Princeton sues Princeton (h/t to Glenn):
Bruce Afran, an attorney who lives in the town, is suing the school in the Tax Court of New Jersey on behalf of four other residents and the estate of a fifth, arguing that the country’s fifth-richest university—with a $17 billion endowment—doesn’t have the right to collect and distribute profits while claiming tax exemptions on most of its property. “Some faculty are becoming fabulously wealthy, while taxpayers are paying more than they should,” says Afran. “That is fundamentally unfair.”
The profits in question come from a “big hit” patented technology. The article gets Bayh-Dole wrong, of course. No, Bayh-Dole does not split royalty income with the federal government; no Bayh-Dole does not require inventors to assign to the university. It’s not even clear that the Princeton invention is a subject invention under Bayh-Dole. Have a look at the 29 patents in Princeton’s issued portfolio–things appear to start with the ‘653 patent, filed in 1986 and issuing in 1987. There’s no government interest statement. According to one source, the work was funded by Lilly. This does not appear to have much at all to do with Bayh-Dole. Princeton’s attorney gets the royalty sharing bit all wrong–
The school’s attorney, Keith Lynott, said in oral arguments in June that the test under New Jersey law is “whether the institution seeks to generate profits from its activities, not merely whether it makes payments to individuals.” Sharing royalties with faculty, who under Bayh-Dole must assign their patents to their employer, isn’t profit sharing, Lynott said in court. “It’s simply recognition in the form of just compensation for ownership interests that the faculty inventor would otherwise have.”
What does Bayh-Dole have to do with it, if Bayh-Dole isn’t involved? And isn’t a patent policy that demands assignment of inventions and hands them to an organization with a mandate to pursue profits pretty much evidence of an intent to generate profits? Is not the retention of royalties for institutional use, rather than dedication, say, to a fund for cancer victims, more evidence that the university wants the profits for itself? Lynott then works the Bayh-Dole angle–since Bayh-Dole does require the standard patent rights clause to require universities to agree to share royalties with inventors. But that sharing is *not* “just compensation” for universities taking ownership of inventions, precisely because Bayh-Dole, unlike the old IPAs, does not require university ownership. All the sharing requirement means is that whatever is negotiated as “just compensation” must include funds from royalties received.
Universities routinely screw this all up by making assignment a condition of employment or use of resources or fogging a mirror–so that there is no other consideration, as far as the university is concerned. Any payment from royalties is an administrative decision, a perk, not a quid pro quo for assignment. This approach works only if faculty are hired to invent, which is generally not the case, not even close to being the case, and not the case generally in federally sponsored research. Thus, the vast majority of the time, faculty inventors receive no compensation at all for being made to assign their inventions to the university. Even the university’s royalty-sharing policy, if it is merely compliant with the standard patent rights clause, is not the “just compensation” we are looking for to conform with an eminent domain taking (whether in a public university, or under a claim of federal law requirement). An obligation already required cannot also be consideration for an agreement. Thus, that the university has agreed with the government to share royalties with inventors cannot be used by the university as consideration in any agreement between the university and its inventors. The consideration for the agreement has to be something else. Maybe the article has garbled Lynott’s testimony as much as it has Bayh-Dole. Then again, maybe Lynott has garbled Bayh-Dole and the article merely reports that.
But there is more to all this.
First, the clump of patents. Princeton does not have just one patent but 29 on the underlying technology around Alimta. It’s a patent stack. Of course, we cannot tell from the PTO data what patents are licensed to Lilly, though at least six are co-assigned.
Second, Lilly has its own patents. The second bundle of patents is a typical side-effect of university exclusive licensing programs–the licensee then creates a portfolio of applications, extensions, and variations that not only broaden the scope of the monopoly and prevent the development of alternatives, but also potential extend the monopoly beyond the term of the licensed university patents or the licensing agreement. This has happened, for instance, with the 3d printing patents that MIT licensed exclusively to Z Corp.
Consider: if a university licensed for a short exclusive term–in the range of 3 to 8 years–then other players would have incentives to develop applications, variations, and extensions, with the university-licensed work passing from incentive to platform. Competition for new developments would put pressure on standards formation and interoperability. Competition in the marketplace would then depend on application, quality of build, price, support, and the like, rather than the university’s patent position. One of the objectives of Bayh-Dole is to
to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery;
The objective does not limit “future research and discovery” to merely the university and an exclusive licensee. If no one else can conduct research on the invention (and after Madey v Duke there is effectively no “research exception”) because a university has licensed exclusively, how then is this objective met? If there is no free competition, again, how has a university’s exclusive licensing met this objective? Might it be the case that any exclusive license for a subject invention should have to be for less than half the term of the patent or the university should have to make a positive case for how the exclusive license meets this objective? (It certainly could: the exclusive license could require sublicensing, permit dedication to a standard, or cross-licensing at no charge to encourage broad access to the licensed invention–none of these things are typically found in any university license, and if you proposed it, the response would be scoff). Of course, this is just an aside, because the Princeton and Lilly patents apparently do not involve subject inventions.
Third, Lilly is using its second bundle, such as the ‘209 patent (7,772,209), to extend the term of its patent monopoly–but it would appear to be a term extension that does not provide additional royalties to Princeton, as Princeton’s patents appear–like many university biotech patents–to expire in the next few years. Lucrative drug–income in the billions–corporate DNA: one has to please the shareholders. One wonders how many university endowments are invested in Eli Lilly and stand to gain if Lilly prevails in pushing its monopoly out another six years or so. I see how doing so helps Lilly. How, again, does the monopoly help cancer patients?
Back to Princeton suing Princeton. Universities have had running battles with their communities over taxes. When a university buys a commercial building and applies its tax-free standing to it, the building is lost from the host community’s tax rolls. In a big city, that might not matter, but in a small city, such as Princeton or Santa Cruz, it can make a difference, especially if repeated multiple times. When a university pleads poor and turns out to be generating substantial income from its activities, and beyond that uses the income to expand, causing even greater pressure on civic infrastructure, then cities, and citizens, might think about asking for a little help with things. “Asking” typically has no effect, however. So it ends up before a judge:
“There’s a lot riding on this,” Judge Vito Bianco said at the hearing in which he refused to toss out the case. “It’s not just for this university or for every university in the country, but for nonprofits as a whole. I think this case is going to have a very, very deep” impact.
The word “appeal” comes to mind. It may come down to whether Princeton in entering into the license with Lilly is an active participant in “commercialization” of the technology. If so, then it would appear to be a straight shot that the royalty income is unrelated business income and subject to taxation of all sorts. If one is “commercializing” rather than simply benefiting from the commercial activities of others, then it does not matter what purpose is ascribed to doing so–companies, too, argue they provide a public benefit, too, with that big “unseen hand” ensuring that every bit of self-interest somehow works for the common good. It is not the purpose of the dealings that matters: it is the nature of the dealings. One can obtain a car by having it given to you or by stealing it. There’s a difference, you see, regardless of how helpful it is to have it. Similarly, a university can set up invention administration programs that avoid taxes or one that incurs taxes. It’s a choice about methods. The point is to conduct one’s affairs so that the tax does not apply, not simply to assert one doesn’t have to pay, regardless of how an activity is conducted. If these are subtleties, then the moral fabric itself is pretty torn up, and that itself ought to be reason to tax the heck out of university patent licensing.
All of this elicits a typical response from AUTM officials. The article quotes the current AUTM president:
The lawsuit in New Jersey concerns him because a win for the residents could spark other litigation and potentially shrink the pots of money that schools have for research. “We would not want any type of result that could have a chilling effect on innovation,” he says.
Let’s hope the article here has as well garbled the words. The “pots of money” that universities have for research are generally speaking, huge. Taxing the royalty income from “commercialization” programs is not a big deal. But look at what follows: that somehow taxing income “could have chilling effect on innovation.” How does this follow?How does taxing a university’s licensing income have any effect whatsoever on innovation? One might argue that a city obtaining revenues to support its infrastructure–streets, parks, police, energy–is just as vital to “innovation” as adding another 0.1% to a university’s research budget. Of course, at Princeton, its income from the Lilly license appears to be on the order of $100m a year, where Princeton’s overall research budget is under $300m. It’s a tidy amount. But sharing a portion with the city might make for a lesson in civics for university administrators.
Perhaps university administrators should take a lesson from their lead inventor, Edward Taylor, who has set up a $1m fund at Hamilton College, where he gained his love of chemistry. That is a wonderful gesture from a faculty member who had the good fortune to discover a valuable compound and worked to develop a successful collaboration with an industry partner. Perhaps university administrators should be a little more of this and a little less of this. But it appears that it will take judges to put the quarter into the right slot in the jukebox.