Penn State’s Protection Racket, 23: Conflict of Interest

Penn State’s conflict of interest policy, HR91, discusses requirements on “faculty and staff members”:

In their dealings with and on behalf of the University, they shall be held to a strict rule of honest and fair dealings between themselves and the University.

In one way, this is a very strange “strict rule.” Stylistically, methinks it repeats itself:

in their dealings they shall be held to a strict rule of dealings

What makes this rule “strict”? Is it that policy elsewhere is “non-strict” but here it is “strict”? That would suggest must other bits of policy, unless they also declare themselves to be strict, are more like guidelines. And what is this about “honest” and “fair”? Why not also “utmost good faith,” if not also “candid” and “committed to the benefit of the University above personal interests”? What dealings are there that are dishonest or unfair that would otherwise be contemplated by the university? Is there an expectation that the university routinely gets into deals that are dishonest or unfair and by toosh the university won’t tolerate such deals from faculty and staff members?

Removing the passive voice we get something like this:

The University shall hold faculty and staff members to a strict rule of honest and fair dealings with and on behalf of the University.

Removing the “strict rule” nonsense we arrive at:

Faculty and staff members must be honest and fair in their dealings with and on behalf of the University.

But even this is strange. If the “dealings” rise to the level of contracts, then it would appear that the policy statement here contemplates faculty and staff acting as agents–dealings on behalf of the university–or doing business with the university–dealings with the university. That’s interesting enough, given that faculty don’t get delegated responsibilities for research contracting or IP licensing. If the dealings are contractual, then the contract establishes the mutual understandings and carries with it an implied duty of good faith.

More strange: it’s one thing to require faculty and staff not to have unmanaged personal conflicts of interest in performing any official duty “on behalf of the University.” That makes sense. But what is this demand with regard to dealings with the university? What does conflict of interest have to do with that? In representing myself in a negotiation with the university (say, over a salary increase), I am forbidden to have a personal interest in the outcome of the negotiation? If the strict rule is just that fraudulent deals won’t bind the university, what is the point of the policy statement, especially here under “Conflict of Interest”? There’s something grasping here about this “strict rule” that reaches too far–thoughtlessly, needlessly. What the policy might meaningfully state is:

Agents of the university shall disclose conflicts of interest and recuse themselves from decisions or actions on behalf of the University unless those conflicts of interest are eliminated or managed to the University’s satisfaction.

If folks aren’t agents of the university, then they cannot act on behalf of the university and so cannot have a conflict of interest on the matter. If they are agents, then boom we have a policy on that. The matter then turns on when someone is an agent of the university. Employees, say, acting within the scope of their employment–which means, then, what they have been assigned to do, that the university has a right to control, and that if otherwise on an independent course, was intended to be for the university. And also agents who have manifested asset to act as agents in response to the university’s manifest assent that they should so act. Yeah, like that. But perhaps such a statement would be just too difficult for Penn State to swallow.

We might add that this policy statement also applies to staff members (administrators) dealing with faculty on behalf of the university. It would appear, then, that the university must hold administrators to this same “strict rule” of “honest and fair dealings” when it comes to the IP policy. Any honest reading of Penn State’s IP policy arrives at the conclusion that faculty have an obligation to disclose a range of things, and an obligation to sign an IP agreement, and that IP agreement locks in the formal fact that Penn State’s policy requires disclosure and signing of an IP agreement, and that’s it. That’s the honest truth. But that doesn’t appear to be what Penn State administrators do.

And if the dealings aren’t contractual, then just what are they? Press releases? Disclosing inventions that don’t otherwise have to be reported (since, if they did have to be reported, there’s an IP Agreement for that–contractual)? Dunno. Perhaps it is better to give up and say that there’s so much water down this rabbit hole, no rabbit could possibly live down there. But let’s hold our breath and consider just what this statement of “utmost good faith” and “strict rule of honest and fair dealing” are up to.

Wording such as “utmost good faith” suggests the standard of care of a trustee or fiduciary–someone who acts on behalf of another, in whom that other has placed reliance or trust beyond that of a simple contract. Here’s a law case from Pennsylvania (Ginley v Mahoney) that discusses fiduciary duty, “the highest standard of any duty implied by law.” Is that what “utmost good faith” implies? And if not, then just what?

In the Ginley case, a hotel owner contracts for construction services that don’t work out, and brings an action claiming not only breach but that the contractor had a fiduciary duty given the owner’s dependence of the contractor to manage the construction. The court declines to find that the relationship is fiduciary since the “gist of the action” has to do with the contract and not with some special other relationship:

A fiduciary relationship arises under Pennsylvania law where
“one person has reposed a special confidence in another to the
extent that the parties do not deal with each other on equal
terms, either because of an overmastering dominance on one side or weakness, dependence or justifiable trust, on the other.”

The court then reasons regarding contracts (quoting from another decision):

“Most commercial contracts for professional services involve one party relying on the other party’s superior skill or expertise in providing that particular service. Indeed, if a party did not believe that the professional possessed specialized expertise worthy of trust, the contract would most likely never take place.”

Thus,

Only if the relationship goes beyond “mere reliance on
superior skill” and into one characterized by overmastering
influence on one side or justifiable weakness on the other will a
fiduciary relationship be established.

To decide whether an issue involves breach of contract or tort (and hence an implied fiduciary duty), one looks at the “gist of the action”:

To determine where the gist of the action lies, a court must ascertain whether the parties’ obligations have been
defined by mutual consensus, or rather by larger social policies
embodied in the law of torts, with the contract being merely
collateral or incidental.

The court then considers a standard for when to invoke fiduciary duty:

Typically, a breach of fiduciary duty claim will survive the
gist of the action doctrine only where the fiduciary relationship
in question is well-established and clearly defined by
Pennsylvania law or policy, such as (for example) the social
policy which defines relationships among majority and minority
shareholders. . . .

In other words, the obligations owed by a building and remodeling company to its clients are generally
defined by the terms of their contract rather than by grander
social policies embodied in the law of torts.

Penn State IP policy goes out of its way to insist that the obligation to assign IP is established by the IP Agreement. It defines the obligations of employees by the terms of the agreement, not by “grander social policies” that might create a claim that regardless of the IP policy or the IP agreement, faculty owe the university assignment of their inventions (this was, basically, Yale’s argument, lacking as they did an IP agreement, they substituted the claim that Bayh-Dole required that they report and they would violate federal law if they didn’t report–all untrue, based on the circumstances–but the appearance of a university obligation was sufficient to persuade a court that faculty at Yale had a fiduciary duty, not merely a contractual one).

We might think, then, that once Penn State has an employee sign the IP Agreement, that agreement controls the relationship, not some grander social policy statement–not even a policy statement in Penn State policy on conflict of interest.

So what do we do with fiduciary duties? Do Penn State faculty have an “overmastering dominance” brought about by a weakness of administration? Or does the administration depend on faculty, even though the administration insists it employs faculty? Or is it a matter of “justifiable trust”? Here’s the Ginley court again:

This Court has held that there is a “crucial distinction” between surrendering control of one’s affairs to a fiduciary in a position to exercise undue influence and entering into an arm’s-length commercial agreement, however important its performance may be.

Thus, unless Pennsylvania law provides that employees owe a fiduciary duty to employers, then the “gist of the action” will be in contract law, not in breach of fiduciary duty. Can a university policy establish a fiduciary duty anyway, but just not call it out as such?

There’s Pennsylvania law regarding directors and officers of nonprofit corporations (15 Pa Cons St Ann 5712)–they must act in “good faith”–not “utmost good faith.” The standard is “in a manner he reasonably believes to be in the best interests of the corporation,” “with such care . . . as a person of ordinary prudence would use in similar circumstances.”

There’s a court decision (PTSI v Haley) that argues that employees do not have a fiduciary duty of loyalty to an employer with regard to setting up a competing business (citing a Pennsylvania Supreme Court decision):”The rule is quite clear that the solicitation of customers and use of customers lists is permissible unless there is a breach of an express contract or violation of some confidence. There must be some element of fraud or trade secrecy involved.” The same case addressed fiduciary duties established in a confidential relationship:

[T]he party in whom the trust and confidence are reposed must act with scrupulous fairness and good faith in his dealings with the other and refrain from using his position to the other’s detriment and his own advantage.

This language sounds a great deal like HR91 and IP06. Compare:

Faculty and staff members of the University shall exercise the utmost good faith in all transactions touching upon their duties to the University and its property. In their dealings with and on behalf of the University, they shall be held to a strict rule of honest and fair dealings between themselves and the University.

and

Actions which serve personal interests to the detriment of University interests must be avoided.

It appears that the policy writers were working with the same palette, aiming to assert a fiduciary relationship without expressly calling it by name. The PTSI court cites a previous decision in the case that does not find employment, even of a senior manager, creates a fiduciary duty:

[T]his Court has found no published case law which holds that [an] employee owes fiduciary duty to his or her employer simply by virtue of being employed as a manager without showing that employee has committed some fraudulent, unfair or wrongful act in the course of employment.

Might this finding be changed simply by having an employer put in a policy statement that all employees do owe a fiduciary duty to the employer, simply by virtue of being employed and required to agree to the policy statement? It would make silliness of the law, of course. The PTSI court runs through a check list:

Were the parties unequal? No.

Was there an overmastering influence? No.

Weakness, dependence or trust, justifiably reposed? No.

Did the employee breach an express contract or violate some confidence? No.

Was the employee subject to a restrictive covenant (non-compete, non-disclosure, non-solicitation agreement)? No.

Was there an element of fraud or trade secrecy? No.

Was the employee a director or officer? No.

Sort of didn’t work out for PTSI on appeal. We can use this checklist as a guide to thinking about faculty at a university. Despite the claims in policy that suggest that university employees must have what amounts to a fiduciary duty to the university, it appears that other than performing the duties assigned to them without committing fraud or using confidential information, employees have no such fiduciary duty. What’s all the more interesting is that Penn State policy floats the idea of fiduciary duty (without saying it) at “faculty and staff members” when Pennsylvania law requires such a duty of directors and officers. And even then, the standard is “good faith” and “reasonable” and “prudent,” not “utmost” and “strict rule” stuff.

Under Penn State policy (see HR64), faculty “duties” are assigned by authorized university officials. There is then a broad scope of other faculty activities which are not assigned, but for which the university’s resources are made available. Service to the public, for instance, such as answering questions or providing background to news reporters or peer reviewing articles for scholarly journals, preparing talks for conferences or other events. Any of this might be called “consulting”–without having to be for compensation. But even if for compensation–honorarium, reimbursement for travel or other expenses, hourly pay–what of it, so long as the pay is for the service provided and not in the form of a bribe?

University offices and other basic services are expressly permitted to be used, even for compensated consulting. As for research, Penn State has no policy (at least that I can find) that stipulates that administrators assign or control research. When the university enters into sponsored research agreements, it may require faculty who participate in those funded projects to comply with the terms of those projects. For federally funded projects, the vehicle for doing so is the (f)(2) written agreement. If the university does not comply with the (f)(2) written agreement requirement, it is difficult to see how it has a claim to inventions made with federal support through any other means, short of assigning faculty to the duty to conduct research supported by federal funds. In actual practice, however, universities release faculty from assigned duties to participate in federally supported research.

While it is possible that faculty members can have a duty of loyalty or a fiduciary duty to the university, it takes more than using suggestive language in an conflict of interest policy statement to get there. What’s clever here is how university administrators use a conflict of interest policy statement that makes a big deal about honest and fair dealings to do something that’s apparently intended to be covert–lay a mine field of wording and then make faculty and staff who argue for a different meaning overcome that wording. Not utmost good will, to be sure, and not really either honest or fair. But, then, why would we expect Penn State policies to do also what they demand of others?

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