The NAM filed an amicus letter urging the California Supreme Court to review a lower court decision that allows plaintiffs to recover tort and punitive damages merely because a defendant refused to pay royalties that it arguably did not owe under the terms of a complex commercial contract.A jury awarded $200 million in punitive damages against Genentech for breach of contract and fiduciary duty. The crux of the decision on appeal is that fiduciary duties and the potential for punitive damages arise whenever two sophisticated parties, each represented by counsel, enter into a contract in which one party transfers an invention to the other party, and that other party agrees to pay royalties in exchange for exercising an option to patent, develop, and commercially exploit the invention. This fiduciary duty applies to the payment of all royalties called for by the parties’ contract.
The NAM urged review so that the California Supreme Court could reconsider this conclusion. We are concerned that the principle could extent fiduciary obligations, which are stricter and subject to greater penalties, to contract disputes. This expansion of contract law by the courts usurps the power of the legislature to make law and threatens a wide range of contracts that do not necessarily involve patented or secret information.
The NAM urged review so that the California Supreme Court could reconsider this conclusion. We were concerned that the principle could extend fiduciary obligations, which are stricter and subject to greater penalties, to contract disputes. This expansion of contract law by the courts would usurp the power of the legislature to make law and threaten a wide range of contracts that do not necessarily involve patented or secret information.
On 4/24/08, the California Supreme Court threw out the $200 million punitive damages award, holding that punitive damages cannot be awarded for a breach of contract unless there was an actual fiduciary relationship between the parties.