Inventors and researchers often enter into agreements with other parties to develop, patent, and commercially exploit their inventions. But does such an agreement create a fiduciary relationship or is it nothing more than a simple contractual relationship? The answer to this question is critical – if there is a fiduciary relationship, a breach of that relationship gives rise to a tort claim and a potential recovery of punitive damages. But if the relationship is merely contractual, punitive damages would not be available. In City of Hope National Medical Center v. Genentech, Inc., 2008 WL 1820916 (Cal. 2008), the California Supreme Court held that such an arrangement should be “treated like an ordinary contractual agreement, a breach of which supports only contract and not punitive damages.” In so holding, the Court invalidated a $200 million punitive damages award that City of Hope had won at trial.
The case arose from a scientific discovery by two scientists employed by City of Hope. The scientists developed a groundbreaking process of genetically engineering human proteins that enabled the production of large quantities of various medicines. Genentech sent a proposal to City of Hope to provide funding for further development, and the parties entered into an agreement under which Genentech would provide funding, use the results in the manufacture of medicines, and secure and hold patents as they emerged. In 1999, City of Hope sued Genentech for breach of fiduciary duty and breach of contract. The jury found that Genentech had breached its fiduciary duty to City of Hope, acted with fraud and malice, and also breached the contract. The judgment awarded City of Hope $300,164,030 in compensatory damages and $200 million in punitive damages. The Court of Appeals affirmed.
The Supreme Court noted that the case was very complex, with “25,567 pages of reporter’s transcript plus 12,267 pages of clerk’s transcript and . . . 18 friend-of-the-court briefs.” The court affirmed the part of the judgment awarding City of Hope $300,164,030 in damages for Genentech’s breach of contract. But because the relationship did not give rise to a breach of fiduciary duty claim, the court set aside the punitive damages award. Generally, a contract between two parties, without more, does not create a fiduciary relationship. In this case, the contract between Genentech and City of Hope was between two sophisticated parties advised by counsel.
The court rejected the notion that an agreement to develop, patent, and market an invention automatically gave rise to a fiduciary relationship, stating that “a fiduciary relationship is not necessarily created simply when one party, in exchange for royalty payments, entrusts a secret invention to another party to develop, patent, and market the eventual product.” In addition, while the secrecy of the information entrusted by one party to another may be a factor, “it does not compel the imposition of fiduciary duties by operation of law.” Accordingly, the trial court erred by instructing the jury that a fiduciary relationship necessarily arises “when a party, in return for royalties, entrusts a secret idea to another to develop, patent, and commercially develop.” Because City of Hope’s legal theory for the creation of a fiduciary relationship was invalid, the court reversed the award of tort damages against Genentech. Businesses should study this decision before deciding to entrust a new invention to another party for development.
Full Opinion Text: http://www.courtinfo.ca.gov/opinions/documents/S129463.PDF