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Officials at Genentech Inc. can breathe again. The state Supreme Court agreed on Wednesday to review a Second District Court of Appeal decision in which the South San Francisco biotech giant was hit with a $500 million judgment — including $200 million in punitive damages — for failing to pay licensing fees to a Southern California medical research center. It was the largest award ever upheld in a published appellate decision in California. The verdict had knocked the breath out of Genentech and others in the high-tech world who felt the court’s decision could impede innovation. In his petition for review, Genentech attorney Jerome Falk Jr. wrote, “Knowledgeable amici curiae told the court of appeal that imposing tort liability for inaccurately reporting and paying royalties ‘would especially reduce investment in research and development for [intellectual property] that is not yet patented — that is, the very newest technologies with the greatest potential social value.’” Disney, Intel Corp., Microsoft Corp. and other companies had entered the case on Genentech’s behalf. A grant of review doesn’t necessarily mean the high court intends to favor Genentech, but it at least gives the company another forum to argue its position. “If review had been denied, it would have been bad for our client because the only remaining appeal would have been to the U.S. Supreme Court,” said Steven Mayer, a partner with Falk at San Francisco’s Howard, Rice, Nemerovski, Canady, Falk & Rabkin. Justice Carlos Moreno didn’t vote for review, while Justice Kathryn Mickle Werdegar recused herself. Her son, Matthew, is an associate at Howard, Rice co-counsel Keker & Van Nest. The case goes back to Genentech’s infancy in 1976 when the company negotiated a patent agreement to develop and market human insulin and human growth hormone based on a genetic engineering breakthrough by two doctors in Southern California’s City of Hope National Medical Center. Genentech paid City of Hope a 2 percent royalty on the sale of products developed from the technology but didn’t pay the medical center for licensing revenue. Genentech claimed the contract required royalty payments only on patents using DNA synthesized by City of Hope. The research center sued Genentech for breach of contract. The first trial ended in a 7-5 deadlock favoring Genentech, but the second ended with the $500 million award. About three months ago, Los Angeles’ Second District Court of Appeal affirmed the judgment, saying there was “substantial evidence” that Genentech acted fraudulently. The three-justice panel said that there is “every reason to afford the utmost protection to inventors who entrust their secrets to others for developing, patenting, manufacturing and licensing.” In its petition for review, Genentech argued that the Second District’s decision conflicts with Wolf v. Superior Court (Walt Disney Pictures and Television), 107 Cal.App.4th 25, a 2003 ruling by another division of the Second District that said the failure to account for and pay royalties is not a tortious breach of fiduciary duty but only a breach of contract. In opposition, City of Hope’s lawyers argued that Genentech misconstrued the ruling in Wolf. They also emphasized Genentech’s alleged fraud. Joseph Lipner, a partner in Los Angeles’ Irell & Manella, wrote, “[T]he court of appeal stated that Genentech breached its fiduciary duty through a ‘despicable, base and vile’ course of conduct, including an attempted buy-down of City of Hope’s royalty rights while concealing the true value of City of Hope’s invention.” Irell & Manella is co-counsel with Encino’s Horvitz & Levy and the L.A. office of Reed Smith. Howard, Rice and Keker & Van Nest are joined by the San Francisco office of Skadden, Arps, Slate, Meagher & Flom. The case is City of Hope National Medical Center v. Genentech Inc., S129463.

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