navigating the patent maze

In late October, a Los Angeles appeal court upheld more than $500 million in damages against Genentech Inc.  Although the award is large, it is still less than 1 percent of Genentech’s $51 billion market capitalization.

The case stems from 1976, when Genentech reached an agreement with City of Hope in Duarte, CA, to license technology for production of the proteins in bacteria that was invented by Riggs and Itakura at City of Hope.

Download City of Hope v Genentech (Word doc)

Genentech paid City of Hope a 2 percent royalty on the sale of products developed from the technology but didn’t pay the medical center for licensing revenue it collected.  There were 27 licenses involving 35 products.  Genentech claimed that the contract required royalty payments only on patents using DNA synthesized by City of Hope.  A jury disagreed with Genentech, and Genentech appealed the verdict. 

In reaching their decision, the appeal court justices acknowledged that the 1976 contract was difficult to understand, saying that its "imprecise royalty provisions" were like "trying to walk across shifting sands. Each step is unsteady."

In an unusual move, the justices held that the relationship between the inventors at the City of Hope and the developers at Genentech should be treated as fiduciary in nature.

In upholding the punitive damages, the court sharply criticized Genentech, noting that their "scheme of concealing licenses and withholding royalties spanned decades. The conduct may not have been widespread as to the number of victims, but it was pervasive and continuous as to City of Hope."  Furthermore, the court concluded that Genentech "essentially cheated City of Hope out of a staggering amount of money."

Several amici curiae — including Intel Corp., TechNet and the California Chamber of Commerce — had pleaded with the court to reverse the judgment, saying that imposing fiduciary status as a cost of using third-party intellectual property would impede innovation.