California Appeals Court Upholds Genentech Verdict

Genentech v. City of Hope

City of Hope v. Genentech (Cal. App. 2004) (B161549). 

Decision: A California state appellate court has upheld a $500 million verdict against Genentech for back payment of royalties on drug sales from a 1976 agreement with City of Hope National Medical Center.  The court found that Genentech breached a fiduciary duty to City of Hope.

Genentech does not dispute that it failed to disclose various licenses and pay royalties on those licenses. Rather, it contends that it did not breach any fiduciary duty so long as it was adhering to an erroneous but legally tenable interpretation of the agreement. In essence, Genentech would have us hold that even if it followed an interpretation it knew was contrary to what the parties intended and agreed upon, it could not be held liable so long as that interpretation was objectively sustainable under the law. . . . None of [the cases cited by Genentech] allows a party to profit from a legally tenable contract interpretation when the party knows that the agreement has a wholly different meaning. In any event, it would be antithetical to the very nature of the obligations imposed on fiduciaries for us to hold that a fiduciary could act in the manner suggested by Genentech.

To the extent Genentech contends that its interpretation of the agreement was held in good faith, that contention fails. The jury’s finding of fraud or malice demonstrates that it believed that Genentech acted in bad faith. That finding . . . is supported by substantial evidence and is sufficient for concluding that Genentech breached its fiduciary duty.

According to a California based patent attorney, several amici curiae — including Intel Corp., TechNet and the California Chamber of Commerce — pleaded with the court to reverse the judgment, saying that imposing fiduciary status as a cost of using third-party intellectual property would impede innovation.  Genentech has announced its plans to appeal the decision to the California Supreme Court.

About the Case: In 1978, City of Hope biologists Arthur Riggs and Keiichi Itakura developed a technique for splicing into a bacteria gene the DNA for human insulin, which became the world’s first biotechnology drug. Genentech agreed to pay City of Hope 2% on net sales of products that were tied to the DNA provided by the cancer center.  (see Patent No. 4,704,362). Royalties had been paid for sales of insulin and on sales growth hormone products, but the cancer center is asking for royalties on products made under 20 other license agreements.