Lawsuits Threaten ACS' Nonprofit Status, Financial Health

The American Chemical Society, whose members will gather in Washington, D.C., next week for the organization's 200th national meeting, is facing several legal attacks against its profitable Chemical Abstract Service. In June, Dialog Information Services, a California-based online information vendor, filed a $50 million suit against the society for "anticompetitive, illegal and predatory" management of CAS databases. The society is also fighting several law suits brought against it by the Columb

Aug 20, 1990
Julia King

The American Chemical Society, whose members will gather in Washington, D.C., next week for the organization's 200th national meeting, is facing several legal attacks against its profitable Chemical Abstract Service. In June, Dialog Information Services, a California-based online information vendor, filed a $50 million suit against the society for "anticompetitive, illegal and predatory" management of CAS databases. The society is also fighting several law suits brought against it by the Columbus (Ohio) Board of Education, which wants to overturn the service's real estate tax exemption.

The Columbus-based CAS, which is the society's largest division, publishes Chemical Abstracts, which since 1907 has printed more than 13 million abstracts and patent equivalents. Virtually all of the world's published chemical knowledge is contained within its pages and related registries, according to the society. Last year the service, with more than 25,000 research institutions as subscribers, generated a profit of more than $4 million on revenues of approximately $45 million.

In 1980, CAS launched its own on-line service to provide chemists with direct computer access to this information. In doing so, it went head-to-head with Dialog, an electronic information vendor that includes Chemical Abstracts among its database offerings.

Dialog's suit, filed June 7 in the U.S. District Court for the District of Columbia, charges ACS with using the CAS databases to monopolize the market for on-line chemical research. It also demands that CAS be required to make available to Dialog all information contained within its 100-plus computer databases because they were developed with federal grant money. ACS says Dialog filed the suit after the society refused to agree to a list of demands the company presented to the society. Among other things, ACS says Dialog demanded a "perpetual, non-exclusive license to process and distribute all present and future CAS files." Dialog, meanwhile, says it filed the suit because with its monopoly over CAS files, ACS has, in recent years, come to unfairly dominate the on-line chemical research market.

Dialog says it is licensed by the society to provide only pieces of CAS' Chemical Registry System Database and is denied access to other "critical" pieces, including all of the chemical literature abstracts, all pre-1967 literature, and certain updating material necessary to maintain the currency of its data. "There is no other database producer that is a tax-exempt scientific society that withholds portions of its database," says Bob Simons, Dialog's attorney. "Tax-exempt societies are out there to serve their scientists and, under federal contracts, ACS is obligated to make all data available."

The contracts Simons mentions are the multimillion-dollar National Science Foundation grants and contracts awarded to ACS between 1965 and 1975 to develop much of the CAS database. Because public money was used to create the databases, Simons notes, the law requires that they be widely available. Quoting from one of the NSF contracts mentioned in the suit, Simons says ACS is required to "make publicly available at fair and reasonable prices any and all computer programs, computer accessible files or documentation, now or hereafter."

A second and perhaps more significant issue Dialog raises in its suit is the question of whether ACS is a full-fledged competitor in the information services market, and not a nonprofit organization. "The fact that the government subsidized the ACS database is an interesting point, but it's not our major point," Simons says. "If there weren't even one dollar of federal funds involved, we'd still sue for antitrust because what ACS has is a monopoly." Should the court find in favor of Dialog, ACS could be forced to pay damages totaling $150 million.

In press releases and on the pages of recent issues of Chemical and Engineering News, ACS has said that Dialog's antitrust charges are "patently false." The society also maintains that it has complied and continues to comply with all terms and conditions of federal contracts and grants, including the NSF grants cited by Dialog. ACS concedes that it does not furnish Dialog with all CAS computer files, saying that this is within its rights. At press time, ACS had yet to file its legal response, which was due August 13.

In Columbus, Board of Education attorney Jeffrey Rich says the school board decided to seek revocation of CAS' real estate tax exemption as a charitable organization after examining CAS financial records dating to 1980 -- the year CAS started its own on-line service. After reviewing the figures, Rich says he concluded that "CAS is just a big computer business." By 1980, for example, Rich says CAS records show that it had accumulated a surplus of approximately $22 million on accumulated revenues that exceeded $70 million. "This showed that they [CAS] were not exactly in the business of breaking even," he says.

As for CAS' being a charitable organization, Rich says, "CAS is in no way related to the Boy Scouts of America or the United Way. What they do is no different from what a big computer business or publishing company does. That's not a sign of a charitable organization, but of an intellectual business organization in business to make a bundle."

The Columbus cases are expected to be decided within the next six months. Should the court strip CAS of its real estate tax exemption, says Edward Donnell, a senior adviser for planning and communication for CAS, "it's not a huge amount we would lose."

On the other hand, Donnell noted that if the society were to lose its non-profit status -- which has not been legally challenged, but which all of the lawsuits certainly call into question -- it would lose its federal tax exemption. Were that exemption not in place in 1989, the society presumably would have paid taxes on $10.84 million, the year's "excess of revenues over expenses."

The stakes are also high in the antitrust suit. If Dialog's arguments should prevail, Donnell says, the decision would surely deplete the society's reserves, which at the end of 1989 totaled $60.9 million.

"If ACS were to lose, and Dialog got the kind of damages it is claiming, ACS reserves would be totally bankrupt," he says. "Either members would have to cough up more money or programs would be cut."

Annual ACS membership dues are now $82 and, regardless of the outcome of the suit, will increase to $86 in 1991.