City of Hope Nat. Med. Center v. Genentech
| Decision Date | 21 October 2004 |
| Docket Number | No. B161549.,B161549. |
| Citation | 123 Cal.App.4th 306,20 Cal.Rptr.3d 234 |
| Court | California Court of Appeals Court of Appeals |
| Parties | CITY OF HOPE NATIONAL MEDICAL CENTER, Plaintiff and Respondent, v. GENENTECH, INC., Defendant and Appellant. |
Howard, Rice, Nemerovski, Canady, Falk & Rabkin, Jerome B. Falk, Jr., Steven L. Mayer, Amy L. Bomse, San Francisco; Keker & Van Nest, Robert A. Van Nest, Susan J. Harriman, Kara M. Andersen, and Steven A. Hirsch, San Francisco, for Defendant and Appellant.
Fred Main for Chamber of Commerce of the United States, California Chamber of Commerce; Jim Hawley for TechNet; D. Bruce Sewell, Janet Craycroft for Intel Corporation; Robin S. Conrad for National Chamber Litigation Center, Inc. and Thomas R. Lavelle, San Jose, for Xilinx, Inc. as Amici Curiae on behalf Defendant and Appellant.
Horvitz & Levy, Ellis J. Horvitz, Jon B. Eisenberg, Encino, William N. Hancock, San Francisco; Irell & Manella, Morgan Chu, Gregory R. Smith, David I. Gindler, Joseph M. Lipner, Los Angeles; Reed, Smith, Crosby, Heafey, Peter W. Davis, San Francisco, and James C. Martin, Los Angeles, for Plaintiff and Respondent.
This case arises out of a 1976 patent agreement (the agreement) that governs the right of respondent City of Hope National Medical Center (City of Hope) to receive royalties from appellant Genentech, Inc. (Genentech) with respect to patents1 worth billions of dollars. The agreement contains ambiguous provisions regarding the royalty base that applies to product sales by Genentech's licensees and proceeds from patent infringement actions. According to City of Hope, Genentech breached the agreement and the fiduciary duty it owed under Stevens v. Marco (1956) 147 Cal.App.2d 357, 305 P.2d 669 (Stevens) by concealing and failing to pay royalties that were due. The jury agreed and awarded City of Hope $300,164,030 in compensatory damages and $200 million in punitive damages. Genentech appeals on multiple theories, primarily contending that the jury misinterpreted the agreement and Stevens does not apply. Absent an outright reversal, Genentech asks us to reduce the contract damages by $94 million and $181,817 which, respectively, represent two percent of sales by licensees who obtained licenses through settlement agreements and two percent of settlement proceeds. Also, Genentech asks us to reverse the punitive damages award on the grounds that (1) there was no evidence of fraud or malice because it withheld royalties pursuant to a legally tenable contract interpretation, and (2) the award was excessive.2 At a minimum, Genentech asks us to remand the entire matter for a new trial.
We affirm in all respects.
The lynchpin for the bulk of this case is the following question: Did the agreement require Genentech to pay royalties on the product sales of licensees of the Riggs-Itakura patents even if those licensees did not practice3 the patents when manufacturing their products? The jury said yes. The next question is: Which product sales by licensees are part of the royalty base upon which royalties are calculated? Impliedly, the jury agreed with City of Hope that royalties are due on the sale of products listed in a license of a Riggs-Itakura patent. Genentech concedes that the agreement is susceptible to City of Hope's interpretation. The major battleground issues are whether it was error for the trial court to submit interpretation of the agreement to the jury, and whether the jury's interpretation was reasonable. After review, we conclude that both issues must be resolved in favor of City of Hope.
As for Stevens, we conclude that it applies. In the circumstances of this case—where an inventor transfers its invention to a third party who exercises an option to patent, develop and commercially exploit the invention in exchange for royalties—a confidential relationship is established.
Finally, there is no basis for reducing the contract damages, there was substantial evidence of fraud and malice, the punitive damages award was not excessive, and there are no grounds for a new trial.
Initial contact between the parties
While they were working for City of Hope in the mid-1970's, Riggs and Itakura achieved a breakthrough in biotechnology by inventing a way to genetically engineer human proteins.4 At about the same time, Dr. Herbert Boyer (Boyer) and a businessman named Robert Swanson (Swanson) joined forces to form a venture to exploit biotechnology. Boyer, who had worked with Riggs and Itakura in the past, called Riggs and proposed that they collaborate together on a project to make bacteria produce human insulin. Riggs was amenable. In fact, when he received the call, Riggs was in the process of writing a grant application for the same sort of project.
Genentech came into being on April 7, 1976, when Boyer and Swanson incorporated their venture.
The parties negotiate a contract
On May 18, 1976, Swanson sent City of Hope a letter proposing that Genentech provide City of Hope with approximately $300,000 over a two-year period to "complete the synthesis of genes coding for somatostatin and insulin." The letter went on to aver: Additionally, the letter stated that if Genentech failed to take "the necessary steps to commercialize the results of the joint development effort within a five year period from the date of agreement, all patent rights will become the property of City of Hope."
Thereafter, Genentech provided City of Hope with a copy of the University of California's schedule of support and patent privileges. According to Swanson's accompanying letter, the schedule "details the rights and obligations of industry funded research, and provided a guideline for Genentech's proposal to the City of Hope." Specifically, the schedule established that if the grantor paid all direct and indirect costs of research, then the grantor would receive "[a]n exclusive license for the life of the patent with the right to sublicense and the obligation to pay royalties on the license and sublicenses."
John J. Hall (Hall), City of Hope's patent attorney, began negotiating a patent agreement with Swanson and Genentech's patent attorney, Thomas Kiley (Kiley). Early on, Hall prepared a summary of points for agreement. That summary, in relevant part, proposed:
On June 30, 1976, Hall met with Kiley and Swanson in order to discuss various aspects of the agreement.
The agreement goes through three revisions
Kiley eventually prepared and sent Hall a first draft of the parties' agreement. The cover letter explained that the royalty rate in Article 6.01 of the agreement5 had been left blank. Kiley indicated that "[Swanson] has taken your proposal of [a] 2% flat rate under advisement" and that "[t]he agreement is in accordance with various points raised in [Swanson's] presentation to City of Hope and in discussions with you, save for the business of the royalty rate."
Kiley's cover letter for the second draft informed Hall, inter alia, 6 Also, Kiley wrote:
Finally, after a third revision, the parties signed the agreement.
The agreement stated that Genentech proposed to "engage in the manufacture and sale of certain polypeptides" and "requires synthetic DNA[7] which codes for the production of a particular polypeptide when incorporated in a bacterial or other plasmid." Corollary to that, it stated: "For its part, CITY OF HOPE wishes to conduct DNA synthesis and related work with GENENTECH funding, to publish the results of such work, and to earn royalty income from GENENTECH sales of polypeptides in whose manufacture synthetic DNA is employed." Genentech was to "solely and exclusively own such patent or other proprietary property as emerges from the work performed by CITY OF HOPE under this agreement."
Article 5.03 provided that Genentech could, "at its sole option, elect to make application for United States and/or foreign letters patent on" on the technology generated by Riggs and Itakura.
City of Hope's right to payment of royalties was set forth in Article 6 and Article 7.
Pursuant to the terms of Article 6.01, City of Hope was entitled to receive "a royalty of two percent (2%) of the net sales of all polypeptides sold by [Genentech] or its affiliates, provided only that manufacture of the polypeptide employs DNA synthesized by CITY OF HOPE under this agreement and provided to GENENTECH by CITY OF HOPE."8
Next, Article 6.02 established that for the first five...
To continue reading
Request your trial