fiduciary duty

California Supreme Court Restricts Application of Fiduciary Duties in Licensing Situations

We previously discussed a California appellate decision holding that a technology licensing relationship created fiduciary duties between the inventor who disclosed confidential technology and the licensee who agreed to exploit the technology in exchange for a royalty.  

The California Supreme Court has now reversed that ruling, holding that no fiduciary duty had been established and that punitive damages awarded could not stand.  A $300 Million breach-of-contract judgment was, however, upheld.  City of Hope Natl. Medical Ctr. v. Genentech, Inc., 75 Cal.Rptr.3d 333 (2008). 

As we previously wrote, technology disclosure and licensing arrangements are commonly arms-length business deals.   The City of Hope opinion provides guidance to licensing practitioners seeking to avoid creating a fiduciary relationship between the parties – a relationship that imposes heightened duties and can result in tort damages, including punitive damages.

Embracing the Arm’s Length Licensor -- Closer Than You Think

Technology disclosure and licensing arrangements are common arms-length business deals, usually thought to involve no fiduciary relationship, i.e., one having special trust and confidence and heightened duties of fairness toward the other. 

Frequently, inventors disclose their idea to others, who then invest money to commercially exploit it, with one side or both having or obtaining legal protection, e.g., patents, trade secrets, trademarks or copyrights.  The inventors/licensors are usually compensated by a royalty scheme – some percentage of the developers/licensees’ revenues or profits.

While oral contracts occasionally exist, usually the parties memorialize their arrangement in a written contract, carefully spelling out the obligations of each side, and governing any later disagreements.  Normally, even if there are unforeseen circumstances or contractual ambiguities, the parties will be limited to their rights and remedies under the contract.

But not so fast!  A recent California case suggests that in some circumstances the exploiting party, the developer, may be treated as a fiduciary, owing a heightened duty to the inventor, and subjecting itself to heightened damages, including punitive damages.