In City of Hope National Medical Center  v. Genentech, Inc., No. S129463, the California Supreme Court narrowed the circumstances in which a fiduciary relationship will be implied, and therefore, the circumstances that will support a claim for breach of a fiduciary duty. The Court expressly disapproved a 50-year-old case that intimated that a fiduciary duty arose by operation of law between parties to a contract that provided for the development of intellectual property in exchange for royalties. The Court found that City of Hope was not entitled to damages on its breach of fiduciary duty claim, which City of Hope based solely on a contract between it and Genentech whereby City of Hope, in exchange for royalties, gave up its rights to certain confidential intellectual property that Genentech agreed to develop.

The City of Hope holding has implications well beyond the field of intellectual property. For example, it may apply to allegations that an accounting firm was a fiduciary because it performed non-audit consulting services. At the outset, it is important to understand that the case concerned the circumstances in which a fiduciary relationship would be implied where it does not arise as a matter of law, such as in a partnership or agency setting. To understand those implications of the case, it is useful to begin with what the plaintiff argued.  It argued that under California case law, four characteristics, if present, lead courts to imply a fiduciary relationship. Those four characteristics are (a) where one party entrusts its affairs or property to another, (b) where the contract grants one party broad discretion in how it acts, (c) where there is an asymmetrical access to information, and (d) where one party is vulnerable and dependent on the other. 

The Court held that a fiduciary relationship does not necessarily arise even if all four characteristics are present. It noted that the four characteristics are commonly present in many contractual relationships, that it is normal for parties to enter a contract in order to acquire the expertise or superior knowledge of the other party, and that every contract requires parties to place trust and confidence in the other. In rejecting the existence of a fiduciary relationship, the Court noted the parties before it were sophisticated, had substantial bargaining power, and were represented by counsel.  It is perhaps significant that the Court did not say that the bargaining power was equal, but simply that each had “substantial” bargaining power. The Court did state that one party’s vulnerability could be so substantial as to create a fiduciary relationship as a matter of equitable considerations. 

Also relevant in the City of Hope case itself was the fact that the contract disclaimed the formation of an agency or partnership or joint venture, which, the Court noted, are categories in which fiduciary relationships arise as a matter of law. This part of the Court’s opinion suggests that disclaimers of fiduciary relationships will be enforced where the relationship between the parties does not create fiduciary duties as a matter of law as, for example, in a partnership setting. On the other hand, it is important to note that the City of Hope decision does not rule out the possibility that a finder of fact could use the actual conduct of the parties to imply a relationship that carries fiduciary duties, such as partnership or agency, even where the relationship is not formally established. Certainly disclaimers are relevant and the party at risk of being called a fiduciary may want to include a disclaimer in a contract. 

It is common in litigation to append a breach of fiduciary duty claim to an action involving a claimed breach of contract. Because fiduciary duty claims carry the risk of punitive damages while contract claims generally do not, City of Hope provides guidance to litigants (and parties in advance of any dispute) seeking to avoid the reach of a fiduciary duty claim. One question raised by City of Hope is whether the Court's approach is likely to be influential in other states. In New York, for example, the Court of Appeals has held that a fiduciary relationship does not depend solely on the existence of a contract, but on the relationship of the parties as a whole. Cases do use phrases like creating a “relationship of higher trust" in determining whether a fiduciary relationship exists. It may be that the looseness of this kind of language will allow courts in other states to import the City of Hope analysis to narrow the circumstances in which a relationship will be found. Certainly we expect that defendants will argue that they should.

If you have any questions regarding this matter, please do not hesitate to contact the Heller Ehrman attorney with whom you regularly work or any of the Heller Ehrman lawyers listed below:

Douglas M. Schwab | +1 (415) 772-6376