Consider, EXAMPLE Genentech and City of Hope at page 389 of Business and Its Environment, Second Custom Edition. Explain how Figure 14-2 at page 383, and the concepts described in it, apply to the EXAMPLEs facts.

Figure 14-2 Appropriability of Returns Cost of replication Low High Loose Weak appropriability Moderate appropriability Intellectual property protection (rights and enforcement) Tight Moderate appropriability Strong appropriability gene a Example Genentech and City of Hope In 1976 as a fledgling company, Genentech entered into a 16-page contract that stated, "Should Genentech license any contract with the City of Hope Medical Center (COH) under third party under any patent acquired by it hereunder, then which two COH researchers agreed to splice a human Genentech shall secure from that party and pay to City of into bacteria to synthesize the DNA for human insulin. In Hope the same royalty City of Hope would have received had 1978 the scientists were successful, resulting in the first Genentech itself carried out the licensed activity." genetically engineered pharmaceutical and the birth of the Genentech rejected COH's claim and argued that the biotechnology industry. The contract provided that all governing section of the contract was the section that stated, research findings and resulting patents were the property of "Genentech shall pay to City of Hope a royalty of 2 percent of Genentech, and Genentech obtained 127 patents related to the the net sales of all polypeptides (proteins) sold by it or its COH research. Upon the discovery Genentech licensed the affiliates, provided only that manufacture of the polypeptide DNA patent for human insulin to Eli Lilly & Co. Under employs DNA synthesized by City of Hope under this agree- the license Lilly agreed to pay a 6 percent royalty to ment"2 Genentech stated that the term provided only" meant Genentech and a 2 percent royalty to COH. COH had received that royalties were due only on products that used the DNA $285 million in royalties from human insulin and also from developed by the COH scientists. Genentech not only argued the human growth hormone. that it had not violated the contract but that the case was actu- In the mid-1990s COH began inquiring into Genentech's ally about patent law and hence should be tried in federal, not licensing of the DNA patents to pharmaceutical companies state, court. other than Lilly. Genentech had licensed the patents to The case was tried in state court in 2001 and the jury 22 companies, and COH filed a breach of contract lawsuit, split seven in favor of Genentech and five in favor of COH. claiming that Genentech owed it $445 million in additional Since nine votes were required to decide the case, the judge royalties. COH also claimed that Genentech intentionally was forced to declare a mistrial. The case was retried and concealed the licensing, which opened the possibility of Buni- the jury voted 9-3 that Genentech had breached the contract tive damages. COH based its lawsuit on a paragraph of the and 10-2 that it had done so with fraud or malice. The jury awarded COH $300 million in compensatory damages and $200 million in punitive damages. CO Figure 14-2 Appropriability of Returns Cost of replication Low High Loose Weak appropriability Moderate appropriability Intellectual property protection (rights and enforcement) Tight Moderate appropriability Strong appropriability gene a Example Genentech and City of Hope In 1976 as a fledgling company, Genentech entered into a 16-page contract that stated, "Should Genentech license any contract with the City of Hope Medical Center (COH) under third party under any patent acquired by it hereunder, then which two COH researchers agreed to splice a human Genentech shall secure from that party and pay to City of into bacteria to synthesize the DNA for human insulin. In Hope the same royalty City of Hope would have received had 1978 the scientists were successful, resulting in the first Genentech itself carried out the licensed activity." genetically engineered pharmaceutical and the birth of the Genentech rejected COH's claim and argued that the biotechnology industry. The contract provided that all governing section of the contract was the section that stated, research findings and resulting patents were the property of "Genentech shall pay to City of Hope a royalty of 2 percent of Genentech, and Genentech obtained 127 patents related to the the net sales of all polypeptides (proteins) sold by it or its COH research. Upon the discovery Genentech licensed the affiliates, provided only that manufacture of the polypeptide DNA patent for human insulin to Eli Lilly & Co. Under employs DNA synthesized by City of Hope under this agree- the license Lilly agreed to pay a 6 percent royalty to ment"2 Genentech stated that the term provided only" meant Genentech and a 2 percent royalty to COH. COH had received that royalties were due only on products that used the DNA $285 million in royalties from human insulin and also from developed by the COH scientists. Genentech not only argued the human growth hormone. that it had not violated the contract but that the case was actu- In the mid-1990s COH began inquiring into Genentech's ally about patent law and hence should be tried in federal, not licensing of the DNA patents to pharmaceutical companies state, court. other than Lilly. Genentech had licensed the patents to The case was tried in state court in 2001 and the jury 22 companies, and COH filed a breach of contract lawsuit, split seven in favor of Genentech and five in favor of COH. claiming that Genentech owed it $445 million in additional Since nine votes were required to decide the case, the judge royalties. COH also claimed that Genentech intentionally was forced to declare a mistrial. The case was retried and concealed the licensing, which opened the possibility of Buni- the jury voted 9-3 that Genentech had breached the contract tive damages. COH based its lawsuit on a paragraph of the and 10-2 that it had done so with fraud or malice. The jury awarded COH $300 million in compensatory damages and $200 million in punitive damages. CO