$300 Million Award Stands Against Genentech, but $200 Million in Punitives Get Tossed

Mike McKee

The Recorder

Not many attorneys would find reason to celebrate if a court upheld a $300 million damages award against a client. But Jerome Falk Jr. did just that Thursday.

"I love this ruling," the partner at San Francisco's Howard, Rice, Nemerovski, Canady, Falk & Rabkin said. "I'm particularly gratified it's unanimous, and that it's such a thoughtful opinion."

Falk was referring to Thursday's long-awaited California Supreme Court decision in a high-profile contractual dispute between South San Francisco's Genentech Inc. and the Duarte, Calif.-based City of Hope National Medical Center. While the court affirmed a $300 million judgment against Falk's client, Genentech, it also threw out $200 million in punitive damages -- and by extension, Falk noted, another $120 million in post-judgment interest.

"Anytime I can save a client $320 million," Falk said, "I'm happy."

The ruling also did what anxious executives from a huge array of industries, from a Hollywood writers' guild to a biotech trade organization, had hoped for years -- it stated clearly that punitive damages cannot be awarded for a breach of contract unless there was an actual fiduciary relationship between the feuding parties.

"People were very concerned about it," said Michael Barclay, a patent litigator with Palo Alto, Calif.'s Wilson Sonsini Goodrich & Rosati who wasn't involved in the case. Barclay noted that it was not just a patent dispute, but addressed questions central to many kinds of contracts. "This is very helpful to clarify the law as to what constitutes a fiduciary relationship."

Eighteen amicus curiae briefs had been filed with the court supporting one side or the other. Among the amici were the Biotechnology Industry Organization, the United Inventors Association, Microsoft Corp. and Intel Corp.

The case rose to national prominence in 2002 when Los Angeles jurors hit Genentech with the huge compensatory and punitive damages for allegedly cheating City of Hope out of billions of dollars in royalties. The medical center had sued Genentech for breach of contract and breach of fiduciary duty, claiming the biotech giant withheld royalties from sales made by third-party companies that -- with Genentech's help -- got patent licenses based on City of Hope's development of a groundbreaking process for genetically engineering human proteins.

L.A.'s 2nd District Court of Appeal sent a shock through several industries in 2004 by upholding the entire financial award, and holding companies liable for punitive damages in simple contract disputes.

In Thursday's Supreme Court ruling, Justice Joyce Kennard said the lower courts erred in finding a fiduciary relationship between City of Hope and Genentech.

"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," she wrote. "The secrecy of information provided by one party to another -- here the scientific discovery by City of Hope -- may be considered by the trier of fact in deciding whether a fiduciary relationship exists, but it does not compel the imposition of fiduciary duties by operation of law."

The contract provisions, Kennard noted, show that Genentech had not intended to take on a fiduciary obligation.

However, she wrote, evidence was properly admitted to the jury that Genentech had concealed certain information from City of Hope after forming a contractual relationship. She also shot down City of Hope's argument that the contract should have been interpreted by the trial court judge and not jurors.

"Juries are not prohibited from interpreting contracts," Kennard wrote. "Interpretation of a written instrument becomes solely a judicial function only when it is based on the words of the instrument alone, when there is no conflict in the extrinsic evidence, or a determination was made based on incompetent evidence."

City of Hope's appellate attorney, Peter Davis, counsel at Reed Smith's San Francisco office, referred calls to the medical center. In a prepared statement, Robert Stone, City of Hope's general counsel, expressed mixed emotions about the ruling.

"City of Hope is extremely pleased that the California Supreme Court followed sound legal precedent in ruling the jury's verdict on compensatory damages was correct," he said. "While we are disappointed that the court did not agree with our position on fiduciary duty, we are delighted by the overall outcome."

Falk, of Howard Rice, said the ruling takes things back to "good business as usual."

"People are going to make mistakes and misinterpret contracts," he said. "And they should be punished. But this garden variety commercial dispute should never have been."

The ruling is City of Hope National Medical Center v. Genentech Inc., 08 C.D.O.S. 4785.