Royalty Case Is Granted Review
The state Supreme Court on Wednesday agreed to review a $500.2-million jury verdict against Genentech Inc. for refusing to pay royalties on some drugs under a 1976 contract with City of Hope National Medical Center.
The court said it would consider an appeal by the South San Francisco biotechnology company arguing that jurors misinterpreted the contract and that the award was excessive. The court didn’t indicate when it would hear the case.
The action was the latest turn in an epic legal dispute over a 29-year-old contract that led to the first biotechnology drug, human insulin, and launched an entire industry.
An appeals court in October upheld the judgment after finding evidence of “fraud and malice” by Genentech, which failed to pay a 2% royalty on drugs based on discoveries by two City of Hope scientists.
City of Hope sued Genentech in 1999, claiming the company concealed licenses with 22 companies to avoid paying the hospital $457 million in royalties on nearly two dozen drugs, including hepatitis B vaccine.
Genentech said it was pleased that the court decided to consider the 2002 civil verdict.
The company argued that Los Angeles County Superior Court Judge Edward Y. Kakita erred when he allowed the jury to interpret the disputed contract without clear instructions from him. “He abandoned his job,” Genentech attorney Susan Harriman said.
Genentech also contended that it was not liable for punitive damages because it had no fiduciary duty to the Duarte-based cancer hospital. That portion of the award amounted to $200 million, the largest punitive damage amount upheld by the state Court of Appeal.
“You cannot turn a breach-of-contract claim into a tort claim,” Harriman said.
The case was closely watched in the legal community because the appeals court held -- for the first time in California -- that nonpayment of royalties was a breach of fiduciary duty.
Genentech maintained it had no such duty to City of Hope because it never agreed to act on the hospital’s behalf.
“There was a lot of fear that those who get involved in licensing contracts might find themselves exposed to punitive damage awards,” said Paul Kaminer, senior executive counsel at the Washington Legal Foundation, which filed a brief in support of Genentech. “This could thwart high-technology industry development. We are thankful the court agreed to clarify the case along those lines.”
City of Hope said in a statement that the Court of Appeal decision was “supported by well-established precedent” and that it was confident the state Supreme Court would uphold the 2002 verdict.
