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On April 24, 2008, the California Supreme Court issued its long awaited decision in City of Hope National Medical Center v. Genentech, Inc., No. 129463, 2008 WL 1820916 (Cal. Apr. 24, 2008) ("City of Hope"). (Mr. Falk was lead appellate counsel in this appeal.) Although the decision's primary focus was reversing a $200 million punitive damages award against Genentech, the Supreme Court also affirmed two aspects of the trial court proceedings that have significant implications for attorneys drafting contracts.
BACKGROUND
The dispute in City of Hope centered on a contract negotiated by City of Hope and Genentech in 1976. Genentech's attorney produced all three drafts of the contract, although the parties discussed and negotiated the terms of the agreement over a period of several months. More than 20 years later, a dispute arose concerning the amount of royalties the contract required Genentech to pay City of Hope. At trial, City of Hope argued that the contract obligated Genentech to pay additional royalties of approximately $300 million, while Genentech asserted that it had fully satisfied its contractual royalty obligations.
Key questions at trial included whether the contract was ambiguous and, if so, how those ambiguities should be interpreted. Genentech and City of Hope both presented extrinsic evidence bearing on their intent in entering into the agreement, including oral and written communications pre-dating and post-dating the contract. The trial court submitted to the jury both the determination of the credibility of the parties' conflicting extrinsic evidence and (over Genentech's objection) interpretation of the contract. In connection with the latter responsibility, the trial court instructed the jury that uncertainties in the language of a contract must be interpreted against the party that caused the uncertainty to exist.[1] Inferentially, this instruction required the jury to interpret contractual uncertainties against Genentech, since its attorney had drafted the document. The jury returned a general verdict finding for City of Hope.
Genentech appealed the trial court's judgment to the Court of Appeal for the Second Appellate District, which affirmed. Among other things, the Court of Appeal agreed that because some of the extrinsic evidence was in dispute, the contract's interpretation was a proper matter for the jury. The Court of Appeal also approved the jury instruction concerning uncertainties without comment in its published opinion.
Genentech then appealed to the California Supreme Court. Following extensive briefing (including 18 amicus briefs) and oral argument, the Supreme Court approved the method used by the trial court to determine the contract's meaning. In essence, the Supreme Court ruled that a trial court may choose either to submit to the jury evaluation of conflicting extrinsic evidence and interpretation of the contract or to obtain a special verdict from the jury concerning the disputed extrinsic evidence, which the trial judge would then use to interpret the contract.[2]
The Supreme Court also agreed that the trial court had properly instructed the jury concerning interpreting contractual uncertainties.
LIMITING CONTRACT INTERPRETATION BY JURIES
The Supreme Court's City of Hope opinion challenges parties negotiating and documenting an agreement, particularly a complex commercial agreement. Unless one party to the agreement anticipates future litigation in which it will want to argue an idiosyncratic interpretation, both parties should prefer to have a judge interpret any contractual provision deemed, in hindsight, to be ambiguous. Because of recent California case law casting doubt on the enforceability of jury trial waivers, however, a contractual clause waiving the right to a jury on this issue may not produce the desired result. See Grafton Partners LP v. Superior Court, 36 Cal. 4th 944 (2004) ("Grafton Partners") (holding that a predispute contractual waiver of the right to jury trial was unenforceable).
A more innovative (and untested) approach is to address City of Hope head on, focusing on the parties' desire for greater certainty in interpreting the agreement. We envision this would be captured in the contract's boilerplate with a provision (a) acknowledging the City of Hope decision; (b) recognizing that disputes concerning oral communications often arise because of the failings of human memory; (c) stating that to ensure greater predictability and certainty, the parties desire to exclude, in any litigation over the meaning of the contract, any evidence of oral communications between the parties concerning the contract's interpretation (both communications made before and after the contract's execution); (d) setting forth the parties' mutual agreement, pledge and covenant not to offer into evidence oral communications concerning the contract's meaning; and (e) selecting, to the extent material parol evidence is in dispute, the special verdict procedure set forth in Medical Operations.
Alternatively, contracting parties may address the City of Hope jury role issue by including a mandatory arbitration or judicial reference provision in their agreement. Grafton Partners made clear that these methods of waiving a right to jury trial, which are among those specifically authorized by statute, will be respected by the California courts. Of course, since the parties will have to fund the fees and expenses of an arbitrator or referee, they will have to weigh the benefits of avoiding the possibility of having a jury interpret their contract against the projected expense of hiring a private judge to resolve a possible future contractual dispute. At least in substantial commercial agreements, parties may find these additional expenses preferable to the uncertainty created by a jury. In addition, because the decision of an arbitrator is essentially final and nonreviewable, some parties may prefer judicial reference, which results in a judgment (by the judge pro tem to whom the matter was referred) that can be appealed like any other judgment by a court.
ADDRESSING WHO IS THE "DRAFTER" AGAINST WHOM AMBIGUITIES WILL BE CONSTRUED
The City of Hope decision likewise challenges a party taking principal drafting responsibility for an agreement. The view of the Supreme Court - that ambiguities in a mutually negotiated agreement should be charged against the drafting party - is contrary to the expectations of many practitioners and at odds with many routine commercial procedures. Despite the risk presented by the City of Hope decision, it may be impractical for a contracting party to ensure that the other party also participates in the agreement's drafting. Moreover, City of Hope provides no guidance on the amount of drafting participation that is required to avoid the interpretation instruction.
It is noteworthy, however, that the City of Hope-Genentech contract did not contain a provision that sometimes appears in boilerplate: a clause specifying that the contract was the product of mutual negotiations and accordingly should not be construed against either party. While the effectiveness of such a provision is not certain, it might prove beneficial in future disputes. Accordingly, contract drafters should consider including language of this type in their agreements.
[1]The instruction stated: "If, after considering the evidence in light of the foregoing rules of interpretation, there remains an uncertainty in the language of the contract, that language must be interpreted against the party who caused the uncertainty to exist."
[2]The latter procedure is outlined in Medical Operations Management, Inc. v. National Health Laboratories, Inc., 176 Cal. App.3d 886, 892 n.4 (1986) ("Medical Operations").
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