By Julia Cheever
April 24, 2008
The California Supreme Court today upheld a jury verdict requiring Genentech Inc. of South San Francisco to pay a medical center $300 million in compensation for royalties due on a groundbreaking genetic engineering discovery.
But the court overturned a second part of the verdict that would have required the Genentech to pay the City of Hope National Medical Center an additional $200 million in punitive damages.
The panel, in a ruling issued in San Francisco, said unanimously that punitive damages could not be awarded because the royalty agreement was an ordinary contract and Genentech did not have a fiduciary duty toward the center.
The process for genetically engineering human proteins enabled Genentech to produce medicines including insulin, human growth hormone and interferon.
It was discovered by two scientists at the City of Hope center, near Duarte in Los Angeles County, in the mid-1970s. In 1976, the center and Genentech signed a contract providing that Genentech would develop medicines with the process and pay the royalties to the center.
The original $500 million award was granted by a Los Angeles Superior Court jury in 2002. It was upheld in 2004 by a state appeals court, which said the punitive damages award was justified because “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.”
Punitive damages can be awarded for violation of fiduciary duty, a specialized legal relationship in which one party is in a position of trust toward the other.
But state high court ruled there was no fiduciary duty because the agreement was a contract “between two sophisticated parties of substantial bargaining power,” both represented by lawyers during the contract negotiations.
Justice Joyce Kennard wrote, “A fiduciary duty 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.”
Kennard said the royalty contract could be compared to a situation in which a person takes a car to a garage for repairs.
She wrote that while the car owner “must grant the garage operator broad discretion to carry out the necessary work and must rely on the truth” of operator’s statements about what repairs are needed, no court has ever ruled that such a situation creates a fiduciary duty.
Spokespersons for Genentech and the City of Hope had no immediate comment.
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