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In a ruling that critics warn could jolt the biotechnology world, a Los Angeles appeal court on Thursday upheld more than $500 million in damages against Genentech Inc. The 2nd District Court of Appeal ruled unanimously that there was “substantial evidence” that the South San Francisco-based biotech giant had acted fraudulently in failing to pay royalties on human insulin and human growth hormone developed by the City of Hope National Medical Center. The decision affirms a Los Angeles County Superior Court jury’s 2002 decision to award City of Hope more than $300 million in compensatory damages and $200 million in punitive damages. That represents less than 1 percent of Genentech’s $51 billion market capitalization. “In a growing global economy, where a valuable patent can be licensed all over the world and be worth billions of dollars, there is every reason to afford the utmost protection to inventors who entrust their secrets to others for developing, patenting, manufacturing and licensing the secrets in exchange for royalties,” Justice Judith Ashmann-Gerst wrote. “Inventors,” she added, “cannot be expected to scour the world to determine whether they are being fleeced.” Justices Roger Boren and Michael Nott concurred. In 1976, Genentech, then in its infancy, negotiated a patent agreement to develop and market human insulin and human growth hormone based on a genetic engineering breakthrough by Arthur Riggs and Keiichi Itakura, two doctors at City of Hope, a cancer research center in Duarte. 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 that the contract required royalty payments only on patents using DNA synthesized by City of Hope. City of Hope eventually sued Genentech for breach of contract. At issue were 27 licenses with 22 companies involving 35 products. The award in the case came during a second trial. The first ended in a 7-5 deadlock, with the jurors leaning toward Genentech. In reaching their decision, the appeal court justices acknowledged that the 1976 contract was difficult to understand, saying that its “imprecise royalty provisions” were like “trying to walk across shifting sands. Each step is unsteady.” Nonetheless, the justices held that the relationship between the inventors at the City of Hope and the developers at Genentech should be treated as fiduciary in nature. That was based on Stevens v. Marco, 147 Cal.App.2d 357, a 1956 2nd District ruling that a fiduciary relationship exists where an inventor entrusts an idea or device to a third party for development. “Genentech would have us believe that there has been a policy shift away from this earlier history. But that is not born out by the cases,” Justice Ashmann-Gerst wrote. In upholding the punitive damages, the court was especially harsh, noting that Genentech’s “scheme of concealing licenses and withholding royalties spanned decades. The conduct may not have been widespread as to the number of victims, but it was pervasive and continuous as to City of Hope.” The court said Genentech “essentially cheated City of Hope out of a staggering amount of money.” Several amici curiae — including Intel Corp., TechNet and the California Chamber of Commerce — had 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. “Once allowed outside its traditional boundaries, the fiduciary concept could produce an ever expanding, tort-based regime where businesses — on pain of punitive damages — are expected to be accommodating rather than efficient,” they argued. “That is bad law, bad economics and bad social policy.” Genentech lawyers, including lead appellate counsel Jerome Falk Jr., couldn’t be reached. Horvitz & Levy partner Jon Eisenberg, who directed the appeal for City of Hope, declined comment. But Robert Stone, general counsel for City of Hope, said the center was “certainly gratified” by the court’s ruling. He also disagreed with the amici’s gloomy prediction. “The court followed the Stevens case, and that case has been around for 50 years,” Stone said, “so the type of situation the amici talk about hasn’t appeared”

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