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Breach Of Contract Article Review

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DATE: 2008

TO: *Instructor*

FROM: ***********

RE: Egelko B., and Tansey B. (2008, April 25). Court cuts Genentech damages: It must pay City of Hope $300 million in royalty suit. San Francisco Chronicle, p. D.1. Retrieved April 28, 2008 from ProQuest database.


As of April 25, 2008, biotechnology giant Genentech in South San Francisco has to pay the City of Hope National Medical Center in Southern California $300 million in lost royalties. The lost royalties are from the sale of breakthrough gene-splicing technology developed by the center's scientists. By withholding royalties, Genentech breached a contract to pay the medical center 2 percent of all income generated by Genentech for licensing products using the gene-splicing technology to other companies.

The contract in question was signed August 1976 and, according to Genentech’s general council Sean Johnston, was one of the first biotechnology contracts written. In the mid-1970s while working for City of Hope, two scientists, Arthur Riggs and Keichi Ikatura, “developed a biotech process for manufacturing human proteins…The process was used to insert human genes into fast-growing bacteria and make them produce medically useful proteins, like insulin.” (Egelko, 2008)

In 1999, City of Hope sued Genentech arguing that although Genentech had paid out royalties on products using the technology, they did not pay out the royalties “on its licenses to companies for other products - including a hepatitis B vaccine and human growth hormone - that used the same genetic engineering technique.” (Egelko, 2008) Genentech also refused to disclose those licensing agreements. On June 10, 2002, a Los Angeles jury awarded City of Hope $500 million, $200 milliion of which was for punitive damages. “The jurors had found that Genentech not only violated the contract but also defrauded City of Hope, violating a fiduciary duty to look out for the medical center's interests when marketing the technology its scientists developed.” (Egelko, 2008) The ruling was disputed by Genentech, arguing that the contract did not specify that royalties needed to be paid on the licenses.

On April 25, 2008 the California Supreme Court ruled to uphold the lost royalties but not to uphold the punitive damages. The court said that apart from its duty to adhere to the contract, a company that markets the discoveries of another firm in exchange for royalties does not have an obligation to protect the other’s interests. “Without any such obligation, the justices said, punitive damages cannot be awarded for a breach of contract.”



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