Class Action

Punitive Damages Class Action Defense Issues–City of Hope v. Genentech: California Supreme Court Affirms $300 Million Compensatory Award For Breach Of Contract But Reverses $200 Million Punitive Damage Award For Breach Of Fiduciary Duty

By Michael J. Hassen

Punitive Damages for Breach of Fiduciary Duties Improper because Evidence Established Merely Contractual Relationship even though Plaintiff Entrusted Secret Scientific Discoveries to Defendant for Commercial Exploitation California Supreme Court Holds

Plaintiff City of Hope filed suit (not a class action) against Genentech alleging breach of contract and breach of fiduciary duties arising out of an agreement whereby “City of Hope, in return for royalties, entrusted a secret scientific discovery to Genentech to develop, to patent, and to commercially exploit.” City of Hope v. Genentech, Inc., ___ Cal.4th ___ (Cal. April 24, 2008) [Slip Opn., at 1]. Plaintiff prevailed at trial, and the jury awarded $300 million in compensatory damages and $200 million in punitive damages. Id. In a case of critical importance to class action and non-class action cases alike, the California Supreme Court addressed “whether, as the jury found, a fiduciary relationship necessarily arose” between City of Hope and Genentech. Id. The High Court held that it did not and, accordingly, reversed the punitive damage award. However, in a portion of the opinion that we do not summarize, the Supreme Court affirmed the $300 million damage award, concluding that “the evidence that City of Hope introduced at trial to prove that Genentech had breached a fiduciary duty [did not] so prejudice[] the jury as to require setting aside the jury’s award of compensatory damages for breach of contract.” Id., at 2. We again stress that this lawsuit was not a class action, but it involves a topic of significant importance to class action litigation.

In brief, scientists employed by City of Hope “developed a groundbreaking process for genetically engineering human proteins,” and filed a confidential application with the National Institutes of Health for a grant. City of Hope, at 2-3. Genentech was formed by a doctor who learned of the discovery and a venture capitalist “to commercially exploit biotechnology.” Id., at 3. Genentech contacted the City and offered to fund additional research and to secure the patents required for commercialization of the products developed; these discussions led to a draft agreement that left open the royalty rate because Genentech had not yet decided whether to accept the City’s proposal of a 2% flat rate. Id. Ultimately, the parties entered into a contract, see id., at 4-6 (summarizing salient terms), and “the rest is history,” so to speak. Genentech obtained various patents and granted various licenses, but it did not inform the City of all of those licenses. Id., at 6. Genentech also filed a lawsuit, which it settled for $20 million, alleging infringement of patents held by the City’s scientists, but it refused to share any of that award with the City. Id., at 8. That refusal precipitated the lawsuit by the City against Genentech for breach of fiduciary duty and breach of contract, id. As noted above, while the first trial ended deadlocked at 7-5 in favor of Genentech, the jury at the second trial ruled in favor of the City, id., at 8-9.

Full post as published by Class Action Defense Blog on May 05, 2008 (boomark / email).