City of Hope Wins Major Judgment

A Los Angeles County jury awarded City of Hope National Medical Center $300.2 million in compensatory damages Monday after finding that its former collaborator Genentech Inc. breached the 26-year-old contract that launched the biotechnology revolution.

Genentech-funded research at City of Hope produced the first biotechnology drug, human insulin, creating an industry--and the seeds of an epic legal battle that could play out in court for years to come.

By a 9-3 vote, jurors found that Genentech failed to pay the Duarte-based cancer hospital royalties on nearly two dozen other drugs, including the hepatitis B vaccine, that stemmed from City of Hope research.

Jurors also found, 10 to 2, that Genentech, based in South San Francisco, acted with malice or fraud. The jury will reconvene next week to determine punitive damages.

If the award withstands an expected appeal, it would be an extraordinary potential windfall for medical researchers at City of Hope, a world-renowned nonprofit cancer center with an annual budget of $328 million and a pioneer of bone marrow transplants for cancer patients. It also would be a huge financial blow to biotechnology giant Genentech, an industry leader with $2.2 billion in annual sales.

Immediately after the verdict was read in court, Genentech attorney Robert Van Nest moved for a mistrial, citing what he called irregularities with the voting. Specifically, he said, one juror cast inconsistent votes.

But Superior Court Judge Edward Y. Kakita denied his motion.

In an impromptu news conference after the proceedings, City of Hope attorneys were jubilant. General Counsel Glenn L. Krinsky said the hospital planned to seek “substantial punitive damages.” He called Genentech a “wealthy company” that “should be punished.”

“We are ecstatic with the result,” Krinsky said.

Appeal Expected

The case represented the second time the lawsuit was tried. The first case ended in October in a hung jury, with jurors split 7 to 5 in favor of Genentech.

Genentech patent counsel Sean Johnston said in a telephone interview that the company was disappointed but would have no additional comment until the punitive phase is concluded.

“At that point, we’ll take a step back and make some decisions,” he said.

Genentech is expected to appeal the verdict, which exceeds the company’s annual profit, unless a settlement is reached in the coming days. An appeal could tie the case up for several years; the suit was filed in 1999.

Genentech had budgeted up to $500 million in the event of a verdict against it, to cover both compensatory and punitive damages, said Friedman Billings Ramsey analyst Jonathan Aschoff.

The $300-million award “only leaves us $200 million of wiggle room before we start going over the worst-case scenario,” Aschoff told Bloomberg News. “They’d be lucky to have the total downside to their company be the $500 million they were talking about earlier.”

But the verdict won’t have a big effect on the biotechnology industry, because most research institutions today retain ownership of patents and license them directly.

The jury’s decision came after 16 days of deliberations in a dispute that dates to the start of the biotechnology age.

In 1976, Genentech, then a start-up company with one employee, agreed to fund research at City of Hope. The cancer hospital agreed to give the patents on any discoveries to Genentech in exchange for royalties on sales of products that resulted from those patents.

Insulin Discovery

In 1978, two City of Hope scientists became the first to produce human insulin in bacteria, which went on to become the world’s first biotechnology drug. The scientists, Arthur Riggs and Keiichi Itakura, discovered a method of coaxing ordinary bacteria to produce insulin and other human proteins.

Genentech has paid City of Hope more than $302 million in royalties on sales of human insulin and human growth hormone, a drug that directly resulted from the collaboration. But Genentech did not pass royalties on to City of Hope for drugs produced by third parties that licensed the Riggs-Itakura patents from Genentech.

Genentech claimed the contract did not require the company to do so. But City of Hope said, and the jury agreed, that the company owed it royalties on drugs produced by licensees.

City of Hope additionally claimed that Genentech hid the licenses from the hospital to avoid paying royalties, an alleged pattern of deceit that opened the door to punitive damages.

During the trial, City of Hope attorney Morgan Chu charged that Genentech used stalling tactics to keep the hospital at bay. He laid out a document trail that began in 1986 in which hospital officials repeatedly asked Genentech for information about third-party licensees.

Patent Licenses at Issue

In December 1998, Genentech finally told City of Hope that it planned to offer cheap, nonexclusive patent licenses--deals unlikely to produce royalties for City of Hope.

But the hospital was not told that the exclusive licensees had begun producing drugs with total sales of $147 million, Chu said. Genentech was receiving royalties on those sales, he said.

Genentech “did not disclose specific, large revenue-producing licenses,” Chu said. “That is deceitful.”

The hospital, in an aggressive tactic, put a string of former and current Genentech executives on the stand, thus dominating the jury’s attention during the five-week trial.

Most damaging to the company’s case was the inconsistent testimony of Thomas Kiley, a former Genentech general counsel, regarding a 1986 meeting with City of Hope representatives.

In his deposition, Kiley said nothing of substance was discussed at the meeting. But on the stand, he said he had told City of Hope at the meeting about a technicality that meant the hospital would not receive royalties on third-party drugs.

Attorneys for Genentech argued that it was no secret that the company had licensed the Riggs-Itakura patents.

Lawyer Van Nest told jurors that the licenses were mentioned in annual reports, news articles and Genentech’s 1980 public stock offering prospectus.

A third-party license with Swiss drug maker Hoffmann-La Roche was filed in its entirety with the Securities and Exchange Commission, Van Nest said.

City of Hope did not raise objections about royalties until 1998, when the patents, first issued in 1987, were approaching their 2003 expiration, Van Nest said. (Royalties generally end when patents expire and the technology enters the public domain.)

Windfall for Hospital

Jurors gave City of Hope less than what it was seeking, an indication that they accepted Genentech’s argument that City of Hope should have known about the licenses sooner. The jury awarded City of Hope an amount that dates from September 1994.

Judge Kakita ordered jurors not to discuss the case until the punitive phase was finished.

But the jury evidently concluded that claims before that date were outside the statute of limitations. City of Hope had been seeking $157 million on royalties on products sold before that date.

City of Hope has denied that the lawsuit was financially motivated. The verdict, nonetheless, represents a huge windfall for the hospital, which has relied on royalties from the Riggs-Itakura patents to help it meet its annual budget.

The verdict also is a potential bonanza for Riggs and Itakura, who attended the trial daily as spectators and also testified. Together, the scientists stand to receive 10% of the award, or $30 million, under a previous court settlement with the hospital.

But Krinsky, City of Hope’s general counsel, said Monday that no decision had been made on whether the jury award would be treated as a royalty, and if so, how it would be distributed.