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Princeton (the Town) Sues Princeton (the University) Over Millions Derived from Taxpayer-funded Research

English: Exterior of the Princeton University ...

English: Exterior of the Princeton University Chapel. (Photo credit: Wikipedia)

Before the Bayh-Dole Act of 1980, researchers with grants from the federal government assigned any patents they obtained back to the government. Since then, patents have gone to the researchers. In most cases, universities and businesses employing federally-funded researchers have retained these patents, and benefited from the so-called transfer payments — royalties paid to the business, institution, or non-profit, with a portion of the revenues typically shared in some manner with the researchers or inventors.

These payments to academic institutions can be significant. Google has paid Stanford $337 million in royalties from its Web search algorithm. New York University made $185 million in 2012 from transfer payments, with Columbia, MIT, Northwestern, and the University of California system all making more than $100 million in the same year from transfer payments.

Another member of this $100-million club is Princeton University, which is now being sued by the town of Princeton, NJ, where the university resides, because the town feels that the university is not sharing enough of its windfalls and not behaving like a non-profit.

The university — which has a $17 billion endowment, the fifth largest in the US — sought to have the lawsuit dismissed this summer, but the judge refused, saying:

There’s a lot riding on this. 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 two questions are profoundly different, in a sense.

First, there is the question of whether Princeton University is sharing enough of its revenues with the town. The university does pay $10.2 million in school, sewer, and municipal taxes each year, while voluntarily giving the town another $2.48 million as an act of goodwill because it is a large nonprofit property owner. But that’s insufficient in the eyes of the mayor, Liz Lempert. Princeton University owns so much land in the town that much of the local property is virtually untaxed, placing greater burdens on other businesses and on individual taxpayers.

The second question is about the nature of a nonprofit and the nature of profit. There is a common misconception that nonprofits strive to have “zero budgets” each year — zero loss, zero surplus — and this makes them “nonprofit.” Nonprofits need revenues and surpluses to survive, but have to achieve these through missions that go well beyond profit-seeking and are viewed as charitable or of broad civic benefit. Is an educational institution a valid nonprofit? Finding otherwise would have a very deep impact indeed. There is also the question of whether these transfer payments represent “profit” and not just revenue. Princeton University’s attorney, Keith Lynott, said in oral arguments this summer that sharing royalties with faculty isn’t profit sharing:

It’s simply recognition in the form of just compensation for ownership interests that the faculty inventor would otherwise have.

This rather opaque construction fails to address the issue the plaintiff contends, as quoted on Patentlyo:

. . . under the law they are not even entitled to a tax exemption because they are engaged in commercial patent licensing, and the school gives out a percentage of profits to faculty. Under the law in New Jersey, if a nonprofit gives out profits, it is not entitled to an exemption at all.

This is an interesting legal distinction that may be the Achilles’ Heel of the Bayh-Dole Act — that is, if patent royalties (which are paid out of profits at companies like Google and others) are viewed as profits being disbursed under the nonprofit umbrella, the tax status of those funds at the least and of the institution overall could be at risk.

Princeton representatives have argued that all the money made by the university is intended to support the school’s educational mission, and thus the school should not pay taxes on the buildings. Exactly how this reasoning squares with passing patent royalties through to inventors and researchers is unclear, but the case could be made that the royalties attract the researchers, who get the grants that support the university’s research function, and therefore one cannot exist without the other. Still, it seems a circuitous rationalization.

Paying nonprofit employees a fair and well-documented rate is not behaving like a for-profit. Amassing revenues into a large fund and saving this for a rainy day is not behaving like a for-profit. But passing along sizable windfalls along to individuals from supposedly mission-driven activities may well strike a court as beyond the pale.

Bruce Afran, a Princeton lawyer representing the plaintiffs, has noted that the university often behaves like a for-profit company, noting that Princeton has a licensing agreement with Eli Lilly for the chemotherapy drug Alimta, and that when the Israeli drug company Teva Pharmaceutical Industries announced it was planning to manufacture a generic version of the drug, Eli Lilly and the trustees of Princeton University filed a lawsuit to block its release. Afran says:

In many ways these modern universities have become commercial enterprises. If we prevail in this suit, it would change the entire tax base and it could mean tens of millions of dollars in tax payments every year for our community.

To readers here, the third question between these two is what is the role of taxpayer-funded research, and why nonprofits or for-profits are allowed to receive and pass along these sizable financial benefits on the backs of taxpayers.

The issues in Princeton, NJ, represents the most significant challenge to the Bayh-Dole Act’s fundamental practices. With billions of dollars at stake across academia and within the tax system, the impact of this decision could be profound.

About Kent Anderson

I am the CEO/Publisher of the STRIATUS/JBJS, Inc., the home of the Journal of Bone & Joint Surgery, JBJS Case Connector, JBJS Reviews, JBJS Essential Surgical Techniques, the JBJS Recertification Course, PRE-val, and SocialCite. Prior to this, I was an executive at the New England Journal of Medicine. I also was Director of Medical Journals at the American Academy of Pediatrics.

Discussion

13 thoughts on “Princeton (the Town) Sues Princeton (the University) Over Millions Derived from Taxpayer-funded Research

  1. I’ll ask the obvious question: what would a decision against Princeton mean for a not-for-profit university press’ ability to pay royalties to a book author?

    Posted by David Crotty | Oct 1, 2013, 6:29 am
    • I think they may simply become taxable, which is not the end of the world.

      The issue here isn’t whether a university can pay royalties, but whether the monies are subject to taxation. For-profits pay taxes on their revenues (well, except for all the multinationals who hide their money from federal taxes, ahem), and nonprofit publishers with large advertising revenue streams pay some taxes on those already.

      So, we’re not looking at a trade off between “can do it” and “can’t do it,” but rather “can do it without paying taxes” or “have to pay taxes if you do it.”

      The potentially dramatic court finding would be if such payments void the nonprofit status. That would be a revolutionary finding, and I would bet on years of legal action as it wended its way through to the Supreme Court.

      Posted by Kent Anderson | Oct 1, 2013, 7:25 am
  2. What on Earth was the motivation for passing Bayh-Dole in the first place? One would have thought that public ownership of patents (or no patenting at all) would be the obvious outcome of publicly funded research.

    Posted by Mike Taylor | Oct 1, 2013, 7:45 am
    • The objective was for the scientific outputs of publicly funded research to reach potential beneficiaries. The act was passed to provide an incentive for universities to mine their research outputs for potential commercialization opportunities. The argument made by proponents was that without this incentive many potentially valuable products would never be developed.

      Posted by rschon | Oct 1, 2013, 10:27 am
    • Before getting into the reasoning behind Bayh-Dole, it’s worth pointing out that virtually every funding agency on earth has the same sort of policy, leaving the IP of discovery with the discoverer. For example, here’s the RCUK (http://www.rcuk.ac.uk/kei/maximising/Pages/IntellectualProperty.aspx) and the Wellcome Trust’s (http://www.wellcome.ac.uk/About-us/Policy/Policy-and-position-statements/WTD002762.htm) versions of the same thing. This sort of policy is pretty universal, which probably says something about its importance.

      I wrote quite a bit about Bayh-Dole recently here:

      http://scholarlykitchen.sspnet.org/2013/08/06/is-access-to-the-research-paper-the-same-thing-as-access-to-the-research-results/

      Bayh-Dole has been hailed as one of the most important and effective pieces of legislation for the last half decade. It has resulted in an estimated 5,000 companies formed since 1980 and makes up around 30% of the NASDAQ stock market’s value. From a perspective of economic benefit to the US, Bayh-Dole has been a staggering success. More on the results here:

      http://www.autm.net/Bayh_Dole_Act1.htm

      Why is it important to leave IP with the researcher/research institution? There are a lot of good reasons for this:

      1) It improves the return on investment for funding agencies: if the NIH gives a $1M grant to Princeton that turns into $500M in continuous funding from technology transfer, that’s a great investment for the NIH. Not only was a new drug created to heal sick people, but jobs were created, tax revenue generated, and best of all for Princeton, a huge amount of money came in that can be put to fund further research at the school (a whole chemistry building resulted from one grant!).

      2) It offers rewards for performance. This can help motivate researchers and institutions to better fulfill the promise of their research.

      3) It offers incentive to researchers to stay in academia. Why stay in academia if there’s no chance to reap the rewards of your own ingenuity and hard work? Why not go work for Wall Street and earn more money doing an easier job? Here you’re providing a gold ring to reach for, a helpful tool for keeping the best and the brightest in academia.

      4) It allows products to be developed from publicly-funded research. Most pharma companies, to use one example, are hesitant to invest in developing a drug unless they’ll have an exclusive right to sell that drug. If everything is public domain, likely the drug companies don’t bother turning a discovery into something that can cure disease. There are pluses and minuses to this side of things, but if your goal is to improve medical care, it’s probably necessary.

      5) It requires those looking to profit from federally funded research to invest back into the system in a symbiotic relationship, rather than acting as parasites. If Eli Lilly is going to make $2.5 Billion from NIH funded research, they should sure as hell kick in to support that research. As noted above in point 1, it creates a more efficient system that offers better funding for continued research.

      Posted by David Crotty | Oct 1, 2013, 10:50 am
      • Thanks, David, this is helpful. So to summarise, it turns out, counterintuitively, that there is greater public benefit in allowing the patents into private hands than there would be in retaining them as publicly owned?

        Posted by Mike Taylor | Oct 1, 2013, 7:45 pm
        • That’s the theory behind it, though it is not without faults. For example, when an exclusive right is sold to one company, you can get into abusive situations, such as the University of Utah did with their (now invalidated) patents on the BRCA genes (NIH funded), where breast cancer tests were kept at such an expensive level that many patients couldn’t afford them, and the pace of research was slowed.

          One proposed solution is to prevent exclusive licensing of funded IP, instead requiring that everything be licensed on a non-exclusive basis to whoever wants to try to exploit it. That would solve the monopoly abuse issues, but might also massively reduce the revenues that universities and researchers reap, as companies will pay a lot more for exclusive rights than they’ll pay to be one of a horde. It might also put a dent in the actual product development–if for example the NSF funded researchers behind Google had to share all their IP with Yahoo and the other search engines of the time, then maybe they never get the chance to build Google into what it is now.

          How much you support it probably depends on your goals, and your attitude toward IP. If you’re a government and you’re trying to drive economic development and tax revenue, then it seems to make sense. If you’re a researcher on the verge of an important discovery and you have a family to feed and kids to send to college, then it certainly makes sense, as it does a pharma company looking for the next big drug. But if you believe, as the Finch Report stated, “the principle that results of research that has been publicly funded should be freely available in the public domain is a compelling one, and fundamentally unanswerable,” then the patent paywalls created by researchers and institutions are likely even more problematic than publisher restrictions on access to the papers written about those results.

          And it’s likely to be a major stumbling point for efforts like that of the OSTP to require the release of data from federally funded research projects, which is another can of worms…

          Posted by David Crotty | Oct 1, 2013, 8:35 pm
  3. Well, at least Princeton is not involved in big-time football, so makes no “profits” out of that enterprise. Indeed, its stadium is mostly empty on football weekends. As a member of the Ivy league, Princeton of course does not offer athletic scholarships.

    Princeton University Press, unlike most university presses, is not a unit of its parent university, as almost all university presses in the U.S. are. It is a separately chartered corporation in the state of New Jersey, so could not be brought into this suit against the University.

    I know because I worked there for 22 years after graduating from Princeton. I do not shed tears for the town of Princeton, however, as I would guess that the median income of its residents is well over $100,000. The Amtrak station that runs through Princeton Junction every day is filled with top executives commuting to high-paying jobs in NYC. There is virtually no low-income housing in the town, so I never could afford to live there while I worked at the Press.

    Posted by Sandy Thatcher | Oct 1, 2013, 8:10 am
    • Football poses an interesting contrast. Charging for tickets and realizing these revenues is fine in the nonprofit space. Again, nonprofits aren’t non-revenues. Paying coaches salaries (albeit high, but competitive and benchmarked) isn’t against the rules at a nonprofit. But paying them a share of revenues as a profit-share would be against the rules, and paying players would also be (as then the entire educational mission aspect would be compromised).

      Of course, the NFL is a nonprofit organization, so there you have it. Its mission? “Trade association promoting interests of its 32 member clubs.” Their IRS 990 is fascinating. The NFL actually seems to be losing money in the best tradition of non-profits. They aren’t charging their members enough it appears.

      Posted by Kent Anderson | Oct 1, 2013, 8:29 am
  4. Suppose the transaction was re-characterized? Instead of saying that the university pays researchers as part of a revenue-sharing agreement, how about if we say that researchers reimburse the University for the resources it invests in research out of the rare but occasionally very high revenue they they, the researchers, earn from patents. This would recognize that the researchers are the source of patent rights, as inventors, and that the universities support their endeavors by providing salaries, facilities and often extraordinary resources for research. In the case of Alimta, the research that led to the drug was carried on for decades and originated in a “pure” research question with no plans to develop a chemotherapy drug. Like most of the research universities sponsor, it was carried on originally for its own sake. When such research very occasionally turns into a patent, why should the researcher not share some of the revenue back with the institution to support ongoing and future research? And let’s not forget that getting a patent is very difficult and expensive these days, and is also supported by the university. The universities bear considerable risk in the process of supporting research through to a patent, and that should be a context for this discussion.

    The “third question” posed at the end of this piece sounds more like a challenge to the patent system as a whole, especially since it condemns both for-profit and non-profit patentees. That is an interesting question to discuss, but is different than whether or not Princeton’s non-profit status should be undermined by its patent income Are you suggesting that for all taxpayer-funded research, patent rights should belong to the government, as they did prior to Bayh-Dole (perhaps even if that research is carried on at a for-profit company)? If so, could we apply the same logic to other IP rights that grow out of such federally-supported research, like copyrights?

    Posted by Kevin Smith | Oct 1, 2013, 9:47 am
  5. One could look at a non-profit as having a dual relationship with a person who conducts research. On the one hand, they are employees whose works-for-hire belong to the non-profit to exploit as it wishes. On the other hand, they are partners in a venture that may become lucrative or for naught. The latter relationship is recompense for the researcher’s creative input as distinguished from duties that involve following protocols and the like. Whatever that portion is determined to be, it comes from those who pay for the right to use the patent. The fact that the university is acting as a fiduciary agent should not be construed as profit sharing. Princeton, the city, is simply grasping IMO.
    It might not be a bad idea for Congress to revisit the Bayh-Dole Act and possibly update it to resolve this ambiguity.

    Posted by Frank Lowney | Oct 1, 2013, 10:42 am
  6. I agree with the judge. This case does pose very interesting questions: Are the criteria we use to define not-for-profit adequate? Is a societal need served by granting not-for-profit status to an organization? If a not-for-profit organization’s revenues consistently exceed expenses over a ten year period; can it truly be classified as not-for-profit, regardless of its stated mission?

    I am not so sure, Kent, that amassing large revenues into a fund over multiple years does not at least constitute de facto for-profit. The question then becomes; is it in society’s interest to continue to treat such an organization as a not-for-profit and not tax those accumulated revenues. It will be very interesting indeed to see this issue play out in court.

    Posted by Mark Danderson | Oct 1, 2013, 3:23 pm

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