IS ENTITLED TO RETAIN THE $36,100, AT LEAST ON THE BASIS OF THE PRESENT RECORD.

ACCORDINGLY, THE SECOND ELEMENT OF NSF'S CLAIM IS SUSTAINED AND BSCS SHOULD REMIT THE $36,100 TO NSF.

III. UNAUTHORIZED ADMINISTRATIVE EXPENSES

THE THIRD ELEMENT OF NSF'S CLAIM INVOLVES ALLEGED UNAUTHORIZED ADMINISTRATIVE EXPENSES WHICH BSCS CHARGED TO "HOUSEKEEPING" GRANTS. THE "HOUSEKEEPING" GRANTS TOOK THE FORM OF AMENDMENTS TO THE BASIC GRANT GE- 1321 WHEREBY THE FOUNDATION IN EFFECT ALLOWED BSCS TO RETAIN CERTAIN GRANT -SUPPORTED ROYALTY PAYMENTS IN ORDER TO FINANCE ITS ADMINISTRATIVE OPERATIONS. THE NSF SUBMISSION SUMMARIZES THIS ELEMENT OF THE CLAIM AS FOLLOWS:

" * * * UNDER AMENDMENTS TO GRANT GE 1321 THE GRANTEE WAS AUTHORIZED:

"' * * * IN MANAGING THE MATERIAL PRODUCED UNDER THIS GRANT * * * TO APPLY RECEIPTS DERIVED FROM THE PUBLICATION AND SALE OF SUCH MATERIALS TOWARD EACH TYPE OF ADMINISTRATIVE EXPENSE ITEMIZED IN THE ATTACHED BUDGET

"IN ADDITION, SEPARATE RECORDS WERE TO BE MAINTAINED BY THE UNIVERSITY OF EXPENDITURES CHARGEABLE TO THE ADMINISTRATIVE EXPENSE ACCOUNT. THE PROBLEM HERE WAS PRIMARILY THAT THE UNIVERSITY CHARGED THE ROYALTY ACCOUNT FOR GENERAL BSCS SUPPORT WHICH WAS NOT SPECIFICALLY PROVIDED FOR IN THE 'ATTACHED BUDGET' AND THEIR EXPENSE RECORDS COULD NOT ESTABLISH A DIRECT RELATIONSHIP TO THE SPECIFIC NSF GRANT. ALSO, CERTAIN CHARGES WERE DISALLOWED AS UNSUBSTANTIATED BY ANY RECORDS. ACCORDINGLY, AFTER NSF AUDITED BSCS ACCOUNTS, IT WAS CONCLUDED THAT ONLY $49,943 OUT OF A TOTAL OF $167,500 WERE AUTHORIZED EXPENDITURES. SINCE $643 HAS ALREADY BEEN REMITTED TO NSF, THE AMOUNT AT ISSUE IS $16,914."

AMENDMENT NO. 16 TO THE GRANT, DATED SEPTEMBER 16, 1969, AUTHORIZED BSCS TO USE $88,500 IN RECEIPTS FROM PUBLICATION OF GRANT-SUPPORTED MATERIALS TO FINANCE SPECIFIED ADMINISTRATIVE COST ITEMS PRESENTED IN AN ATTACHED BUDGET FOR THE PERIOD SEPTEMBER 1, 1969 TO AUGUST 31, 1970. THE EXPENSE CATEGORIES IN THE BUDGET CONSISTED PRIMARILY OF A PRO RATED PORTION OF CERTAIN BSCS EMPLOYEE SALARIES, TRAVEL COSTS, VARIOUS OFFICE SERVICES AND SUPPLIES, AND A PERCENTAGE OF THE DIRECT COSTS AS AN INDIRECT COST FACTOR. AMENDMENT NO. 17, DATED JUNE 9, 1970, AUTHORIZED $79,000 TO BE USED FOR GENERALLY THE SAME TYPES OF BUDGETED EXPENSES DURING THE PERIOD SEPTEMBER 1, 1970 TO AUGUST 31, 1971. THE GRANTEE WAS TO MAINTAIN SEPARATE RECORDS FOR EXPENDITURES CHARGEABLE TO THE "ADMINISTRATIVE EXPENSE ACCOUNT" AND SUBMIT REPORTS OF EXPENDITURES BASED ON THE LINE ITEM CATEGORIES SHOWN IN THE BUDGETS.

THE NSF AUDIT DISALLOWED THE EXPENDITURES HERE INVOLVED ON THE BASIS THAT THEY WERE OF A GENERAL NATURE NOT SPECIFICALLY ATTRIBUTABLE TO GRANT GE- 1321. THE NSF FOLLOW-UP REPORT OBSERVES IN THIS REGARD, AT PAGE 100:

"ACCORDING TO THE AUDIT REPORT, IT WAS BSCS ACCOUNTING POLICY TO DIRECTLY IDENTIFY WHENEVER POSSIBLE ALL EXPENDITURES TO PARTICULAR PROGRAMS OR PROJECTS. EXPENDITURES WHICH COULD NOT BE SO IDENTIFIED OR WHICH BENEFITTED ALL BSCS ACTIVITIES WERE ALLOCATED TO A CENTRAL EXPENSE ACCOUNT. FROM THE AUDIT REPORT, IT APPEARS THE ACTIVITIES INVOLVED IN 'MANAGING' THE MATERIALS PRODUCED UNDER GRANT GE-1321 WERE PERFORMED BY BSCS 'CENTRAL OFFICE' PERSONNEL. THE COSTS WERE ACCUMULATED IN THE BSCS CENTRAL EXPENSE ACCOUNT. HOWEVER, THIS ACCOUNT INCLUDED COSTS NOT ONLY APPLICABLE TO GE-1321 MATERIALS BUT ALSO GENERALLY APPLICABLE TO THE ENTIRE RANGE OF BSCS ACTIVITIES. BSCS MAINTAINED NO RECORDS INDICATING THE ACTUAL TIME AND EXPENSE INVOLVED IN MANAGING MATERIALS PRODUCED UNDER GE-1321. EXPENDITURES OF INCOME FUNDS AUTHORIZED UNDER AMENDMENTS 16 AND 17 WERE APPARENTLY ALLOCATED TO THESE CENTRAL OFFICE COSTS ON THE BASIS OF THE AVAILABILITY OF THESE FUNDS RATHER THAN THEIR IDENTIFICATION TO GE- 1321 ACTIVITIES. THE NSF AUDIT FINDINGS REFLECT THE RESULT OF DISTRIBUTING THESE COSTS TO ALL BSCS PROGRAMS AND PROJECTS ON THE BASIS OF THEIR TOTAL EXPENDITURES."

THE FOLLOW-UP REPORT POINTS OUT THAT DURING THE PERIOD IN QUESTION, BSCS "CENTRAL OFFICE" COSTS WERE INCURRED ON BEHALF OF 11 NSF-FUNDED PROJECTS AS WELL AS 14 ADDITIONAL PROJECTS FUNDED BY OTHER ORGANIZATIONS.

THE BASIC RESPONSE OF BSCS IS THAT IT DID NOT SPECIFICALLY IDENTIFY THOSE EXPENDITURES DIRECTLY ATTRIBUTABLE TO GRANT GE-1321 BECAUSE THE "HOUSEKEEPING" GRANTS WERE NOT LIMITED TO SERVICING OF MATERIALS SUPPORTED BY THIS GRANT. RATHER, BSCS CONTENDS THAT THE HOUSEKEEPING GRANTS WERE AVAILABLE FOR ITS GENERAL ADMINISTRATIVE SUPPORT.

A. SCOPE OF HOUSEKEEPING GRANTS.

IN VIEW OF THE CONFLICTING POSITIONS OF THE PARTIES ON THIS POINT, IT IS NECESSARY AT THE OUTSET TO ADDRESS THE BASIC NATURE AND SCOPE OF THE "HOUSEKEEPING" GRANTS; I.E., WERE THEY FOR GENERAL ADMINISTRATIVE SUPPORT OF BSCS OR WERE THEY LIMITED TO EXPENSES DIRECTLY ATTRIBUTABLE TO THE SERVICING OF GE-1321 MATERIALS FOR THE REASONS STATED HEREAFTER, WE AGREE WITH NSF'S INTERPRETATION THAT THE HOUSEKEEPING GRANTS WERE DESIGNED TO COVER ONLY THOSE EXPENSES ATTRIBUTABLE TO GE-1321.

FIRST,THE EXPRESS TERMS OF THE GRANT AMENDMENTS,QUOTED PREVIOUSLY, REFER TO "MANAGING THE MATERIALS PRODUCED UNDER THIS GRANT," I.E., THE BASIC GRANT GE-1321, AND AUTHORIZE THE USE OF "RECEIPTS DERIVED FROM THE PUBLICATION AND SALE OF SUCH MATERIALS" FOR THE SPECIFIED ADMINISTRATIVE EXPENSES. IT SEEMS CLEAR FROM THIS LANGUAGE THAT THE FUNDAMENTAL PURPOSE WAS TO USE THOSE GRANT-SUPPORTED RECEIPTS IN MANAGING THOSE GRANT-PRODUCED MATERIALS. THIS CONSTRUCTION IS FURTHER INDICATED BY THE FACT THAT THE HOUSEKEEPING ASSISTANCE TOOK THE FORM OF AMENDMENTS TO GRANT GE-1321. /7/

/7/ IT IS NOTABLE THAT BSCS HAD ORIGINALLY PROPOSED THAT THE HOUSEKEEPING ASSISTANCE TAKE THE FORM OF AN ENTIRELY NEW GRANT. SEE LETTER DATED JANUARY 3, 1969, FROM DR. MAYER TO DR. BINDER.

SECOND, WHILE THE RECORD BEFORE US CONTAINS SOME AMBIGUITIES, THE WEIGHT OF THE EVIDENCE SUPPORTS THE CONCLUSION THAT THE HOUSEKEEPING GRANT PROPOSAL WAS PRESENTED AND JUSTIFIED BY BSCS IN TERMS OF FINANCING COSTS RELATED TO GE-1321 MATERIALS AND WAS ADOPTED BY THE FOUNDATION ON THIS BASIS. THE NSF FOLLOW-UP REPORT POINTS OUT NUMEROUS REFERENCES IN THE BACKGROUND OF THE REQUEST AND APPROVAL FOR THE HOUSEKEEPING GRANTS-- INCLUDING MANY STATEMENTS BY BSCS OFFICIALS-- WHICH TIE SUCH GRANTS TO SERVICING GE-1321 MATERIALS. THE FOLLOWING REFERENCES ARE ILLUSTRATIVE.

DR. MAYER'S LETTER OF JANUARY 3, 1969, TO THE FOUNDATION'S DR. BINDER, WHICH FIRST PROPOSED A HOUSEKEEPING GRANT, STATED THE BELIEF THAT "THE SUM REQUESTED IS JUSTIFIED IN TERMS OF THE RESIDUAL WORK REMAINING ON GRANT GE -1321." A DRAFT PAPER PREPARED BY BSCS WHICH ACCOMPANIED DR. MAYER'S LETTER OBSERVED THAT DURING THE YEAR OR TWO FOLLOWING TERMINATION OF NSF GRANT GE-1321, "THERE WILL BE A SIZABLE RESIDUUM OF ACTIVITIES GENERATED BY THE PROJECTS UNDERTAKEN UNDER GRANT GE-1321." THE PAPER ALSO STATED:

" * * * THE BUDGET HERE PREPARED FOR THE PERIOD SEPTEMBER, 1969 THROUGH AUGUST, 1970 CONCERNS ITSELF ONLY WITH THOSE ACTIVITIES THAT REQUIRE CONTINUED SERVICING AFTER THE TERMINATION OF GE-1321."

AN APRIL 25, 1969, LETTER FROM DR. MAYER TO DR. BINDER SUBMITTED IN CONNECTION WITH THE HOUSEKEEPING GRANT PROPOSAL ENCLOSED A STATEMENT BY MR. KEITH BUMSTED, THE BSCS BUSINESS MANAGER, WHICH PRESENTED "ACTIVITIES EXPECTED TO BE GENERATED DURING THE FORTHCOMING YEAR IN RELATION TO OUR NSF SUPPORTED PROGRAMS." A JUNE 9, 1969, LETTER FROM MR. BUMSTED TO DR. BINDER PROVIDED "A SUMMARY OF A NUMBER OF ADMINISTRATIVE ACTIVITIES THAT ARE CARRIED OUT BY THE BSCS STAFF IN PURSUIT OF THE PROGRAM FUNDED BY NSF GE-1321," AND OBSERVED:

" * * * AS STATED IN THE PROPOSAL, IT IS NOT OUR INTENT TO FORMULATE A BUDGETARY REQUEST FOR A REORGANIZED BSCS,BUT MERELY TO CONTINUE TO PROVIDE THOSE ADMINISTRATIVE SERVICES CONSIDERED ESSENTIAL AND INCIDENT TO THE TERMINATION OF NSF GE-1321."

THE BACKGROUND CONCERNING THE 1970-1971 HOUSEKEEPING GRANT IS SIMILAR. FOR EXAMPLE, THE SECOND YEAR PROPOSAL, SUBMITTED TO THE FOUNDATION ON MARCH 11, 1970, BEGAN BY POINTING OUT THAT THE 1969-1970 HOUSEKEEPING GRANT "CONCERNED ITSELF ONLY WITH THOSE ACTIVITIES CONDUCTED UNDER GE- 1321." THE PROPOSAL WENT ON TO LIST "THOSE PROGRAMS GENERATED UNDER GE- 1321 WHICH STILL REQUIRE MANAGEMENT BY" BSCS.

THE ATTORNEY FOR BSCS RAISES SEVERAL OBJECTIONS TO THE FOREGOING ACCOUNT, AS DERIVED LARGELY FROM THE NSF FOLLOW-UP REPORT. FIRST, HE IN EFFECT ACCJSES THE REPORT OF SELECTIVE QUOTATION WITH RESPECT TO THE REFERENCES WHICH APPARENTLY TIE THE HOUSEKEEPING GRANTS TO GE-1321 SERVICES. HOWEVER, OUR REVIEW OF THE RECORD AS A WHOLE CONVINCES US THAT THESE REFERENCES ACCURATELY REFLECT THE OVERALL CONTEXT OF THE HOUSEKEEPING GRANTS. MORE SIGNIFICANTLY, THE BSCS ATTORNEY PRESENTS AN ALTERNATE THEORY OF THE BASIC RATIONALE FOR THE HOUSEKEEPING GRANTS. HE SUBMITS THAT HOUSEKEEPING ASSISTANCE WAS DESIGNED NOT MERELY TO FACILITATE GE-1321 ACTIVITIES AFTER TERMINATION OF THAT FOUNDATION GRANT, BUT HAD THE BROADER PURPOSE OF ASSURING CONTINUATION OF BSCS AS A VIABLE INSTITUTION. SUPPORT OF THIS THEORY, HE NOTES THAT THE AMOUNT OF HOUSEKEEPING FUNDING REQUESTED BY BSCS WAS BASED ON ITS OVERALL ANTICIPATED DEFICITS FOR THE PERIODS CONCERNED. THUS DR. MAYER'S LETTER OF JANUARY 26, 1969 TO DR. BINDER, WHICH FORMALLY TRANSMITTED THE INITIAL HOUSEKEEPING PROPOSAL, STATED IN PART:

" * * * 1969 AND 1970 ARE CRITICAL YEARS WHICH, IF BUDGETARY STRINGENCIES CAN BE SLIGHTLY ALLEVIATED DURING THIS TIME, WILL ALLOW THE BSCS TO CONTINUE AS AN INDEPENDENT CENTER ON THE CAMPUS OF THE UNIVERSITY OF COLORADO CONCERNED WITH CURRICULUM DEVELOPMENT.

"WITH OVER TEN MILLION DOLLARS IN FEDERAL FUNDS ALREADY INVESTED IN THE BIOLOGICAL SCIENCES CURRICULUM STUDY, THE NATIONAL SCIENCE FOUNDATION SHOULD HAVE MORE THAN CASUAL INTEREST IN THE PRESERVATION OF THE GOALS, AIMS AND ADMINISTRATIVE ORGANIZATION THAT HAVE MADE SUCH AN IMPACT ON BIOLOGY IN THE PAST DECADE. CERTAINLY A NEW GENERATION OF MATERIALS AND PHILOSOPHIES ARE ABOUT TO BE DEVELOPED. THE BSCS HAS PULLED WITH IT TEXTBOOK PATTERNS TO THE POINT WHERE NEW BOOKS MARKEDLY RESEMVLE, AT LEAST SUPERFICIALLY, THE BSCS PRODUCTS. IT IS NOW TIME FOR ANOTHER QUANTUM JUMP, WHICH MAY OR MAY NOT BE FINANCED BY FEDERAL FUNDS, BUT, IN ANY EVENT, WILL NOT BE AVAILABLE FOR SEVERAL MORE YEARS. WE ARE IN THE AWKWARD POSITION OF HAVING COMPLETED MATERIALS FROM WHICH WE GET NO INCOME AND NOT YET HAVING DEVELOPED THOSE WHICH WILL BE OF THE NEXT GENERATION.

"A VERY CAREFUL AND CONSERVATIVE ESTIMATE OF OUR REQUIREMENTS, BASED ON A CALENDAR YEAR, INDICATES DEFICITS IN THE LAST QUARTER OF 1969 OF $50,500.00; FOR THE CALENDAR YEAR 1970,$102,600.00 AND FOR THE CALENDAR YEAR 1971, $43,400.00. THE 1969-70 FIGURES COULD BE MET IF THE FOUNDATION WERE TO GRANT SUPPORT FOR THE BSCS CENTRAL OFFICE ADMINISTRATIVE FUNCTIONS IN TERMS OF THE HOUSEKEEPING GRANT PREVIOUSLY SUBMITTED FOR YOUR PERUSAL IN THE SUM OF $121,500.00. THIS WOULD THEN MEAN THAT THE BSCS COULD DIVEST ITSELF COMPLETELY OF FEDERAL SUPPORT AND BE AN INDEPENDENTLY OPERATING AGENT WITH AN ADDITIONAL GRANT OF $65,000 FOR THE PERIOD SEPTEMBER 1, 1970 THROUGH AUGUST 31, 1972. "THUS, FOR A COST OF LESS THAN 2 PERCENT OF THE NSF MONIES PREVIOUSLY GRANTED, THE BIOLOGICAL SCIENCES CURRICULUM STUDY CAN STAND ON ITS OWN ADMINISTRATIVE FEET AS A CENTER ON THE CAMPUS OF THE UNIVERSITY OF COLORADO AS LONG AS IT CAN PRODUCE CREATIVE, IMAGINATIVE MATERIALS AND MAKE A CONTRIBUTION TO BIOLOGICAL EDJCATION AND PARTICULARLY, IN THE FUTURE, INVOLVE INTERFACE AREAS BETWEEN BIOLOGY AND THE SOCIAL SCIENCES."

THE NSF FOLLOW-UP REPORT RECOGNIZES, AS DO WE,THAT THE BSCS ATTORNEY'S THEORY IS NOT WITHOUT SOME MERIT. IT IS TRUE THAT DR. MAYER'S JANUARY 26 LETTER, QUOTED ABOVE, IMPLIES THAT THE PURPOSE OF THE HOUSEKEEPING GRANTS WAS TO ASSIST BSCS IN BECOMING A FINANCIALLY INDEPENDENT INSTITUTION. ALSO, AS INDICATED IN PART I OF THIS OPINION, NSF CLEARLY HAD AN INTEREST IN THE SURVIVAL OF BSCS AS SUCH WHICH TRANSCENDED THE SPECIFIC FOUNDATION- SUPPORTED ACTIVITIES CONDUCTED IN THE PAST. HOWEVER, WE CANNOT ACCEPT THIS THEORY AS SUFFICIENT TO OVERCOME THE ACTUAL LANGUAGE OF THE GRANT AMENDMENTS AND THE GENERAL THRUST OF THE BACKGROUND INFORMATION TO THE EFFECT THAT FUNDING WAS TIED TO GE-1321 RELATED COSTS.

MOREOVER, THE LIMITED CONSTRUCTION OF THE HOUSEKEEPING GRANTS DOES NOT NEGATE THE THEORY THAT NSF WAS CONCERNED WITH BSCS VIABILITY AS AN INDEPENDENT INSTITUTION SINCE ANY ADDITIONAL FUNDING PROVIDED BY THE FOUNDATION WOULD CONTRIBUTE TOWARD THIS OBJECTIVE. NSF'S CONCERN FOR THE SURVIVAL OF BSCS WOULD NOT NECESSARILY COMPEL IT TO UNDERWRITE BSCS' FULL DEFICIT. IN FACT, THE TOTAL HOUSEKEEPING ASSISTANCE ACTUALLY GRANTED BY NSF-- $167,500-- WAS LESS THAN THE TOTAL ANTICIPATED DEFICIT-- $186,500-- FOR WHICH BSCS REQUESTED FUNDING. /8/

/8/ WE NOTE THAT THE BSCS ATTORNEY'S SUBMISSION OVERSTATES THE NEXUS BETWEEN THE AMOUNT OF THE TOTAL DEFICIT AND THE AMOUNT OF THE HOUSEKEEPING GRANTS THROUGH HIS APPARENTLY MISTAKEN IMPRESSION THAT THE TOTAL DEFICIT ANTICIPATED BY BSCS AT THE TIME OF THE PROPOSAL WAS $166,000 RATHER THAN $186,500.

IN VIEW OF THE FOREGOING, WE CONCLUDE THAT THE HOUSEKEEPING GRANTS WERE LIMITED TO EXPENDITURES ATTRIBUTABLE TO THE MANAGEMENT OF MATERIALS SUPPORTED BY NSF GRANT GE-1321. CONSEQUENTLY, EXPENDITURES NOT MEETING THIS CRITERION WERE PROPERLY DISALLOWED AND SHOULD BE REMITTED TO NSF. REMAINS TO CONSIDER THE EXTENT OF BSCS' LIABILITY IN THIS REGARD.

B. AMOUNT OF UNAUTHORIZED EXPENDITURES.

AS NOTED PREVIOUSLY, BSCS DID NOT MAINTAIN RECORDS WHICH TIED HOUSEKEEPING GRANT EXPENDITURES TO GE-1321 RELATED ACTIVITIES SINCE IT WAS OPERATING UNDER THE BELIEF THAT THE GRANTS WERE AVAILABLE FOR GENERAL ADMINISTRATIVE SJPPORT. WE DO NOT QUESTION BSCS' GOOD FAITH IN THIS REGARD. NEVERTHELESS, HAVING CONCLUDED THAT BSCS' UNDERSTANDING OF THE SCOPE OF THE GRANTS WAS NOT JUSTIFIED, WE CANNOT ACCEPT ITS FAILURE TO MAINTAIN APPROPRIATE RECORDS AS A BASIS TO PRECLUDE RESTITUTION.

DUE TO THE ABSENCE OF NECESSARY RECORDS, THE NSF AUDITORS APPARENTLY ARRIVED AT THEIR FIGURE FOR DISALLOWANCE BY SIMPLY PRORATING ALL BSCS "CENTRAL OFFICE" COSTS TO WHICH HOUSEKEEPING GRANT FUNDS WERE APPLIED ON THE BASIS OF TOTAL EXPENDITURES FOR ALL BSCS PROJECTS BEING CONDUCTED AT THE TIME. THE BSCS ATTORNEY OBJECTS TO THIS DISTRIBUTION FORMULA ON THE GROUND THAT DURING THE PERIODS IN QUESTION BSCS'"MAJOR COMMITMENT WAS TO GE-1321 ADMINISTRATION." WHILE THE AUDITORS' FORMULA WAS CONCEDEDLY ARBITRARY, IT DOES HAVE A RATIONAL BASIS IN THEORY. MOREOVER, SOME THEORETICAL APPROACH WAS NECESSITATED BY THE FAILURE OF BSCS TO MAINTAIN RECORDS WHICH COULD BE USED TO ESTABLISH AN ACTUAL DISTRIBUTION OF COSTS IN TERMS OF THE PROPER GRANT PURPOSES. THEREFORE, WE CONCLUDE THAT THE FIGURE FOR THE CLAIM ASSERTED BY NSF-- $116,914 (AFTER SUBTRACTION OF AN AMOUNT ALREADY PAID) IS PRESUMPTIVELY VALID UNLESS THE PARTIES CAN AGREE ON A MORE APPROPRIATE COST DISTRIBUTION METHOD. CF., B-186166, AUGUST 26, 1976, AT 5-6.

WE NOTE IN THIS REGARD THAT THE NSF FOLLOW-UP REPORT INDICATES A WILLINGNESS TO ATTEMPT A MORE FLEXIBLE APPROACH, RECOGNIZING THAT THE AUDITORS' DISTRIBUTION METHOD MAY BE DEFICIENT:

" * * * BOTH PARTIES MAY HAVE TAKEN AN EXTREME POSITION ON THIS MATTER. NSF MIGHT CONCEDE THAT A BROADER VIEW SHOULD PERHAPS BE TAKEN OF BSCS ADMINISTRATIVE EFFORTS PROPERLY RELATING TO GRANT GE-1321. AT THE SAME TIME, BSCS SHOULD ACKNOWLEDGE THAT AMENDMENTS 16 AND 17 DID NOT PROVIDE GENERAL 'HOUSEKEEPING' SUPPORT. THE PARTIES MIGHT THEN BE IN A POSITION TO ARRIVE AT A MUTUALLY ACCEPTABLE DEFINITION OF ACTIVITIES PROPERLY SUPPORTED UNDER AMENDMENT 16 AND 17.

"FURTHER, THE FORMULA USED BY NSF AUDITORS TO ALLOCATE EXPENDITURES TO NSF GRANT ACTIVITIES APPEARS OPEN TO QUESTION. BSCS SHOULD BE GIVEN AN OPPORTUNITY TO DEVELOP AN ALLOCATION OF COSTS MORE REFLECTIVE OF THOSE ACTUALLY INCURRED IN MANAGING GE-1321 MATERIALS.

"WHILE THERE APPEARS TO CLEARLY BE SOME LIABILITY ON THE PART OF BSCS FOR UNAUTHORIZED ADMINISTRATIVE EXPENDITURES, THE AMOUNT AT ISSUE MIGHT PERHAPS BE SCALED DOWN TO A LEVEL ACCEPTABLE TO BOTH PARTIES."

WE WOULD ENCOURAGE THE PARTIES TO ATTEMPT A MORE REALISTIC COST DISTRIBUTION. ACCORDINGLY, WE WILL SUSTAIN THE "HOUSEKEEPING GRANTS" ELEMENT OF NSF'S CLAIM IN THE AMOUNT STATED, SUBJECT TO ANY MUTUALLY AGREEABLE ADJUSTMENT OF THE AMOUNT NOW CLAIMED BASED ON REDETERMINATION OF ALLOWABLE COSTS.

IV. SINGLE TOPIC FILMS

THE FOURTH ELEMENT OF NSF'S CLAIM INVOLVES $234,769 OF INCOME RETAINED BY THE UNIVERSITY OF COLORADO FROM SALES OF 40 "SINGLE TOPIC TRAINING FILMS." THESE FILMS, AND THEIR ACCOMPANYING TEACHER'S GUIDES, WERE APPARENTLY DESIGNED FOR CLASSROOM USE AS AN ADJUNCT TO THE BSCS TEXT MATERIALS. THE FILMS WERE DEVELOPED WITH NSF SUPPORT UNDER GRANT GE- 1321. HOWEVER, THE UNIVERSITY, THROUGH BSCS, ITSELF PROCESSED THE FILMS FOR DISTRIBUTION AND SOLD THEM TO SEVERAL PUBLISHING COMPANIES FOR RESALE TO SCHOOLS.

THE NSF SUBMISSION STATES WITH RESPECT TO THE $234,769 CLAIM:

" * * * THIS AMOUNT REPRESENTS THE DIFFERENCE BETWEEN THE GROSS RECEIPTS OF $648,581 AND THE AUTHORIZED EXPENSES OF $413,812. THE CONTROVERSY ARISES BECAUSE NSF INDICATED THAT IT WOULD ACCEPT $1.00 ROYALTY FROM THE UNIVERSITY FOR EACH FILM SOLD AS A REASONABLE APPROXIMATION OF ACTUAL NET INCOME. THE UNIVERSITY'S INTERPRETATION OF THIS WAS THAT NSF'S FINANCIAL INTEREST IN THE FILMS WAS LIMITED TO $1.000 PER FILM AND THAT INCOME IN EXCESS OF THAT, I.E., PROFIT, WOULD BELONG TO THE UNIVERSITY. SUCH A VIEW OVERLOOKS THE FACT THAT THE CLAUSE IN THE GRANT APPLIES GENERALLY TO INCOME AND IS NOT LIMITED TO ROYALTIES. IT ALSO IGNORES THE FACT THAT PROFITS FROM MATERIALS DEVELOPED UNDER NSF GRANT GE-1321 PROPERLY BELONGED TO THE GOVERNMENT, NOT THE GRANTEE. THUS, NSF COULD NOT AND DID NOT SELL ITS RIGHTS IN THESE FILMS FOR A $1.00 ROYALTY. THE LATTER MUST BE REGARDED AS A PROVISIONAL MEASURE OF THE PROFITS ON THE SINGLE TOPIC FILMS. IF THE $1.00 WERE ACCEPTED AS THE EXTENT OF THE INCOME OBLIGATION TO THE FOUNDATION, THE RESULT WOULD BE A PROFIT TO THE UNIVERSITY OF NEARLY $165,000."

THE BSCS ATTORNEY DISPUTES NSF'S ASSERTION THAT THE FILM DISTRIBUTION RESULTED IN A $165,000 "PROFIT." HE STATES THAT THE PROFIT IS CLOSER TO $100,000 SINCE THE NSF CALCULATIONS FAIL TO INCLUDE ALL COSTS INCURRED. HOWEVER, HIS BASIC POSITION IS THAT NSF APPROVED THE FILM DISTRIBUTION CONTRACTS AND SPECIFICALLY AGREED TO LIMIT ITS RECOVERY FOR THE SINGLE TOPIC FILMS TO THE $1 ROYALTY PAYMENT PER FILM,IRRESPECTIVE OF THE ACTUAL PROFITS IF ANY.

A. FACTUAL BACKGROUND

THE FACTS CONCERNING THIS ELEMENT OF THE CLAIM, AS PRESENTED IN THE SUBMISSIONS AND DOCUMENTARY RECORD BEFORE US, MAY BE SUMMARIZED AS FOLLOWS:

IN MID 1966 A TENTATIVE ARRANGEMENT FOR MARKETING OF THE SINGLE TOPIC FILMS WAS DISCUSSED AMONG THE UNIVERSITY AND THE THREE BSCS "VERSION" PUBLISHERS (PLUS ONE ADDITIONAL PUBLISHING COMPANY). UNDER THE ARRANGEMENT AS FIRST PROPOSED, THE PUBLISHERS WOULD PRODUCE THE FILMS AND DISTRIBUTE THEM FOR SALE, PAYING A ROYALTY OF $1 PER FILM FOR REMITTAL TO NSF. BSCS WOULD PROVIDE A SINGLE SOURCE FOR AMALGAMATING FILM ORDERS FROM THE INDIVIDUAL PUBLISHERS, TO ACHIEVE THE LOWEST POSSIBLE COST PER UNIT FROM THE FILM LABORATORY, AND WOULD MAINTAIN QUALITY CONTROL. IN RETURN FOR THESE SERVICES, BSCS WOULD IMPOSE A SURCHARGE OF $2 PER FILM (TO BE RETAINED BY BSCS) WHICH THE PUBLISHERS WOULD PAY IN ADDITION TO THE $1 ROYALTY. THIS PROPOSED ARRANGEMENT WAS SUBMITTED TO, AND FORMALLY APPROVED BY, NSF.

HOWEVER, THE PUBLISHERS SUBSEQUENTLY DECIDED THAT THEY SHOULD ACT SOLELY AS DISTRIBUTORS, THEREBY LEAVING PRODUCTION OF THE FILM PRINTS AND TEACHERS GUIDES TO BSCS. UNDER THE REVISED PROPOSAL, BSCS WOULD PRODUCE THE MATERIALS, SET A LIST PRICE, AND SELL THE FINAL MATERIALS TO THE PUBLISHERS AT A STANDARD DISCOUNT. NSF WAS NOTIFIED OF THE REVISED PROPOSAL, AND IT WAS DISCUSSED INTERNALLY AT THE FOUNDATION WHILE NEGOTIATIONS PROCEEDED BETWEEN BSCS AND THE PUBLISHERS. IN JUNE OF 1967 DRAFT DISTRIBUTION CONTRACTS IMPLEMENTING THE REVISED PROPOSAL WERE SUBMITTED TO NSF. THE DRAFT CONTRACTS SPECIFIED A LIST PRICE OF $18 FOR EACH FILM, WHICH WAS NOT BINDING ON THE PUBLISHERS FOR PURPOSES OF THEIR SALES. THE PRICES PER FILM TO THE DISTRIBUTOR-PUBLISHERS RANGED FROM $7.60 TO $11.50.

ON JULY 24, 1967, THE FOUNDATION ADVISED THAT IT HAD NO OBJECTION TO THE CONTRACTS, SUBJECT TO CERTAIN CORRECTIONS NOT RELEVANT HERE. IN AUGUST 1967 NEW CONTRACTS INCORPORATING THE CORRECTIONS SUGGESTED BY NSF WERE EXECUTED BY THE PARTIES. THERE WAS NO DISCUSSION OF THE ROYALTY PROVISION DURING NSF'S INTERNAL DELIBERATIONS OR IN ITS ADVICE TO THE UNIVERSITY AT THIS TIME.

QUESTIONS RELATING TO THE TREATMENT OF INCOME UNDER THE SINGLE TOPIC FILM DISTRIBUTION ARRANGEMENTS WERE FIRST RAISED IN A JANUARY 1968 MEETING AMONG UNIVERSITY, BSCS, AND NSF OFFICIALS WHICH CONCERNED VARIOUS NSF-BSCS MATTERS. THE NSF REPRESENTATIVES AT THE MEETING WERE DR. KELSON, MR. CHARLES BROWN, DEPUTY GENERAL COUNSEL, AND MR. FRANK CARLSON, OF THE NSF AUDIT OFFICE. ACCORDING TO A SUMMARY OF THE MEETING PREPARED BY BSCS, THE DISCUSSION OF THE SINGLE TOPIC FILMS DEVELOPED AS FOLLOWS:

" * * * IT WAS ESTABLISHED THAT THE UNIVERSITY OF COLORADO WAS ACTING AS THE PUBLISHER OF THESE MATERIALS, AND THEREFORE,WOULD BE RESPONSIBLE FOR THE AFFAIRS OF THE PROJECT RELATING TO PRODUCTION, QUALITY CONTROL, DISTRIBUTION, AND SALES TO ULTIMATE CONSUMERS. A ROYALTY RATE OF $1.00 PER PRINT HAS BEEN ESTABLISHED FOR THE FILMS. THE ROYALTIES WILL BE EARNED AT THE TIME THE UNIVERSITY SELLS THE FILMS TO THEIR RESPECTIVE DISTRIBUTORS, SUCH ROYALTIES TO BE SET ASIDE IN A SPECIAL ACCOUNT AND PERIODICALLY REMITTED. IN REVIEWING THE ARRANGEMENTS WHICH HAD BEEN MADE FOR THE PROJECT BY BSCS ACTING THROUGH THE UNIVERSITY, KELSON WAS AT FIRST INCLINED TO THINK OF INCOME ACCRUING TO THE UNIVERSITY AS INCOME PROPERLY RETURNABLE TO THE FOUNDATION, MUCH THE SAME AS ROYALTY INCOME RECEIVED FROM OTHER COMMERCIAL PUBLISHERS ON NSF SUPPORTED BSCS MATERIALS. MR. CAROLSON (SIC) STATED THE FOUNDATION WOULD BE INTERESTED IN SEEING A PROSPECTIVE UNIVERSITY BUDGET FOR THE OPERATION OF THE PROGRAM SO THAT IT COULD SATISFY ITSELF THAT VIRTUALLY ALL INCOME RECEIVED BY THE UNIVERSITY WOULD BE EXPENDED FOR ADMINISTRATIVE SUPPORT OF THE PROJECT AND THAT THE UNIVERSITY WOULD NOT, IN FACT, BE MAKING A 'PROFIT' ON THE MATERIALS. WAS THEN POINTED OUT THAT IF THE FOUNDATION ASSUMED THIS POSITION, IT WOULD BE TREATING THE UNIVERSITY, AS PUBLISHER OF THE MATERIALS, DIFFERENT FROM EVERY OTHER PUBLISHER OF BSCS MATERIALS. SUCH ACTION, IF EXTENDED TO OTHER PUBLISHERS WOULD RESULT IN SEIZURE OF THEIR OPERATING PROFITS FROM MATERIALS DEVELOPED WITH GOVERNMENT SUPPORT WHICH THEY MARKET. BOTH DRS. WILSON AND MANNING STATED THAT THE UNIVERSITY ENTERED INTO THIS PROJECT WITH THE IDEA THAT IT WAS ENTREPRENEURIAL IN NATURE. THEY QUERIED KELSON ON THE POSITION OF THE NSF IF THE UNIVERSITY'S RECEIPTS FROM THE PROJECT AMOUNTS TO LESS THAN EXPENSES. KELSON STATED THAT NSF WOULD NOT BE IN A POSITION TO INDEMNIFY THE UNIVERSITY IN THIS PROJECT. MANNING REPLIED THAT AS LONG AS THIS POSITION WAS HELD BY THE FOUNDATION, IT DID NOT SEEM FAIR THAT THE UNIVERSITY SHOULD BE RESPONSIBLE TO THE FOUNDATION FOR ANY EXCESS OF REVENUE OVER EXPENSES WHICH MAY RESULT. THE UNIVERSITY ENTERED THE PROJECT FULLY REALIZING THAT THE SALES OF THE SINGLE TOPIC FILMS ARE EXTREMELY DIFFICULT TO FORECAST WITH ANY DEGREE OF ACCURACY AND THAT THE UNIVERSITY WAS ASSUMING THE RISKS INVOLVED WITH FAITH IN THE ACCEPTABILITY OF THE MATERIALS TO THE EDUCATIONAL COMMUNITY AND HOPING FOR AN ESSENTIALLY BREAK EVEN OPERATION WHILE, AT THE SAME TIME, BEING PREPARED TO ENSURE THE CONTINUED AVAILABILITY OF THE MATERIALS. UNLESS THE FOUNDATION WAS PREPARED TO ASSUME THE RISKS INVOLVED AND INDEMNIFY THE UNIVERSITY WITH RESPECT TO EXPENSES, THE UNIVERSITY WOULD LIKE TO RETAIN CUSTODY AND CONTROL OF ALL FUNDS GENERATED BY THE PROJECT IN PARTIAL COMPENSATION FOR THE RISKS INVOLVED.

"KELSON PONDERED THESE STATEMENTS MOMENTARILY AND REPLIED THAT THE UNIVERSITY HAD A VALID POSITION AND THAT AS FAR AS HE WAS CONCERNED,THE UNIVERSITY COULD CONTINUE IN THE PRESENT MANNER WITH THE PROJECT. THE CONTRACTS WHICH HAVE BEEN ESTABLISHED BETWEEN THE UNIVERSITY AND THE PUBLISHERS WILL NOT BE ALTERED. HE WOULD CARRY HIS RECOMMENDATIONS TO THAT EFFECT BACK TO WASHINGTON TO SEEK SUPPORT FROM HIS COLLEAGUES IN MAKING THIS DECISION OFFICIAL. CARLSON STATES THAT THE NSF HAD PROBABLY MADE A MISTAKE IN ALLOWING THE UNIVERSITY TO PROCEED IN THIS MANNER, IN ESSENCE TO ESTABLISH AN EXCLUSIVE PUBLISHING CONTRACT AND RIGHTS WITH ITSELF TO MATERIALS DEVELOPED WITH PUBLIC FUNDS NOT SUBJECT TO COMPETING BIDS FROM OTHER INTERESTED PARTIES. FOR THIS REASON, HE REQUESTED A COPY OF THE UNIVERSITY'S PROSPECTIVE OPERATING BUDGET FOR THE PROJECT IN ORDER THAT THE NSF MIGHT HAVE THE INFORMATION IN THEIR FILES SHOULD THE GENERAL ACCOUNTING OFFICE RAISE QUESTIONS ON THE MATTER." APPARENTLY NSF ACCEPTS THE BASIC ACCURACY OF THIS SUMMARY, WITH THE QUALIFICATION-- REFLECTED IN THE NOTES ON THE MEETING BY DR. KELSON AND MR. CARLSON-- THAT BSCS WAS TO FURNISH NSF A FINANCIAL PROJECTION WHICH WOULD SUSTAIN THE PROBABILITY OF A BREAK-EVEN RESULT.

IMMEDIATELY AFTER THE JANUARY 1968 MEETING,THE RESIDENT COUNSEL OF THE UNIVERSITY AND MR. BROWN OF NSF JOINTLY DRAFTED A LETTER TO AMEND THE BASIC NSF GRANT GE-1321. WHILE THIS DRAFT WAS APPARENTLY INTENDED TO COVER SEVERAL MATTERS DISCUSSED AT THE JANUARY MEETING, IT INCLUDED THE FOLLOWING STATEMENTS WITH RESPECT TO SINGLE TOPIC FILM SALES:

"WITH REFERENCE TO NATIONAL SCIENCE FOUNDATION GRANT GE-1321 FOR THE SUPPORT OF THE BIOLOGICAL SCIENCES CURRICULUM STUDY AS MORE PARTICULARLY OUTLINED IN OJR LETTER OF JANUARY 11, 1963, TO DR. QUIG NEWTON, FORMER PRESIDENT OF THE UNIVERSITY OF COLORADO,AND AMENDMENTS THERETO, A QUESTION HAS BEEN RAISED AS TO THE MEANING OR INTERPRETATION OF THE FOURTH PARAGRAPH ON PAGE 3 RELATING TO INCOME DERIVED BY THE UNIVERSITY FROM RENTS OR ROYALTIES OR FROM SALE OF WORKS RELATED TO THE BSCS ACTIVITIES.

"IT WAS THE INTENT OF THE CITED PROVISION TO REQUIRE THAT INCOME DERIVED FROM OR MEASURED BY THE SALE OF MATERIALS PRODUCED UNDER THE GRANT, AS AMENDED, PRIOR TO MARCH 31, 1968, EXCEPT CERTAIN FILMS LISTED IN THE ATTACHED SCHEDULE 'A' (THE SINGLE TOPIC FILMS), WOULD BE SUBJECT TO THE DISPOSITION OF THE NATIONAL SCIENCE FOUNDATION, AND SUCH WORKS BROUGHT TO USEABLE OR SALEABLE FORM THEREAFTER AS WERE CHARGED DIRECTLY TO THIS PARTICULAR GRANT. IT IS UNDERSTOOD, HOWEVER, THAT THIS STATEMENT IN NO WAY AFFECTS THE TERMS OF ANY OTHER GRANT BY THE NATIONAL SCIENCE FOUNDATION TO THE UNIVERSITY OF COLORADO.

"WITH RESPECT TO THOSE FILMS LISTED IN SCHEDULE 'A' ATTACHED HERETO, IN VIEW OF THE IMPOSSIBILITY OF PREDICTING THE DIFFERENCE, IF ANY, BETWEEN COST OF PRODUCTION AND REVENUE FROM SALES, PAYMENT BY THE UNIVERSITY TO THE FOUNDATION OF ONE DOLLAR (1.00) FOR EACH COPY SOLD WILL BE DEEMED TO SATISFY, IN FULL, ALL OBLIGATION OF THE UNIVERSITY TO THE FOUNDATION AND THE FOUNDATION SHALL NOT BE REQUIRED TO REIMBURSE THE UNIVERSITY FOR ANY LOSS OR DEFICIT IN CONNECTION WITH THE SALE OF THESE FILMS."

THE DRAFT LETTER WENT THROUGH SEVERAL REVISIONS. THE ONLY POINT OF INTEREST HERE IS THAT NSF OFFICIALS SUGGESTED INCLUSION OF A PROVISO STATING THAT THE SALES PRICE OF ANY OF THE FILMS COULD NOT BE INCREASED WITHOUT NSF APPROVAL. BSCS OBJECTED TO THIS PROVISO ON THE BASIS THAT SINCE NSF WAS NOT REQUIRED TO REIMBURSE THE UNIVERSITY FOR SALES DEFICITS, IT SHOULD NOT BE ABLE TO CONTROL SALES PRICES. THE PROVISO WAS OMITTED FROM SUBSEQUENT VERSIONS OF THE DRAFT LETTER, WHICH ADHERED ESSENTIALLY TO THE VERSION QUOTED ABOVE FOR PURPOSES HERE RELEVANT.

WHILE THERE APPEARS TO HAVE BEEN NO DISAGREEMENT OVER THE PROVISIONS CONCERNING SINGLE TOPIC FILMS (ONCE THE ISSUE OF NSF CONTROL OVER SALES PRICES WAS RESOLVED), THE DRAFT AMENDMENT LETTER WAS NEVER ISSUED. NEITHER PARTY INDICATES WHY THE AMENDMENT WAS NEVER FORMALIZED AND THE RECORD PROVIDES NO EXPLANATION. THE ONLY POSSIBLE HINT IN THE RECORD IS THE OBSERVATION IN THE NSF FOLLOW-UP REPORT, AT PAGE 122, THAT BSCS CONSIDERED THE DRAFT "UNSATISFACTORY IN NOT HAVING DEALT WITH OTHER ISSUES NOT RELATED TO THE SINGLE TOPIC FILMS." IN ANY EVENT, VARIOUS DRAFTS OF AMENDMENT LETTERS WERE EXCHANGED FROM JANUARY UNTIL EARLY MAY OF 1968, AND THEN THE MATTER WAS APPARENTLY DROPPED.

THE NSF FOLLOW-UP REPORT ALSO DESCRIBES SUBSEQUENT CORRESPONDENCE BETWEEN BSCS AND THE FOUNDATION ON RELATED MATTERS. THIS CORRESPONDENCE INDICATES BSCS' CONSISTENT UNDERSTANDING THAT THE $1 PER FILM ROYALTY FULLY SATISFIED ITS OBLIGATION TO NSF FROM THE SINGLE TOPIC FILM SALES, AND FAILS TO DISCLOSE ANY OBJECTION TO THIS UNDERSTANDING BY THE FOUNDATION. IN A LETTER TO NSF'S DR. BINDER DATED JULY 5, 1968, BSCS' DR. MAYER SUGGESTED THAT THE SALE OF CERTAIN BSCS BULLETINS COULD BE HANDLED:

" * * * MUCH IN THE SAME MANNER AS (SINGLE TOPIC) FILM DISTRIBUTION IS CURRENTLY AUTHORIZED WHEREBY THE SALE INCOME IS SUFFICIENT FOR HANDLING EXPENSES AND LOSSES (IF ANY) OR PROFITS (UNLIKELY) ARE ABSORBED BY THE UNIVERSITY."

THE RECORD CONTAINS NO RESPONSE BY NSF.

IN A LETTER TO DR. BINDER DATED MARCH 14, 1969, DR. MAYER REQUESTED THAT NSF USE THE SINGLE TOPIC FILM DISTRIBUTION ARRANGEMENT AS A MODEL FOR THE SALE OF NSF-SUPPORTED TEACHER PREPARATION FILMS. DR. MAYER'S LETTER STATED IN PART:

" * * * YOU WILL RECALL THAT OUR ARRANGEMENT IS SUCH AS TO ABSOLVE THE NATIONAL SCIENCE FOUNDATION FROM THE ABSORPTION OF ANY LOSSES INHERENT IN SUCH FILM SALES * * * . IN THE SINGLE TOPIC INQUIRY FILM PROJECT THE FOUNDATION'S INTERESTS HAVE BEEN SATISFIED BY A SET FEE PER FILM SOLD. * * IF * * * THE FOUNDATION WOULD BE SATISFIED WITH A SET FEE OF LET US SAY $10.00 PER FILM SOLD IN LIEU OF ROYALTIES, THIS MIGHT BE AN EASY AND EXPEDITIOUS WAY TO HANDLE THIS MATTER. * * * "

A MEMORANDUM BY THE NSF OFFICE OF GENERAL COUNSEL ADVISED AS FOLLOWS CONCERNING THIS PROPOSAL:

" * * * THE $10 PER FILM FEE IN LIEU OF ROYALTY MENTIONED IN DR. MAYER'S LETTER OF MARCH 14, 1969 WOULD BE PROPER PROVIDED IT IS SHOWN TO BE BASED ON THE ESTIMATED COST OF MANUFACTURE AND DISTRIBUTION AND CAN BE JUSTIFIED AS REASONABLE ON THIS BASIS."

WHILE THE RECORD DOES NOT REVEAL NSF'S FINAL RESPONSE TO THIS PROPOSAL, THE FOLLOW-UP REPORT OBSERVES, AT PAGE 124, THAT "THE CONCEPT OF A FIXED FEE IN LIEU OF A PERCENTAGE ROYALTY PAYMENT DOES NOT SEEM TO HAVE POSED A PARTICULAR PROBLEM FOR NSF. RATHER,THE CONCERN WAS WHETHER THE FEE OR PERCENTAGE ROYALTY WAS REASONABLE."

THE NSF FOLLOW-UP REPORT, AT PAGES 124-126, DESCRIBES TWO ADDITIONAL ARRANGEMENTS FOR DISTRIBUTION OF OTHER SINGLE TOPIC FILM ADAPTATIONS IN WHICH BSCS PROPOSED, AND NSF ACCEPTED, FIXED FEE PAYMENTS AS THE SOLE RETURN TO THE FOUNDATION.

B. ANALYSIS AND CONCLUSIONS

AT THE OUTSET, WE NOTE SEVERAL POINTS WHICH ARE UNCONTESTED. CLEARLY, ANY INCOME OR PROFIT FROM SALES OF THE NSF-SUPPORTED SINGLE TOPIC FILMS FALLS WITHIN THE TERMS OF THE GE-1321 INCOME CLAUSE AS WRITTEN. AS NSF POINTS OUT, THE INCOME CLAUSE IS NOT RESTRICTED TO ROYALTIES AS SUCH, BUT INCLUDES:

"INCOME DERIVED BY THE UNIVERSITY OF COLORADO FROM RENTS OR ROYALTIES OR FROM THE SALE OF BOOKS, FILMS, OR OTHER PROPERTY RIGHTS RELATED TO THE BIOLOGICAL SCIENCES CURRICULUM STUDY ACTIVITIES * * * ."

MOREOVER, THE DRAFT LETTER WHICH WOULD HAVE AMENDED THE INCOME CLAUSE WITH RESPECT TO SINGLE TOPIC FILM SALES PROCEEDS WAS NEVER FORMALIZED.

THE BSCS ATTORNEY DOES NOT DISPUTE EITHER OF THESE POINTS. RATHER, HE CONTENDS THAT THE ACTIONS OF THE PARTIES AMOUNT TO AN AGREEMENT TO LIMIT NSF'S RECOVERY UNDER THE INCOME CLAUSE TO THE $1 PER FILM ROYALTY. NSF NOT ONLY ASSERTS THAT NO LEGALLY BINDING WAIVER OR MODIFICATION OF THE INCOME CLAUSE RESULTED, BUT ALSO CONTENDS THAT ITS ACTIONS WERE NEVER INTENDED TO HAVE THIS EFFECT. THUS THE CONTENTIONS OF THE PARTIES PRESENT THE FOLLOWING SPECIFIC ISSUES FOR RESOLUTION:

1. WAS THERE IN FACT AN UNDERSTANDING BETWEEN THE PARTIES THAT NSF'S RECOVERY WOULD BE UNCONDITIONALLY LIMITED TO THE $1 PER FILM ROYALTY, IRRESPECTIVE OF ANY PROFIT OR LOSS WHICH MIGHT ULTIMATELY RESULT?

2. IF THERE WAS SUCH AN UNDERSTANDING, CAN IT BE GIVEN EFFECT AS A MATTER OF LAW?

FOR THE REASONS SET FORTH HEREAFTER, WE CONCLUDE THAT BOTH ISSUES MUST BE RESOLVED IN THE AFFIRMATIVE.

IN OUR VIEW, THE RECORD CLEARLY SUPPORTS THE UNIVERSITY/BSCS RATHER THAN NSF ON THE FACTS. BOTH BSCS AND NSF SEEM TO PLACE GREAT WEIGHT ON THE LANGUAGE OF THE DRAFT AMENDMENTS TO THE GE-1321 INCOME CLAUSE AS REFLECTING THE UNDERSTANDING OF THE PARTIES. AS IN THE CASE OF THE VARIOUS STATED INTERPRETATIONS OF THE INCOME CLAUSE DISCUSSED IN PART I, SUPRA, WITH REFERENCE TO THE PUBLISHER'S GRANTS, THE QUESTION HERE IS WHAT DOES THE LANGUAGE OF THE INSTANT DRAFT AMENDMENTS REALLY MEAN?

THE NSF FOLLOW-UP REPORT, AT PAGE 122, ASSERTS WITH RESPECT TO THE DRAFT AMENDMENTS TO GRANT GE-1321:

"IT SHOULD BE NOTED THAT NEITHER OF MR. BROWN'S DRAFT AMENDMENTS SPECIFICALLY OR IMPLICITLY TREATS THE SINGLE TOPIC FILM INCOME AS AN EXCEPTION TO FOUNDATION POLICY. THIS SUGGESTS THAT THE FOUNDATION VIEWED THE $1.00 FIGURE AS REPRESENTING THE BEST ESTIMATE OF THE ACTUAL INCOME OBLIGATION TO THE FOUNDATION, NOT AS A WAIVER OF FURTHER RIGHTS TO SUCH INCOME. THE PROHIBITION AGAINST BSCS RAISING FILM PRICES WOULD FURTHER SUPPORT SUCH A RATIONALE."

THESE ASSERTIONS ARE MANIFESTLY CONTRARY TO THE PLAIN LANGUAGE OF THE PROPOSED AMENDMENTS, WHICH SPECIFICALLY DESCRIBED THE SINGLE TOPIC FILM ARRANGEMENT (APART FROM THE $1 PER FILM ROYALTY) AS AN EXCEPTION TO THE GE -1321 INCOME CLAUSE WITHOUT CONDITION OR QUALIFICATION. ALSO, AS NOTED PREVIOUSLY, THE PROVISO REQUIRING NSF APPROVAL FOR PRICE INCREASES WAS DROPPED IN THE LATER VERSIONS OF THE DRAFT AMENDMENT.

THE FOUNDATION'S ASSERTIONS AS TO THE CONDITIONAL NATURE OF THE ROYALTY ARRANGEMENTS ARE ALSO SPECIFICALLY CONTRADICTED IN THE STATEMENTS SUBMITTED BY ITS FORMER OFFICIALS. DR. BINDER'S STATEMENT OBSERVES ON THIS POINT:

"CONCERNING THE 'ONE DOLLAR FILM ROYALTY AGREEMENT', MY RECOLLECTION IS THAT THE FOUNDATION AND THE UNIVERSITY ON BEHALF OF BSCS MADE AN AGREEMENT, THE ESSENCE OF WHICH WAS THAT THE FOUNDATION WOULD ACCEPT ONE DOLLAR PER COPY OF FILM SOLD; THAT THE FOUNDATION WAS NOT WILLING TO FUND THIS PROJECT IN THE SAME WAY THAT IT HAD FUNDED THE PREPARATION OF THE VERSION MANUSCRIPTS; AND THAT IT WAS UNWILLING TO ACCEPT THE USUAL ROYALTY ARRANGEMENT. THERE WAS, TO THE BEST OF MY RECOLLECTION, NO CONDITION UPON THE AGREEMENT TO ACCEPT ONE DOLLAR PER COPY OF FILM SOLD IN LIEU OF ROYALTIES. TO THE EXTENT THAT INTERNAL MEMORANDA BY OFFICIALS OF THE FOUNDATION MAY REFLECT THE CONTRARY, I CAN ONLY STATE THAT IN OUR DISCUSSIONS, WHETHER ORAL OR IN WRITING, WITH THE UNIVERSITY AND BSCS SUCH CONDITIONS WERE NOT EXPRESSED. AS FOR MYSELF, I DID NOT PERCEIVE ANY CONDITION TO HAVE BEEN PART OF THE UNDERSTANDING. OBVIOUSLY, I CANNOT SPEAK FOR OTHER OFFICIALS OF THE FOUNDATION WHO PARTICIPATED IN SAID DISCUSSIONS."

SIMILARLY DR. KELSON, WHO WAS APPARENTLY MORE INVOLVED IN THE SINGLE TOPIC FILM DISCUSSIONS, STATES:

"I RECALL THE MEETING REFERRED TO IN THE REPORT HELD IN JANUARY 1968. EXCERPTS FROM MY NOTES AND NOTES PREPARED BY OTHERS ARE QUOTED IN THE REPORT. THE PROVISO FOUND IN MY NOTES TO THE EFFECT THAT THE WILLINGNESS BY NSF TO ACCEPT THE ONE DOLLAR PAYMENT IN LIEU OF ROYALTIES WAS CONDITIONAL UPON BSCS FURNISHING FINANCIAL PROJECTIONS SUSTAINING THE PROBABILITY OF A NO-LOSS, NO-GAIN RESULT HAS BEEN MISCONSTRUED AND MISINTERPRETED. THE ONE DOLLAR PER COPY PAYMENT WAS CONSIDERED BY BOTH PARTIES TO BE A REASONABLE COMPROMISE. THE REPORT BY THE GRANTS AND CONTRACTS OFFICE REFERS TO THAT AS A CONDITIONAL RATE OR PAYMENT TO BE RENEGOTIATED ON THE BASIS OF SUBSEQUENT, ACTUAL EXPERIENCE. THIS INTERPRETATION IS NOT CONSISTENT WITH MY RECOLLECTION OF OUR AGREEMENT WITH BSCS OR THE PROVISO CONTAINED IN MY NOTES WHICH I DICTATED FOLLOWING THE MEETING IN JANUARY OF 1968. THE LATTER MERELY WAS INTENDED TO REFLECT OUR WILLINGNESS TO ACCEPT THE POSITION OF BSCS BY ASSUMING THAT ITS POSITION WAS SUSTAINABLE BY ADEQUATE PROJECTIONS. I DID NOT INTEND TO STATE THAT ACCEPTANCE BY NSF OF THE ONE DOLLAR PER FILM PAYMENT WAS CONDITIONAL UPON VERIFICATION OF THE BSCS SALES PROJECTIONS BY ACTUAL SALES EXPERIENCE. OUR POSITION WAS THAT A DIFFERENT RATE MIGHT BE REQUIRED ON FUTURE FILM PROJECTS, IF ANY, AND IF EXPERIENCE SO JUSTIFIED. BOTH PARTIES UNDERSTOOD THAT WITH REGARD TO THE HIGHLY UNPREDICTABLE NATURE OF EDUCATIONAL FILM PROJECTS, NSF WAS NOT IN A POSITION TO RAISE THE RATE OF PAYMENT POST FACTO IF SALES WERE HIGH WITHOUT AT THE SAME TIME AGREEING TO INDEMNIFY BSCS AGAINST LOSSES IF THAT PROCEEDED TO BE THE CASE. NSF COULD NOT AGREE TO THE LATTER AND WAS THEREFORE NOT GOING TO RESERVE THE RIGHT TO RENEGOTIATE THE AGREED UPON RATE OF ONE DOLLAR PER FILM. THE FACT THAT OUR AGREEMENT WAS UNCONDITIONAL IS BORNE OUT BY THE OTHER DOCUMENTS WHICH REFLECT AN UNCONDITIONAL ACCEPTANCE OF SAID DRAFT AMENDMENTS TO GRANT GE-1321 PREPARED BY THE OFFICE OF GENERAL COUNSEL OF THE FOUNDATION. IN SHORT, THE UNDERSTANDING REACHED BY THE PARTIES WITH REGARD TO THIS MATTER WAS FINAL AND UNCONDITIONAL."

THE FOUNDATION'S EXPLANATION OF THE LANGUAGE OF THE DRAFT AMENDMENTS LIKEWISE SEEMS UNTENABLE FROM THE FACT OF THEIR VERY EXISTENCE. IF, AS NSF SUGGESTS, THE AMENDMENT WOULD HAVE MERELY TREATED THE $1 PER FILM ROYALTY AS A PROVISIONAL MEASURE OF INCOME FROM SINGLE TOPIC FILM SALES, IT WOULD HAVE CHANGED NOTHING AND WOULD HAVE HAD NO IMPACT WHATSOEVER IN TERMS OF THE CONCERNS EXPRESSED AT THE JANUARY 1968 MEETING, WHICH LED TO ITS DRAFTING. WE CANNOT BELIEVE THAT THE PARTIES SPENT SEVERAL MONTHS AND WENT THROUGH NUMEROUS DRAFTS CONCERNING AN AMENDMENT WHICH WOULD HAVE BEEN WHOLLY ILLUSORY FROM THE OUTSET.

WE ACCEPT NSF'S ASSERTION THAT IT ANTICIPATED ESSENTIALLY A "BREAK EVEN" RESULT FROM THE SINGLE TOPIC FILM SALES. HOWEVER, THIS GOES TO THE FOUNDATION'S MOTIVE IN PURSUING THE DRAFT AMENDMENT RATHER THAN THE EFFECT OF THE PROPOSED LANGUAGE ITSELF. AS INDICATED ABOVE, THE ACTUAL LANGUAGE CONTAINED IN THE ORIGINAL DRAFT AND RETAINED IN EACH SUCCEEDING VERSION UNCONDITIONALLY LIMITED NSF'S RECOVERY TO $1 PER FILM. BOTH PARTIES RECOGNIZED THAT THE FINANCIAL OUTCOME OF THE FILM DISTRIBUTION ARRANGEMENT WAS UNCERTAIN. THUS, IN OUR VIEW, EACH PARTY ACCEPTED THAT ITS OBLIGATION TO THE OTHER WOULD BE FULLY DISCHARGED BY THE $1 PER FILM ROYALTY. THE UNIVERSITY WAS WILLING TO ACCEPT THE RISK OF A DEFICIT WHICH IT WOULD HAVE TO ABSORB WITHOUT NSF SUPPORT. OF COURSE, THE UNIVERSITY ALSO HAD A FIRM OBLIGATION TO REMIT THE $1 PER FILM ROYALTY TO NSF EVEN IF IT WAS OPERATING AT A LOSS. THE FOUNDATION FOR ITS PART WAS WILLING TO ASSUME THE RISK, SO TO SPEAK, OF A "PROFIT" TO THE UNIVERSITY AFTER DEDUCTION OF THE ROYALTY PAYMENTS AND PRODUCTION COSTS.

SEVERAL ADDITIONAL OBSERVATIONS ARE IN ORDER CONCERNING NSF'S UNDERSTANDING OF THE BREAK EVEN PROSPECTS FOR THE DISTRIBUTION ARRANGEMENT. FIRST, THE NSF FOLLOW-UP REPORT OBSERVES, AT PAGE 127:

"IT IS NOT CLEAR BSCS TOOK ACTION TO FULLY INFORM THE FOUNDATION AS TO ITS INTENTIONS TO SEEK PROFITS IN THE COURSE OF SECURING APPROVAL OF THE PROPOSED SINGLE TOPIC FILM DISTRIBUTION ARRANGEMENTS. * * * "

WE FIND NO EVIDENCE IN THE RECORD THAT BSCS EVER HAD AN INTENT TO SEEK PROFITS FROM THESE ARRANGEMENTS. ON THE CONTRARY, THE RECORD INDICATES THAT BSCS HAD NO DESIRE TO EVEN BECOME THE PRODUCER OF THE FILMS AND THEREBY INCUR THE POTENTIAL FOR A PROFIT OR LOSS. IT ASSUMED THE ROLE OF PRODUCER ONLY AFTER ITS TENTATIVE ARRANGEMENTS FOR PRODUCTION BY THE PUBLISHING COMPANIES FELL THROUGH.

SECOND, THE FOLLOW-UP REPORT OBSERVES THAT, ACCORDING TO THE NOTES MADE BY NSF REPRESENTATIVES AT THE JANUARY 1968 MEETING, THE UNIVERSITY WAS TO SUBMIT TO NSF A FINANCIAL PROJECTION SUSTAINING THE PROBABILITY OF A BREAK EVEN RESULT FROM THE SINGLE TOPIC FILM DISTRIBUTION ARRANGEMENTS. APPARENTLY NO SUCH FINANCIAL PROJECTION WAS FURNISHED. THE BSCS ATTORNEY STATES THAT THERE IS NO INDICATION IN THE RECORD THAT ANY REQUIREMENT FOR A FINANCIAL PROJECTION WAS EVER COMMUNICATED TO THE UNIVERSITY OR BSCS. INDEED, THERE IS NO SUCH REQUIREMENT OR CONDITION IN THE LANGUAGE OF THE DRAFT AMENDMENTS.

REGARDLESS OF WHO WAS AT FAULT, WE DO NOT BELIEVE THAT THE FAILURE TO OBTAIN A SPECIFIC FINANCIAL PROJECTION IS CRUCIAL. AS NOTED PREVIOUSLY, WE ACCEPT NSF'S CONTENTION THAT ITS WILLINGNESS TO PURSUE THE DRAFT AMENDMENT WAS MOTIVATED BY ANTICIPATION OF A BREAK EVEN RESULT. ITS DESIRE FOR A SPECIFIC FINANCIAL PROJECTION IS CONSISTENT WITH THIS MOTIVE. HOWEVER, WE HAVE NO REASON TO DOUBT THAT THE UNIVERSITY AND BSCS ALSO HONESTLY ANTICIPATED A BREAK EVEN RESULT AT THE OUTSET, AND THAT A FINANCIAL PROJECTION TO THIS EFFECT COULD HAVE BEEN FURNISHED. IN ANY EVENT, THERE IS NO EVIDENCE THAT NSF'S FAILURE TO OBTAIN THE PROJECTION INFLUENCED THE OUTCOME OF THE NEGOTIATIONS.

IN SUM, IT IS ABUNDANTLY CLEAR TO US FROM THE FACTUAL RECORD THAT THROUGHOUT THE COURSE OF THE NEGOTIATIONS THE PARTIES INTENDED TO TREAT THE $1 PER FILM ROYALTY AS THE EXCLUSIVE AND UNCONDITIONAL MEASURE OF THE UNIVERSITY'S OBLIGATION TO NSF UNDER THE GE-1321 INCOME CLAUSE. IN OUR VIEW, THIS IS THE ONLY REASONABLE CONCLUSION WHICH CAN BE DRAWN FROM THE LANGUAGE OF THE DRAFT AMENDMENT AS WELL AS THE ENTIRE CONTEXT OF THE NEGOTIATIONS. THIS CONCLUSION IS ALSO CONSISTENT WITH THE SUBSEQUENT EXPRESSIONS AND ACTIONS OF THE PARTIES WITH RESPECT TO RELATED ARRANGEMENTS.

MOREOVER, WE DO NOT SEE ANY LEGAL BASIS WHICH WOULD PRECLUDE THE PARTIES FROM ADOPTING SUCH AN APPROACH. THE APPROACH REFLECTED IN THE DRAFT AMENDMENTS DID NOT INVOLVE A MERE GRATUITOUS WAIVER BY NSF OF ITS RIGHTS UNDER THE GE-1321 INCOME CLAUSE. IN RETURN FOR ITS WILLINGNESS TO FOREGO REMITTAL OF ANY PROFIT AS SUCH, NSF INDUCED THE UNIVERSITY TO PROCEED WITH PRODUCTION AND MARKETING OF THE FILMS WITHOUT HAVING TO PROVIDE ADDITIONAL FINANCIAL SUPPORT AND WITHOUT HAVING TO FOREGO OR REDUCE ITS GUARANTEED $1 PER FILM ROYALTY. IN VIEW OF THE FINANCIAL UNCERTAINTIES, THE PROPOSAL WAS CERTAINLY SUPPORTED BY ADEQUATE CONSIDERATION. /9/

/9/ IT COULD PERHAPS BE ARGUED THAT THERE WOULD BE NO LEGAL CONSIDERATION FOR A MODIFIED INCOME ARRANGEMENT BETWEEN THE UNIVERSITY AND NSF SINCE THE UNIVERSITY HAD ALREADY ENTERED INTO CONTRACTS WITH THE PUBLISHING COMPANIES FOR MARKETING OF THE SINGLE TOPIC FILMS. HOWEVER, THE UNIVERSITY HAD NO CONTRACTUAL OBLIGATION TO NSF TO MARKET THE FILMS, AND WE ASSUME THAT IT COULD HAVE CANCELLED ITS MARKETING CONTRACTS AT THIS STAGE WITH LITTLE, IF ANY, LOSS. ACCORDINGLY, WE REGARD THE PROPOSED INCOME MODIFICATION BETWEEN THE UNIVERSITY AND NSF AS A SUBSTANTIAL INDUCEMENT FOR CONTINUED VIABILITY OF THE FILM MARKETING OPERATION.

THE QUESTION REMAINS WHETHER THE APPARENT INTENT OF THE PARTIES DURING THE NEGOTIATING STAGE CAN BE GIVEN EFFECT IN LIGHT OF THEIR FAILURE TO FORMALIZE THE DRAFT AMENDMENT.

INITIALLY, IT IS CLEAR THAT THE MERE EXISTENCE OF THE WRITTEN INCOME CLAUSE DOES NOT NEGATE THE POSSIBILITY OF A SUBSEQUENT AGREEMENT BETWEEN THE PARTIES TO MODIFY ITS OPERATION IN THIS INSTANCE. A PRIOR WRITTEN CONTRACT MAY BE VARIED OR RESCINDED BY A SUBSEQUENT ORAL AGREEMENT. SEE, E.G., 6 CORBIN ON CONTRACTS, 1294, 1296 (1963); 17 AM.JUR.2D, CONTRACTS, 465 ET SEQ. THE EXISTENCE OF SUCH A SUBSEQUENT AGREEMENT IS A QUESTION OF FACT, AND ITS PROOF IS NOT BARRED BY THE PAROL EVIDENCE RULE. 3 CORBIN ON CONTRACTS, SUPRA, 575, 564.

IT IS ALSO CLEAR THAT THE FAILURE OF THE PARTIES TO FORMALLY ADOPT AN AMENDMENT TO THE PRIOR WRITTEN CONTRACT-- HERE THE GE-1321 INCOME CLAUSE-- IS NOT DISPOSITIVE. AGAIN, THE INTENT OF THE PARTIES, TO BE ASCERTAINED AS A QUESTION OF FACT, IS THE DECISIVE CONSIDERATION. AS EXPRESSED IN THE RESTATEMENT OF CONTRACTS, SEC. 26 (1932):

"MUTUAL MANIFESTATIONS OF ASSENT THAT ARE IN THEMSELVES SUFFICIENT TO MAKE A CONTRACT WILL NOT BE PREVENTED FROM SO OPERATING BY THE MERE FACT THAT THE PARTIES ALSO MANIFEST AN INTENTION TO PREPARE AND ADOPT A WRITTEN MEMORIAL THEREOF; BUT OTHER FACTS MAY SHOW THAT THE MANIFESTATIONS ARE MERELY PRELIMINARY EXPRESSIONS * * * ."

SEE GENERALLY, 1 CORBIN ON CONTRACTS, SUPRA, 30; 17 AM.JUR.2D, CONTRACTS, 28, 29.

THE FOLLOWING PASSAGES FROM CORBIN, SEC. 30 SEEM APPLICABLE HERE:

"THE COURTS ARE QUITE AGREED UPON GENERAL PRINCIPLES. THE PARTIES HAVE POWER TO CONTRACT AS THEY PLEASE. THEY CAN BIND THEMSELVES ORALLY OR BY INFORMAL LETTERS OR TELEGRAMS IF THEY LIKE. ON THE OTHER HAND, THEY CAN MAINTAIN COMPLETE IMMUNITY FROM ALL OBLIGATION, EVEN THOUGH THEY HAVE EXPRESSED AGREEMENT ORALLY OR INFORMALLY UPON EVERY DETAIL OF A COMPLEX TRANSACTION. THE MATTER IS MERELY ONE OF EXPRESSED INTENTION. IF THEIR EXPRESSIONS CONVINCE THE COURT THAT THEY INTENDED TO BE BOUND WITHOUT A FORMAL DOCUMENT, THEIR CONTRACT IS CONSUMMATED, AND THE EXPECTED FORMAL DOCUMENT WILL BE NOTHING MORE THAN A MEMORIAL OF THAT CONTRACT. IN VERY MANY CASES THE COURT HAS BEEN CONVINCED THAT SUCH WAS THE INTENTION AND HAS HELD THE PARTIES BOUND BY A CONTRACT EVEN THOUGH NO DOCUMENT HAS BEEN EXECUTED.

"IF THE COURT IS CONVINCED THAT THE PARTIES INTENDED NOT TO BE BOUND UNTIL THE FORMAL DOCUMENT IS EXECUTED, THERE IS NO CONTRACT UNTIL ITS EXECUTION BY BOTH PARTIES. THERE ARE MANY CASES HOLDING THAT SUCH WAS THE INTENTION AND THAT NO CONTRACT WAS MADE.

" * * * THE FACT THAT THE PARTIES CONTEMPLATE THE EXECUTION OF A DOCUMENT IS SOME EVIDENCE, NOT IN ITSELF CONCLUSIVE, THAT THEY INTEND NOT TO BE BOUND UNTIL IT IS EXECUTED.

"THE SUBSEQUENT CONDUCT AND INTERPRETATION OF THE PARTIES THEMSELVES MAY BE DECISIVE OF THE QUESTION AS TO WHETHER A CONTRACT HAS BEEN MADE EVEN THOUGH A DOCUMENT WAS CONTEMPLATED AND HAS NEVER BEEN EXECUTED. THEY MAY BOTH HAVE ALREADY BEGUN PERFORMANCE AND MAY HAVE MADE STATEMENTS THAT ARE STRONGLY EVIDENTIAL. OF COURSE, THE SUBSQUENT CONDUCT OF THE PARTIES MAY CONSTITUTE A TACIT CONTRACT ON THE TERMS PREVIOUSLY AGREED UPON, EVEN THOUGH THE UNDERSTANDING HAD AT FIRST BEEN THAT THE EXECUTION OF A FORMAL DOCUMENT WAS NECESSARY.

"THE EVIDENCE MAY BE CONVINCING THAT THE PARTIES INTEND TO REDUCE THEIR ALREADY CONSUMMATED CONTRACT TO WRITING AS A MERE 'MEMORIAL' THEREOF AND NOT AS THEIR ONLY OPERATIVE EXPRESSION OF ASSENT. IN SUCH A CASE, THE CONTRACT IS VALID EVEN THOUGH THEY TRY AND FAIL TO AGREE UPON THE FORM AND TERMS OF THE MEMORIAL. * * * "

CERTAINLY THE FIRST INCLINICATION IN A CASE SUCH AS THIS WOULD BE TO TREAT THE DRAFT AMENDMENT AS MERELY PRELIMINARY SINCE IT INVOLVED MODIFICATION OF A PRIOR WRITTEN CONTRACT. HOWEVER, THE FACTUAL RECORD AS A WHOLE CONVINCES US THAT THE TERMS OF THE DRAFT AGREEMENT SHOULD BE GIVEN LEGAL EFFECT. IN OUR VIEW, THE FACTS DISCLOSE A DEFINITE MEETING OF THE MINDS CONCERNING TREATMENT OF THE SINGLE TOPIC FILM PROCEEDS WHICH WAS ESSENTIALLY COMPLETE, FOR PURPOSES HERE RELEVANT, FROM THE EARLY STAGES OF NEGOTIATION. FROM THE JANUARY 1968 MEETING, WHEN THE SUBJECT WAS FIRST RAISED, THROUGH ALL VERSIONS OF THE DRAFT AMENDMENT, THERE WAS A CONSISTENT UNDERSTANDING THAT NSF'S ENTITLEMENT SHOULD BE LIMITED TO THE FIXED $1 PER FILM ROYALTY. THE ONLY POINT WHICH CAUSED CONTROVERSY WAS THE SUBSIDIARY ISSUE OF WHETHER NSF SHOULD CONTROL THE SALES PRICES, AND EVEN THIS ISSUE WAS SUBSEQUENTLY RESOLVED.

WHILE THE NEGOTIATIONS CENTERED ON A FORMAL AMENDMENT TO THE GRANT INCOME CLAUSE, THERE IS ABSOLUTELY NO INDICATION IN THE RECORD THAT FAILURE TO FORMALIZE THE AMENDMENT RESULTED FROM ANY OBJECTION TO THE LANGUAGE RELATING TO SINGLE TOPIC FILMS. IN FACT, AS NOTED PREVIOUSLY, THE ONLY POSSIBLE SUGGESTION AS TO WHY THE AMENDMENT WAS NOT FORMALIZED RELATES TO OTHER MATTERS WHICH WERE TO HAVE BEEN COVERED BY THE SAME AMENDMENT. MIGHT ADD THAT THE GENERAL THOROUGHNESS WITH WHICH NSF COMPILED THE INSTANT RECORD CONVINCES US THAT IT IS EXTREMELY UNLIKELY THAT RELEVANT EVIDENCE HAS BEEN OVERLOOKED.

FINALLY, THE CORRESPONDENCE BETWEEN BSCS AND NSF ON MATTERS RELATED TO THE SINGLE TOPIC FILM MARKETING ARRANGEMENTS WHICH OCCURRED AFTER THE APPARENT CESSATION OF EFFORTS TO ADOPT THE DRAFT AMENDMENT DEMONSTRATES BSCS' CONSISTENT UNDERSTANDING THAT NSF'S RECOVERY HAD BEEN FIXED AT $1 PER FILM. THERE IS NO INDICATION THAT NSF EXPRESSLY ENDORSED THIS UNDERSTANDING AS TO THE ORIGINAL SINGLE TOPIC FILM DISTRIBUTION ARRANGEMENT. HOWEVER, THE CORRESPONDENCE DOES SHOW THAT NSF KNEW BSCS WAS PROCEEDING ON THIS BASIS AND THAT THE FOUNDATION DID NOTHING TO DISPELL SUCH UNDERSTANDING. THIS, IN TURN, SUGGESTS TO US THAT THERE AROSE AT THIS STAGE, IF NOT EARLIER, "A TACIT CONTRACT ON THE TERMS PREVIOUSLY AGREED UPON, EVEN THOUGH THE UNDERSTANDING HAD AT FIRST BEEN THAT THE EXECUTION OF A FORMAL DOCUMENT WAS NECESSARY." IN THE ALTERNATIVE, WE BELIEVE THAT NSF'S ACTUAL KNOWLEDGE AND LACK OF OBJECTION MUST BE CONSIDERED SUFFICIENT TO ESTOP IT FROM NOW RELYING ON THE FAILURE OF THE PARTIES TO FORMALIZE THE AMENDMENT.

ACCORDINGLY, WE CONCLUDE THAT NSF'S CLAIM FOR ANY INCOME FROM THE SINGLE TOPIC FILM SALES BEYOND ITS ROYALTY ENTITLEMENT MUST BE DISALLOWED. THE $234,769 AMOUNT CLAIMED BY THE FOUNDATION INCLUDES APPROXIMATELY $70,000 REPRESENTING THE FOUNDATION'S $1 PER FILM ROYALTY ENTITLEMENT BASED ON SALES DURING THE PERIOD COVERED BY THE NSF AUDIT. THE BSCS ATTORNEY'S OCTOBER 1976 RESPONSE INDICATED THAT THESE ROYALTY PAYMENTS BY THE PUBLISHERS, WHICH APPROXIMATED $180,000 AT THAT TIME, WERE BEING HELD IN A SEPARATE ACCOUNT IN ACCORDANCE WITH THE REQUIREMENTS OF GRANT GE-1321. THE ATTORNEY STATES THAT BSCS AND THE UNIVERSITY STAND READY TO REMIT TO NSF THE ROYALTY PAYMENTS WHICH ARE IN THIS ACCOUNT. ACCORDINGLY, INSOFAR AS THE NSF CLAIM INCLUDES SUCH ROYALTY PAYMENTS, THE CLAIM IS UNCONTESTED AND IS ALLOWED.

V. INTEREST

THE FINAL ELEMENT OF THE NSF CLAIM IS FOR INTEREST EARNED BY THE UNIVERSITY ON TEMPORARY INVESTMENTS OF INCOME AMOUNTS QUESTIONED BY THE AUDIT REPORT. THE NSF SUBMISSION ESTIMATED THE AMOUNT OF THE INTEREST CLAIM TO BE $23,714, BUT RECOGNIZES THAT THIS AMOUNT IS SUBJECT TO ADJUSTMENT BASED ON FINAL DETERMINATION OF THE FOUNDATIONS'S ENTITLEMENT TO THE VARIOUS SOURCES OF FUNDS ON WHICH INTEREST WAS REALIZED. NSF ALSO NOTES THAT THE LAPSE OF TIME SINCE THE AUDIT REPORT MAY AFFECT THE AMOUNT OF INTEREST REALIZED. THE BSCS ATTORNEY CONCEDES NSF'S ENTITLEMENT TO INTEREST EARNED ON AMOUNTS WHICH ARE PROPERLY REMITTABLE TO THE FOUNDATION.

IN VIEW OF THE VARIABLES DESCRIBED ABOVE, WE ARE UNABLE TO DETERMINE THE PRECISE AMOUNT OF INTEREST INCOME PAYABLE TO NSF. HOWEVER, WE ASSUME THAT THE PARTIES WILL BE ABLE TO CALCULATE THE PROPER AMOUNT CONSISTENT WITH THE CONCLUSIONS REACHED IN THIS OPINION. FOR EXAMPLE, NSF IS NOT ENTITLED TO ANY INTEREST ATTRIBUTABLE TO THE "PUBLISHER'S GRANT" PAYMENTS SINCE, UNDER PART I OF THIS OPINION, IT HAS NO CLAIM TO THE GRANT PAYMENTS THEMSELVES. ALSO, WE NOTE THAT NSFS'S CLAIM FOR INTEREST IS LIMITED TO INTEREST INCOME ACTUALLY REALIZED BY THE UNIVERSITY/BSCS FROM THE INVESTMENTS OF FUNDS REMITTABLE TO NSF.

VI. SUMMARY OF CONCLUSIONS; BSCS COUNTERCLAIM

OUR CONCLUSIONS AND DISPOSITIONS HEREIN WITH RESPECT TO THE VARIOUS ELEMENTS OF THE NSF CLAIM AGAINST THE UNIVERSITY MAY BE SUMMARIZED AS FOLLOWS:

1. THE CLAIM FOR $856,000 IN "PUBLISHER'S GRANT" PROCEEDS TO IS ALLOWED IN ITS ENTIRETY.

2. THE CLAIM FOR $36,100 IN PUBLISHER PAYMENTS CONCERNING THE "PATTERNS AND PROCESSES" IS ALLOWED IN FULL AS BETWEEN NSF AND THE UNIVERSITY/BSCS.

3. THE CLAIM FOR RECOVERY OF $116,914 FOR UNAUTHORIZED EXPENDITURES UNDER THE SUPPLEMENTAL "HOUSEKEEPING" GRANTS IS ALLOWED IN THE FULL AMOUNT ASSERTED, SUBJECT TO POSSIBLE ADJUSTMENT BASED ON A MUTUALLY AGREEABLE METHOD OF DETERMINING MORE ACCURATELY THE AMOUNT OF GRANT EXPENDITURES WHICH WERE ATTRIBUTABLE TO SERVICING NSF-SUPPORTED MATERIALS. 4. THE CLAIM FOR $234,769 REPRESENTING "PROFIT" FROM THE SALE OF "SINGLE TOPIC FILMS" IS DISALLOWED, EXCEPT FOR THE AMOUNT WHICH CONSTITUTES NSF'S ROYALTY ENTITLEMENT OF $1 PER FILM.

5. THE CLAIM, FOR INTEREST EARNED BY THE GRANTEE IS ALLOWED ONLY TO THE EXTENT OF INTEREST ACTUALLY REALIZED FROM AMOUNTS PAYABLE TO NSF UNDER THE OTHER PARTS OF THIS OPINION.

FINALLY, WE NOTE THAT THE BSCS ATTORNEY'S OCTOBER 1976 SUBMISSION TO US ASSERTS A COUNTERCLAIM AGAINST NSF, IN THE AMOUNT OF $18,501.49, WHICH WILL APPARENTLY BE WITHHELD FROM THE AMOUNTS PAYABLE TO NSF. THE COUNTERCLAIM IS STATED AS FOLLOWS:

"SOMETIME AGO, RAND MCNALLY & COMPANY, ONE OF THE VERSION PUBLISHERS, INFORMED THE UNIVERSITY OF COLORADO AND BSCS THAT IT HAD OVERPAID ROYALTIES FOR THE SECOND EDITIONS BY AN AMOUNT OF $18,501.49. BECAUSE NEITHER THE UNIVERSITY OF COLORADO NOR BSCS HAD IN ITS POSSESSION SAID FUNDS, THE FUNDS HAVING BEEN REMITTED TO THE UNITED STATES TREASURY PURSUANT TO THE INSTRUCTIONS OF THE NSF, BSCS SUGGESTED THAT RAND MCNALLY TAKE THE MATTER UP WITH THE FOUNDATION. FOR A PERIOD OF TIME RAND MCNALLY AND THE FOUNDATION NEGOTIATED WITH REGARD TO THIS MATTER. HOWEVER, THE PUBLISHER WAS UNABLE TO REACH AGGREMENT WITH THE FOUNDATION CONCERNING THE OVERPAYMENT. THE FOUNDATION, ACCORDING TO RAND MCNALLY, TOOK THE POSITION THAT IF ANY REFUND WAS TO BE MADE IT SHOULD COME FROM THE UNIVERSITY OR FROM BSCS.

"CONSEQUENTLY, RAND MCNALLY IN EARLY 1976 MADE A DEMAND ON BSCS AND THE UNIVERSITY TO REFUND THE AMOUNT OVERPAID.

"SINCE THERE IS NO DISAGREEMENT BETWEEN BSCS, THE UNIVERSITY OF COLORADO AND THE PUBLISHER REGARDING THE FACT THAT AN OVERPAYMENT OCCURRED, AND IN ORDER TO DO WHAT WAS POSSIBLE, BSCS AGREED THAT THE PUBLISHER DEDUCT THE AMOUNT OF THE OVERPAYMENT FROM THIRD EDITION ROYALTIES DUE BSCS. THIS WAS DONE AND THE AMOUNT WITHHELD BY THE PUBLISHER FROM THIRD EDITION ROYALTIES.

"IT IS OUR POSITION THAT THE FACT OF OVERPAYMENT CANNOT BE DISPUTED. BSCS DID NOT PARTICIPATE IN THE EFFORTS THE PUBLISHER MADE TO OBTAIN REPAYMENT FROM NSF FOR THIS AMOUNT. CONSEQUENTLY, THE BASIS FOR THE FOUNDATION'S POSITION WITH REGARD TO THIS ITEM IS KNOWN TO BSCS ONLY INDIRECTLY. HOWEVER, AT THIS TIME BSCS ASSERTS A CLAIM AGAINST THE FOUNDATION FOR REPAYMENT OF THE OVERPAYMENT, WHICH BSCS HAS ADVANCED TO THE PUBLISHER AS INDICATED. THE AMOUNT OF THE OVERPAYMENT OF $18,501.49 WILL BE WITHHELD FROM THE MONEYS DUE THE FOUNDATION."

APPARENTLY THIS COUNTERCLAIM HAS NOT BEEN SUBMITTED TO NSF BY THE UNIVERSITY OR BSCS. WE DO NOT HAVE ANY RESPONSE TO IT FROM THE FOUNDATION AND THE RECORD NOW BEFORE US CONTAINS NO ADDITIONAL INFORMATION. CONSEQUENTLY, WE ARE NOT IN A POSITION TO PASS UPON THE VALIDITY OF THE COUNTERCLAIM AT THIS TIME. /10/

/10/ THERE MAY BE AN ADDITIONAL QUESTION AS TO WHETHER THIS COUNTERCLAIM, EVEN IF VALID, IS APPROPRIATE FOR OFFSET AGAINST AMOUNTS OWED TO NSF BY THE UNIVERSITY IN ITS CAPACITY AS GRANTEE UNDER GRANT GE 1321 SINCE IT IS NOT CLEAR WHETHER THE UNIVERSITY IS THE REAL PARTY IN INTEREST OR WHETHER THE AMOUNT CLAIMED WAS ACTUALLY PAID BY BSCS AS A SEPARATE ENTITY.

ACCORDINGLY, WE BELIEVE THE BEST COURSE WOULD BE FOR NSF TO CONSIDER THE MERITS OF THE COUNTERCLAIM, BOTH SUBSTANTIVELY AND PROCEDURALLY, AND THE FOUNDATION IS HEREBY REQUESTED TO DO SO. IF NEF DETERMINES THAT THE COUNTERCLAIM IS VALID, IT MAY DISPOSE OF THE MATTER WITHOUT FURTHER ACTION BY OUR OFFICE. IF NSF CONCLUDES THAT THE COUNTERCLAIM IS INVALID OR DOUBTFUL, IT SHOULD SUBMIT TO US A FULL REPORT ON THE MATTER AND WE WILL DISPOSE OF THE CLAIM PURSUANT TO 31 U.S.C. 71.