Jurors Fine Genentech $200 Million

By DENISE GELLENE

June 25, 2002 12 AM PT

TIMES STAFF WRITER

A jury Monday ordered Genentech Inc. to pay City of Hope National Medical Center $200 million in punitive damages for betraying its trust with the renowned cancer hospital.

The award ends a bitter, four-month trial over the contract that established a brief collaboration between the hospital and Genentech 26 years ago. It comes one week after jurors ordered Genentech to pay $300.2 million in compensatory damages to City of Hope for withholding royalties from the Duarte medical center.

Jurors awarded punitive damages to punish Genentech for acting with fraud or malice.

Genentech said Monday that it was disappointed by the award and would appeal to the California Court of Appeal, setting in motion a legal process the company said could take one to four years to complete.

The South San Francisco-based company said it would take a one-time, $500-million charge in the second quarter to account for the judgments against it. The amount is almost twice Genentech’s 2001 pretax income of $283 million.

“The important thing to remember here is that no cash changes hands until the appeals process is over,” said Genentech Chief Financial Officer Louis J. Lavigne Jr.

Genentech’s shares rose after the judgment was announced, indicating investors were relieved that punitive damages were not higher.

The firm’s shares closed at $34.84, up $1.89, on the New York Stock Exchange. City of Hope sought a punitive award of $300 million to $580 million.

“In the grand scheme of things, it could have been a lot worse,” said Bear Stearns analyst Ronald C. Renaud, noting the company has $2.5 billion in cash and marketable securities. “This makes it seem less dramatic, and investors are pleased.”

City of Hope general counsel Glenn Krinsky said the hospital was elated with the punitive award and predicted that Genentech would lose any appeal. “Our legal team is persuaded that their appeal will be fruitless,” he said.

The dispute centered on a 1976 contract that created the scientific collaboration that led to discovery of human insulin, the world’s first biotechnology drug.

In research funded by Genentech, City of Hope scientists Arthur Riggs and Keiichi Itakura in 1978 developed a way to use bacteria to produce human proteins, a discovery that paved the way for the biotechnology revolution and billions of dollars in drug sales.

In return for laboratory funding and a 2% share of future drug sales, the cancer center agreed that Genentech would own any patents stemming from the Riggs and Itakura research.

But the parties disagreed on whether the royalties should apply to all drugs produced by third parties that had licensed the patents from Genentech.

Genentech claimed that the contract applied to only two drugs, human growth hormone and human insulin, and that it had paid all royalties owed on those drugs, a total of $305 million so far.

City of Hope claimed, and the jury agreed, that Genentech owed it royalties on all drugs produced by Genentech licensees. Jurors agreed with City of Hope’s claim that Genentech concealed 27 licensing agreements with 22 companies to avoid paying royalties to the cancer center.

The penalty is another blot on Genentech’s corporate image. In 1999, it paid the University of California $200 million to settle a patent case that claimed the company had used DNA taken from UC San Francisco to develop human growth hormone--one of Genentech’s key drugs.

Also in 1999, the company paid $50 million to settle criminal charges that it marketed human growth hormone for uses not approved by the Food and Drug Administration.

During five weeks of testimony, City of Hope emphasized the twin themes of greed and deceit.

Attorney Morgan Chu accused former Genentech general counsel Thomas Kiley and former Genentech Chairman Thomas Perkins of having “recovered memories” when their testimonies contradicted their statements in earlier depositions.

Jury foreman Herman Askew said the majority of the jury did not believe the Genentech executives who took the stand--many of whom were called by City of Hope as adverse witnesses.

“What stood out most in our minds was--a lot of the Genentech witnesses--we didn’t believe their testimony,” said Askew, a supervisor for the Department of Water and Power. Askew said jurors came to believe that Genentech was “hiding something or lying about something.”

The verdict reflected the jury’s opinion about which side was more credible, Askew said. Jurors did not agree on a proper interpretation of the contract itself, he added.

“It is still fuzzy to them. How is it going to be clear to us?” Askew said. “It will always be unclear until someone sits down and rewrites the contract.”

City of Hope received less than it wanted because jurors thought the hospital could have been more vigilant, Askew said. The hospital wanted compensatory damages of $457 million, in addition to higher punitive damages. “City of Hope did not keep good records,” Askew said. “City of Hope had blame. They did not keep up with the money.”

The suit was filed in 1999, after Genentech refused to share the settlement in a patent dispute with European drug maker Novo Nordisk over human growth hormone. After filing its suit, the hospital found that Genentech had licensed widely the Riggs-Itakura patents.

Genentech said the licenses had been previously disclosed in news releases and legal documents. It said City of Hope was not entitled to royalties on products produced by third parties because the hospital’s scientists did not actually work on those drugs.

Legal experts predicted the award would be reduced on appeal. They said the punitive award was proportionate to the compensatory award, an important legal test. However, nine-figure awards almost always face judicial scrutiny.

“Courts are pretty skeptical of upholding those kinds of numbers,” said Loyola Law School professor Richard L. Hasen. “How much is needed to punish and deter and send a signal?”

Besides filing an appeal, Genentech said it would ask Los Angeles County Superior Court Judge Edward Y. Kakita to grant a new trial and to reduce the punitive award.

However, Kakita already has turned down several mistrial motions by Genentech attorneys.

Sean Johnston, Genentech senior vice president for intellectual property, called prospects for a settlement “speculative.”

City of Hope has not decided how it will use the money, once it receives it.

Genentech royalties have gone to the cancer center’s Beckman Research Institute, which is headed by Riggs. Itakura is a scientist there.

The funding arrangement results from a lawsuit the scientists filed against City of Hope in the early 1990s. They insisted that the royalties be used for research and not to fund the hospital.

Krinsky said that if the money goes to Beckman, City of Hope could reduce its financial support of the research institute. In fiscal 2000 Beckman received about $30 million from City of Hope, according to its tax returns.

“The money will go to City of Hope’s charitable uses,” he said, which include patient care.

The terms of City of Hope’s settlement with the scientists also gave them 10% of Genentech royalties, or about $30 million of the amount Genentech already has paid City of Hope.

Krinsky said the scientists, who sat through the daily court proceedings, would share 10% of the contingency award, or another $30 million, but that no decision had been made on whether they would get a piece of punitive damages.

Riggs said Monday after the judgment that he would donate his share to scientific and environmental charities, including City of Hope.

He said he did not know why the scientists would not share in the punitive award, but he said it had not been discussed.

Itakura said his share “will go to science.”

The case is a huge win for City of Hope’s Los Angeles law firm, Irell & Manella, which, according to American Lawyer, was among the nation’s 50 most profitable firms last year.

Krinsky refused to say whether the cancer center agreed to pay its lawyers on a contingency fee basis. Partial contingency arrangements are not uncommon in commercial cases.

Such fees can run from 10% to 20% of the award, whereas in consumer cases, fees can be as high as 40%, said Joseph Calvo of the National Law Review.

(BEGIN TEXT OF INFOBOX

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