Application of 18 U.S.C. § 209 to Employee-Inventors Who Receive Outside Royalty Payments ( 2000 )

Application of 18 U.S.C. § 209 to Employee-Inventors Who
Receive Outside Royalty Payments
A federal g o v ern m en t em ployee w ho obtains p aten t rights to an invention m ade in the course o f
federal em p lo y m en t ordinarily does not violate 18 U S.C. § 2 0 9 by licensing the patent rights to
a private entity and receiving royalty payments in exchange
September 7, 2000
M em o ran d u m O p in io n fo r t h e D ir e c t o r
O f f ic e of G o v e r n m e n t E t h ic s
Y o u have asked for our opinion whether a federal government employee who
obtains patent rights to an invention made in the course of federal employment
violates 18 U.S.C. §209 by licensing the patent rights to a private entity and
receiving royalty payments in exchange. See Letter for Randolph D. Moss, Acting
Assistant Attorney General, Office o f Legal Counsel, from Stephen D. Potts,
Director, Office of Government Ethics (Oct. 19, 1999) (“ Potts letter” ). We con­
clude that § 209 ordinarily does not ban outside royalty payments to employee-
inventors.
I.
Section 209(a) states:
Whoever receives any salary, or any contribution to or
supplementation of salary, as compensation for his services as an
officer or employee of the executive branch of the United States
Government, of any independent agency of the United States, or
of the District of Columbia, from any source other than the Govern­
ment of the United States, except as may be contributed out of
the treasury of any State, county, or municipality; or
Whoever, whether an individual, partnership, association, cor­
poration, or other organization pays, or makes any contribution to,
or in any way supplements the salary of, any such officer or
employee under circumstances which would make its receipt a vio­
lation of this subsection shall be subject to the penalties set forth
in section 216 o f this title.
18 U.S.C. § 209(a) (1994). This provision, as the Court of Appeals for the Ninth
Circuit has explained, bars “ (1) an officer or employee of the executive branch
or an independent agency of the United States government from (2) receiving
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Application o f 18 U.S.C. §209 to Employee-lnventors Who Receive Outside Royalty Payments
salary or any contribution to or supplementation of salary from (3) any source
other than the United States (4) as compensation for services as an employee
of the United States.” United States v. Raborn, 575 F.2d 688, 691-92 (9th Cir.
1978). You have asked us to focus on the third and fourth elements, see Potts
letter at 2, and we accordingly assume that the first two elements — that an
employee-inventor is an “ officer or employee of the executive branch” or an
“ independent agency,” and that royalty payments constitute a “ contribution to
or supplementation of salary” — would be established here.
The government has the right to obtain the “ entire right, title and interest in
and to all inventions made by any Government employee (1) during working
hours, or (2) with a contribution by the Government of facilities, equipment, mate­
rials, funds, or information, or of time or services of other Government employees
on official duty, or (3) which bear a direct relation to or are made in consequence
of the official duties of the inventor.” Exec. Order No. 10096, 3 C.F.R. 292
(1949-1953 comp.). If an agency determines that the government’s contribution
to the employee’s invention is “ insufficient equitably to justify” the government’s
obtaining all rights to the invention, or that the agency has “ insufficient interest”
in the invention, it “ shall leave title to such invention in the employee,” subject
to an irrevocable, nonexclusive license to the government. Id. We understand that
employee-inventors who are allowed to retain patent rights in their inventions
often enter into licensing agreements with private entities, under which they
receive royalty payments. See Potts letter at 1. In some instances, an employee-
inventor may continue to develop the invention as part of his or her job respon­
sibilities and may participate in a cooperative research and development agreement
(“ CRADA” ) between the agency and a private entity. See id.II.
You have suggested that the third element of a § 209 violation — receipt of pay­
m en t/raw a source other than the United States — might not be satisified here
because the government could be deemed the source of outside royalty payments
to employee-inventors. See Potts letter at 2-3; see also 18 U.S.C. § 209(a) (forbid­
ding salary supplementation “ from any source other than the Government of the
United States” ). We do not believe that this argument can be sustained.
The closest analogue appears to be set out in an opinion of our Office from
1993. There, we considered the government’s practice, under the Federal Tech­
nology Transfer Act (“ FTTA” ), 15 U.S.C. §§3701-3717 (1994 & Supp. IV
1998), of sharing with an employee-inventor the royalties that the government
received from licensing the employee’s invention. These payments to the
employee, we concluded, did not place the employee in the position of violating
18 U.S.C. §208, which generally forbids an employee from working on a par­
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ticular matter in which he or she has a financial interest.1 See Ethics Issues Related
to the F ederal Technology Transfer A ct o f 1986, 17 Op. O.L.C. 47, 50 (1993).
The F IT A, as then written, required government agencies 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) (1994). Because
the government paid the royalties at issue, we determined that they did not con­
stitute an outside financial interest implicating §208. See 17 Op. O.L.C. at 50-
5 1.2 Although the opinion primarily dealt with §208, we also concluded, on the
same reasoning, that employees receiving such payments would not violate
§ 209(a). See id. at 51.
Here, although private entities pay the royalties, employee-inventors acquire
patent rights only because the government has decided not to exercise its right
to obtain title. See Potts letter at 3. We agree, therefore, that the royalties come
from the government in an indirect sense. Nonetheless, the royalties at issue in
our 1993 opinion came directly from the government and indirectly from a private
source; here the converse is true. See 17 Op. O.L.C. at 51 (“ Since an employee
receives section 7 payments from the federal agency holding the rights to the
invention, the payments are not subject to §209(a)’s prohibition.” ). Rather than
incidentally benefitting by receiving a portion of the royalties from an agreement
between the government and a private entity, employee-inventors in the present
case are themselves entering into licensing agreements to which the government
is not a party. The payments here are thus critically different from those addressed
in our 1993 opinion. Here, the indirect connection between the government and
the royalty payments cannot negate their direct connection to a nongovernmental
source. Accordingly, we conclude that the third element of §209 could be met,
and we turn to the fourth element.
1Section 208(a) states.
Except as permitted by subsection (b) hereof, whoever, being an officer or employee o f the executive
branch o f the United States Government, o r o f any independent agency of the United States, a Federal
Reserve bank director, officer, or employee, o r an officer or employee of the District of Columbia, including
a special G overnment employee, participates personally and substantially as a Government officer or
employee, through decision, approval, disapproval, recommendation, the rendering of advice, investigation,
or otherw ise, 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, his spouse, minor child, general partner, organization in which he is serving as officer, director, trustee,
general partner or employee, or any person o r organization with whom he is negotiating or has any arrange­
ment concerning prospective employment, has a financial interest [s]hall be subject to [specified] penalties
18 U S C § 208(a) (1994)
2 W e reasoned that such payments would becom e part o f the inventor’s federal employment contract, would nec­
essarily be known to the government, and therefore would not implicate the central concerns of §208. See id.
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Application o f 18 U.S.C. § 209 to Employee-inventors Who Receive Outside Royalty Payments
III.
You have expressed the concern that outside royalty payments might be viewed
as compensation “ for the employee’s past or present services to the Government
in developing the invention.” Potts letter at 6. We recognize that the statute might
be given that interpretation. Nonetheless, we believe that, on the better view, the
payments would not meet this element of the statute.
In a 1997 opinion, we interpreted §209 to require an “ intentional, direct link”
between the outside compensation and the employee’s government service.
Applicability o f 18 U.S.C. § 2 0 9 to Acceptance by FBI Employees o f Benefits
Under the “ Make a Dream Come True” Program, 21 Op. O.L.C. 204, 206
(1997). We did not read §209 to prohibit “ all non-government payments to an
individual where there is any nexus between the payment and the individual’s
employment by the government.” Id. at 209. We largely relied on an amendment
of the provision in 1962, by which Congress deleted the phrase “ in connection
with” from the earlier version and substituted the “ as compensation for” lan­
guage. Congress made this change because the former phrase was thought ambig­
uous and “ capable of an infinitely broad interpretation.” Id. at 206 (citing H.R.
Rep. No. 87-748, at 13, 25 (1961)). “ The amendment was designed to clarify
that there must be a direct link between the contribution to or supplementation
of salary and the employee’s services to the government.” Id. (emphasis added).
No intentional, direct link between an employee-inventor’s government services
and the licensing of patent rights would typically exist here. Our 1997 opinion
identified several factors that should be taken into consideration when construing
the ‘ ‘as compensation for’ ’ requirement of § 209, where the existence of an inten­
tional, direct link is unclear. Those factors include:
(1) whether there is a substantial relationship or pattern of dealings
between the agency and the payor; (2) whether the employee is
in a position to influence the government on behalf of the payor;
(3) whether the expressed intent of the payor is to compensate for
government service; (4) whether circumstances indicate that the
payment was motivated by a desire other than to compensate the
employee for her government service . . .; (5) whether payments
would also be made to non-government employees; and (6) whether
payments would be distributed on a basis unrelated to government
service.
Id.
Three of these factors support the conclusion that outside royalty payments gen­
erally are not intended to be compensation for government services. It is unlikely
that a payor would expressly indicate an intent “ to compensate for government
service.” Id. (third factor). To the contrary, the circumstances typically would
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indicate that the payor “ was motivated by a desire other than to compensate the
employee for her government service” Id. (fourth factor) — the desire to obtain
property rights to an invention that it views as valuable. This value would not
normally come from the fact that the employee-inventor developed his or her
invention while working as a government employee. Presumably, a payor would
be just as interested in acquiring rights to such an invention if the inventor were
not a federal employee. Moreover, the payments “ would be distributed on a basis
unrelated to government service.” Id. (sixth factor). They would not be calibrated
to reflect the amount of government time the employee devoted to developing
the invention but only to the value o f the invention. In sum, these factors point
to the conclusion that payors would not be compensating employee-inventors for
government service, but instead would be motivated by the economic advantages
of securing property rights to a potentially valuable invention. “ This Department
has consistently construed § 209(a) and its predecessor, 18 U.S.C. § 1914, to forbid
only payments intended to serve as additional compensation to an individual for
undertaking or performing government service.” See Gifts Received on Official
Travel, 8 Op. O.L.C. 143, 144 (1984) (citing 41 Op. Att’y Gen. 217, 221 (1955);
39 Op. Att’y Gen. 501, 503 (1940)) (emphasis added) (internal quotation marks
omitted).
One other factor— “ whether payments would also be made to non-government
employees” — at the least would not point to the contrary conclusion. We have
not been apprised of any situation in which a particular licensee has entered into
licensing agreements only with government-employed inventors, or in which, in
instances where patent rights are held jointly by a federal employee and another
inventor who is not employed by the federal government, a licensee has paid
a disproportionately large share of the royalties to the federal employee.
The two remaining factors set forth in our 1997 opinion— “ whether there is
a substantial relationship or pattern o f dealings between the agency and the payor”
and “ whether the employee is in a position to influence the government on behalf
of the payor,” 21 Op. O.L.C. at 206 — may be applicable to some, though not
all, licensing arrangements between a private entity and a government employee.
Even in those circumstances in which these factors are present, however, we
believe the independent prohibition in 18 U.S.C. §208 should ensure that royalty
payments are not made “ as compensation for” the employee-inventor’s govern­
ment services. These two factors follow from the Supreme Court’s explication
of § 209 in Crandon v. United States, 494 U.S. 152, 158 (1990). The Crandon
Court observed that § 209 was intended to prevent an outside payor from having
a “ hold on the employee deriving from his ability to cut off one of the employee’s
economic lifelines,” and to address the tendency of an employee “ to favor his
outside payor even though no direct pressure is put on him to do so.” Id. at
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Application o f 18 U.S.C. §209 to Employee-inventors Who Receive Outside Royalty Payments
165 (quoting Association of the Bar of the City of New York, Conflict o f Interest
and Federal Service 211 (I960)) (internal quotation marks omitted).3
Where a private entity purchases the right to use a government employee’s valu­
able patent rights and the employee does no further work relating to the patent,
neither the “ substantial relationship” nor the “ position to influence” factors
should typically apply. In such situations, therefore, royalty payments would not,
absent unusual circumstances, constitute “ compensation for” government serv­
ices. According to your letter, however, in some cases, “ employee[-inventor]s
may continue to work, as part of their official duties, on certain aspects of the
product or process for which they have been permitted to obtain certain patent
rights. This additional work may include, among other things, technical improve­
ments to the invention or research on new uses for the invention.” Potts letter
at 1; see also 17 Op. O.L.C. at 47 (discussing this practice). When the government
and the payor are collaborating through a CRADA, there would likely be a
“ substantial relationship or pattern of dealings between the agency and the
payor.” 21 Op. O.L.C. at 206. Even when there is no CRADA, concerns may
be raised if in developing or refining the invention the employee-inventor “ is
in a position to influence the government on behalf of the payor.” Id.
Nevertheless, in the context of employee-inventors who receive outside royalty
payments, these concerns are largely eliminated by the independent prohibition
of §208. C f Crandon, 494 U.S. at 166 (noting that “ the [§209] concern that
the employee might tend to favor his former employer” can be addressed by
“ other rules [that] disqualify the employee from participating in any matter
involving a former employer” ). Section 208 requires employee-inventors to recuse
themselves from agency actions when they have a financial interest in a particular
matter. Section 208 thus bars employee-inventors who receive outside royalty pay­
ments from continuing to participate in research concerning their inventions,
including CRADAs. See 17 Op. O.L.C. at 53. This prohibition on participation
in matters in which employee-inventors have financial interests prevents them
from being “ in a position to influence the government on behalf of the payor,”
even if “ there is a substantial relationship or pattern of dealings between the
agency and the payor.” 21 Op. O.L.C. at 206.4]
To be sure, §208 may be waived “ upon a written determination that the dis­
qualifying interest of the employee is ‘not so substantial as to be deemed likely
to affect the integrity of the services which the government may expect’ from
the employee.” See W aiver o f the Application o f Conflict o f Interest Laws fo r
3 The Court noted that §209 is also aimed at preventing the “ suspicion and bitterness among fellow employees
and other observers” that can occur when employees are receiving compensation from outside sources Id.
4 We do not address whether there could be facts under which an employee-inventor would have a financial interest
under §208 before licensing an invention However, although our 1993 opinion did not reach this issue, it noted
that after the government decides not to take up foreign patent nghts (but before the em ployee-inventor licenses
those nghts), the employee-inventor’s possession o f foreign patent nghts “ consitute[sJ an integral part o f the FTTA
incentive program created by Congress” and “ that §208 can and should be interpreted as consistent with the provi­
sions o f the FTTA.” 17 Op O L C . at 50, 53
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M em bers o f the P residen t’s Commission on Strategic Forces, 1 Op. O.L.C. 10,
12-13 (1983) (quoting 18 U.S.C. § 208(b)). Nevertheless, although that determina­
tion is left to the discretion of the official who appointed the employee, “ [i]t
is the responsibility of that official to exercise his considerable discretion soundly
and in good faith, after a careful and thorough consideration of all of the pertinent
facts.” Id. at 14-15. In these circumstances, possible concerns about the divided
loyalty of an employee are adequately addressed under § 208, including the stand­
ards for waivers. See 5 C.F.R. § 2640.301 (2000).
In view of § 208, a broad interpretation of § 209 would not advance any statutory
purpose. Cf. Beth Nolan, Public Interest, Private Income: Conflicts and Control
Limits on the Outside Income of Government Officials, 87 NW. U. L. Rev. 57,
80 (1992) ( “ The law prohibits not private gain per se, but rather prohibits private
gain that impairs the integrity of services provided to the government, that creates
the appearance of misuse of government office, or that requires others to pay
to receive access to or services from the government.” ). Indeed, a ban on
employee-inventors’ receiving any royalties from their inventions might well run
counter to congressional intent. As the Crandon Court recognized, § 209 was not
intended to “ impair the ability of the Government to recruit personnel of the
highest quality and capacity.” 494 U.S. at 166 (quoting Message from the Presi­
dent o f the United States Relative to Ethical Conduct in the Government, H.R.
Doc. No. 145, 87th Cong., 1st Sess. 2 (1961)). We understand that a ban on
outside royalties could impede, perhaps severely, the government’s ability to
attract and retain talented employees in the relevant labor markets because it
would increase the already considerable income gap between private and public
sector employment. See Potts letter at 12 (“ The application of section 209 to
this situation would mean that employee-inventors would have to leave Govern­
ment if they wanted to commercialize patents obtained under section 8” of the
FTTA.); c f Crandon, 494 U.S. at 167 n.22 ( “ The reach of [§209’s predecessor]
had long been recognized as a serious obstacle to recruitment of men for govern­
ment office . . . .” ).
An overly broad interpretation o f §209 would also frustrate the purposes of
the FTTA. Congress passed the FTTA to increase use of federally-developed tech­
nology by the private sector in order “ to improve the economic, environmental,
and social well-being of the United States.” 15 U.S.C. §3702. Congress expected
employee-inventors to obtain and exploit patent rights to their inventions when
the government opted not to retain its rights. See S. Rep. No. 99-283, at 14 (1986),
reprinted in 1986 U.S.C.C.A.N. 3442, 3456. As we observed in our opinion inter­
preting §208 and the FTTA, “ [i]t is well settled that statutes must be construed
as consistent if possible.” 17 Op. O.L.C. at 50 (citing Watt v. Alaska, 451 U.S.
259, 266-67 (1981) and Patterson v. McLean C redit Union, 491 U.S. 164, 181
(1989)). “ [A] specific policy embodied in a later federal statute should control
our construction o f the [earlier] statute, even though it ha[s] not been expressly
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Application o f 18 U.S C. §209 to Employee-inventors Who Receive Outside Royalty Payments
amended.” FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 143
(2000) (quoting United States v. Estate o f Romani, 523 U.S. 517, 530-31 (1998));
see also Patterson, 491 U.S. at 181 (stating that courts should hesitate to “ read
an earlier statute broadly where the result is to circumvent” a later-enacted statu­
tory scheme). If § 209 were interpreted to prohibit employee-inventors from
licensing their inventions to private entities, the exploitation of those inventions
would languish because employees would have little incentive to “ move the[ir]
invention[s] into the private sector.” S. Rep. No. 99-283, at 14, reprinted in 1986
U.S.C.C.A.N. at 3456. Such a construction would hinder one of the FTTA’s pur­
poses.5
Finally, to the extent that the “ as compensation for services” language of §209
is ambiguous, it should be interpreted in light of the rule of lenity. See Crandon,
494 U.S. at 182-83 (Scalia, J., concurring in the judgment) (referring to that lan­
guage as a “ troublesome phrase” devoid of a “ clear and constant meaning” );
id. at 178 (describing administrative interpretations of the phrase as “ unpredict­
able” ); see also Nolan, supra, at 102 (describing §209’s meaning as “ uncertain”
and noting that “ interpretations of section 209 and its predecessors have some­
times been tortured” ). Interpreting different language in §209, the Crandon Court
looked to this “ time-honored interpretive guideline” that ambiguities in criminal
statutes should be construed narrowly because of the due process requirement of
“ fair warning of the boundaries of criminal conduct.” Crandon, 494 U.S. at 158(quoting Liparota v. United States, 471 U.S. 419, 427 (1985)). In general,
“ [cjriminal statutes should be given the meaning their language most obviously
invites. Their scope should not be extended to conduct not clearly within their
terms.” United States v. Williams, 341 U.S. 70, 82 (1951) (plurality opinion).
Conclusion
We therefore conclude that, in the usual case, § 209 does not bar employee-
inventors from receiving outside royalties. As you observe in your letter, ‘‘in any
section 209 analysis, the facts of individual cases would have to be examined.”
Potts letter at 11 n.7. In the typical case, however, we do not think that outside
royalties would be paid “ as compensation for [the employee-inventor’s] services
as an officer or employee of the executive branch.” 18 U.S.C. § 209(a).
RANDOLPH D. MOSS
Assistant Attorney General
Office o f Legal Counsel
5 As you note, the legislative history o f ihe FTTA indicates that Congress intended to “ make no changes in
the conflict o f interest laws affecting Federal employees or former Federal employees ” Potts letter at 5 (quoting
S Rep. No 99-283, at 10, reprinted in 1986 U S C.C A N at 3451) As discussed above, however, we believe
that §209 is best read as ordinarily not bam ng outside royalty payments. On this view, it was not necessary for
Congress to amend that section when it enactcd the FTTA.
177