SAN FRANCISCO--The California Supreme Court, ruling in a closely watched patent royalty case, April 24 reduced by $200 million a $500 million jury verdict that City of Hope National Medical Center won against Genentech Inc. (City of Hope National Medical Center v. Genentech Inc., Cal., No. S129463, 4/24/08).

A unanimous court held there was no fiduciary relationship when City of Hope gave a secret scientific discovery to Genentech to develop, patent, and commercially exploit, throwing out the jury's $200 million punitive damage award. But the court left intact the $300,164,300 compensatory damage award to City of Hope on its breach of contract claim.

The case illustrates that “a fiduciary relationship is not necessarily created simply when one party, in exchange for royalty payments, entrusts a secret invention to another party to develop, patent, and market the eventual product,” the court said in a 29-page decision.

“Here the contract was between two sophisticated parties of substantial bargaining power,” the court said. Both parties had counsel during negotiations for the contract that stated in return for royalty payments to City of Hope, Genentech was the sole owner of patents it would obtain for the center's scientific discovery of synthetic DNA.

Under the contract, Genentech could assign and transfer its contractual rights, including patents, and the parties' relationship was not one involving agency, joint venture, or partnership, but had City of Hope as an independent contractor, the court said.

Vulnerability.

“Was City of Hope vulnerable because it had to rely on Genentech's superior ability in obtaining patents and in marketing products based on the secret scientific discovery of City of Hope scientists Drs. [Arthur] Riggs and [Keichi] Itakura? Yes, but not to the extent that would necessarily warrant recognition of a fiduciary duty,” the court said.

“It is not at all unusual for a party to enter into a contract for the very purpose of obtaining the superior knowledge or expertise of the other party,” the court said.

“Standing alone, that circumstance would not necessarily create fiduciary obligations, which generally come into play when one party's vulnerability is so substantial as to give rise to equitable concerns underlying the protection afforded by the law governing fiduciaries,” Justice Joyce Kennard wrote for the court.

Perspectives.

In a statement, Genentech General Counsel Sean Johnston said the company “has maintained throughout this process that we have lived up to the letter and spirit of the contract.”

“We are pleased with the Court's finding that punitive damages are not applicable in this setting and we would like to thank the many parties that filed supporting briefs in this case,” Johnson said.

Paul Kamenar, senior executive counsel with the Washington Legal Foundation, which filed an amicus brief in the case on behalf of Genentech (5 MRLR 112, 2/15/06), said punitive damages were not warranted “because the contract violation was not one where there was fiduciary duty owed by Genentech to the City of Hope hospital.”

Kamenar told BNA the opinion was “an important ruling in the whole life sciences and patent and trademark area dealing with issues of royalties” because it does not authorize punitive damages, which “are only warranted where you have a tort cause of action.”

Kamenar suggested that in crafting future contracts in this area, “parties are well advised to spell out explicitly as to what relationship is intended, e.g., 'Parties agree that this is a contractual relationship and no fiduciary relationship of any kind is intended … etc.’ ”

City of Hope General Counsel Robert W. Stone said in a statement that the research facility ''is extremely pleased that the California Supreme Court followed sound legal precedent in ruling the jury's verdict on compensatory damages was correct. While we are disappointed that the court did not agree with our position on fiduciary duty, we are delighted by the overall outcome.'' The facility said it plans to use the verdict payment to fund further research.

Lower Court Fiduciary Ruling Invalidated.

The ruling invalidates a California Superior Court, Los Angeles, jury's $200 million punitive damage awarded to City of Hope based on the Southern California cancer center's tort claim for breach of fiduciary duty.

A California appeals court refused to set aside the jury verdict against Genentech in a lawsuit City of Hope brought, alleging breach of a 1976 agreement. Genentech agreed to pay royalties on a number of drugs, including synthetic insulin and human growth hormone, discovered by City of Hope researchers.

City of Hope alleged Genentech breached the contract by failing to pay or report to the research center the full royalties due under the contract, and by failing to give City of Hope full access to the company's records to accurately determine the full royalties owed.

Collaboration.

Kennard said the Genentech-City of Hope collaboration “resulted in extraordinary scientific and commercial success.”

The contract provided that Genentech would fund City of Hope research to synthesize DNA for selected polypeptides, a molecular chain of amino acids.

City of Hope received $302 million in royalties on Genentech's sales and on sales by Genentech's licensees of somatostatin, insulin, and a human growth hormone that used DNA synthesized by City of Hope.

Genentech told City of Hope that in August 1978 it granted Eli Lilly a license to produce human insulin, the court said.

“But Genentech did not tell City of Hope about other licenses it had granted, such as one it granted to other companies for the production of interferon, which was then viewed as a potential cure for cancer and the sales of which Genentech projected as potentially exceeding its revenue from all other sources combined,” the court said.

While Genentech shared its settlement with Eli Lilly over the sales of future growth hormone for alleged patent infringement, the company rejected City of Hope's claim for a share of a $20 million settlement of a separate infringement case. City of Hope sued but the first trial ended with jurors unable to reach a verdict.

No Fiduciary Obligation.

Citing Committee on Children's Television Inc. v. General Foods Corp., 35 Cal.3d 197, 221 (1983), the court said contractual provisions indicate the parties' “common goal was to achieve a mutually beneficial arrangement, not that Genentech had undertaken a fiduciary obligation 'to act on behalf of and for the benefit of another.' ”

The justices looked to a California Court of Appeal ruling in a case in which the author of the book later made into the Walt Disney movie Who Framed Roger Rabbit? sued over royalty payments and to obtain access to the studio's records (Wolf v. Superior Court, 107 Cal.App.4th 25 (2003)).

The Supreme Court, in finding the trial court erred, agreed with the appeals court in Wolf that “fiduciary obligations are not necessarily created when one party entrusts valuable intellectual property to another for commercial development in exchange for the payment of compensation contingent on commercial success.”

Counsel for City of Hope National Medical Center included Jon B. Eisenberg, of Eisenberg & Hancock, Oakland, Calif.; Peter W. Davis, of Reed Smith LLP, San Francisco; and Ellis J. Horvitz, of Horvitz & Levy, Encino, Calif.

Counsel for Genentech included Jerome B. Falk Jr., of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, San Francisco; and Robert A. Van Nest, of Keker & Van Nest, San Francisco.

By Joyce E. Cutler

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The decision is available at http://www.courtinfo.ca.gov/opinions/documents/S129463.PDF.

Copyright 2008, The Bureau of National Affairs, Inc.