New York State
Ethics Commission


Advisory Opinion No. 93-3: Application of Public Officers Law §74 to State officers or employees involved in a joint venture between Health Research, Incorporated, a not-for-profit corporation closely affiliated with the Department of Health, and a private for-profit corporation.

Introduction

The following advisory opinion is issued in response to an inquiry submitted by David Axelrod, M.D., the former New York State Commissioner of Health ("former Commissioner of Health")(1) and Edward V. Regan, the New York State Comptroller ("Comptroller"), requesting the Commission to review the results contained in the Comptroller's Office Audit Report (No. 89-S-34).(2) In that report, the Comptroller examined the relationship and interactions between Health Research, Inc. ("HRI"), a private not-for-profit corporation which is closely affiliated with the New York State Department of Health ("DOH"), and Virogenetics, Inc., ("VGC") a private, for-profit corporation formed as a joint venture between HRI and Institute Merieux, a French pharmaceutical concern.

The letter requests that the Commission review the facts and advise the Commissioner of Health and the Comptroller whether the joint venture raises issues of conflicts of interest under the Public Officers Law.(3) Specifically, the Commission has been asked whether the Commissioner of Health, the Chair of the State Public Health Council, and the Executive Director of HRI (who, as a member of DOH's Institutional Review Board for Human Research Review ("IRB"), is a State officer), may serve on the board of directors of VGC.(4)

The Commission addressed the following issues:

  1. Whether it is a violation of Public Officers Law §74 for the Commissioner of Health, who serves as a director and as the president of HRI, to serve as the Chair of the board of directors of VGC.

    Under the particular facts presented, due to the nature and the terms of the joint venture agreement and the Department of Health's vast authority over all matter concerning public health in New York State, the Commission concludes that there is an appearance of a conflict of interest in violation of Public Officers Law §74 for the Commissioner of Health to serve as Chair or a member of the board of directors of VGC.

  2. Whether it is a violation of Public Officers Law §74 for the Chair of the State Public Health Council to serve at the Commissioner of Health's request as a member of the board of directors of VGC.

    The Commission concludes that, due to the broad responsibilities of the Public Health Council, there is an appearance of a conflict of interest under Public Officers Law §74 for the Chair of the State Public Health Council to sit on the board of directors of VGC, a private sector company which is developing a particular vaccine.

  3. Whether it is a violation of Public Officers Law §74 for the Executive Director of HRI, in his position as Executive Director or as a member of DOH's Institutional Review Board for Human Research Review, to serve as a member of the board of directors and secretary/treasurer of VGC.

    By virtue of his service as a member of DOH's Institutional Review Board, the Executive Director of HRI is a State officer. As such, he may not serve on the board of directors or as an officer of VGC without presenting the appearance of a conflict under Public Officers Law §74 particularly because of HRI's close identity with DOH. The Commission recommends that the individual resign his position on the board of directors and his position as secretary/treasurer of VGC.(5)

Background

To determine whether conflicts of interest arise if the Commissioner of Health, the Chair of the State Public Health Council, and the Executive Director of HRI serve on the board of directors or as officers of VGC, the Commission must examine each State officer's duties on behalf of the State. As the Attorney General has noted, "whether and to what extent a State employee may pursue a particular private activity or occupation depends not only on the nature of that activity or occupation but on the nature of his official duties on behalf of the State."(6)


Department of Health

The Department of Health ("DOH") is a State agency as defined in Public Officers Law §74 and its officers and employees, including the Commissioner of Health, are State officers and employees covered by the law. Pursuant to Public Health Law §201, DOH shall, among other functions, power and duties,

supervise the reporting and control of disease;

conduct laboratory examinations for the diagnosis and control of disease;

promote education in the prevention and control of disease; and

exercise control over and supervise the abatement of nuisances affecting or likely to affect public health.

The Commissioner of Health is the head of DOH and, by law, must be a physician, a graduate of an incorporated medical college with at least twenty years' experience in the actual practice of his profession and skill and experience in public health duties and science. [Public Health Law §203] DOH has broad authority over all aspects of public health in New York State. The Commissioner of Health shall, among other general powers and duties:

take cognizance of the interests of health and life of the people of the state, and of all matters pertaining thereto;

exercise general supervision over the work of all local boards of health and health officers;

exercise general supervision and control of medical treatment of patients in the state institutions, public health centers and clinics in the department; and

enforce the public health law and the sanitary code.(7)

Public Health Law §206(1)(d) specifically requires the Commissioner to investigate the causes of diseases.


The Public Health Council

The State Public Health Council ("Council") established under Public Health Law §220 includes the Commissioner of Health and 14 members appointed by the Governor with the advice and consent of the Senate. Because the Council is a State agency, its members are subject to the provisions of §74.

The Council shall, among other powers and duties:

. . . at the request of the commissioner, consider any matter relating to the preservation and improvement of public health, and may advise the commissioner thereon; and it may, from time to time, submit to the commissioner, any recommendations relating to the preservation and improvement of public health. [Public Health Law §225(1)]

The Council may also appoint advisory committees in the major areas of public health concern.(8) The Chair of the Council served on the board of directors of VGC at the former Commissioner of Health's request.


Institutional Review Board for Human Research Review

The Institutional Review Board for Human Research Review ("IRB") for DOH created pursuant to Public Health Law §2444 requires each public or private institution or agency which conducts human research to establish a human research review committee composed of five members approved by the Commissioner of Health. Section 2444(1) states:

No member of a committee shall be involved in either the initial or continuing review of any activity in which he has a conflicting interest, except to provide information required by the committee.

Each of these institutions or agencies must promulgate a statement of principle and policy in regard to the rights and welfare of human subjects in the conduct of human research.(9) The committee periodically examines each existing human research project with regard to determining adherence to the approved principles and policies which the institution or agency has promulgated.(10)

The former Commissioner of Health named the Executive Director of HRI as a member of DOH's IRB. By virtue of his service as an IRB member, he is a State officer subject to Public Officers Law §74.


Relationship of the Department of Health to HRI

In 1953, DOH officials established HRI as a not-for-profit corporation.(11)

HRI is not a State agency. It is closely affiliated with DOH.(12) HRI's main purposes are to assist in developing and increasing the facilities of DOH, to solicit, accept and administer federal, State and private financial resources to support DOH research and to finance and conduct related research studies.(13) During fiscal year 1990-91, HRI had net revenues of $75.1 million.(14) HRI employs approximately 1200 administrative and technical support staff.

HRI is not a public authority or a public benefit corporation or a subsidiary thereof.(15) None of the directors of HRI is appointed by the Governor; in fact, all directors are also DOH employees. HRI's employees are not State employees for purposes of civil service protection or State health and vacation benefits. They are represented for collective bargaining purposes under federal law by the Civil Service Employees Association, Inc. ("CSEA") and participate in the State pension program. Because HRI is not a State agency as defined by Public Officers Law §§73 or 74, its officers and employees are not subject to the Public Officers Law.

HRI maintains its executive offices at DOH's central administration facilities in Albany and has operating divisions in Albany and Buffalo. HRI's Executive Director supervises the administrative functions and reports to the Vice-President of HRI (who currently is the Executive Deputy Commissioner of DOH). HRI's by-laws provide that the Commissioner of Health serves ex-officio as a director of HRI. Directors of the corporation may not receive any salary or compensation for their services. The by-laws direct that a majority vote of the board of directors elects the president at the annual meeting. Since 1953, all Commissioners of Health have served as the president of HRI.

Most of HRI's major research projects are carried out in State facilities, using State scientists and available administrative and laboratory resources.(16) HRI is the conduit by which grants of private or government monies are used to pay for the research.

DOH and HRI are parties to an operating contract which specifies the rights and obligations of each entity.(17) The major provisions of this contract are the following:

DOH is responsible for the overall supervision and direction of HRI's activities.

HRI pays the State monthly for a share of DOH's overhead costs (personal services, facilities and support services) applicable to HRI research.(18)

The State subsidizes HRI's annual net operating loss.(19)

Contract fees, interest income and revenue from inventions are retained by HRI and deposited into HRI's Intracorporate Fund ("ICF") and are not used in computing HRI's annual loss or profit.(20)

The contract also gives HRI broad discretion to receive and disburse funds without being subject to the review and approval process required of State agencies.


The DOH/HRI Technology Transfer Program

Determining that technology transfer is sound public policy, DOH has had a patent policy since 1971. DOH revised its patent policy in 1983 to provide that HRI serve as the technology transfer agency for DOH.(21) As technology transfer agent, HRI is responsible for all patent administration and technology coordination on behalf of DOH. The policy states that all inventions and technology developed by persons utilizing DOH facilities or by DOH employees are the property of DOH. Any resulting patents must be in DOH's name.(22) DOH also reserved for itself the rights to all inventions developed in the course of projects under contract to DOH/HRI unless the Commissioner of Health grants a specific waiver.(23)

As DOH's technology transfer agent, HRI administers approximately 55 DOH inventions, 21 of which have been licensed to private sector companies, and for which approximately 36 patents have been issued or are pending. With the exception of the joint venture agreement that created VGC, all licenses have been provided to already existing companies from which HRI receives royalties and other forms of direct payments for use of the license or patent. What makes the case of VGC unique is that for the first time HRI transferred all of its rights to the technology to a private company rather than retaining the technology and licensing its use.(24)


Relationship of HRI to the Virogenetics Corporation

_______In 1981, DOH assigned the State's rights to a pox virus vaccine technology to HRI for $1 with the intent that the private sector would commercially develop the vaccine.(25) According to DOH, the Department pursued the joint venture route because of the special nature of the vaccine technology.(26)

Specifically, DOH was anxious to have the vaccine developed and looked to the private sector because of the public health significance of the vaccine technology, the fact that the technology was a generic approach that could lead to the creation of a multitude of products, the expense and time required to develop actual vaccine products and the commercial realities of the vaccine industry in the United States.

DOH reports that it had considered licensing, the route it has taken with all other technology transfers, but believed the process was disadvantageous primarily because, once the vaccine was licensed, DOH would play no further role in its commercial development and the licensee would be under no obligation to bring the vaccine into the market.

In March 1986, DOH again pursued the commercial development of the vaccine and proposed a joint venture between HRI and a French for-profit corporation, Institute Merieux ("Merieux"). Under the agreement, HRI retains a role in the vaccine's commercial development through stock ownership and representation on the board of directors of a separate, private for-profit corporation, VGC.(27)

The only present relationship between HRI and VGC is HRI's stock ownership and its representation on VGC's board of directors.(28)

Pursuant to the joint venture agreement, DOH/HRI has four of the eight seats on the VGC board. Initial "DOH" members of the board included the former Commissioner of Health, the Chair of the State Public Health Council, the Executive Director of HRI and the DOH scientist who invented the pox virus vaccine. The seats formerly occupied by the former Commissioner of Health and Chair of the State Public Health Council currently are vacant.(29) The DOH vaccine inventor is now employed by VGC.(30) Should Merieux exercise its 1996 option to buy-out HRI's share of VGC, DOH would lose its representation on the VGC board.

Applicable Statutes

Business Corporation Law

The directors of VGC, incorporated as a for-profit corporation in New York State, are subject to New York State Business Corporation Law. Business Corporation Law §717 enumerates the duties of a corporate director, in relevant part, as follows:

  1. A director shall perform his duties as a director . . . in good faith and with that degree of care which an ordinary prudent person in a like position would use under similar circumstances.

The courts generally interpret §717(a) as the "business judgment rule" to mean that they will not inquire into the wisdom of actions taken by directors in the absence of fraud, bad faith or abuse of discretion.

Corporate directors and officers, in the performance of their corporate duties, have a fiduciary responsibility to their corporations to which they owe undivided loyalty.(31) Directors must subordinate their individual and private interests to their duty to the corporation whenever the two conflict.(32) The test for determining whether a director acts with undivided loyalty to the corporation is whether his or her actions serve the corporation's interests.(33)


Public Officers Law §74(2)

The Code of Ethical Conduct contained in Public Officers Law §74(2) sets forth the rule with respect to conflicts of interest:

No officer or employee of a state agency . . . should have any interest, financial or otherwise, direct or indirect, or engage in any business or transaction or professional activity or incur any obligation of any nature, which is in substantial conflict with the proper discharge of his official duties in the public interest.

The rule is further explained by standards found in Public Officers Law §74(3) which provide, in pertinent part, the following:

  1. No officer or employee of a state agency . . . should accept other employment which will impair his independence of judgment in the exercise of his official duties.

    . . . .

  2. No officer or employee of a state agency . . . should disclose confidential information acquired by him in the course of his official duties nor use such information to further his personal interests.

  3. No officer or employee of a state agency . . . should use or attempt to use his official position to secure unwarranted privileges or exemptions for himself or others.

  4. No officer or employee of a state agency . . . should engage in any transaction as representative or agent of the state with any business entity in which he has a direct or indirect financial interest that might reasonably tend to conflict with the proper discharge of his official duties.

    . . . .

  5. An officer or employee of a state agency . . . should endeavor to pursue a course of conduct which will not raise suspicion among the public that he is likely to be engaged in acts that are in violation of his public trust.


Policy-making status

The Commissioner of Health, the Chair of the State Public Health Council and the Executive Director of HRI in his capacity as a member of IRB, have all been designated by their respective appointing authorities as serving in policy-making positions.(34) In Advisory Opinion No. 90-25, the Commission concluded that a policymaker of a State agency could not serve on the governing board of a not-for-profit corporation licensed by or whose rates are set by the policymaker's State agency. There the Commission discussed the role of policymakers:

[T]he requesting individual has been designated by his appointing authority as serving in a policy-making position. Such a designation demonstrates that the individual has substantial responsibilities and obligations in his position at [state agency]

. . .

This question [of whether a policymaker can serve on the board] goes beyond the appearance of a conflict of interest faced by this policymaker, because of the relationship of his agency with the private entity with which he is affiliated. It strikes at all similar situations, where a policy-making employee desires to serve or is serving on the board of an organization which is regulated or licensed by the State agency with which that individual is employed. We conclude that a question of an appearance of a conflict of interest will always be raised in such circumstances. A policymaker, by definition, has influence in the execution of policy or assists one who does. Even if that policymaker is not in the line of authority to regulate or oversee the private organization on whose board he or she serves, the appearance that he or she can influence other policymakers, with whom he or she works or who have appointed him, clearly exists whenever favorable action is taken by the agency towards such organization.

Thus, the fact that these individuals have all been designated as policymakers, while not dispositive of the issue of whether they may serve on the board of directors of VGC, is significant to the Commission's determination.(35) The Commission cannot overlook the fact that these individuals hold positions of substantial authority and responsibility at DOH and that their names are publicly identified with both DOH and VGC.(36)

Discussion

In (37) The Commission concluded that the service as a member of both boards of directors involved a prohibited appearance of a conflict of interest, under Public Officers Law §74, because both corporations conducted extensive business with the State.(38)

In reaching its determination, the Commission first considered that the individual was responsible for the day-to-day operations of the State agency.(39) The Commission also recognized that the individual, as a member and officer of the not-for-profit corporation and the for-profit subsidiary " . . . is responsible for voting on any number of business matters which may result in direct remuneration to the corporation and potentially, its members and officers." Furthermore, the Commission stated:

The requesting individual is in a position to influence the board of the corporation concerning all business transacted with the State of New York and any other potential clients.

. . . .

The presence of a State employee on the board of such a corporation may raise questions as to the knowledge the corporation had about available State business and the manner in which it was received. . . . As the Attorney General stated, it is not that this activity constitutes wrongdoing in itself; it is the appearance of a potential conflict which is the problem. No State employee should place, or appear to place himself or herself in a position of disclosing confidential information which he or she has received in a State position. Nor, should he or she disclose such information or attempt to obtain unwarranted privileges for others.

The Commission also recognized that concern for conflicts of interest is greater whenever a profit-making venture is at issue, for the public could perceive that any profits that are received may be a direct or indirect result of the involvement of the State officer or employee with the profit-making corporation.(40)

The facts here are similar to those which formed the basis for the conclusions reached in Advisory Opinion No. 90-6: the Commissioner of Health, the Chair of the State Public Health Council and the Executive Director of HRI in his capacity as a member of the IRB, all have significant responsibilities on behalf of DOH, and the State agency has substantial oversight over all facets of public health and the control of disease; issues which are of concern to both Merieux and VGC. Each of the State officers has been designated as serving in policy-making positions by his appointing authority. Each of the mentioned State employees is an uncompensated voting member of the board of directors of VGC, a for-profit corporation.(41)

The difference between the facts in Advisory Opinion No. 90-6 and the present matter is the respective relationships between the State agencies and the for-profit corporations. In Advisory Opinion No. 90-6, the for-profit corporation conducted extensive and direct leasing business with several State agencies. In the present matter, DOH does not have a direct relationship with VGC except for the presence of the Commissioner of Health, the Chair of the State Public Health Council and the Executive Director of HRI as a member of the IRB, on its board of directors. Rather, HRI has a direct relationship with VGC by virtue of the joint venture agreement and HRI's stock ownership in the corporation.

If DOH had entered directly into the agreement with Merieux for the transfer of DOH's patent rights to the vaccine and for its commercial development by VGC, there would be no question that the Commissioner of Health and the Chair of the State Public Health Council could not sit on the board of VGC without violating the code of ethical conduct of Public Officers Law §74(3). Specific questions could be raised as to how Merieux obtained the joint venture agreement; by what authority the agreement was made; whether the agreement was obtained through insider information, other DOH confidences or any future promises; whether the terms of the joint venture agreement were fair and in the best interests of the State; whether the seats on the VGC board of directors were provided by Merieux as a reward for the patent rights to the vaccine and the joint venture agreement and whether these DOH officials could fairly consider the fair market value of DOH's stock at the time VGC exercises its rights to buy out DOH's shares.(42)

But because HRI and DOH are so closely affiliated, the fact that DOH does not have a direct relationship with VGC does not resolve the problem. DOH transferred the patent rights to the vaccine to HRI, which then entered into the agreement with Merieux for the vaccine's commercial development by VGC. The former Commissioner of Health served as a member of the board of directors and as president of HRI and as a member of the VGC board of directors.(43) HRI could have been utilized to evade both State scrutiny and other legal requirements, including the State Ethics Law.

The same above-mentioned concerns that would be present if DOH had directly entered into the joint venture agreement with Merieux are present in the former Commissioner of Health's case because of his roles in all three organizations: DOH, HRI and VGC. Questions can be raised whether the agreement with Merieux was in the State's best interests, whether the offer of positions on the VGC board was proffered as an inducement to select Merieux for the joint venture, whether the ultimate purchase of all the VGC stock by Merieux was a special benefit to Merieux and a detriment to the State, and whether the initial decision by DOH to transfer the vaccine to HRI for $1 was tainted with the appearance of a conflict of interest.

Furthermore, the loyalties of the Commissioner of Health and the Chair of the Public Health Council would come into question if DOH and VGC ever had a dispute concerning the conditions of the initial or any subsequent agreements. For example, at the time of the 1996 buy-out option, the interests of Merieux, HRI and the State may be incompatible. Merieux's interest will be to purchase HRI's remaining shares in VGC for the lowest possible price, whereas the HRI's interest will be to receive as much as possible from the sale. The Commissioner as well as the other two State policymakers' interests would be in a conflict: to see to it the vaccine is developed on the one hand, and to assure, on the other, that HRI receives a fair price for its shares. Which will be more important--the potential distribution of the vaccine or the price? Can the Commissioner, who has State responsibilities here, fairly make a judgment as both HRI president and VGC board member? Can he, as a State official, assure that the vaccine will be provided to the public at a fair cost, while meeting his fiduciary responsibilities as a VGC director? It is unclear how any State official can best serve the interests of both VGC and the State in this matter. The Business Corporation Law clearly directs that, in their capacities as directors of VGC, the first loyalties of the Commissioner of Health and the Chair of the Public Health Council must be undivided and to VGC yet the Public Officers Law demands first loyalties to the State.

There are other potential issues, concerning public health and the control of disease, where the interests of the State and VGC could diverge. VGC is a for-profit corporation and, therefore, the corporate directors of VGC must cast their votes to further advance the corporation's profits. DOH's interest, as evidenced by its initially entering the joint venture agreement with Merieux, is to foster the development of the vaccine technology. Many issues including the marketability of the vaccine, the pricing of any resulting products and the timing of introducing the vaccine into the market, could pit DOH's interests against those of VGC.

While DOH does not directly regulate VGC, the State agency has vast authority over all matters of public health and the control of disease. DOH could take policy positions that could impact upon VGC. Because of the potential for the appearance of a conflict of interest by virtue of DOH's mission, DOH officials should not serve on the VGC board.

As long as HRI retains its shares of VGC stock, as a shareholder, any shareholder lawsuits against the corporation would cause HRI to be suing itself as long as any DOH or HRI officials remain on the VGC board of directors and HRI owned stock. This would clearly result in a conflict of interest for the State officials, who have general responsibility for the implementation of the Public Health Law.

The Commission has tried to construe how the former Commissioner of Health could insure that the interests of DOH, HRI and VGC are each being met whenever he voted on matters before the VGC board of directors. While the interests of DOH and HRI are arguably intertwined, VGC and HRI have conflicting interests because they are parties to an agreement and majority and minority shareholders of a corporation. Therefore, because of these relationships and the appearance of a conflict of interest they entail, the Commission finds that the Commissioner of Health may not serve on the board of directors of VGC to avoid a violation of Public Officers Law §74.

The Executive Director of HRI, due to his position with DOH's IRB, the close relationship between DOH and HRI and his service as a board member and secretary/treasurer of VGC, would be in a similar dilemma as the Commissioner of Health because of his roles in all three organizations. His serving in all capacities gives rise at least to the suspicion that he can not discharge his responsibilities as a public officer or employee.(44) Worse is his functioning as a director of VGC and as Executive Director of HRI, closely affiliated to DOH. Since HRI does not have to return revenues it receives to the State and receives from the State money to offset its operating losses, he has no interest to act on behalf of the State's interest. Therefore, because of the relationships and the appearance of a conflict of interest they entail, the Executive Director of HRI should resign his positions as member of the board of directors and officer of VGC to avoid a violation of Public Officers Law §74.

The Chair of the State Public Health Council's situation is factually different as he has no direct role in HRI. However, like the Commissioner, the Chair of the Public Health Council has significant and substantial authority both over DOH and the State's health policies in general. The Chair of the Public Health Council could make policy decisions that could directly affect VGC and its parent Merieux. The Chair's loyalty to DOH and the State could come into question by virtue of VGC's right to "buy-out" HRI's shares of the corporation and in the event that any other dispute ever arose between HRI and VGC. Clearly, DOH would benefit from HRI's receiving the maximum amount for its shares and from any dispute being resolved in HRI's favor over VGC's.(45) Therefore, because of the appearance of a conflict of interest, the Chair of the State Public Health Council should resign from the VGC board of directors to avoid a violation of Public Officers Law §74.(46)

Conclusion

The Commission has considered all the circumstances surrounding DOH's and HRI's relationship with VGC, DOH's mission to control disease, the provisions and legislative intent of Public Officers Law §74, and the provisions and interpretations of Business Corporation Law's corporate director's duty of loyalty. We conclude that the Commissioner of Health, the Chair of the State Public Health Council and the IRB member/Executive Director of HRI, should not serve on the VGC board of directors.

The Commission is aware that DOH's desire to see the commercial development of the vaccine led to HRI's entering into the joint venture agreement with Merieux and the creation of VGC and HRI's stock ownership and seats on the VGC board.(47) In the process, however, DOH has been relegated a position of no ownership but merely a position on the VGC board. Now that Merieux controls 80% of VGC's shares and holds a majority of seats on VGC's board of directors due to the former Commissioner of Health's and the Chair's resignation from the board, HRI and DOH cannot affect the actions of VGC. Notwithstanding HRI's and DOH's diminished role in the commercial development of the vaccine, the fact that DOH officials, including the IRB member/Executive Director of HRI, serve on the VGC board of directors creates the appearance of a conflict of interest. Because the Business Corporation Law requires directors to give their undivided loyalty to the corporation, any vote taken by these individuals shall always raise questions about their loyalties to the State.(48)

This opinion, until and unless amended or revoked, is binding on the Commission in any subsequent proceeding concerning the person who requested it and who acted in good faith, unless material facts were omitted or misstated by the person in the request for opinion.

Concur:

Joseph M. Bress, Chair

Barbara A. Black
Angelo A. Costanza
Robert E. Eggenschiller, Members

Dissent:

Donald A. Odell, Member, dissenting. I respectfully dissent from the conclusion reached by the other Commission members.

The record shows that the DOH had many important public health reasons for seeing this new vaccine technology developed and looked to the private sector to provide the capital and commercial expertise essential to achieving this important objective.

In furtherance of this objective, HRI, in essence an extension of the DOH, which held by assignment the rights to the vaccine technology, entered into a joint venture with the Institute Merieux.

Pursuant to this agreement, a new corporation, VGC, was formed. HRI transferred to VGC its rights to the vaccine technology and received initially 49% of the stock and the right to four of the eight seats on the VGC Board of Directors.

Institute Merieux, for its part, agreed to provide $4 million in capital, received 51% of the stock and the right to four seats on the VGC Board. An additional investment of $20.4 million was made in VGC by Merieux by 1990.

The formation of a joint venture corporation, such as VGC, to facilitate the introduction of new products or the entry into new markets is a commonly used technique in the business world.

Each sponsor of a joint venture, as in this case, brings something of value to the table. Both, again as in this case, have a clear interest in promoting and encouraging the success of the new venture.

In the case before the Commission the DOH and HRI have a clear interest in seeing the vaccine technology developed into a public health and financial success. The more successful VGC becomes, the wider the use and distribution of the technology and the greater the potential for financial return to HRI through the enhanced value of its common stock holdings. The joint venture agreement provides an arbitration mechanism for resolving any issues arising over the valuation of the stock.

Representation on the Board of VGC (non-compensated) pursuant to the joint venture agreement, by the Commissioner of Health, the Chair of the State Public Health Council and the Executive Director of HRI furthers the interests of the DOH, HRI (and ultimately the State) in monitoring developments and helping VGC grow and prosper.

As a director of VGC their interest and duty likewise is to see VGC grow and prosper.

There is no conflict of interests. There is rather a unity or commonality of interests.

Dated: February 8, 1993


Endnotes

1. Dr. Axelrod retired from State service effective May 14, 1991.

2. Audit Report No. 89-S-34, prepared by the Comptroller's Office, entitled, "Department of Health, Health Research, Incorporated - Transferring Technology to the Private Sector." The former Commissioner of Health, as required by Executive Law §170, filed a written response to the Comptroller's audit which is contained in the report. The audit was performed pursuant to the Comptroller's authority as set forth in the State Constitution, Article V, §1, and State Finance Law, Article 2, §8.

3. The Comptroller's audit reviewed activities for the period from April 1, 1985, through October 31, 1988 during a period before the Commission's existence and jurisdiction (see footnote 7, infra.). In their letter, the former Commissioner of Health and the Comptroller stated that similar issues involving the appearance of conflicts of interest "will arise in the future as the State continues to develop patentable technology and products and means are sought to further the commercial availability of such." Furthermore, it is the Commission's understanding that at the time of this inquiry the former Commissioner of Health, the Chair of the State Public Health Council, and the Executive Director of HRI served on the board of VGC.

4. Due to his retirement from State service, Dr. Axelrod no longer sits on the VGC board of directors. The Chair of the State Public Health Council has resigned his position on the VGC board. Nonetheless, the Commission will address the issues as if these individuals still serve on the VGC board.

5. If the Executive Director of HRI did not serve as a State officer, he would not be subject to the provisions of the Public Officers Law and the jurisdiction of the Commission. However, we would believe there still would be a conflict of interest for him to serve in any capacity with the Institute Merieux, although the conflict is not based on the Public Officers Law. Because of circumstances like this, the Commission has pursued statutory authorization for coverage of research entities closely-affiliated with State agencies. The Commission does not endorse or otherwise condone conflicts of interest by officers or employees of HRI or by officers and employees of any other corporation closely affiliated to a State agency. The Commission suggests that this is an area in need of reform and encourages the Legislature, at a minimum, to require closely-affiliated research entities to adopt provisions of §§73 and 74 to cover their employees.

The Commission's identification of the need for reform echoes the report of the New York State Commission on Government Integrity ("COGI") entitled "Underground Government: Preliminary Report on Authorities and Other Public Benefit Corporations." As the COGI report indicates, "once these [closely-affiliated] corporations are established, they can do business, buy and sell property, provide services and charge fees for doing so, apply for federal, state and local grant moneys, enter into contracts with government units, and generally do anything their sponsors desire them to do--organizationally separate from their government sponsors."

The COGI report also targets other concerns of the Commission regarding potential conflicts of interests. The closely-affiliated corporations are not subject to comprehensive oversight and pre-approval, by either the Comptroller or the Attorney General, of their contracts with third parties. These entities are not covered by any conflicts of interest laws.

6. 1962 Op. Atty. Gen. [Inf] 41.

7. See Public Health Law §206 for a full list of the Health Commissioner's powers and duties.

8. These areas of concern include health education, health manpower, economics and delivery of health service, sanitation problems and interprofessional relationships.

9. As required by Public Health Law §2444(2), the Health Commissioner shall approve each statement.

10. Any violations found by the committee must be reported to the Health Commissioner.

11. HRI was established under New York Not-for-Profit Corporation Law §803 (Certificate of Amendment to the Certificate of Incorporation of HRI, dated February 20, 1987) and is a tax-exempt organization under Internal Revenue Service Code §501(c)(3).

12. A number of other State agencies have benefited from the creation of separate not-for-profit corporations which administer and receive research grants. These corporations are not State agencies and include, for example, the Welfare Research Institute (affiliated with the Department of Social Services), the Mental Health Research Foundation (affiliated with the NYS Office of Mental Health), Research Foundation for Mental Hygiene, Inc. (NYS Office of Mental Retardation and Developmental Disabilities) and the State University of New York ("SUNY") and City University of New York ("CUNY") Research Foundations. While the respective State agencies maintain some degree of control over the corporations, closely affiliated not-for-profit corporations remain separate and distinct independent entities whose employees are not State employees and are not subject to the provisions of the Public Officers Law.

13. HRI's by-laws, amended February 24, 1988, Article I, §2, provide a complete listing of HRI's corporate purposes.

14. From its creation in 1953 through 1988, HRI has accepted and administered over $350 million in research funding.

15. See Commission's Advisory Opinion No. 90-13 for a full discussion of the Commission's conclusions that subsidiary public benefit corporations are fully subject to the provisions of the Public Officers Law as distinguishable from closely-affiliated corporations established by State agencies which are not, under the prevailing statutory scheme, subject to the Ethics Law.

16. According to DOH, this organizational integration is designed to ensure that HRI's policies and practices remain consistent with, and forward the best interests of, the State of New York, while providing the flexibility and responsiveness required to meet the changing needs of its research programs.

17. Agreement between the State and HRI effective April 1, 1991 through March 31, 1993.

18. For the 1990-91 fiscal year, HRI paid $3.1 million to the State for overhead.

19. This amounted to $721,000 for fiscal year 1990-91.

20. As of March 31, 1991, the ICF had a $3.4 million balance.

21. The State Division of the Budget and the Comptroller's Office approved HRI's designation as technology transfer agent through an amendment to the administrative contract between DOH and HRI referred to above.

22. As the Comptroller's audit indicates, the patent policy is unclear as to who actually owns the patent rights, DOH or HRI.

23. The Comptroller's audit criticized DOH's policy of transferring all technology to HRI and HRI's licensing arrangements. In July, 1989, legislation was enacted that addressed many of the Comptroller's concerns relative to State oversight of agency technology transfers, patent policies and extra compensation for State employees. Under the legislative reforms, the Comptroller must approve the transfer of patents or other technologies, by or for the benefit of the State. Both the Comptroller and the State Budget Director must approve State agency patent policies. Extra compensation for State employees is now permitted in the form of royalties or other payments if authorized by the employee's State agency patent policy.

24. HRI is permitted to retain the revenues received from royalties and licensing fees as part of HRI's Intracorporate Fund, which is not actively monitored by the Comptroller and which is not used to offset HRI's net operating losses. According to the Comptroller's Audit Report, by assigning patent and technology rights to HRI, rather than retaining the rights itself, DOH loses rights to potentially large sums of money before any transfer to the private sector.

25. At the time, HRI proposed a joint venture with a group of outside investors and submitted this proposal to the State Comptroller and the State Attorney General for their approval.

26. In 1982, both the Comptroller and the Attorney General (prior to the Commission's existence, the Attorney General had sole jurisdiction for enforcing and rendering opinions on the application of Public Officers Law §§73 and 74) expressed reservations about that joint venture, both were concerned about the adequacy of the one dollar consideration to be received by the State from HRI. The Attorney General also perceived that the then proposed joint venture involving a member of the State Public Health Council, a DOH official, as the outside investor, would constitute an apparent conflict of interest. The same individual is now the Chair of the State Public Health Council and, at the former Health Commissioner's request, sat as a member on the VGC board of directors until his recent resignation from the board. DOH tabled the proposed joint venture primarily because of the conflicts of interest concerns.

27. Virogenetics was created in 1981 by its filing of a certificate of incorporation with the New York State Department of State under Business Corporation Law §402. When the initial joint venture was tabled, Virogenetics remained a shell corporation until the proposed collaboration of HRI and Merieux to develop the vaccine. Neither DOH nor HRI submitted the new joint venture agreement to the Comptroller or the Attorney General for their review and approval. Pursuant to the joint venture, HRI provided VGC with exclusive, royalty-free rights to the vaccine technology in return for HRI's initially holding 49% of VGC's outstanding stock. Merieux, for its part, provided cash infusion of $4 million into VGC in return for 51% of VGC's outstanding stock. [DOH does not formally participate in VGC; but certain of its officers and employees serve on the board of VGC.] The joint venture agreement further required that Merieux provide at least another $4 million in research and development funding by the end of 1990 when its shares in VGC increased from 51% to 80%. [Merieux had invested an additional $20.4 million into VGC by 1990, far beyond the $4 million that was required of it.] The Comptroller's report indicates his belief that the project has substantial commercial potential based upon the significant investment by Merieux into VGC. In 1996, Merieux has the option to buy-out HRI's remaining 20% share of VGC. [As noted before, HRI retains the right to ask for an outside appraisal of its shares in VGC if Merieux decides to exercise its right and DOH does not believe Merieux's offer for its shares is fair.]

Until 1989, when it moved to its own facilities and hired its own personnel, VGC conducted its activities utilizing State employees at DOH's Wadsworth Center for Laboratories and Research through a research contract executed between HRI and VGC. [According to DOH, this contract was administered in the same manner as any other external research support provided to DOH through HRI.]

28. The Comptroller's report is, again, sharply critical in the manner by which DOH and HRI relinquished their rights to the vaccine to VGC and the potential State revenues that could have accrued from the vaccine's commercial success had DOH retained the patent rights. As a result of the Comptroller's concerns, in October of 1989, the Comptroller, DOH and HRI entered into a Memorandum of Understanding which provides that, whenever DOH assigns a patent to HRI or HRI enters into an agreement to market a patent for commercial development, the Comptroller will be notified and shall review and approve any final agreement for the patent's commercial development.

29. According to counsel at DOH, the vacancies can only be filled by a vote of the VGC board.

30. The Commission will consider separately the issue of whether the vaccine inventor violated any of the post-employment provisions of the Public Officers Law by virtue of his employment with VGC.

31. Schacter v. Kulik, 466 N.Y.S.2d 444, 96 A.D.2d 1038 (1983) [evidence indicated that 50% shareholder and corporate officer completely disregarded his fiduciary duty to corporation when he seized assets of corporation and entered into a unilateral royalty agreement with a new corporation of which he was sole owner].

32. Nechis v. Granatan Gardens, Inc., 231 N.Y.S. 383, 35 Misc.2d 949 (1963) [court rejected summary judgment motion for defendants as there was sufficient evidence to allege that corporate directors had wasted corporate assets by authorizing payment of an excessive salary to president and payment of excessive legal fees].

33. Chelrob v. Barrett, 293 N.Y. 442, 57 N.E.2d 825, motion denied 293 N.Y. 859, 59 N.E.2d 446 (1944); Lippel v. Hirsch, 119 N.Y.S. 435 (1953).

34. The Governor has designated the Commissioner of Health and the Chair of the State Public Health Council as policymakers. The former Commissioner of Health designated the Executive Director of HRI, when serving as IRB member, as a policymaker. Pursuant to Public Officers Law §73-a, policymakers are required to file an annual statement of financial disclosure and are subject to certain Commission regulations.

35. The significance of policy-making status cannot be understated. The Commission's regulations, at 19 NYCRR 932, provide that individuals who have been designated as policymakers by their appointing authority may not engage in certain political activities and that certain policymakers serving in salaried positions must obtain the approval of their appointing authority and the Commission to engage in certain outside activities including service as a director or member of the board of a for-profit corporation.

The former Commissioner of Health and the Chair of the State Public Health Council had pending requests for approval to serve on the board of directors of VGC. The Executive Director of HRI, as a member of DOH's IRB, would not have to file an outside activity request because the position is not salaried, although it has been designated as policy-making.

36. A State employee not designated as a policymaker is still covered by the Code of Ethical Conduct of Public Officers Law §74. The Commission, however, has applied a heightened level of scrutiny to the appearance of conflicts of interest whenever policymakers engage in outside employment. (See Advisory Opinion No. 91-3.)

37. By law, the not-for-profit local development corporation was eligible to conduct business with the individual's employing State agency.

38. An appearance of a conflict of interest, under Public Officers Law §74, would occur if the Commissioner of Health or his designee served on the board of a private company that had or was seeking a licensing agreement with HRI for a DOH invention. The basis for the appearance of a conflict of interest would be manifold: for example, whether the Commissioner of Health provided insider or other confidential information to the company in order that the company obtain the licensing agreement, whether the Commissioner of Health's service as a board member of the company could be perceived to be a result of the company's obtaining the licensing agreement, whether the Commissioner of Health could maintain his loyalty to the State if a dispute ever arose between DOH, HRI, and the licensing company.

39. Advisory Opinion No. 90-6 does not indicate whether the individual had been designated as serving in a policy-making position. The fact that the individual had the responsibility for the agency's day-to-day operations qualifies the individual to be designated as a policymaker.

40. This inference is consistent with the Commission's regulations on outside activities (19 NYCRR 932) which require policymakers to obtain the approval of their appointing authority and the Commission to serve as officers or members of profit-making entities but do not require policymakers to seek approval for their service as officers or members of not-for-profit corporations.

41. The HRI Executive Director's involvement with VGC goes one step further; he is also the Secretary/Treasurer to VGC.

42. The Commission does not need to conclude that any such violations in fact occurred. Under Public Officers Law §74, the appearance of a conflict of interest may also support the finding of a violation.

43. The Commission does not find a conflict of interest with the Commissioner of Health serving as the head of DOH and as a director and president of HRI. (See Advisory Opinion No. 91-20.) DOH and HRI have a similar mission. Their close affiliation enhances DOH's ability to conduct research and to obtain the necessary funding to do so. As the head of DOH, the Commissioner of Health has an obligation to review the activities of HRI and to direct its policies and operations.

44. His positions with DOH's IRB and HRI do not pose the appearance of a conflict of interest with each other because of the common mission of DOH and HRI. In addition, pursuant to Public Health Law §2444, as an IRB member he would not be able to review the human research statement or projects of HRI.

45. For example, the greater the funds HRI receives from VGC, the less monies it would need from DOH to carry out its research projects.

46. The Chair of the State Public Health Council had previously requested the opinion of DOH's General Counsel on whether service on the board of directors of VGC would create any actual or potential conflict of interest. Counsel, in a letter to the Chair of the State Public Health Council dated February 6, 1990, opined that such service would not pose any actual or potential conflicts of interest based on the facts that the Chair of the State Public Health Council has no financial or other economic interest in VGC and that the activities of VGC do not fall under the regulatory powers of the State Public Health Council. While the foregoing facts are true, Counsel's letter does not address any of the appearance of a conflict of interest issues of concern to the Commission. Counsel did advise the Chair of the State Public Health Council that if he wished to pursue the matter he should write the Commission which, under Executive Law §94, is authorized to render advisory opinions concerning Public Officers Law §74.

47. The Commission has not commented on the particular financial arrangements between DOH, HRI and VGC which was the focus of the Comptroller's audit report. The Commission opines only on the conflicts of interest issues raised by certain DOH officials' sitting on the board of directors of VGC.

48. The Commission would deem it appropriate, in this case, for the Commissioner of Health, the Chair of the State Public Health Council and the Executive Director of HRI to hold uncompensated non-voting membership on the VGC board of directors or serve as uncompensated advisors to the corporation or for DOH to nominate private citizens to the VGC board.



URL: http://www.nysl.nysed.gov/edocs/ethics/93-03.htm