The California Supreme Court has overturned a $200 million punitive damage award against Genentech in the City of Hope National Medical Center case.  A copy of the opinion is attached.

The San Francisco Business Times reported on the ruling as follows:

Because of the court’s decision, Genentech (NYSE: DNA) will still pay out about $475 million in the second quarter of 2008, which includes $300 million in compensatory damages and interest since the original jury decision in 2002. . . . the removal of punitive damages will save Genentech about $315 million when interest is factored in.

The suit, filed in 1999, was over a 1976 research agreement in which Genentech paid royalties to the hospital. A first trial ended in a hung jury in October 2001. In a retrial verdict in 2002, South San Francisco-based Genentech was ordered to pay $300 million in royalties and $200 million in punitive damages.

The California court’s decision will likely be viewed with a sense of relief by the California business community, which was stunned by the 2005 damage award against Genentech for breach of contract..  It is highly unusual for punitive damages to be awarded in a breach of contract case, and of course, the concern was that this decision would set a new precedent.

Bloomberg.com reported on the history of the dispute between the parties:

The dispute between Genentech and City of Hope involves a research relationship more than 30 years ago. Doctors Arthur Riggs and Keiichi Itakura, who began working under contract with Genentech in 1976, produced human insulin two years later. The contract gave Genentech, then a fledgling company, the patents on the techniques used by Riggs and Itakura. In exchange, City of Hope was to receive a 2 percent royalty on sales of products that resulted from the patents. A dispute arose over the products covered by the contract.

City of Hope said it deserved royalties from 35 patent license agreements between Genentech and 22 other companies including Shering-Plough Corp. and American Home Products Corp. The center sued Genentech for breach of contract and fiduciary duty in 1999.

Genentech said in 2002 that it owed royalty payments to City of Hope only for sales of products made using DNA produced by the center and containing the patented technology from the sponsored research. The company said it paid City of Hope more than $300 million over 20 years.

A jury ruled against Genentech and awarded City of Hope compensatory damages and punitive damages. A state appeals court in Los Angeles upheld the jury’s verdict in 2004 and the California Supreme Court agreed to review the case in 2005.

What was the basis for today’s California Supreme Court ruling?  An excerpt from the opinion explains the Court’s decision as follows:

[W]e conclude that the trial court erred here in instructing the jury that a fiduciary relationship is necessarily created when a party, in return for royalties, entrusts a secret idea to another to develop, patent, and commercially develop.  Because fidicuary duties do not necessarily arise from this type of relationship, City of Hope’s only theory at trial for claiming a fiduciary relationship with Genentech was legally invalid, and therefore the judgment against Genentech is defective insofar as it is based on the jury’s finding that Genentech breached fiduciary duties owed to City of Hope. . . . .The only other ground for the jury’s imposition of liability against Genentech was the jury’s finding that Genentech had breached its contract with City of Hope.  Because punitive damages may not be awarded for breach of contract. . . .the award of punitive damages must be set aside.

The Recorder noted in an article that it ran last fall that the case between Genentech and City of Hope had been plagued by delays:

 Both parties [in the case] had fully briefed the case by December 2005, and 21 amicus curiae briefs had been filed and responded to by April 2006. Still, the court hasn’t set an oral argument date for City of Hope National Medical Center v. Genentech Inc., S129463.

Some court watchers are baffled by how long the case has languished. . . .Other than death penalty cases, which take years to process, only two out of 135 pending California Supreme Court cases — both criminal — have been awaiting oral argument longer than City of Hope.

Why were there so many delays in this case?  The Recorder offered some possible explanations:

Paul Utrecht, a partner in San Francisco’s Zacks Utrecht & Leadbetter who filed an amicus brief supporting Genentech for the Washington Legal Foundation, said the court’s justices could be proceeding cautiously because of the money involved. . . .Utrecht also said the legal issue — whether a breach of contract rises to despicable conduct that merits punitive damages — is so important that the court might be examining the case from all angles. . . . .It’s also possible the justices haven’t decided what to do with the case, and are still trading memos in the hopes that a tentative majority will emerge.

While Genentech cannot possibly be happy with the 2005 verdict and damage award, today’s ruling will at least take the some of the sting out of the verdict.  A $200 million reduction in damages is certainly not "chump change" and will surely help with the company’s bottom line. 

For the rest of us in California, today’s decision is similarly significant because it reaffirms that punitive damages cannot be awarded in contract cases–there must be a fiduciary relationship.  More importantly, for the biotech community (and even the high tech and medical device communities in California), we now have clarification from the California Supreme Court  that licensing relationships do not establish fiduciary relationships and therefore will not  incur punitive damages if they are breached.    

Billionaire Investor Carl Icahn has filed suit against Biogen in a Delaware chancery court in order to force Biogen to turn over documents related to its failed sale of the company last year, according to a Reuters.  Biogen was reported by Delaware Online to have lost $5 billion in market value as a result of its decision to abandon its plan to sell the company.  Icahn is a major investor in Biogen, owning shares valued at $650 million, according to Delaware Online.

Reuters described Icahn’s complaint as follows:

[In his complaint] Icahn demanded the right to inspect documents and board meeting minutes to determine what the board of directors knew about the sale process, which Icahn claims Biogen deliberately sabotaged.  According to the complaint, Icahn and his associates are demanding the documents in order to alert shareholders to any non-confidential information they discover about the performance of the board.

Xconomy provided some additional insight on the complaint as well:

Icahn’s complaint, filed in Delaware Chancery Court, repeats his earlier accusations that the confidentiality agreements prospective buyers were required to sign before they could talk to two key Biogen partners, Elan Pharmaceuticals and Genentech, were too restrictive. Both companies hold some change-of-control rights on key Biogen drugs—Elan on the multiple sclerosis and Crohn’s disease drug Tysabri, and Genentech on cancer-fighting Rituxan. Biogen’s restrictions on how suitors could talk to the companies, Reuters said Icahn charged in the complaint, “prevented any potential bidders from learning where Biogen’s third-party partners stood on exercising change-of-control options on key Biogen drugs.”

Biogen refused to hand over the documents when requested by Icahn on March 28th–a move which prompted the filing of the complaint.  Xconomy reported on the reasons Biogen has given for its refusal:

Biogen refused to hand over the information that Icahn demanded in part because CEO Jim Mullen and the company already shared much of it at a JP Morgan conference in early January. . . .  What’s more. . . .Icahn himself was a potential bidder on the company, and has already received much of the information he’s now seeking. “He has the information he says he’s looking for,” [says Naomi Aoki, a spokeswoman for Biogen], To disclose anything beyond what is already disclosed, which would include confidential internal documents, “we believe would compromise and negatively affect our ability to maximize value for shareholders in any future sale process,” she said.

So, you might wonder: who exactly is this billionaire investor Carl Icahn?  The Boston Globe ran a good story on Icahn last August, which provides some background on Icahn and context to his fight with Biogen:

Icahn . . . . might be best known as a corporate raider who piloted TWA in 1985 and tried to grab Nabisco in 1996, often buys large stakes in companies and pushes them to make changes or find a buyer. Icahn, a former medical student, has also shown increasing interest in rattling the cages of biotechs and drug makers. He gradually accumulated shares in ImClone Systems, Inc.., a cancer drug developer in New York linked to the Martha Stewart insider trading scandal. Last year, Icahn finally took control of the company after a raucous shareholder battle and vowed to install his own management team.

In February, Icahn revealed he had taken a 1 percent stake in MedImmune, Inc., one of the country’s largest biotech firms. Shortly afterward, he threatened to start a shareholder fight to force the sale of the Maryland company, complaining about its "lackluster" performance. In April, MedImmune agreed to sell itself to drug maker AstraZeneca PLC for $15.6 billion. . . .Not all of his moves have paid off. In late 2004, Icahn disclosed he became the biggest shareholder in Blockbuster, Inc. and quickly pushed for changes at the movie rental chain to compete with online competition like Netflix, Inc. Since then, Blockbuster’s stock has fallen from about $10 a share to less than $5.

I have not had the opportunity to review a copy of Icahn’s complaint, but based on the reporting, it appears that the sole justification for this lawsuit is to obtain documents.  It would be interesting to know what other claims, if any, are included in the complaint. 

Will this suit succeed in forcing Biogen to be put up for sale once more?  It seems very unlikely.  So, what is Icahn going to accomplish by this lawsuit?  While it is possible he will obtain the documents he is seeking, it is difficult to come up with any other real benefits that could result from his action.  Is he hoping to come up with evidence of wrongdoing in order to take corporate decisionmakers on at an individual level? Or is this merely an act of aggression to encourage compliance with his wishes?

In all honesty, this suit leaves me scratching my head a bit.  We will follow how it develops at the California Biotech Law Blog and keep you posted, as I am certain that many of you in the biotech world will want to take notes on Carl Icahn’s activites.  The knowledge will likely be useful if and when he ever invests in your biotech company. 

Gilead Sciences has now overtaken Amgen as the world’s second most highly valued biotech company after Genentech, according to Seeking Alpha.

Seeking Alpha reported:

Investors now think that a biotech company with less than one-third the revenue of Amgen (AMGN) is worth more than the former sector king. . . .

Genentech (DNA) is the commanding number one with a market cap of more than $83 billion. It’s a little nip and tuck between GILD and AMGN, but as I write this Amgen’s market cap stands at approximately $43.5 billion and Gilead’s at $45.5 billion. Amgen is still tops when it comes to revenue: $14.8 billion in 2007 versus Genentech’s $11.7 billion and Gilead’s $4.2 billion.

While Gilead Sciences’ ascension to the number two slot has little if any bearing on the biotech legal landscape, it undoubtedly will have some impact on the negotiating power of Gilead Sciences in future commercial negotiations. 

The Medimmune v. Genentech case has received extensive media coverage since the Supreme Court decision earlier this year, but if you still have questions about the case and its anticipated impact, you should check out the recap published on IP Frontline by attorney Dennis Fernandez and college student Brian Bensch.

In their article "The Impact of MedImmune v. Genentech," the authors describe the potential implications of MedImmune as follows:

The major implication of MedImmune is that potential and current licensees will find it incredibly easier to file a declaratory judgment action. . . . After MedImmune, licensees will be able to recklessly challenge contracts knowing that the worst possible consequence is that the contract is upheld. . . .

[T]he implications of MedImmune are already taking shape. Since the MedImmune ruling only four months ago, the Federal Circuit Court of Appeals has begun to clarify the impact of MedImmune by dropping the "reasonable apprehension" clause of its subject matter jurisdiction test in its decision in SanDisk Corporation v. STMicroelectronics, Inc. . . .

 [I]n its decision on March 26 of this year, the CAFC established a new test that "holds that "where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license," the party may bring a declaratory judgment action."

In the end, the authors conclude that the impact of the ruling will be as follows:

[T]he Supreme Court’s MedImmune decision weakened the stability of both future and current licensing agreements. While the federal circuit’s precedent had been rather unambiguous, the Supreme Court accepted the circularly reasoning and exaggerated risk claimed by MedImmune and allowed it to file for declaratory judgment relief against its licensor without first ending their licensing agreement. The decision gives a blank check to licensees to challenge their licensor on patent invalidity charges if they feel they have any chance at success.

As a licensing attorney looking at this case and the subsequent San Disk ruling, I can’t help but wonder if the impact of these decisions is really going to be as severe as legal commentators are predicting.  While certainly this line of cases enables licensees to challenge licenses more easily, I question whether this will really happen with the kind of frequency you might expect from the commentary.  Is it possible that they are looking at these cases from litigator’s perspective rather than considering the business realities that would often caution against souring an otherwise cordial business relationship?

The vast majority of licensing negotiations are not done at the end of a big stick, and that there are generally sound business reasons to maintain a good relationship with the other side of the negotiating table.  While it is true that these cases make it easier for licensees to challenge a licensing relationship, I question whether it will make good business sense for licensees to do so as frequently as it has been suggested they will do.  Will licensors really want to do deals with licensees who have challenged other licensing agreements with third parties?  Will licensors really want to develop relationships with licensees who have challenged  other licensing arrangements with prior licensors? 

In the end, I suspect that the application of these cases will depend largely on the realities of the business world.  I find it hard to believe that regularly challenging license agreements will ultimately prove to be a good business strategy as the dust settles on these decisions.  I anticipate that in the end declaratory judgments will be used a little more judiciously to challenge relationships that have already soured, in much the same way that litigation and the threat of litigation have been used prior to the MedImmune ruling.  When a relationship can be managed outside of the courtroom, I continue to believe that, despite the hype to the contrary, the average licensee is going to stick with negotiation and stay away from the courts.