Penn State’s Protection Racket, 24: Fiduciary Duty

Penn State’s policy on conflict of interest, HR91, uses language that might be used to describe fiduciary duties. Penn State “faculty and staff members,” as a matter of policy, must use “utmost good faith” in their “duties to the University and its property.” By policy, faculty and staff “shall be held to a strict rule of honest and fair dealings between themselves and the University.” Further, “they shall not use their positions, or knowledge gained therefrom, in such a way that a conflict of interest might arise between the interest of the University and that of the individual.”

These assertions of policy put a great deal of pressure on what it means to have a conflict of interest. It would appear that “faculty and staff members” are reduced to that of the abstract “individual” that can have no personal interests but those that advance the interests of the University, writ large with a capital U.

All this is darkly odd. Typically, conflict of interest policies recognize that conflicts of interest do happen and the purpose of policy is to disclose those conflicts of interest that matter, and see that these conflicts are managed. Only in certain boundary cases are conflicts of interest not allowed–perhaps involving purchasing agents or senior executives involved in contracting, where even appearances might create problems. But here, conflicts of interest are simply forbidden. 

We might say, this is an impossible demand. What is the “interest of the University”? Is that merely whatever any university administrator declares as an “interest of the University”? Or is it an interest expressed by a University policy? For instance, administrators might place in policy the desire to sell inventions to raise money for the university, and define invention broadly to be anything administrators desire to sell. Once that policy is established, any faculty member creating something, call it an “invention, broadly” that administrators desire to sell has a conflict of interest with the University if the faculty member does not want administrators to sell this “invention, broadly.” Perhaps the faculty member wants to give away the “invention, broadly”–or perhaps the faculty member does not want to release any information regarding the “invention, broadly” for some time, for instance, so that it may be verified or proofread or reconsidered before being released.

But any such personal interest is, by policy definition, a forbidden conflict of interest, and policy demands that the faculty member confess their crime: “Faculty and staff members shall disclose . . . every potential conflict of interest of which they are aware before a contract or transaction is consummated.” It’s not just actual conflicts of interest, but also potential conflicts of interest.

And one last bit:

University tangible assets, equipment, supplies and services may not be used by employees for personal gain, or for purposes outside the scope of their employment.

Now it would appear that “tangible assets” covers equipment and supplies, and so one wonders why a list that appears to distinguish tangible assets from equipment and supplies. “Personal gain” is so general that it’s not clear that the use of university cafeteria services might create a conflict of interest, since the food ingested might supply energy to the brain to think thoughts unrelated to the benefit of the university.

The second list is even stranger–“personal gain” or “purposes outside the scope of their employment.” It would appear, from the logic here, that the policy imagines that there might be some uses of University equipment within the scope of employment for personal gain, and these uses must be forbidden, even though within the scope of employment.

Notice, as well, we have switched from “faculty and staff members” to “employees.” Is that a meaningful change? Faculty and staff are ambiguous with regard to employment. For faculty, university “employment” is narrow–what the university assigns and has the right to control. For faculty scholarship–including research and professional development and even choice of content in the classroom–university employment is narrow, bounded by statements of academic freedom and security of employment. Faculty are free to choose to do research, and what research to do, how to do it, and when and where to disclose or publish their findings.

For “staff” there is also an ambiguity in employment. If staff are assigned to assist faculty, even though those staff members are employed by the university, they are “seconded” to the faculty. So if a faculty member shows up at a university service center created to help faculty build on-line course materials, the faculty member is authoring those materials and the staff contributions are subordinate to the faculty member’s authorship–even if the staff members are otherwise “working within the scope of employment.” The work product is the faculty member’s, not the staff employee’s nor the university’s (see Lindsay v. The Wreck of the Titanic).

But the policy here makes it appear that no one can assist a faculty member to prepare anything “outside the scope of employment” or “for personal gain.” Thus, a faculty member could not use a photocopy center to make a copy of a journal article for use in a book project. The book might be published and the author receive royalties, thus personal gain, and the book project is not within the scope of the faculty member’s employment, having not been assigned by the university, not subject to its control. Thus, to write a book is a conflict of interest, to write a piece of software is a conflict of interest–forbidden, unless, of course, one avoids penalties by deciding that the book or software is within the “scope of employment.” The every-expanding scope of employment, to avoid conflict of interests by having any personal interest in anything that university administrators might wish to sell.

Even the “knowledge gained” from “their positions” cannot be used for any other purpose than the benefit of the university–certainly not for “personal gain” and not for public gain, apparently, unless doing so is within the scope of one’s employment.

What are we to make of this policy statement? It’s outrageous, yes, and it’s full of logical ambiguities, but in outline it makes some claims:

  • faculty and staff may have no private interests in anything the university might sell
  • any use of university tangible assets and services is only for the gain of the university
  • no conflicts of interest are allowed

These are the conditions of a police state. Rules that cannot possibly be followed. Rules that claim all resources for the government and none left for anyone to have a personal interest. “Gain” is not merely “making money from commercial enterprise” but any “gain.” “Knowledge” is not proprietary information controlled by the university and not made available to the public generally, but rather any “knowledge.” “Services” is not specialized services made available with an express bargain regarding any resulting work product–any “services” are claimed.

“You owe us all you do.” “Nothing you do can be for yourself or for others–it must be for us.” “You must report to us any time you or anyone else other than the university might gain from knowledge you obtained from your position.”

In the Fenn case, the court agreed with Yale’s contention that Professor Fenn owed the university a “duty of loyalty.” The upshot was that any inventing ought to be done for the university, so the university licensing office could make money by selling the invention (or a license to the invention, or a patent on the invention). Professor Fenn could not use his knowledge to invent for himself, or for others–he must invent for the university. Furthermore, he had an obligation to explain to the university how any invention he made might be valuable, to give administrators all the more encouragement to own the invention and attempt to sell it off. Of course, Fenn was decided in the context of a now abolished interpretation of Bayh-Dole:

Fenn had no obligation to disclose his invention to Yale under his NIH grant because Yale breached the standard patent rights clause and did not implement the (f)(2) written agreement.

Yale furthermore breached the standard patent rights clause by not disclosing Fenn’s invention to the NIH prior to sixty days before a statutory bar to file a patent application.

Yale had absolutely no ownership interest in Fenn’s invention as a consequence of receiving NIH funding for Fenn’s research.

Yet the court assumed–following Yale’s line of attack–that Fenn owed Yale his invention as a result of federal funding–that somehow the NIH funding agreement (especially the Bayh-Dole part) created a contract that Yale relied on Fenn to fulfill on Yale’s behalf. That poor, helpless Yale depended on strong, powerful Fenn to properly manage Yale’s assets. That is, the court found there was a fiduciary relationship between Fenn and Yale (citations removed):

Under Connecticut law, “[a] fiduciary or confidential relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other.” It follows that a fiduciary “`must act in scrupulous good faith and candor … and with the finest and undivided loyalty to the trust.'”

Dr. Fenn and Yale had a special relationship of trust and confidence that was different from the usual employer-employee relationship. Yale supported Dr. Fenn’s research in the form of facilities, funding, and staff and entrusted Dr. Fenn with the proper management of its NIH grants in the reasonable expectation that Dr. Fenn would use his superior knowledge, skill and expertise to act in good faith and with complete candor and undivided loyalty in connection with the University’s research funds and intellectual property, including the ‘538 invention and related NIH grants.

If Yale’s goofball account of Bayh-Dole is set aside–as the Supreme Court did in Stanford v Roche, then the Fenn court got things entirely bass-ackwards. It would remain true that Fenn and Yale had a “special” relationship, not the “usual employer-employee” relationship. But the dependency goes now the other way. It is Fenn who relied upon Yale to be competent and look out for Fenn’s scholarly interests, including compliance with NIH grant requirements on which Yale was required to act. But Yale breached those requirements, and won’t admit it even now. Why ruin a good beatdown of a Nobel-prize winning faculty member by admission that doing so was wrong, when the beatdown serves as a lesson to all faculty nationally that showing up administrators as incompetent is not to be tolerated. The Fenn court again:

By virtue of Dr. Fenn’s special relationship with Yale and the trust Yale necessarily had to place in Dr. Fenn, Dr. Fenn owed Yale the duties of a fiduciary, including the duties to make full disclosures and maintain an undivided loyalty.

Yale breached the (f)(2) agreement requirement in the standard patent rights clause by which Fenn would have promised to disclose subject inventions and by which all inventions Fenn made with NIH funding would have been subject inventions when he made them, not when Yale acquired them. The Fenn court then ridiculously asserts that Yale relied on Fenn because Yale breached its federal funding obligation. And this was Fenn’s point–that Yale’s licensing office was incompetent (which it appears they were). So because Yale breaches its obligation to the federal government, it must rely on Fenn to undertake that obligation anyway, on behalf of Yale. If Yale had implemented the (f)(2) agreement, Fenn would have had a contractual obligation to disclose his inventions made with NIH funding. The Fenn court, however, makes it appear that no (f)(2) written agreement is actually required, because the mere statement of university desire to own is enough to create a fiduciary duty to disclose, even if, had Yale complied with its federal funding obligations, the (f)(2) written agreement would have *not* created for Yale any ownership interest whatsoever in any inventions Fenn might make with federal funding. Under the (f)(2) agreement, which states the entire obligation of any inventor with regard to inventions made with federal support, Fenn did not owe anyone any account of the value of an invention, its potential commercial uses, possible licensees–none of that. It’s just not there.

The Supreme Court in Stanford v Roche made it clear that employee inventors have no implied duty to assign inventions to their employers:

We have rejected the idea that mere employment is sufficient to vest title to an employee’s invention in the employer. . . .

With an effective assignment, those inventions—if federally funded—become “subject inventions” under the Act, and the statute as a practical matter works pretty much the way Stanford says it should. The only significant difference is that it does so without violence to the basic principle of patent law that
inventors own their inventions.

For “vest title” include “right to assert title” and “right to demand the assignment of title.” The employer must have an agreement with the employee with regard to inventions, and within the scope of that agreement obtain an assignment. This is basic stuff. If all employees had a fiduciary duty to their employer with regard to inventions they made, then we would be right back to what the Supreme Court has rejected, that mere employment creates an obligation that inventors hand over their inventions to their employers.

Here’s another discussion of the matter, from a law firm’s discussion of the implied “duty of loyalty”:

Under Illinois law, the duty of loyalty requires that an employee act solely for the benefit of the employer in all matters connected with his or her employment.

This duty does not prohibit an employee from planning, forming, and outfitting a competing corporation while still working for the employer, or even informing a client of the employee’s intention to leave the employer, so long as the employee does not engage in competition with the employer.

We might ask whether university faculty have such a duty of loyalty to the university with regard to their scholarship–whether in the form of books, software, inventions, data, or knowledge. That is, although faculty are also “employees” of the university for the tasks they are assigned, they are not employees otherwise, and certainly not for their scholarship. Or, in the twisted version of a university administrator who defines inventions to include non-inventions, faculty are “employees without the obligations to an employer that employees otherwise might have.” That is, faculty are employees for their scholarship if employee is defined to include non-employees. And, of course, this is just what many university IP policies do–define employee to include non-employees. How convenient. What wonderful uses for clever incompetence.

In this web discussion of the duty of loyalty, loyalty is linked to competition. We might ask what a university’s competitive interests are–is it winning grant funding against the efforts of other universities? Is it recruiting football players against the efforts of other universities? Without a patent licensing program, would we expect that a faculty member owed a duty of loyalty with regard to patentable inventions other than in those instances in which the university expressly contracted with the faculty member to do inventive work for the university? No.

Should things change if a university creates a patent licensing office and then declares that its business is managing anything that faculty members might make? Does this declaration then create an implied duty of loyalty, that faculty now must decide that anything that they do that might possibly result in something inventive must be done for the university, because anything else would compete with the university’s stated desire to manage everything that faculty might invent–relating to their field of expertise, or to their appointment, or to their discipline, or arising from knowledge gained in their position, or from the use of any university resource (other than perhaps one’s office–but the University of Washington once held that it was a violation of the state’s ethics law to plug in a personal laptop and use it to view web sites not directly related to work duties–one was stealing electricity from the state for purely personal purposes; with that reasoning, one could not recharge a cell phone and use it for personal calls–meanwhile, out in the parking garages, university administrators make electricity freely available for plug-in hybrid cars–what a world, that has such people in it).

The question is whether an employment relationship is so fluid that any administrator of an organization can announce a new policy and so change the conditions of employment, merely by assertion, regardless of any previous conditions and regardless of any conflicting policies or agreements. Which is to control, an IP policy or the other policies and understandings? A conflict of interest policy or the other policies and understandings? At least the Shaw court ruled that where there was a contract between a university employer and an employee, the employee had an equal right to the benefit of the contract.

We might find, then, that with regard to their scholarship–including inventions–faculty have no fiduciary duty to the university, nor do they have any duty of loyalty not to “compete” with the university in what they choose to do “outside” the university, nor in what they they do “within the university” but for which they are not assigned. Their fiduciary duty extends only to the scope of work they are assigned as university employees; their duty of loyalty also extends only to assigned work. For everything else, policies on academic freedom control. Even policies on conflict of interest depend on faculty acting as agents of the university. For research, many universities expressly disclaim that faculty may act as agents of the university with regard to signing research contracts or licensing agreements. Not agents, not representing the interests of the university, not performing executive actions that bind the university. Such a disclaimer makes sense if faculty, for their scholarship, have no fiduciary duties to the university, do not owe the university an implied duty of loyalty.

These same things hold for intellectual property: faculty have no fiduciary duty or implied duty of loyalty with regard to intellectual property in their scholarly or professional work, other than in those tasks they are assigned by the university or which they expressly agree to perform under a separate written agreement. Faculty have no obligation to assign any such intellectual property to the university; it is not work made for hire, it is not the university’s as a condition of employment–because it is not even a matter of employment.

One would then construe an IP policy to claim “as a condition of employment, you owe us a bunch of things that you do beyond the scope of your employment, and in fact if you choose to do any of those bunch of things for anyone but the university, you have to agree that they are within the scope of your employment, even though they aren’t–or we will beat you down.” It may well be that this is the shape of many universities’ IP policies and the state of administrative mind behind them. We might call it a manifestation of the Moloch administrative state, ready to eat everything that it might give birth to–and also everything that anyone close to the university might give birth to.

If we were to simplify all this, we would argue that university IP policies, in general, must be read narrowly with regard to faculty and students. These policies are a mess of ambiguities, outrageous assertions, illogic, misrepresented law, and mind-numbing practices. Their intent is obvious–take everything, create pain for anyone who resists, avoid accountability, claim doing these things is desired by the public.

What is not at all obvious is that such taking is good for technology transfer, for making money, for university’s role in supporting research, for the progress of research, for industry, for economic development, for the independent maker community, for free competition and enterprise, for the public good. It may be good for the Moloch administration–for the convenience of administrators and the satisfaction of the university lawyers who love them, but not for most anyone else. That’s what’s consternating–that any Moloch thing can appear to be a virtue simply by claiming it’s in the public interest and that there are success stories.

By contrast, I argue that effective university technology transfer starts by leaving faculty and students alone with their intellectual property, taking nothing by policy or employment agreement or use of university resources except where those involved voluntarily agree, on terms acceptable to them, and for which the university is then accountable. I haven’t seen any other approach work, except as the random output of a bureaucracy, where success is the thing important enough that survived the suppression of opportunity. Yet no U.S. university administration I know is openly willing to give up its worship of the Moloch state of IP management.

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