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.