Fiscal Note & Local Impact Statement

123 ^rd General Assembly of Ohio

Ohio Legislative Budget Office: a nonpartisan agency providing fiscal research for the Ohio General Assembly

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BILL:	Am. Sub. S.B. 286		DATE:	May 25, 2000
STATUS:	As Passed by the House		SPONSOR:	Sen. Gardner
LOCAL IMPACT STATEMENT REQUIRED:		No —	Permissive

CONTENTS:

To permit the board of trustees of a state college or university to establish rules under which an employee may take a financial interest in a firm to which the institution has transferred its interest in intellectual property arising from research conducted at the institution

State Fiscal Highlights

STATE FUND	FY 2001	FY 2002			FUTURE YEARS
General Revenue Fund
Revenues	- 0 -		- 0 -	- 0 -
Expenditures	- 0 -		- 0 -	- 0 -

Note: The state fiscal year is July 1 through June 30. For example, FY 2001 is July 1, 2000 - June 30, 2001.

· No direct fiscal effect on the state.

· The bill’s confirmation of college and university research employees’ royalty and equity participation in firms that license university intellectual property could help attract more researchers to Ohio’s colleges and universities (or keep them there), thereby stimulating start-up investment in high-technology firms in Ohio with positive results for job creation, business and the state’s economy.

Local Fiscal Highlights

LOCAL GOVERNMENT		FY 2000		FY 2001		FUTURE YEARS
Local Governments
Revenues	- 0 -		- 0 -		- 0 -
Expenditures	- 0 -		- 0 -		- 0 -

Note: For most local governments, the fiscal year is the calendar year. The school district fiscal year is July 1 through June 30.

· No direct fiscal effect on political subdivisions.

Detailed Fiscal Analysis

Summary of the bill

Through added language, the bill would clarify existing law to ensure opportunities for employees of Ohio’s colleges, universities and other institutions of higher education to share in the financial rewards of their research, including both the receipt of royalties and the taking of equity positions in firms to which Ohio’s institutions license their intellectual properties. This clarification is proposed in order to resolve any potential conflicts with Ohio’s ethics laws.

The bill would clarify and standardize section 3345.14 of the Revised Code for all colleges, universities and other institutions of higher education through the addition of language that would (1) expand and clarify the scope of the institutions’ rights and interests in discoveries, inventions and patents, yet protect the discoveries and inventions made by employees on their own time and with their own resources; (2) allow the institution to transfer such interests to employees in the current way–by license, or in a new way–by allowing an employee to take a financial interest in a licensee firm; (3) allow an institution to develop rules that permit an employee researcher to participate in the royalties from, or to take an equity position in, a licensee firm; (4) require certain mandatory rules in such cases; (5) retain the Ohio Ethics Commission’s authority to ensure the implementation of the mandatory rules; and (6) require a committee to develop a model set of rules.

Fiscal effects of the bill

Direct effects: Both the bill’s language and the current language of section 3345.14 are permissive: no college or university is or would be required to transfer discoveries, inventions and patents to an individual or firm. Thus, the institution would not be required to incur any costs and would not be ensured any revenues. Therefore, the bill would have no direct fiscal effects.

Indirect effects: The indirect fiscal effects of the bill, as compared to Ohio’s current situation, are potentially significant.

Under the current, albeit arguable, language of section 3345.14, a college or university may transfer an employee’s discoveries, inventions and patents to an outside licensee firm and may (if the trustees so decide) share the remuneration with the employee. This remuneration has usually consisted of no more than a stream of royalties paid by the firm. However, since these amounts could be just a small fraction of the revenues and/or profits that the firm will eventually receive from the commercialization of the property, in recent years and in certain cases universities have formulated equity participation arrangements for the researchers.

The bill would clarify that the researcher may take a financial position, equity or otherwise, in the licensee firm itself. Such a firm could even be a company that the researcher himself started in order to obtain the license from the university and then develop his discovery into a commercially viable product or process. Should that effort succeed, the company would be in a position to start marketing the product or process with a view to eventually going public, or else to make a lucrative arrangement with a larger company better able to market the product or process. The researcher could then stand to share in a substantial profit.

Thus, the bill would ensure the availability of those incentives that are attractive to those academics and other researchers who seek significant returns on their personal investments in research. Such opportunities to acquire financial interests in their discoveries might attract more such researchers to take employment (or remain employed) at Ohio’s colleges and universities, thereby giving Ohio an advantage (or, in some cases, eliminating a current disadvantage) in the competition among states for such researchers.

However, such potential employees would likely be in a position to command high salaries and large expenditures on laboratories and specific projects; thus, there could be a substantial up-front investment required by the institutions and the state. Recent examples of such arrangements are as follows:

• Dr. Mauro Ferrari has become the head of the Ohio State University’s Biomedical Engineering Center and will lead the effort to expand the Ohio MicroMD Laboratory. The state is to provide $1.5 million in support of the total project cost of $5,541,000.
• Dr. Leonard Kohn, senior research scientist of the National Institutes of Health, will establish Interthyr, a diagnostic technology company at Athens. The effort will be supported by Ohio University using $900,000 of state funds. The project is estimated to cost $2,870,000. Estimated contribution to the Athens area economy within five to seven years is 125 jobs and $10 million annually.
• Dr. Andrew Steckl has become the principal on a University of Cincinnati project to start up a semiconductor business to manufacture and sell devices that can operate under extreme conditions. The university will support the $2,260,000 project with $595,100 of state funds.

Assuming that the bill’s incentives would prompt the creation of additional discoveries, inventions and patents, there would arise more potential opportunities for high-tech investment in Ohio. This could attract more venture capital and other investment capital to the state, thereby increasing the rate of business and industrial development and job creation, especially in the high-technology sectors. Thus, the effect on Ohio’s economic development could be positive. Further, such an effort to promote high-technology research in Ohio might serve to change the state’s current status as an exporter of technical researchers, intellectual property, and venture capital.

Other states have enacted legislations that permit university employees to take equity positions in outside companies. Recent examples are Massachusetts, Oklahoma and Texas.

q LBO staff: David Price, Budget/Policy Analyst

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