Emory Law Insights

EXCERPT

Nicole N. Morris  

ABSTRACT
Over the past several years, startups that once seemed destined for greatness have failed or collapsed because of fraud committed by the founders. Most notable are the Theranos and FTX business collapses, which culminated in the convictions of two infamous entrepreneurs, Elizabeth Holmes and Sam Bankman-Fried, respectively. Startup innovators are not alone when it comes to morally dubious behavior. According to Retraction Watch, nearly 5000 papers published in science & engineering journals were retracted in 2022. Research misconduct allegations eventually led to the resignation of Stanford University President Marc Tessier-Lavigne in July 2023. The research scandal at Stanford received lots of public attention. Absent such public scrutiny, however, organizations are slow to act on allegations of research falsification. This raises several important questions: are these occurrences becoming more frequent? What governance frameworks are available to effectively detect and prevent such misconduct and fraudulent behavior?

This Essay examines the current business ethics and corporate governance framework applicable to innovation, argues that it lacks sufficient safeguards to prevent misconduct and promote responsible practices. This Essay offers a two-pronged approach to address the ethical void in innovation. First, the implementation of stricter oversight by federal agencies (such as NSF or NIH), including penalties for non-compliance. Second, the legal profession must play a more active role in shaping and advising on ethical frameworks for responsible innovation. Lawyers can play a crucial role in evaluating both the risks and benefits of innovation, while also utilizing innovative tools to improve legal service delivery. By combining enhanced oversight with deeper legal involvement, we can create a more robust and comprehensive framework that fosters responsible innovation governance.…

FALLING SHORT: WHY CURRENT MEASURES ARE FAILING

The prevention of innovation fraud currently relies on a combination of organizational values, established social norms, and professional codes of ethics set by specific organizations. Private and public companies face little scrutiny about their decision-making processes. Most organizations’ company culture and norms provide the governance framework for innovation teams. This raises crucial questions: what safeguards exist to prevent “innovation fraud,” and how do they differ between research institutions and the private sector? Recognizing that a single solution may not suffice, Part II critically examines the existing frameworks that govern the innovation process.

A. THE PEER REVIEW PROCESS IS BROKEN

Published research is subject to substantial critique. Scientific and medical journals use the peer review process to decide which studies are worthy of publication. When a manuscript is submitted to a journal, it is assessed by researchers to see if it meets their criteria for submission. If it is deemed suitable, the editorial team selects potential peer reviewers within the relevant field of research to peer-review the manuscript and make recommendations. Peer reviewers also act as gatekeepers in these fields, wielding vast influence through their evaluations of research for publication, funding, conference slots, and recognition in the discipline. Often, this is a superficial popularity contest with underrepresented and marginalized authors left out of the process or subjected to unwarranted criticism. A major criticism of peer review is that there is little evidence that the process actually works, that it is actually an effective screen for quality scientific work, and that it actually improves the quality of scientific literature.

The number of retractions in scientific research publications has been rising for years. Retraction Watch is a database that catalogs and compiles retractions from existing databases like PubMed. It has curated a searchable database of over 46,000 retractions. The website cataloged more than 5,400 retractions in 2022, up from about 120 in 2002. More than 10,000 papers were retracted by journals in 2023, according to Nature.  Following the resignation of Stanford University President Dr. Tessier-Lavigne and the Retraction Watch co-founders (Ivan Oransky and Adam Marcus) coauthored op-eds in the Guardian and Scientific American noting that scientific misconduct is more common than reported.

Oransky and Marcus cite two main reasons for the sharp rise in retractions: (1) sleuthing largely by volunteers who comb academic literature for anomalies; and (2) major publishers’ (belated) recognition that their business models have made them susceptible to paper mills (scientific chop shops that sell everything from authorships to entire manuscripts to researchers who need to publish lest they perish).

As the number of retracted articles continues to rise, it is clear that the peer review process is no longer the most effective way to prevent innovation fraud. Journal editors acknowledge that errors or fraud can escape notice because reviewers don’t audit underlying data sets. Typically, reviewers are working scientists. Journal editors ask them to critique submissions and recommend whether they should appear in print. Bad data goes undetected in academic journals largely because the publications rely on volunteer experts to ensure the quality of published work, not to detect fraud. Despite assurances from journals that peer review ensures quality control, publishers have increasingly outsourced this task to volunteer sleuths outside the peer review process. However, these volunteer investigators often report that their well-founded critiques are ignored or downplayed by editors. As uncovered in the Stanford investigation, Dr. Tessier-Lavigne did an able job of initially pursuing corrective efforts with the journals Cell and Science between 2015-16. But Cell determined a correction wasn’t necessary, while Science said it would publish Tessier-Lavigne’s corrections—and then didn’t. Lax gatekeeping by journals is compromising the scientific integrity of published research. A stricter approach is necessary to uphold trust in scientific findings.

B. GOVERNMENT OVERSIGHT IS INADEQUATE

The federal government needs to play a greater role in regulating innovation fraud. The Office of Research Integrity (ORI) provides investigative oversight for agencies under the purview of the Secretary of Health and Human Services (HHS) including the National Institute of Health (NIH), which serves as the primary federal agency for biomedical and public health research.  The ORI was established to remove the responsibility of research misconduct investigations from the funding agencies. Unfortunately, ORI is not well respected within the scientific community due to several controversial scientific misconduct investigations. In 1999, ORI was stripped of its policing aspects and was reassigned to teach. As a result, in 2022, ORI received 269 allegations of research misconduct.

Funding agencies such as the NIH and the National Science Foundation (NSF) typically require the institution that receives funds from the agency to investigate and report allegations of research misconduct. Although the NSF regulations allow the agency to investigate a research institution if it obtains any evidence that a high-level administrative official of the awardee institution is involved in misconduct or in a cover up of misconduct, NSF frequently continues its past practice of allowing the awardee institution to perform its own investigation.

First, let’s look at the advantages of requiring the awardee institution to perform the investigation. Research grants from these agencies are made to the institution, rather than to the individual researcher whose work is to be funded, thus making the institution accountable for the use of the funds.  The employing institution, not the federal government, is capable of imposing a full range of sanctions, including dismissal, if misconduct is proven.  Institutions are generally responsible for faculty and employee disciplinary actions and must synchronize scientific misconduct proceedings with their own disciplinary codes and applicable state employment laws.  Investigations must be tailored to meet these requirements, which may not permit an institution to rely solely upon a federal investigation or hearing to support a disciplinary action. Furthermore, the employing institution, not the federal government, is often the first to learn of allegations of misconduct and can move quickly and efficiently to handle local matters that are actually only misunderstandings between individuals or relatively minor matters.  The institution usually has more direct and unfettered access to labs, witnesses, primary data, and other evidence.  Full-scale misconduct investigations are expensive no matter who conducts them.  However, the local institution is probably the most cost-effective choice to undertake most investigations.

The NIH is also involved in policing research misconduct. If an individual involved in NIH funded research is found to have committed research misconduct, the administrative actions that may be taken against this person may include, but are not limited to: 

• debarment from eligibility to receive Federal funds for grants and contracts
  
  
• prohibition from service on Public Health Service (PHS) advisory committees, peer review committees, or as consultants
  
  
• certification of information sources by the respondent that is forwarded by the institution
  
  
• certification of data by the institution
  
  
• imposition of supervision on the respondent by the institution
  
  
• submission of a correction of published articles by the respondent
  
  
• submission of a retraction of published articles by the respondent

 The default governance framework of self-policing policies is failing because research misconduct is not detected until after the data is published. There needs to be a governance framework that catches falsified data before publication. In addition, there needs to be greater accountability for institutions with a high rate of retractions for research papers as well as for individual researchers who commit innovation fraud.  

C. CORPORATE BOARD OF DIRECTORS: FAILURE OF OVERSIGHT

It is axiomatic that all private and public securities transactions, no matter the sophistication of the parties, must be free from fraud.” These words are taken from a speech given by the former SEC Chairwoman Mary Jo White in March 2016. White also discussed one of the chief concerns with startups, insufficient internal controls, and lack of oversight by the Board. “The risk of distortion and inaccuracy is amplified because start-up companies, even quite mature ones, often have far less robust internal controls and governance procedures that most public companies.”  Although innovation fraud can occur in both public and private companies, this risk is amplified with private startup companies because they often have inadequate internal controls and governance frameworks. Startup founders often justify wrongdoing through anticipation of the ultimate benefits. Thus, the Board of Directors plays an important governance role for startups. Arguably the most critical function of the Board of Directors is to oversee the CEO and senior management, holding the C-suite accountable for the company’s performance.

It is impossible for the board to be aware of every decision made by management. Thus, the oversight function of the board is essential for a well-positioned board. Moreover, corporate directors have strong incentives to remain ignorant about decisions that prioritize profits over safety or skirt regulatory requirements more generally. Prioritizing profits is beneficial for directors who receive substantial stock-based compensation. And remaining ignorant about how profits were obtained is good for directors’ ability to maintain plausible deniability and escape accountability. However, directors can be held liable for failing to provide oversight. In other words, oversight liability holds directors liable for their failure to act under circumstances where it can be proven that directors should have acted and their actions could have prevented corporate harm. This director oversight duty applies to both public and private companies alike.

—from Ethics of Innovation: A Framework tor Responsible Innovation Governance, 27 SMU Science and Technology Law Review 39 (2024)