SUPREME COURT WATCH
Blurring the Distinction Between Contract and Tort: the Resurrection of Seaman's
Christina J. Imre
Sedgwick, Detert, Moran & Arnold
As this column goes to press, the California Supreme Court has just decided to hear a matter with
watershed implications for contract disputes and the imposition of punitive damages. See City of
Hope Nat'l Med. Ctr. v Genentech, Inc. (review granted Feb. 2, 2005, S129463; superseded
opinion at 123 CA4th 306, 20 CR3d 324).
In City of Hope (COH), the court of appeal's published opinion not only affirmed $300 million in
compensatory damages and $200 million in punitive damages, it arguably "tortified" a contract
dispute in order to do so. If the high court affirms the result, COH will be the largest punitive
verdict—by far—ever upheld in a California published opinion.
The litigation arose out of a dispute over the interpretation of the parties' contract. Genentech
funded COH doctors to research and perfect a DNA polypeptide. Under the agreement,
Genentech would license the product, collect royalties, and share them with COH. Things went
swimmingly for several years, with Genentech paying COH about $302 million. Then Genentech
took the position that COH's right to royalties had expired under the terms of the agreement.
The "Tortification" of a Contract Dispute
The court of appeal acknowledged that the critical provisions were ambiguous, to put it mildly,
terming the royalty paragraphs "confusing," "murky," "imprecise," "the antithesis of clarity," and
"like trying to walk across shifting sands." 123 CA4th at 326. The opinion noted three plausible
interpretations of the "interplay" between the clauses, conceding that the critical paragraph was
"reasonably susceptible to the parties' conflicting interpretations." 123 CA4th at 327.
Given these concessions, the notion that Genentech could be liable, not just for breach of
contract, but in tort and for punitive damages, is more than a little troubling. Even in the context
of insurance law in which the insurer is considered a "quasi-fiduciary," California courts
uniformly hold that, as a matter of law, the carrier's reasonable, though mistaken, interpretation
of its contract is an absolute defense to "bad faith" tort liability. See, e.g., Frommoethelydo v Fire
Ins. Exch. (1986) 42 C3d 208, 218, 228 CR 160; Dalrymple v United Servs. Auto. Ass'n (1995)
40 CA4th 497, 523, 46 CR2d 845; Tomaselli v Transamerica Ins. Corp. (1994) 25 CA4th 1269,
1280, 31 CR2d 433.
The court of appeal essentially concluded that, despite the objective reasonableness of
Genentech's interpretation, it could be liable in tort for its improper motive, i.e., for advancing a
contract interpretation that it knew to be wrong because it was a fiduciary (in this case, a third
party to whom an inventor had entrusted a secret). City of Hope Nat'l Med. Ctr. v Genentech, Inc.
(review granted Feb. 2, 2005, S129463; superseded opinion at 123 CA4th 306, 355, 20 CR3d
324). The potential blurring between contract and tort, and the thorny problems associated with
evaluating defendants' motive for the breach, are some of the reasons the supreme court
abolished the "Seaman's" tort, which had permitted tort liability for "bad faith" denial of the
existence of a contract. Freeman & Mills v Belcher Oil Co. (1995) 11 C4th 85, 102, 44 CR2d
420, overruling Seaman's Direct Buying Serv., Inc. v Standard Oil Co. (1984) 36 C3d 752, 206
CR 354. "To include bad faith denials of liability within Seaman's scope could potentially
convert every contract breach into a tort." Freeman & Mills, 11 C4th at 103. As the court
explained in an earlier decision, presaging the demise of Seaman's, there are "important
differences between contract and tort theories of recovery," and "the law generally does not
distinguish between good and bad motives for breaching a contract." Applied Equip. Corp. v
Litton Saudi Arabia Ltd. (1994) 7 C4th 503, 515, 28 CR2d 475.
The Punitive Damages Excessiveness Claim
Standard of Review on Appeal
In 2001, the U.S. Supreme Court held that, in deciding if the defendant's due process right to be
free from grossly excessive punitive awards has been violated, appellate courts must review the
issue de novo. Cooper Indus., Inc. v Leatherman's Tool Group, Inc. (2001) 532 US 424, 435, 149
L Ed 2d 674, 686, 121 S Ct 1678. In other words, the constitutional excessiveness analysis is
subject to an independent, not a deferential, standard of review. Cooper Indus., Inc. v
Leatherman's Tool Group, Inc., supra (emphasis added, quotation omitted). Yet the [PAGE
19]COH opinion admittedly viewed the entire record "most favorably to the judgment." City of
Hope Nat'l Med. Ctr. v Genentech, Inc., (review granted Feb. 2, 2005, S129463; superseded
opinion at 123 CA4th 306, 354, 20 CR3d 324) (emphasis added). Such deference to the
judgment arguably does not satisfy Cooper's mandate for independent, de novo review of the
federal excessiveness claim.
The Appellate Court's Application of Campbell
The BMW/Campbell Degree of Reprehensibility Factors
The three guideposts for evaluating a federal excessiveness claim are (1) the degree of
reprehensibility of the defendant's act; (2) the ratio of punitive to compensatory damages; and (3)
comparable fines or penalties for similar conduct. BMW v Gore (1996) 517 US 559, 575, 134 L
Ed 2d 809, 826, 116 S Ct 1589.
Terming "degree of reprehensibility" the most important guidepost, BMW created what could be
called a "scale of relative reprehensibility" as a benchmark for comparison, to decide how bad
this defendant's act was in relation to acts of other defendants. BMW v Gore, supra. Conduct
causing physical injury is generally considered more reprehensible than purely economic harm;
economic harm is worse, relatively speaking, when inflicted on the financially vulnerable than
on the wealthy; reckless disregard is more serious than indifference; repeated conduct is more
blameworthy than a single isolated act; and harm resulting from mere accident is less onerous
than intentional malice or deceit. BMW v Gore, supra.
In its most recent pronouncement on punitive damages, State Farm Mut. Auto. Ins. Co. v
Campbell (2003) 538 US 408, 419, 155 L Ed 2d 585, 602, 123 S Ct 151, the court evaluated the
degree of reprehensibility factors using a weighing or balancing test; observing "the existence of
any one of these factors weighing in favor of plaintiff may not be sufficient to sustain a punitive
damages award and the absence of all of them renders any award suspect." State Farm Mut.Auto.
Ins. Co. v Campbell, supra.
One is compelled to wonder if any of the five relative reprehensibility factors was truly satisfied
in COH. This was a failure to pay additional royalties, a purely economic dispute. The opinion
candidly acknowledged that "Genentech did not directly jeopardize anyone's life, safety or
health," but nonetheless concluded that defendant "damaged an entity that is in the business of
providing medical help to the poor," often at its own expense. City of Hope Nat'l Med. Ctr. v
Genentech, Inc. (review granted Feb. 2, 2005, S129463; superseded opinion at 123 CA4th 306,
357, 20 CR3d 324). Moreover, because City of Hope is a large, sophisticated institution that
collected $302 million in royalties on this contract, Genentech was hardly acting out the
traditional villain's role, exploiting the weak or unwary. Two large institutions butting heads
would not appear to be what Campbell had in mind.
In addition, it is difficult to see how advancing a plausible interpretation of an admittedly
ambiguous contract provision qualifies as "reckless" disregard of the other contracting party's
rights. And the opinion's notion that defendant was a recidivist within the meaning of Campbell
is likewise questionable. Genentech consistently took the same position regarding contract
interpretation throughout the duration of the parties' dispute, a position it communicated to City
of Hope early on. The opinion characterizes defendant's conduct as a series of multiple acts, not
"widespread as to the number of victims, but … pervasive and continuous as to City of Hope."
123 CA4th at 357. Under that interpretation, any act could be divided into multiple parts for
purposes of qualifying the defendant as a repeat offender. Finally, intentional malice, deceit, or
trickery is more reprehensible on the scale than is mere accident. State Farm Mut. Auto. Ins. Co.
v Campbell (2003) 538 US 408, 419, 155 L Ed 2d 585, 602, 123 S Ct 151. The conclusion of the
opinion in COH, that defendant concealed from City of Hope its "entitlement" to additional
royalties, begs the question: City of Hope was only entitled to more royalties if its interpretation
of the "murky" contract was correct. To support intentionality, COH resurrected a Seaman's-like