In a case with important implications for the technology and entertainment industries, the California Supreme Court considered today whether "a fiduciary relationship necessarily arose when [one party], in return for royalties, entrusted a secret scientific discovery to [another party] to develop, to patent, and to commercially exploit."

In a four-word sentence, the Court answered, "Our answer is no." As a result, the Court reversed a $200 million punitive damages award.

The case is City of Hope National Medical Center v. Genentech, in which the City of Hope challenged the method Genentech had used to calculate royalty payments under a patent-license agreement. In 2002, a Los Angeles county jury agreed with the City of Hope's interpretation of the royalty formula and awarded the City of Hope $200 million in punitive damages in addition to just over $300 million in underpaid royalties. In 2004, the California Court of Appeal affirmed both awards. The California Supreme Court agreed to review the ruling in 2005 and the case generated 18 amicus briefs concerning the primary issue: i.e., whether a fiduciary relationship necessarily arises out of a commercial licensing arrangement.

The underlying 1976 patent agreement addressed the payment of royalties from Genentech to City of Hope and covered the development and marketing of human insulin and human growth hormone derived from the work of two City of Hope researchers. Genentech paid and accounted for more than $300 million for all of its sales. The dispute arose because the parties differed on whether Genentech must pay additional royalties on certain sales by its licensees where Genentech itself received no royalty. The California Supreme Court was not willing to fashion a new set of fiduciary duties on those facts. As such, the Court dismissed a previous award of $200 million in punitive damages, while Genentech must still pay City of Hope over $300 million for breach of contract.

The Court's ruling essentially rejects the argument that a 1956 California case, Stevens v. Marco, 147 Cal.App.2d 357, applies to all licensing agreements in California. In that case, the court had ruled that — under the facts before it — a fiduciary relationship was formed when inventors entrust a "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 Court distinguished the present case from Stevens in a number of key areas; in particular that both Genentech and City of Hope are sophisticated parties, represented by counsel, and the contract language made specific that Genentech "was to be the sole owner of patents ... could assign and transfer its ... patents; and that the parties' relationship was not one involving agency, joint venture, or partnership, which are categories in which fiduciary obligations are imposed by operation of law."

In light of the ruling, tech companies can once again take comfort in the fact that their existing technology license agreements will not retroactively be deemed to have imposed fiduciary duties that would subject them to punitive damages and other tort remedies in the event of a breach (or a disagreement over contract interpretation). 

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