Panel To Issue Recommendations on Royalties from Proposition 71-Funded Research; One Lawsuit Against CIRM Dismissed

An advisory panel of the California Council on Science and Technology on Tuesday will issue recommendations on whether the state can legally seek royalty payments from stem cell treatments developed through Proposition 71 funding, the San Francisco Chronicle reports (Tansey [1], San Francisco Chronicle, 10/25).

A "possible snag" involves federal rules that bar states from benefiting financially from using tax-exempt bonds to fund a specific private enterprise rather than "serving a general public good," the Chronicle reports (Tansey [2], San Francisco Chronicle, 10/25).

In general, the Internal Revenue Service allows state and local governments to use tax-exempt bonds to fund public projects, such as bridges and roads, but prohibits states from sharing revenue with projects in which it acts as a business partner.

The state could retain royalty rights on treatments developed using Proposition 71 funding by issuing taxable bonds, but it would have to pay investors a higher interest rate on taxable investments, according to the Chronicle (Tansey [1], San Francisco Chronicle, 10/25).

Some financial experts say the state could issue a combination of tax-exempt bonds to state universities and not-for-profit research facilities and taxable bonds to private firms.

However, Robert Feyer -- an attorney with Orrick, Herrington & Sutcliffe, which helped draft Proposition 71 -- said the IRS could rule that private firms would eventually be the benefactor of university-sponsored research by licensing the universities' inventions.

According to the Chronicle, such a relationship could violate IRS rules against "excessive business involvement if [the grants] are paired with royalties flowing back to the state." Such an interpretation of the rules also could prohibit University of California campuses from receiving royalties for discoveries because they are entities of the state (Tansey [2], San Francisco Chronicle, 10/25).

The panel maintains that mandatory royalty payments to the state could slow medical progress by discouraging private investment in stem cell research. The panel also has said the state would not be able to collect royalties under federal tax laws. Panel members based their conclusion on discussions with Orrick, Herrington & Sutcliffe.

Proposition 71 critics have voiced concerns that the state will adopt the advisory panel's recommendation without first seeking an opinion from the IRS.

Experts not affiliated with Proposition 71 say the state should seek an advisory opinion from the IRS. However, the agency "may never have a chance to answer the question" if the California Institute for Regenerative Medicine adopts the panel's proposal to forgo royalty payments, the Chronicle reports.

Feyer said the state will ask the IRS for a private letter of approval after royalty policies are established and the state has decided on a specific bond issuance.

An IRS spokesperson said it was impossible to say how the agency would rule in the case because it does not comment in general about such issues (Tansey [1], San Francisco Chronicle, 10/25).

In other CIRM news, a federal judge in Los Angeles dismissed a lawsuit against CIRM that sought to declare that embryos are persons and have constitutional rights, the Sacramento Bee reports.

Nathan Barankin, a spokesperson for the attorney general's office, said the judge in the case indicated that the suit could be refilled in federal courts in Sacramento or San Francisco.

Two other lawsuits against CIRM are pending in Alameda Superior Court (Mecoy, Sacramento Bee, 10/25).