Tips on Navigating the Intellectual Property Mine Field

One of the richest men in North Carolina is a former statistics professor who was gently guided to the exit door by administrators at North Carolina State University when his academic work strayed too closely to the commercial world.

The statistician in question is Jim Goodnight, a founder of SAS Institute, now an international developer of analytics software. The split with NC State occurred 40 years ago, though the tension between academia and the commercial world remains.

Ken Swartzel walked the same tightrope, though the food engineer never made a clean break like Mr. Goodnight. When NC State gave Swartzel an ultimatum to choose between Aseptia Inc. and the university’s research labs a decade ago, he opted for the lab. (as we reporting in our December Scheduled Downtime)

Aseptia is licensing some of the patented food processes Swartzel helped develop in the course of a 40-year academic career. “A patent is worth only what somebody is willing to spend to defend it,” he observes, and a major educational institute has deeper resources to protect intellectual property than the solitary inventor. Dozens of U.S. and international patents bear Swartzel’s name, giving him particular insight into navigating the IP waters.

The arcane world of tax law is an example of the expertise he’s acquired outside the thermal transfer and fluid flow that is his main focus. Many of Swartzel’s inventions required years of nurturing before they gained commercial acceptance. Defending their patents requires clear ownership, so university researchers in the state typically sell their interest in the IP to the institution, which treats it as a long-term investment subject to capital gains taxation.

The payment to the researcher is reported in a 1099 filing, usually as a 1099-royalty. But experience taught Swartzel that there are significant tax advantages if a 1099-other is generated. He has spread the news to peers at 17 universities in the North Carolina system. One researcher who took the advice to heart restated her income over several years. When they later met, she thanked him for his advice and said, “You bought me a new car” with the higher tax returns she realized.

Giving credit where credit is due is common practice when patent applications are filed, as evidenced by the multiple inventors listed on many of them. But that practice often leads to nasty legal battles. To avoid being embroiled in those, “I’ve declined to be named on more patents than I am on,” Swartzel says.

The cause of those fights is the invention claims in the patent application vs. the issued patent. Often times, the granted claims include an individual who didn’t contribute to them or exclude someone who did. Bruised egos drive a lot of patent litigation.

“I’ve had to defend my own patents, and I’ve seen things that were really ugly,” he shudders.

Given his professional prominence and current status as a semi-retired engineer, Swartzel often is solicited to provide expert testimony in lawsuits. “Most of the time, I turn those down,” he says. “I really have to believe in what the lawyers are saying” before getting involved.

“You spend your entire career in academics building your reputation,” he adds. “I haven’t had to prostitute myself yet (as an expert witness), and I don’t plan to do it.”