Settlement Possible After Huge City of Hope Verdict
By LAURENCE DARMIENTO
Before the City of Hope was awarded $300.2 million in compensatory damages last week in its case against Genentech Inc., the talk in legal circles was that the two sides were too far apart to reach a settlement.
Now all that has changed in the wake of the verdict and as the punitive damage phase of the trial begins this week.
There are incentives for both sides to settle the case, though obstacles remain not the least of which is the upper hand the Duarte cancer center was given by the whopping jury verdict.
“This changes the landscape,” said Ronald Nessim, a commercial business litigator with Bird, Marella, Boxer & Wolpert. “The City of Hope may have some incentive to lock in a portion of their gain, and Genentech is obviously worried about not only the compensatory damages but the punitive damages that may be awarded.”
Move to settle?
Glenn Krinksy, City of Hope’s general counsel, agreed that Genentech may try to settle the case and that the cancer center would be open to a “discussion.” But he has not heard from the company and has no plans to call them any time soon.
“I think the more likely scenario is that Genentech will pursue an appeal and they will lose and we will get everything,” he said.
He also said that if Genentech were to make an offer prior to the completion of the trial, it probably would be for more than the $300 million in compensatory damages.
The cancer center plans to limit what it is seeking in punitive damages, so whatever City of Hope is awarded will stand up to judicial review.
Sabrina Johnson, Genentech’s director of corporate affairs, declined to comment on any settlement talks or appeal.
“We are certainly disappointed in the verdict but we feel very strongly it would be premature and inappropriate to talk about possible next steps. The jury is still working and the trial proceedings are not concluded,” she said.
In a case that has roots in the dawn of the biotech revolution, a Los Angeles Superior Court jury found that the South San Francisco-based biotech giant improperly withheld royalties stemming from a 1976 licensing agreement.
The agreement stemmed from breakthroughs made by two City of Hope scientists, who developed a process for inserting genes into bacteria and making them produce proteins.
Genentech employed the process to create human insulin and human growth hormone, for which the cancer center received direct royalties. But later the City of Hope accused Genentech of hiding the licenses for the technology it reached with nearly two dozen other companies.
Genentech maintained that it did not hide the agreements, nor did it owe royalties to the cancer center from the third-party licenses. The cancer center disagreed and filed its lawsuit in 1999. The jury found in the cancer center’s favor, after a mistrial in which a prior jury could not reach a verdict.
Genentech’s deep pockets
The compensatory damages awarded to the City of Hope were based on a calculation made by the cancer center on what it was owed in royalties after 1994. Though it would be a tremendous windfall for the center, it could be dwarfed by any punitive damages.
Those elements may prompt Genentech to move for a quick settlement, though it would have to offer a premium over the compensatory damages, said Mark Weinstein, a finance and law professor, with dual appointments at USC’s business and law schools.
“They couldn’t offer a discount unless they were very confident of success at the appellate level,” said Weinstein. “The kind of deal the City of Hope would be looking for is one that would reflect the possibility of punitive damages.”
Another factor in the case: compensatory damages are less likely to be overturned than punitive damages, dealing the City of Hope a big advantage in any talks.
Another reason the cancer center may not want to settle now: Genentech has deep pockets and punitive damage awards are meant to punish wrongdoers. “The deeper the pocket the more you tend to dig,” said Dennis Harp, an analyst for Deutsche Bank.
Genentech reported net income of $150.3 million on $2.2 billion in revenue last year. It also has $2.5 billion in cash and long-term marketable securities.
If no agreement should be reached before the trial ends, there are wide expectations Genentech will appeal not only with the intent of getting the verdict overturned, but in order to further pressure the cancer center into a settlement.
“You just take your chances on appeal,” said attorney Kenneth R. O’Rourke, an intellectual property litigator at O’Melveny & Myers LLP.
The cost of legal fees is not expected to play much of a role in negotiating an agreement, since the size of the compensatory damages dwarfs the legal costs on either side.
However, Genentech could feel some financial pressure by the legal requirement that it pay 10 percent annual interest on any judgment it appeals. That would cost the company some $30 million on the compensatory damages alone and at a time when the stock market and other investments are down. “Damages increase as time passes,” Weinstein said.