Friday, April 25, 2008
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S.C. Tosses $200 Million Punitive Damage Award to City of Hope
By KENNETH OFGANG, Staff Writer
The California Supreme Court yesterday overturned a $200 million punitive damage award in favor of City of Hope National Medical Center in its patent dispute with biotechnology company Genentech Inc.
While rejecting Genentech’s objections to the $300 million award of compensatory damages, the justices unanimously held that the parties’ agreement allowing Genentech to exploit certain intellectual property in exchange for royalties did not create a fiduciary relationship.
City of Hope’s breach of fiduciary duty claim should not have been allowed to go to the jury, Justice Joyce L. Kennard wrote, because it was beyond dispute that the relationship was entered into for mutual benefit, not for the primary benefit of the plaintiff, and there was no basis for a finding that a fiduciary relationship existed.
This district’s Court of Appeal had upheld the entire judgment, saying Genentech was guilty of fraud and malice in withholding royalties it should have been paying to City of Hope.
Royalty Agreement
The lawsuit grew out of a 1976 royalty agreement whereby City of Hope allowed Genentech to commercially exploit a groundbreaking process for genetically engineering human proteins that had been discovered by City of Hope scientists Drs. Arthur Riggs and Keichi Itakura.
City of Hope sued Genentech in 1999, claiming the South San Francisco-based biotechnology giant concealed licensed sales of protein products, such as hepatitis vaccines, over a 15-year period that were worth about $16.7 billion.
City of Hope contended it was owed $457 million in royalties and interest. A Los Angeles Superior Court jury, following a lengthy second trial before retired Los Angeles Superior Court Judge Edward Kakita—who heard the case on assignment and is now deceased—awarded $300 million in compensation and $200 million in punitive damages after finding Genentech failed to pay a 2 percent royalty.
The first trial had resulted in a deadlock, with the jury favoring Genentech by a vote of 7 to 5.
City of Hope successfully contended that the agreement required Genentech to pay royalties on the product sales of its licensees even if those licensees did not “practice” the patents—follow the manufacturing process contained in the patent—when manufacturing their products.
Breach of Contract
But Kennard, writing yesterday for the high court, said that what the plaintiff had proven was a breach of contract, not a breach of fiduciary duty.
In allowing the fiduciary duty claim to go to the jury, she explained, Kakita relied on overbroad language in Stevens v. Marco (1956) 147 Cal.App.2d 357, in which the court found substantial evidence of a fiduciary relationship between an unsophisticated inventor and the defendant, to whom plaintiff had assigned all of his rights in exchange for a percentage of net sales and whom plaintiff later accused of fraudulently advising plaintiff that the invention wasn’t protectable because there were earlier, conflicting patents.
The facts that one party entrusts its scientific discovery to another to exploit the discovery commercially, and leaves itself in a vulnerable position, does not in and of itself establish that the latter owes the former a fiduciary duty, Kennard declared.
Contrasting the facts with those of Stevens, the justice wrote:
“Here the contract was between two sophisticated parties of substantial bargaining power. Throughout the contractual negotiations, both parties were represented by counsel. The contract stated that, in return for the payment of royalties to City of Hope, Genentech was to be the sole owner of patents it would obtain for City of Hope’s scientific discovery of synthetic DNA; that Genentech could assign and transfer its contractual rights, including patents; and that the parties’ relationship was not one involving agency, joint venture, or partnership, which are categories in which fiduciary obligations are imposed by operation of law...but that City of Hope was to be an independent contractor.”
That City of Hope had to rely on Genentech’s superior ability in obtaining patents and marketing biotechnology, the justice added, does not change the equation.
“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,” she wrote. “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.”
The case was argued in the Supreme Court by Jerome B. Falk Jr. of San Francisco’s Howard, Rice, Nemerovski, Canady, Falk & Rabkin for Genentech and by Peter W. Davis of the Los Angeles office of Reed Smith for City of Hope.
The case also drew 17 amicus briefs.
The Biotechnology Industry Organization, Washington Legal Foundation, Product Liability Advisory Council, Inc., Motion Picture Association of America, Inc., The Civil Justice Association of California, and California Healthcare Institute, as well as the U.S. and California chambers of commerce and individual technology companies backed Genentech.
The Academy of Applied Science; United Inventors Association; Inventions, Patents and Trademarks Company, Writers Guild of America, West, Inc.; Directors Guild of America, Inc.; Screen Actors Guild, Inc.; Memorial Sloan-Kettering Cancer Center; Los Angeles Biomedical Research Institute; University of Illinois; Loma Linda University Adventist Health Sciences Center; California Association of Nonprofits; and individual inventors supported City of Hope.
The case is City of Hope National Medical Center v. Genentech, Inc., 08 S.O.S. 2353.
Copyright 2008, Metropolitan News Company