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6 février, 2008 16:08

Mike McKee

The Recorder

02-06-2008

Whether a $500 million damages award against Genentech Inc. stands will probably come down to whether the California Supreme Court interprets a 32-year-old contract as establishing a fiduciary relationship between the biotech giant and a research center.

That issue was the focus of Tuesday's oral argument in the long-awaited case, as the court's justices attempted to nail down exactly what constitutes a fiduciary relationship in a patent contract. All seven justices -- including 1st District Court of Appeal Justice James Lambden sitting in for recused Justice Kathryn Mickle Werdegar -- asked tough questions without tipping their hands about who would prevail.

Attorneys for both sides were well-regarded appellate specialists. Jerome Falk Jr., a partner in San Francisco's Howard, Rice, Nemerovski, Canady, Falk & Rabkin, represented Genentech, while Peter Davis, counsel in the San Francisco office of Reed Smith, presented arguments for City of Hope National Medical Center.

Two justices -- Joyce Kennard and Ming Chin -- put Falk on the spot by asking him why they shouldn't adhere to Stevens v. Marco, 147 Cal.App.2d 357, a 1956 2nd District Court of Appeal ruling that said a fiduciary relationship is formed when an inventor "entrusts his secret idea or device to another under an arrangement whereby the other party agrees to develop, patent and commercially exploit the idea in return for royalties to be paid the inventor."

"Why should we agree with you," Kennard asked Falk, "that there is no fiduciary duty between Genentech and City of Hope?"

The contract at issue was Genentech's first, dating back to a mere month after the South San Francisco company was formed in 1976. Genentech contacted City of Hope, located in the L.A. County city of Duarte, and negotiated a patent agreement to develop and market human insulin and human growth hormone based on a genetic engineering breakthrough by two City of Hope researchers.

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 fiduciary duty. After a first trial ended in a 7-5 deadlock favoring Genentech, a second ended with jurors awarding $300 million in compensatory damages and $200 million in punitive damages.

In late 2004, Los Angeles' 2nd District affirmed the judgment, saying there was "substantial evidence" that Genentech acted fraudulently. The court said there is "every reason to afford the utmost protection to inventors who entrust their secrets to others for developing, patenting, manufacturing and licensing."

On Tuesday, City of Hope's attorney, Davis, told the high court that a fiduciary duty arises whenever a relationship creates a "special vulnerability" for one of the parties. "When somebody entrusts a secret invention to another in exchange for royalties," he said, there is a fiduciary relationship.

Genentech's attorney, Falk, disagreed, arguing that fiduciary relationships are formed only when they create affiliations such as partnerships or joint ventures.

"The only obligation Genentech assumes once the invention is patented is to pay royalties," he said. "It is not a partnership. It is not a joint venture."

Justice Carlos Moreno asked Falk whether the confidential information involved in patent agreements change them into fiduciary relationships rather than "garden variety" contract cases. Falk said he didn't think so, and argued that by the time royalties were being paid, the previously confidential information had been publicly disclosed.

Kennard, however, told Falk that the factors for a fiduciary relationship seemed, "at first glance," to exist in the arrangement between Genentech and City of Hope. City of Hope, she noted, had entrusted a major scientific breakthrough to Genentech because the biotech company had the expertise "to commercially exploit the discovery."

Davis didn't get off easy either. Justice Marvin Baxter told him that his argument seemed to be "once a fiduciary always a fiduciary," which the justice seemed to think wasn't true. Justice Carol Corrigan said she had "trouble believing" that a fiduciary relationship could exist solely because one party had more control. "Isn't that often the case in royalty situations?" she asked.

A ruling in City of Hope National Medical Center v. Genentech Inc., S129463, is due within 90 days. It will be eagerly awaited -- at least 36 amici curiae filed briefs on one side or the other. Genentech's supporters included Microsoft Corp., the U.S. Chamber of Commerce and the Motion Picture Association of America. Siding with City of Hope were three writers and actors guilds, some nonprofits and the United Inventors Association.