A couple days ago, I posted the first post of two about the recent appellate decision in City of Hope v. Genentech. Not only does the opinion showcase why lawyers can be persnickety about contractual language (which can alter your contractual obligations), it also highlights how the relationship memorialized in the contract can create a fiduciary duty on the part of one of the parties to the other.
I won’t go back through the whole fact pattern, but there are a few facts that merit mention to understand why this was a problem. City of Hope (“COH”) assigned the rights to some technology (some of its confidential information and trade secrets) to Genentech. In return, Genentech was supposed to patent the technology and to pay COH royalties from the exploitation of that technology. Genentech was free to license the technology out for however much it wanted to whomever it wanted to make whatever they wanted.
The jury at trial found that Genentech breached a fiduciary duty to COH by not informing COH of some of the license agreements it entered into that would have meant royalties for COH. A fiduciary duty is, most generally, an obligation to act in the best interest of another party. That duty brings with it a host of other burdens, not the least of which is another possible tort claim of the other party against the one with the duty. Under California law, as held in Stevens v. Marco:
Where an inventor entrusts his 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 to be paid to the inventor, there arises a confidential or fiduciary duty between the parties. Stevens, 147 Cal.App.2d at p. 373.
Now, on its face, this doesn’t seem unreasonable or troublesome. However, it greatly concerned a number of people in various business communities and there were amicus briefs filed with the court on behalf of numerous Chambers of Commerce and other business entities. Why? Because it is fairly common for one party (especially among bioscience companies), who has not yet patented that technology, to assign technology to another party. If a patent is later issued for that technology, does that mean the assignee has a fiduciary duty toward the assignor? The various amici were concerned that this is what the court meant to impose upon assignees of technology.
Not to worry, said the appellate court, that fiduciary duty only arises where the assignee explicitly agrees to develop, patent and commercially exploit the technology.
The amici also were concerned with imposing tort damages in contract cases, as most contracting parties consider what the risks are and allocate payments, actions, etc., in a contract according to possible risks. When a tort duty may be imposed, that could throw the whole formula out of whack with uncertainty. The court summarily dismissed this notion, stating that the small risk of this did not outweigh the countervailing public policies that in growing global economies, "there is every reason to afford the utmost protection to inventors . . . [who] cannot be expected to scour the world to determine whether they are being fleeced." Not a bad point.
Companies who read only the first couple pages of the portion of the decision addressing the fiduciary duty of Genentech to COH should not think that they can just leave out an explicit obligation to exploit the assigned technology from their contracts and get away scott free from having a fiduciary duty to the other party. The court here also noted that there is no difference between a party who is contractually obligated to bring the technology to market and one who is given an option to do so and takes it, because the inventor is still trusting the assignee with the secret information and trusting that assignee to keep accurate accountings of what it does with the information.
I wonder where the court would draw the line about “developing” the technology. It seems to be happy assuring the business world that the duty will only be imposed if the assignee is meant to develop, patent and commercially exploit the technology. I see assignees of technology do a lot and also do very little (sometimes nothing at all) to the actual technology that they are assigned. Does “develop” include taking the technology as given over by the inventor and just plugging it in to the assignee’s property constitute “development” of the technology? Does the assignee need to take at least one small step toward tweaking the actual assigned technology for it to be “developed” under the holdings of Stevens and this opinion? What if the tweak doesn’t change the integrity of the technology?
It will be interesting to see what happens upon appeal to the Supreme Court of California, and perhaps in later cases that tease out what “develop, patent and commercially exploit” means in terms of imposing a fiduciary duty.
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