Report 2014-121 Summary - June 2015

University of California, Davis

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It Has Not Identified Future Financing for the Strawberry Breeding Program nor Collected All Available Revenues

HIGHLIGHTS

Our review of the University of California, Davis' (UC Davis) Strawberry Breeding Program (strawberry program) highlighted the following:

Results in Brief

The Strawberry Breeding Program (strawberry program) of the University of California (university) has developed and patented new varieties of strawberry plants since the 1930s and the program has been located at the University of California, Davis (UC Davis) since 1952. From fiscal years 2010-11 through 2012-13, the strawberry program generated roughly $21.6 million in total patent income for the university, which accounted for roughly 89 percent of the patent income that UC Davis earned from its plant patents during that period. Patent income includes the royalties that the university charges its licensees for the sales of patented varieties and the fees that it collects for issuing its licensing agreements. For many years the California Strawberry Commission (commission)—a state government agency that represents an industry of 600 strawberry growers, shippers, and processors—funded a portion of the strawberry program through annual research agreements with the university. In exchange for this funding, the strawberry program's two former breeders, who conducted the research, agreed to share their research findings with the strawberry industry. In addition, the former breeders and UC Davis agreed to reduce the royalty fees that licensees paid for strawberry varieties sold within California, as part of the university's research agreement with the commission. UC Davis also negotiated a separate type of research agreement with licensees that facilitated a similar discount, in which licensees provided a significant amount of funding to the strawberry program in exchange for reduced royalty fees for strawberry varieties sold outside of California, called the Non-California Discount Revenue Program (discount program). Both of these discounts required the ongoing consent of the former breeders; however, in August 2012, the two breeders withdrew their consent to those discounts and UC Davis subsequently discontinued those agreements.

The discontinuation of these research agreements in fiscal year 2012-13 caused a significant drop in the strawberry program's funding in fiscal year 2013-14, when it received only $910,000, a 56 percent decrease in funding from the prior year.1 Despite this significant reduction in funding, the strawberry program's expenses were almost $1.6 million. As a result, the strawberry program used roughly 37 percent of its $1.8 million in reserves to cover this funding shortage. Although UC Davis has publicly stated that it has an unwavering commitment to continue its strawberry program, it has not developed a balanced budget that addresses how it will fund this program in the future.

Such a drop in funding places the viability of the strawberry program in jeopardy because the university's existing funding mechanisms for the strawberry program did not adequately cover this recent loss. For example, under the university's patent income distribution process, most of the patent income the strawberry program generates does not come back to the strawberry program. In fiscal year 2010-11, the strawberry program generated roughly $7 million in strawberry patent income, but the university used $1.7 million of this income to pay various expenses and $2.2 million to pay the two breeders, before distributing the remaining $3.1 million to UC Davis, which ultimately distributed only $556,848 back to the strawberry program. Because UC Davis only allocates a small portion of net strawberry patent income back to the program at the end of the distribution process, we believe that it could address the strawberry program's recent loss of funding by increasing this allocation as necessary to adequately fund the program. Furthermore, despite the elimination of the discounts to the royalty rates, UC Davis' undiscounted royalty rates remain lower than those charged by other universities; therefore, we believe UC Davis should reassess the appropriateness of the current royalty rates charged to licensees and consider increasing those rates.

Because the strawberry program has recently lost a significant amount of funding and its financial reserves have declined, it is imperative that the UC Davis Department of Plant Sciences (department), which is responsible for the day-to-day management of the strawberry program, prepare a budget that details how the program will be funded. However, the department has not consistently developed budgets for the strawberry program in the past and it has not yet developed a balanced budget that shows how the program will be funded in the future. In addition, when the department did develop budgets for the strawberry program, it did not use them to compare actual expenses to those that were budgeted—an important practice that would enable the department to ensure that the strawberry program operates in an efficient and cost-effective manner. As a result, we do not believe that UC Davis is adequately monitoring the financial operations of the strawberry program, particularly given the program's declining fund balance.

In addition, UC Davis does not always collect all revenues that are available to the strawberry program. For example, UC Davis did not collect $157,000 in late fees from licensees that were late in making their royalty payments during fiscal years 2010-11 through 2012-13. The business development and intellectual property manager of UC Davis' Innovation Access unit, which manages the strawberry program's licensing agreements, explained that it is not UC Davis' practice to collect late fees from licensees that are making a good faith effort to make their payments. However, by choosing not to pursue collecting late payment fees, UC Davis is missing opportunities to collect revenues that could be used to support the strawberry program.

Moreover, we identified past discounts totaling roughly $245,000 that UC Davis provided to licensees, around the time the discount program's agreements ended, without receiving any commensurate benefit. UC Davis may have been able to collect additional revenue around the time the discount program ended; however, it set up the agreements that governed the discount program in a way that prevented it from doing so. After considering several factors, and the advice of its counsel, UC Davis decided it would not attempt to collect those contributions. Had the discount program's agreements anticipated the issues associated with its termination and contained language to address those issues, UC Davis would likely have been able to avoid the resulting lost revenue.

Finally, UC Davis' may also be missing out on royalties because it lacks an adequate process for ensuring that master licensees and licensed nurseries are accurately reporting their sales. Specifically, UC Davis has never conducted an audit of master licensees and licensed nurseries to ensure that they accurately report their sales of licensed strawberry varieties. As a result, UC Davis' cannot be certain that it is collecting all of the royalties it is owed under the licensing agreements.

Recommendations

UC Davis should ensure that the strawberry program is adequately funded. To address the strawberry program's recent loss of funding, the university should consider allocating more of the strawberry program's patent income back to the program itself. In addition, UC Davis should regularly reassess the appropriateness of the strawberry program's royalty rates charged to licensees and adjust the rates as needed to support the program.

The department should prepare a balanced budget for each fiscal year that details how it will fund the strawberry program. In addition, it should begin comparing actual income and expenses to the budget periodically to ensure that the program is operating in a cost-efficient manner and is adequately funded.

UC Davis should collect all late fees that its licensees owe.

If UC Davis considers providing future discounts on royalty rates, it should structure the agreements to ensure that it receives a commensurate benefit during the entire time that licensees receive discounts.

UC Davis should develop a risk-based audit plan to begin periodically reviewing the financial records of licensees to ensure that they are accurately reporting all of their sales of licensed strawberry varieties and paying the university all the royalties it is entitled to. To encourage compliance, UC Davis should notify all licensees that it will begin auditing the sales records of selected licensees.

Agency Comments

UC Davis generally agreed with our recommendations and plans to take various actions to implement them. However, it disagreed with certain aspects. For example, UC Davis did not fully commit to collecting all late fees from licensees and notifying all licensees that it will conduct audits.

1 This calculation excludes the impact of funding that UC Davis provides to pay for the indirect costs of the strawberry program. See footnote in Table A on page 34 for further information about UC Davis' method for funding the program's indirect costs.