Ethics Issues Related to the Federal Technology Transfer Act of 1986

• Court: Department of Justice Office of Legal Counsel
• Decided: September 13, 1993
• Status: Published

Opinion

Ethics Issues Related to the Federal Technology Transfer Act of 1986

A g o v ern m en t em p lo y ee-inventor who assigns his rights in an invention to the U nited States and ac­ cepts the g o v ern m en t’s paym ent of am ounts tied to the resulting royalties, as provided in the F ed­ eral T echnology T ransfer Act of 1986, m ay continue to w ork on the invention w ithout violating the statu te ag ain st taking part in matters in w hich he has a financial interest, 18 U .S.C. § 208, or the statu te forbidding supplem entation of federal salaries, 18 U.S.C. § 209

U nder 18 U .S.C § 208, a governm ent em ployee-inventor m ay not take official action with respect to an agreem ent for developm ent of his invention entered into by the U nited States and a com pany w ith w h ich the em p lo yee has contracted to exploit the invention abroad.

Septem ber 13, 1993

M em orandum O p in io n fo r t h e D ir e c t o r O ffice of G o v e r n m e n t E t h ic s

Y ou have asked us to advise w hether we agree with a Septem ber 27, 1988, letter from the Office o f Government Ethics (“OGE”) to the Departm ent of Commerce (“ 1988 O G E letter”) and to review a draft O G E letter to the Special Counsel for Ethics at the D epartm ent of Health and Human Services (“draft OGE letter”). Both letters address issues involving the relationship between federal conflict-of- interest laws and the Federal Technology Transfer A ct of 1986 (“FTTA”), as amended, 15 U.S.C. §§ 3701-3717. W e believe that the 1988 OGE letter was cor­ rect in concluding that payments to a government employee under FTTA section 7 do not violate 18 U.S.C. § 208 or 18 U.S.C. § 209(a). W e also agree with the con­ clusion o f the draft O G E letter that, on the specific facts stated there, § 208 bars an employee from w orking in his official capacity on an invention for which the em ­ ployee holds a foreign patent, and for which the employee has contracted for for­ eign com m ercialization with the sam e company that is under contract with the federal governm ent to develop the invention.

I.

C ongress enacted the FTTA in 1986 as part o f a continuing effort to encourage technology transfers from federal research laboratories to private industry. The FTTA am ended the Stevenson-W ydler Technology Innovation Act o f 1980, Pub. L. No. 96-480, 94 Stat. 2311, which created incentives for federal agencies and employees to w ork with private industry in com m ercializing new technologies de­ veloped in federal laboratories.1 T o this end, section 7 o f the FTTA requires a

1 See, e.g., 132 Cong. Rec. 20,388 (1986) (statement of Sen. Gorton) (“The FTTA is designed to im- prove the transfer o f technology out of the Federal laboratories and into the marketplace. . . . It improves the

46 Ethics Issues R elated to the FTTA o f 1986

government agency to “pay at least 15 percent of the royalties or other income the agency receives on account of any invention to the inventor . . . if the inventor .. . assigned his or her rights in the invention to the United States.” 15 U.S.C. § 3710c(a)(l)(A )(i). Once section 7 payments are made to an employee-inventor, the individual generally will continue to work on the development and im prove­ ment of the invention, including its commercialization as part of federal research and development efforts. These efforts may include a cooperative research and development agreement (“CRADA”). CRADAs are cooperative agreements with universities or other entities in the private sector and are aimed at refining an in­ vention and transferring it to the marketplace. They are specifically authorized under section 2 of the FTTA.2 At the same time, federal ethics laws generally prohibit government em ployees from personally participating in matters where they have a “financial interest.” Under 18 U.S.C. § 208:

Except as permitted by subsection (b) hereof [concerning waivers and other exclusions], whoever, being an officer or employee of the executive branch o f the United States Government . . . participates personally and substantially as a Government officer or employee, through decision, approval, disapproval, recommendation, the ren­ dering o f advice, investigation, or otherwise, in a judicial or other proceeding, application, request for a ruling or other determination, contract, claim, controversy, charge, accusation, arrest, or other particular matter in which, to his knowledge, he . . . has a financial interest — Shall be subject to the penalties set forth in section 216 o f this title.

18 U.S.C. § 208(a).3 If amounts paid to government employees under FTTA sec­ tion 7 constitute a “financial interest” in the invention, then the employee-inventor probably would be forbidden to continue working on the project while receiving section 7 payments.

incentives for Federal scientists to put in the time and effort to explore the commercial possibilities o f their inventions by requiring agencies to share **t least 15 percent of the royalties received from patents with the inventor.’’) ‘ Section 2 provides in relevant part: Each Federal agency may permit the director of any of its Government-operated Federal laborato­ ries, and, to the extent provided in an agency-approved joint work statement, the director of any of its Govemment-owned, contractor-operated laboratories — (1) to enter into cooperative research and development agreements on behalf of such agency . and (2) to negotiate licensing agreements . . for inventions made or other intellectual property developed at the laboratory and other inventions or other intellectual property that may be vol­ untarily assigned to the Government 15 U.S.C § 3710a(a). * Section 216 provides both civil and criminal penalties for violations of § 208. 18 U S C. § 216

47 O pinions o f th e O ffice o f L egal Counsel

In- 1988, OGE resolved this apparent conflict by concluding that amounts paid to federal em ployees under section 7 constitute compensation from the government and that such com pensation does not constitute “a financial interest” under § 208. While the 1988 opinion was not reviewed by this Office at that time, it is consistent with views we expressed in an earlier opinion. In 1980, this Office concluded that § 208(a) does not cover a situation “in which the" only financial interest in the [particular matter] is that which federal employees have in their government posi­ tion and salary, as to which no outside financial interest is im plicated.” See M emo­ randum for Thom as M artin, Deputy Assistant Attorney General, Civil Division, from Leon Ulman, Deputy Assistant Attorney General, Office of Legal Counsel, Re: 18 U.S.C. § 208 a n d Pending Salary Adjustm ent Litigation at 3 (Jan. 24, 1980) (“ 1 9 8 0 O pinion”) 4 The question whether the term “ financial interest” as used in § 208 covers com­ pensation received by a government employee in connection with his government em ploym ent has never been conclusively settled.5 As in any task of statutory con­ struction, we begin with the text, see, e.g., United States v. Turkette, 452 U.S. 576, 580 (1981) (“In determ ining the scope o f a statute, we look first to its language.”), and are bound by the “fundamental canon” that “unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning.” Perrin v. United States, 444 U.S. 37, 42 (1979). Section 208 does not define the term “financial interest.” It could b e interpreted to refer to any number of potential monetary or other personal interests of a covered person, including an individual’s federal com pensation.

4 In 1985 and again in 1987, we admittedly questioned the correctness of the 1980 Opinion in light of the “‘plain language” of § 208(a) See Memorandum for Richard K. Willard, Assistant Attorney General, Civil Division, from Charles J. Cooper, Assistant Attorney General, Office of Legal Counsel, Re 18 U.S.C § 2 0 8 a nd Participation o f Departmental A ttorneys in Debt Ceiling Litigation at 2 n 1 (Dec. 6, 1985); Memorandum for the Solicitor of the Intenor, from Samuel A. Alito, i r , Deputy Assistant Attorney General, Office of Legal Counsel, Re Scope of the Term “Particular Matter ” Under 18 U.S.C 208 at 9 n 13 (Jan. 12, 1987) Notwithstanding those opinions, w e adhere to our 1980 Opinion. 5 The only case arguably on point is U nited States v. Lund, 853 F.2d 242 (4th Cir. 1988) In that case, the court applied § 208 to interests arising from a federal em ployee’s government salary. The facts of that case, however, are unique. The defendant w as a federal manager who married a subordinate and kept their m am age secret. The defendant continued to supervise his wife and, over time, granted her higher pay, pro­ moted her over another applicant, and recommended her for a government-funded graduate school program This conduct was found to violate § 208. The specific issue before the Court, however, was whether § 208(a) was “applicable to conflicts of interest in intra-agency personnel matters." Id. at 243. Based upon the statute’s plain language, the Court concluded that § 208(a) was applicable to such conflicts, rejecting the argument that the statute’s “reach is limited to conflicts of interest in matters involving outside suppliers of goods and services to the government.” Id. at 244. The implication of the Lund court’s decision was that a federal em ployee’s spouse’s employment contract represented a § 208 “financial interest,” even if that contract was with the federal government. The Court did not, however, directly address the issue whether the covered employee’s own federal employment con­ tract could constitute a “financial interest” giving rise to a prohibited conflict. Moreover, it is significant that the arrangement was kept secret As will be discussed infra, Congress appears to have been principally concerned with financial interests that would not be known to the agency involved In any case, it is unclear whether Lund could be extended beyond its very peculiar facts.

48 Ethics Issues R elated to the FTTA o f 1986

It is also true, however, that in “ascertaining the plain meaning of [a] statute, the court must look to . . . the language and design of the statute as a whole.” K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988).6 In this regard, the provisions of § 208(b) may illuminate the meaning of subsection (a). Section 208(b) provides that:

Subsection (a) hereof shall not apply (1) if the officer or employee first advises the Government official responsible for appointment to his position o f the nature and circumstances o f the judicial or other proceeding, application, request for a ruling or other determination, contract, claim, controversy, charge, accusation, arrest, or other particular matter and makes full disclosure of the financial interest and receives in advance a written determination made by such offi­ cial that the interest is not so substantial as to be deemed likely to affect the integrity of the services which the Government may ex­ pect from such officer or employee.

18 U.S.C. § 208(b). The creation o f a procedure whereby employees may obtain exceptions from the prohibitions o f subsection (a) upon disclosure of their financial interest indicates that Congress was not referring to “financial interests” that need no disclosure, such as the compensation a federal employee receives from the government. This rationale led to our original determination that the compensation received by fed­ eral employees was not a “financial interest” within the meaning of § 208(a). As noted in the 1980 Opinion, the full disclosure requirements of § 208(b) “suggest that the interest of concern is one that, without such disclosure, would not be ordi­ narily known to the appointing official. Otherwise, there would appear to be no logical or practical reason for requiring ‘full disclosure’ by the federal em ployee.” 1980 Opinion at 2. This interpretation of § 208 is supported by its legislative history. Section 208 was enacted in its present form in 1962.- Before its enactment, 18 U.S.C. §434 forbade federal employees from acting for the United States in the transaction of business with any business entity in which they were “directly or indirectly interested in the pecuniary profits or contracts.” 18 U.S.C. § 434 (1958). In 1962 § 434 was replaced by § 208, which was intended to broaden the scope of its pro­ hibitions — in particular to cover financial interests held by the spouse, children and partners of covered persons. However, as noted in our 1980 Opinion, it is doubtful that Congress meant to “sweep within § 208’s ambit every conceivable financial interest o f whatever type.” 1980 Opinion at 3. For example, the Senate Report on the bill that became § 208 explained that:

6 See also Richards v United Stales, 369 U S. I (1962), Federal Power Comm'it v Panhandle Eastern Pipe Line Co , 337 U S 498 (1949)

49 O pinions o f th e O ffice o f Legal C ounsel

The disqualification of the subsection embraces any participation on behalf o f the Government in a matter in which the employee has an outside fin a n cia l interest, even though his participation does not in­ volve the transaction of business.

Id. (citing S. Rep. No. 87-2213, at 13 (1962)) (emphasis added). Thus, § 208 was enacted to extend the reach of federal conflict-of-interest prohibitions to cover the “outside” financial interests of a covered employee — those interests outside of the individual’s federal employment contract that would not necessarily be evident to the em ployee’s superiors. Examples would include personal investments or the financial interests o f an em ployee’s family or business partners. There is little evi­ dence that Congress m eant also to encom pass the em ployee’s interest in his own federal com pensation. Indeed, if “financial interest” is interpreted to include compensation received from the federal governm ent, the section could lead to absurd results. If an em­ ployee’s federal salary w ere characterized as a “financial interest” under § 208(a), any action taken with the intent to increase that salary — enthusiastically and con­ scientiously perform ing his or her duties in the hope of promotion for example — might be forbidden by that section. O r an em ployee who must decide claims brought against the United States — a Social Security hearing officer for example — m ight well violate § 208 whenever he or she decides in favor o f the federal gov­ ernm ent. An em ployee might be said to have a conflicting “financial interest” in protecting the federal treasury, from which his or her own livelihood is drawn, and § 208(a) expressly reaches the financial interests of the government em ployee’s employer. There appears to be no principled distinction that would exclude such actions or determ inations made by an officer or employee from § 208’s reach, if federal com pensation is considered a “financial interest.” Such an interpretation of the statute would subject federal em ployees to possible prosecution under § 208 for the vigilant perform ance o f their duties. In addition, we note that Congress enacted the FTTA against the background of the conflict-of-interest laws, including § 208. It is well settled that statutes must be construed as consistent if possible, and that an earlier statute should not be read broadly when the result would be to circum vent a later enactment. See Watt v. Alaska, 451 U.S. 259, 266-67 (1981); Patterson v. McLean Credit Union, 491 U.S. 164, 181 (1989). In this connection, we note that the Supreme Court has de­ clined to interpret federal conflict-of-interest laws broadly when the effect would be to forbid activity specifically authorized by Congress in a later enactment. See U nited States v. Chemical Found., Inc., 272 U.S. 1, 17-19 (1926) (predecessor statute o f § 208 does not cover transactions authorized under later measure passed to deal with wartim e conditions).7 W e believe that § 208 can and should be inter­ preted as consistent with the provisions of the FTTA.

50 Ethics Issues R elated to the FTTA o f 1986

Payments made to employees under FTTA section 7 are federal compensation, indistinguishable for these purposes from salary, benefits, and other paym ents such as performance awards. The 1988 OGE letter concluded that royalty payments made under section 7 should be viewed as “additional compensation for Federal service,” noting that the United States retains ownership rights in the invention under FTTA section 7 and that the inventor receives his or her share in the royalty payments from the United States, not directly from the outside licensee. This con­ clusion finds additional support in section 7, which provides that em ployees can receive payments in excess o f $100,000 under this program only with the approval of the President under the provisions regarding presidential cash awards — 5 U.S.C. § 4504. 15 U.S.C. § 3710c(a)(3). Therefore, we conclude that compensation received by an employee under FTTA section 7 does not constitute a “financial interest” under § 208. Such em­ ployees may receive payments under section 7 and continue to work on the devel­ opment and commercialization of their inventions.8

II.

In addition, we agree with the 1988 OGE letter’s conclusion that FTTA section 7 payments are not prohibited supplementations of salary under 18 U.S.C. § 209(a). Section 209(a) prohibits federal employees from receiving any supple­ mentation of salary in consideration of the performance of their official duties “from any source other than the Government o f the United States.” Since an em­ ployee receives section 7 payments from the federal agency holding the rights to the invention, the payments are not subject to § 209(a)’s prohibition.

III.

The draft OGE letter concerns section 8 of the FTTA. Under that section, when an agency having the right to ownership of an invention

7 See also Bustc v United States, 446 U.S 398, 406 (1980) (more specific statute given precedence over more general one, regardless of sequence of enactment). We acknowledge that the Senate report on the FTTA stated that the provisions of the bill “ma[d]e no changes in the conflict of interest laws affecting Federal employees or former Federal employees ” S Rep No. 99-283, at 10 (1986) This statement, however, could indicale that the Congress that passed the FTTA may well have believed that § 208 did not reach any forms of compensation by the government 8 Given this conclusion, it follows that an employee entitled, or potentially entitled, to payments under section 7 also may work on an invention pursuant to a CRADA, without violating § 208 It would be entirely arbitrary to conclude that an employee could work on an invention potentially leading to such payments before, but not after, a CRADA is signed by the federal laboratory that employs him. He would have the same interest m the potential payments, and the substance of his research would likely be the same, both before and after his laboratory entered into the CRADA. Furthermore, the FTTA expressly contemplates that employees, in at least some circumstances, will continue to work on their inventions under CRADAs. • 15 U.S C. § 3710a(b)(5) Application of § 208 would mean that, absent a waiver, employees could never do such work under CRADAs, because successful work would enable the employees to receive larger payments under section 7. There is no indication that Congress intended such a result

51 Opinions o f th e O ffice o f L eg a l C ounsel

does not intend to file for a patent application or otherwise to pro­ mote com m ercialization of such invention, the agency shall allow the inventor, if the inventor is a G overnm ent employee or former em ployee who m ade the invention during the course of employment with the G overnm ent, to retain title to the invention [subject to res­ ervation o f a nonexclusive, license for the Government],

15 U.S.C. § 3710d(a). Under this provision and implementing regulations, an agency may determ ine to prosecute a patent application in the United States, but not abroad, leaving foreign rights to the em ployee-inventor. 37 C.F.R. § 101.8 (1993). The draft O G E letter addresses a case in which the federal government, while choosing to com m ercialize an invention in this country, has permitted the inventors to retain foreign patent rights. Specifically, three federal em ployee-inventors share the rights to obtain certain foreign patents. The United States owns the domestic patent. These individuals have obtained some foreign patent rights and have en­ tered a licensing agreem ent with a private firm, granting it the right to exploit the inventions overseas in exchange for royalties. Draft OGE letter, at 2-3. At the same tim e, the agency employing th e three inventors has awarded an exclusive license to develop and exploit the inventions domestically to the same licensee. M oreover, the agency intends to enter a CR A D A with the licensee under which that firm would handle the clinical trials necessary to test and evaluate the inven­ tion for the m arketplace. ‘Thus, the private firm has an exclusive license for both the G overnm ent’s dom estic patent rights and the em ployee-inventors’ foreign pat­ ent rights, plus a research and developm ent agreement with the Government to develop and test the product.” Id. at 4. Two o f the three employee-inventors will be directly involved, as part of their official duties, with work related to the inven­ tion through the CRADA. It is, in fact, “typical for the inventor and the Govern­ ment to enter into licensing agreements with the same firm ” and “it is often in the G overnm ent’s best interest to allow inventors w ho hold foreign rights to continue to develop their w ork.” Id. at 4. O G E has concluded that the em ployee-inventors have a § 208 “financial inter­ est” in their inventions “because they own the foreign patent rights from which they receive royalties,” and that they cannot, therefore, “officially act on any matter involving the private firm to which they assigned their patent rights. This prohibi­ tion would include work by the em ployee-inventors on the research and develop­ ment agreem ent with the private firm .” Id. at 5. In distinguishing these interests from the interest of an employee-inventor in section 7 royalty payments, OGE notes that here the inventors, not th e United States, own the patent rights and that they consequently are “placed into a direct relationship with the party paying roy­ alty fees.” Id. M oreover, OGE points out that the licensing agreement itself con­ stitutes a § 208 “financial interest.”

52 Ethics Issues R elated to the FTTA o f 1986

W e agree with OGE that the employee-inventors are prohibited by § 208(a) from taking official action involving the CRADA between the United States and their licensee. The license agreement between the employee-inventors and the governm ent’s contractor appears to constitute a “financial interest” under § 208(a). Accordingly, the employee may not participate “through decision, approval, disap­ proval, recommendation, the rendering o f advice, investigation or otherwise,” in the performance or administration of the CRADA. W e do not, however, believe it necessary to determine whether the inventor-employees’ interest in foreign patent rights constitutes a “financial interest” that in itself would prohibit them from oth­ erwise continuing the governm ent’s research into this invention. W hile the em- ployee-inventors’ section 8 ownership interest in the foreign patent rights to the invention is distinguished from their royalty rights under section 7, both interests constitute an integral part of the FTTA incentive program created by Congress. Both arguably may be characterized as “com pensation” to the employee, and there seems little reason to distinguish between the two interests — both o f which will be known to the individuals’ supervisors. It is unnecessary to resolve this broader question, and we decline to do so.9

W ALTER DELLINGER Acting Assistant Attorney General Office o f Legal Counsel

9 There does, how ever, appear to be a cle ar d istinction betw een ow ning the patent rights them selves, and an interest in a licensing agreem ent under w hich those rights are exploited T his w ould be a nalogous to an em ployee who receives section 7 royalty paym ents, and w ho invests those sum s in the shares o f a business corporation Such an em ployee w ould be forbidden by § 208(a) to participate in a C R A D A w ith th a t corpo­ ration involving the em p lo y e e's invention T his is true not because the royalties, or patent rig h ts under section 8 are a "financial interest,” but because the em p lo y ee’s investm ent, or licensing agreem ent, is such an interest