US Legal Update

Intellectual Property Law – Patent Royalty Payments – Pharmaceuticals –  DNA Material -  Independent Contractor – Breach of Contract-  Right to assign Intellectual Property Rights – Failure to Disclose License of DNA to Third party - Punitive and Compensatory Damages

In City of Hope National Medical Center ("City of Hope") v. Genentech [2008],  the California Supreme Court reversed a $200M punitive damages award in a patent royalty case over synthesized DNA material.  The DNA material was created conceptually by City of Hope but produced by Genentech.

In this case, City of Hope gave Genentech the right to develop, patent, and commercially exploit their scientific discovery in exchange for royalty payments.   The agreement entered into between both parties defined City of Hope as an independent contractor and gave Genentech the right to assign and transfer its rights, including patents, to third parties.

City of Hope sued Genentech for breach of contract agreement.  City of Hope argued that Genentech did not pay or report the royalties due from the sale of certain DNA products to third parties.  The first trial on the issues led to a hung jury.  However, in the second trial the court awarded City of Hope $300M in compensatory damages and $200M in punitive damages.  The evidence suggested that Genentech failed to disclose its license of synthesized DNA to other companies.  City of Hope argued Genentech owed them a fiduciary duty to disclose the records for payments due under the contract.

The California Supreme Court reversed the award of punitive damages finding “a fiduciary relationship is not necessarily created simply when one party, in exchange for royalty payments, entrusts a secret invention to another party to develop, patent, and market the eventual product”  Hence, punitive damages are not allowable.  Under California law, punitive damages are not allowed to be assessed in breach of contract cases.  Punitive damages are reserved for tortuous claims.

City of Hope argued that Genentech had greater expertise in the scientific area and thus owed a fiduciary duty to them.  However, the Supreme Court found that the relationship between City of Hope and Genentech was strictly contractual and between two sophisticated parties.  The Court relied on a 2003 case Wolf v. Superior Court which held, “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.”

Accordingly, any claim for punitive damages under a contractual agreement is made in error.  An award of punitive damages under a contract impedes the practice of contract law.

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© RT COOPERS, 2008. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.




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