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Sarbanes-Oxley and Licensee Fiduciary-Based Tort Liability for Breach of Contract: City of Hope National Medical Center v. Genentech, Inc.

BY Paul Dennis Connuck
November 02, 2005

Over the years, courts frequently have been called upon to determine the nature and extent of the diligence required of licensees, assignees and other parties granted exclusive rights to exploit intellectual property. Dating back to Justice Benjamin N. Cardozo's opinion in Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917), the courts consistently have held such parties to an implied promise to exercise some measure of diligence to commercialize the transferred property in those cases in which the grantor was completely reliant upon the productivity of the intellectual property user to generate royalties or other consideration.

The duties imposed under this rubric have varied widely, ranging from simple “good faith” to “best efforts.” Compare, e.g., Bailey v. Chattem, Inc., 684 F.2d 386, 396 (6th Cir. 1982) (duty of good faith performance), with Emerson Radio Corp. v. Orion Sales, Inc., 253 F.3d 159, 168 (3d Cir. 2001) (duty of best efforts “[w]here an owner … gives an exclusive agency, solely in return for royalties”) (dicta; italics in original). Such implied duties have even been held so exacting as to prohibit the intellectual property user's exploitation of competing technologies, works or products. See, e.g., Parev Products, Co. v. I. Rokeach & Sons, Inc., 124 F.2d 147, 150 (2d Cir. 1941). But see Eclipse Bicycle Co. v. Farrow, 199 U.S. 581, 589 (1905) (no obligation to refrain from selling superior products).

While the scope of the transferee's implied duty has been variously framed, the courts' rationale for interposing the duty has strayed little from Justice Cardozo's analysis in Wood:

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