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a case of punitive damages

Maurice M. Klee

IEEE ENGINEERING IN MEDICINE AND BIOLOGY MAGAZINE SEPTEMBER/OCTOBER 2004

Patents

What should happen when acompany intentionallydeceives another companyduring the negotiation of

an intellectual property license? Can thedeceived company rescind the licenseand sue for damages, including punitivedamages? Those were the questionsbefore the Court of Appeals for theFederal Circuit (CAFC) and the U.S.Supreme Court in the recent case ofRhone-Poulenc Agro v. DeKalbGenetics Corp.

The case involved genetically engi-neered corn sold by DeKalb under thetrademark Roundup Ready®. Unlikeordinary corn, which can be killed byMonsanto’s widely used Roundup®herbicide, Roundup Ready corn is unaf-fected by the herbicide and only theweeds around the corn are killed.

The research that led to RoundupReady corn was done under a jointdevelopment/license agreementbetween Rhone-Poulenc Agro (RPA)and DeKalb. RPA did the genetic engi-neering, and DeKalb did the greenhouseand field testing of the corn. DeKalbwas obligated to report the results of itstesting back to RPA, and for a while itdid so.

Based on this obligation, in early1994, DeKalb reported that a particulargenetic construct, which RPA had pre-pared, known as RD-125, worked suc-cessfully in greenhouse tests performedin Connecticut. Thereafter, during thesummer of 1994, DeKalb did a fieldtest in Hawaii, the critical test for deter-mining whether a genetically modifiedplant will actually be of commercialvalue. The test results were spectacular,with plants containing the RD-125 con-struct exhibiting up to four times the

normal resistance to the Roundup her-bicide. This result, however, DeKalbkept to itself.

Later in 1994, RPA and DeKalbrenegotiated their license agreement.Not knowing that the RD-125 constructwas so valuable, RPA gave DeKalb apaid-up, worldwide license to its intel-lectual property covering RD-125,which included the right to sublicense.In essence, RPA gave up all of itsexclusive rights to its RD-125 work.

In 1997, DeKalb announced the com-mercial introduction of Roundup Readycorn containing the RD-125 construct.Shortly thereafter, RPA sued DeKalbfor fraud. Specifically, it asserted thatDeKalb had fraudulently induced it toenter into the 1994 license agreementby withholding the results of theHawaiian field test. In short, RPA saidthat it would have never given DeKalbsuch a sweet deal if it had known thetrue value of RD-125.

The jury agreed. It awarded RPAthree amounts: US$1 in actual damages,US$15 million in unjust enrichmentdamages (i.e., the benefit DeKalbunjustly received as a result of havinghad the license), and US$50 million inpunitive damages based on DeKalb’sreprehensible behavior in defraudingRPA during the licensing negotiations.

It was on this last award that the U.S.Supreme Court got involved. In a seriesof landmark tort cases, the SupremeCourt has placed constitutional limits,specifically, 14th Amendment DueProcess limits, on the amount of puni-tive damages that juries can award.Based on these cases, DeKalb arguedon appeal that the US$50 million awardwas excessive.

In a series of three decisions—two

by the CAFC and one by the U.S.Supreme Court—DeKalb lost. In thefirst decision, the CAFC applied thethen-existing Supreme Court cases andfound that the US$50 million punitivedamages award was within the accept-able Constitutional range. In the seconddecision, the Supreme Court asked theCAFC to reconsider its decision in viewof a new Supreme Court case—StateFarm v. Campbell—decided after theCAFC’s original decision. In the finaldecision, the CAFC looked again at theUS$50 million award in view of theState Farm case and concluded that dueprocess was satisfied.

Not only did the trial court awardmillions in damages, but it also rescind-ed the 1994 license agreement.Roundup Ready corn was thus on themarket without a license. With RPAnow having the dominant negotiatingposition, what once had been an overlysweet deal for DeKalb now became abitter pill. Poetic justice, one might say,given DeKalb’s prior behavior.

Dr. Klee practices patent, trademark,and copyright law in Fairfield,Connecticut. He received a B.S. inphysics from the University of Illinois, aPh.D. in biomedical engineering fromCase Western Reserve University, and aJ.D. from George WashingtonUniversity. He is a member of Phi BetaKappa and Order of the Coif. He is aformer assistant professor in the Collegeof Engineering at Michigan StateUniversity and a former staff fellow atthe National Institutes of Health. A copyof the full text of the Rhone-PoulencAgro v. DeKalb Genetics Corp. decisioncan be obtained from the CAFC’s Website at http://www.fedcir. gov.