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City of Hope National Medical Center v. Genentech, Inc.

California Supreme Court, April 24, 2008
In an important decision for technology and entertainment companies, the California Supreme Court held that a fiduciary relationship does not necessarily arise when parties enter into an agreement involving the disclosure of intellectual property in exchange for royalties.

The case involved a licensing agreement between a hospital and a biotech company in which the company was allowed to exploit a method for synthesizing human DNA for certain polypeptides, and would pay the hospital royalties for such use. (This contract was the basis for the founding of Genentech). The hospital, City of Hope National Medical Center, sued Genentech for breach of contract and breach of fiduciary duty, claiming that Genentech failed to pay royalties on its third-party licenses. A jury found that Genentech breached the contract by failing to pay royalties as required by the agreement and awarded City of Hope $300,164,030 in damages. The jury also found that Genentech had breached its fiduciary duty to City of Hope and awarded the hospital $200,000,000 in punitive damages. Punitive damages are not available in California under a breach of contract claim, but are available under a breach of fiduciary duty claim.

The appeals court affirmed, relying on a 1956 case (Stevens v. Marco, 147 Cal. App. 2d 357) which held that a fiduciary relationship was formed “where 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.”

The California Supreme Court reversed the punitive damage award (although it affirmed the actual damage award), explaining that before a person can be charged with a fiduciary obligation “he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law” (citing Committee on Children's Television, Inc. v. General Foods Corp. 35 Cal.3d 197 (1983)). The court held that there was no indication in the license agreement that Genentech entered into it with the view of acting primarily for the benefit of City of Hope.

The court then turned to the question of whether an agreement to develop, patent, and commercially exploit a secret scientific discovery in exchange for the payment of royalties is the type of relationship which imposes a fiduciary obligation to act on behalf of and for the benefit of another as a matter of law. The court listed types of relationships in which a fiduciary duty is imposed by law: a joint venture, a partnership, or an agency. But the City of Hope-Genentech licensing agreement expressly stated that the parties' relationship was not a joint venture, partnership, or agency, and City of Hope conceded that its claim of a fiduciary duty did not rest on that basis.

Instead, City of Hope argued that its relationship with Genentech was one in which a fiduciary relationship was formed because the relationship manifested four particular characteristics that are typical of fiduciary relationships: (1) one party entrusts its affairs, interests or property to another; (2) there is a grant of broad discretion to another, generally because of a disparity in expertise or knowledge; (3) the two parties have an "asymmetrical access to information," meaning one party has little ability to monitor the other and must rely on the truth of the other party's representations; and (4) one party is vulnerable and de-pendent upon the other.

The court rejected this argument, noting that the contract was between two sophisticated parties of substantial bargaining power and that throughout the contractual negotiations both parties were represented by counsel.

Instead, the court relied on Wolf v. Superior Court, 107 Cal.App.4th 25 (2003), in which the plaintiff, author of a novel entitled Who Censored Roger Rabbit?, entered into a contract with Walt Disney Pictures and Television. In the contract, the plaintiff assigned to Disney his rights to the novel and the Roger Rabbit characters; in exchange, Disney agreed, among other things, to pay the plaintiff a percentage of net profits from a motion picture based on the novel, and 5 percent of any future gross receipts earned from merchandising or commercially exploiting the Roger Rabbit characters. Disney was given the right to assign or license any of its rights under the contract, and the contract expressly stated that the relationship of the parties was that of creditor-debtor and not that of a partnership or a joint venture, either one of which is a fiduciary relationship created by operation of law. After Disney developed and co-produced the motion picture Who Framed Roger Rabbit, the plaintiff sued Disney for breach of contract and for breach of fiduciary duty. The Court of Appeal in Wolf concluded that a fiduciary duty did not arise simply from the plaintiff's contractual right to receive compensation contingent upon the receipt of future revenues (contingent compensation), or from the profit-sharing provisions of the agreement, or from the plaintiff's contractual right to an accounting, but that the profit-sharing provisions of the contract did shift the burden of proof to the defendant to prove compliance with the contractual payment obligations.

The court in Wolf reasoned that because every contract to some extent requires a party to repose trust and confidence in the other, one party's right to contingent compensation, standing alone, does not give rise to a fiduciary duty. Wolf also noted that one party's right to an accounting by the other party is a remedy that by itself is insufficient to give rise to fiduciary duties on the part of the party with the duty to render an accounting, and it distinguished Stevens by noting that the court there recognized a factual basis for concluding that a fiduciary relationship existed between the parties.

The California Supreme Court in this case wrote “We agree with the holding in Wolf that fiduciary obligations are not necessarily created when one party entrusts valuable intellectual property to another for commercial development in exchange for the payment of compensation contingent on commercial success. The secrecy of information provided by one party to another--here the scientific discovery by City of Hope--may be considered by the trier of fact in deciding whether a fiduciary relationship exists, but it does not compel the imposition of fiduciary duties by operation of law.”