Another Bullshit Motion by Elysium

I will preface this with a reminder that I am not a patent attorney, and this is a highly technical area of the law outside my expertise. Next week we'll get to hear from ChromaDex's counsel, who really are world-class in this field. It will be interesting to see how far off the mark I am. But while we're waiting for the experts to weigh in, I will give you my quick take, which is that this scary sounding motion is really more like another Elysium Hail Mary Pass.

You can find ChromaDex's original motion and exhibits, including the two license agreements, here.

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Elysium yesterday moved to dismiss ChromaDex's patent suit on standing grounds. Their argument is the kind of bullshit sophistry to which we have become accustomed.

I'll start with a short summary -- it's actually pretty straightforward -- but to fully understand what's wrong with their authorities, we're going to have to plumb the unpleasant depths of intellectual property licensing, business law, and civil procedure.

Now is a good time to remember how Elysium thinks the law works.

In this text exchange between Elysium COO Dan Alminana and ChromaDex officer Mark Morris, Alminana remarks, "That's what happens when you throw power lawyers at a situation"

What happens, Elysium thought then, and apparently still thinks now, is that you get your way.

The reality is different. There actually is a thing called "the law," and writing fan fiction extensions of it in briefs doesn't change the law. At least not unless a Judge buys into your fictional world-view. And even on the unusual occasions when that happens, your problem soon triples because then you have to deal with a panel of three appellate judges who aren't yet bought in. And they might just laugh at your arguments, and dismiss them out of hand, without comment, as we have seen.

I mention that because the same legal team that brought us the CAFC appeal is now asserting this motion to dismiss.

So now you know what we are dealing with.

Here is the legal background.

Patent owners are allowed to sue infringers. You can also sue an infringer if you are an exclusive licensee. You don't have to be the only licensee, but you have to have at least some exclusive rights, or else you aren't the person wronged by the infringement. If you have some exclusive rights, but not as many as the patent owner, the patent owner needs to join you as a plaintiff in the suit. That's to make sure that an infinity of exclusive licensees don't sue the infringer one-by-one.

The reason it matters whether ChromaDex gets to sue, or whether only Dartmouth can, has to do with damages. Dartmouth's damages will be different from ChromaDex's. So although an infringer would be liable either way, they might be liable for less if only Dartmouth, and not ChromaDex, could sue.

Next comes the factual background. What I just recited as legal background explains why the factual background looks the way it does.

Dartmouth licensed the patents to ChromaDex and its subsidiaries *exclusively.* They even underlined the word "exclusive" in the license, to show that ChromaDex was an exclusively licensee, and there would be no doubt that the parties intended for ChromaDex to be able to sue infringers. Check it out:

And just to show that there is absolutely no doubt that the parties intended for ChromaDex and its subsidiaries, as exclusive licensees, to be able to sue infringers, the contract says that straightforward, in black and white, no ambiguity: "Company shall be entitled to commence proceedings in its own name against the infringer." Check it out:

So it is a pretty wild thing, here, for Elysium to be suggesting that there is a standing problem, when what you need for standing is an exclusive license, and maybe some clear expression that the parties intended the license to be sufficiently broad to allow the exclusive licensee to sue.

But just in case, and to remove absolutely every doubt, the patent owner, Dartmouth, is joining in the suit, which would normally cure any defect in ChromaDex's exclusivity.

Now the first wrinkle in the facts is that the exclusive licensees in the contract reproduced above are ChromaDex "and its subsidiaries." But it appears to be the case that the parent company ChromaDex Corp, which has subsidiaries, did not do the license deal with Dartmouth. Instead, it was ChromaDex Inc, which IS the subsidiary, that did the deal. That means that Healthspan, which is another subsidiary of ChromaDex Corp might not be expressly included in the Dartmouth license. And maybe Healthspan also has damages, so it might want to sue as well.

To fix this, Dartmouth and ChromaDex re-did the license agreement last year, and the only thing they changed was that the exclusive licensee was ChromaDex and its affiliates, instead of and its subsidiaries, so that would include Healthspan. Check it out:

And they made the change effective retroactively to March 2017, when ChromaDex acquired Healthspan, so that Healthspan was at all times an exclusive licensee as an affiliate of ChromaDex.

The original Sophists, paid instructors in ancient Greece, were the great enemy of Plato and Socrates. The Philosophers believed that the Sophists were mere rhetoricians and peddlers of false knowledge, opponents of Truth, good at persuasion, hair-splitting, and wordsmithing. They were the ancient equivalent of today's Fox News -- or, I should say, some large law firms today -- and that phenomenon was just as alarming to Plato then as it is to some people now.

So here is Elysium's motion to dismiss the patent infringement claim:

It's short and simple. Elysium's argument goes like this. To have standing, you have to be an exclusive licensee. But the Dartmouth license makes both ChromaDex and Healthspan exclusive licensees. If they both have the same rights, then neither has exclusive rights, so neither is an exclusive licensee, and neither has standing to sue. End of argument.

Elysium illustrates its point with an entertainingly improbable example:

"Either company [ChromaDex or Healthspan] could license Elysium’s allegedly infringing activity, and neither has the power to independently exclude Elysium from engaging in that activity. Because neither has exclusive rights, neither has standing to sue for patent infringement."
 
  lol. I don't think either of those companies is going to license Elysium's allegedly infringing activity.

But Elysium's point is that they could, and that logical possibility proves to Elysium that neither ChromaDex nor Healthspan is an exclusive licensee.

The essence of the argument here is that there can be only one "exclusive licensee" -- one or zero are the only two available numbers, because two equals zero.

You can kind of see the logic to it; there is a fuzzy intuitive sense to the words, even though the law isn't like that, and even though it would lead to a ridiculous outcome. That's why I call it sophistry.

Of course, Elysium doesn't just rely on logic alone -- they also cites cases that seem to say that. In particular it relies on Mars Inc. v. Coin Acceptors, in which a patentee was not allowed to add a subsidiary as a plaintiff because one of the subsidiary's sister companies had a non-exclusive right to the patent. "The patent rights held by ChromaDex and Healthspan here are exactly the same as the rights held by MEI and its sister company Mars," Elysium explains breathlessly.

They are not exactly the same.

But let's step back a moment, rather than start gnawing right away on the epistemology of corporate structures.

If you have had the misfortune to read a bunch of these patent license cases, which I have, you will be struck by the disastrous state of the facts. There are partial grants of partially expired patents to prior entities that have peculiarly limited rights to buy, sell, manufacture, or distribute -- and those entities have themselves since been bought and sold. There are ambiguous licenses, requests for implied licenses, and lost or misplaced licenses evidenced only by memory.

So the courts spend a lot of time trying to sort out who actually intended whom to get what and when.

So when Elysium says a case is "just like ours," not only are the facts different, but the Court in that case might have been trying to solve an entirely different problem.

What you rarely see is a situation just as clear and unambiguous as ours: A crystal clear, exclusive grant, in writing, to a single entity and its subsidiaries (or affiliates).

What Elysium is trying to do is to take some reasonable principles applied to solve hard problems in convoluted situations and deduce a new rule -- there can be only one exclusive licensee. That rule would significantly upend patent licensing practice, by establishing that a patent license like Dartmouth's -- "to licensee and its subsidiaries" or "to licensee and its affiliates" -- essentially destroyed the licensee's license.

How likely is that?

Well, it's not very likely.

In WiAV Solutions, the CAFC, which is mandatory authority on patent matters, challenged this very reading of Mars, stating, "Neither of these cases [Textile Productions and Mars] supports the proposition pressed by the Defendants on appeal: that for a licensee to be an exclusive licensee of a patent, the licensee must be the only party with the ability to license the patent. Indeed, this court has recently held otherwise."
 
 That pretty much ends it. But just to be sure, the Court goes on to state:

This court therefore holds that an exclusive licensee does not lack constitutional standing to assert its rights under the licensed patent merely because its license is subject not only to rights in existence at the time of the license but also to future licenses that may be granted only to parties other than the accused. If the accused neither possesses nor can obtain such a license, the exclusive licensee's exclusionary rights with respect to that accused party are violated by any acts of infringement that such party is alleged to have committed, and the injury predicate to constitutional standing is met. (emphasis added)

What that says, I think, is the fact that Elysium might in theory get a future license from Healthspan doesn't mean that ChromaDex lacks standing, if Elysium neither possesses nor can obtain such a license. And I am 100% confident that Elysium neither possesses nor can obtain such a license.

Elysium doesn't think so, though. They even cite WiAV to argue for the opposite, that because neither ChromaDex affiliate could prevent the other from licensing to Elysium, neither has an exclusive right as to Elysium.

WiAV, of course, like Mars, was solving a different problem.

The problem in Mars was whether to imply an express license where none was stated. That's not our situation.

The problem in WiAV was the effect of limited third-party licenses. That is also not our problem.
 

We actually do not have a problem. We have an express, written, unambiguous, exclusive license to a company and its affiliates, with the patent owner as a joined party.

Elysium would like to make that kind of thing legally ineffective, so that patent owners can only license a patent to a single entity, affiliate, or subsidiary, and a licensee must decide in advance which single entity will be the licensee. There is no reason for that.

And it's not what is the common practice, or what courts believe is the common practice. WiAV also involved the right to license to affiliates, and the Court gave no hint that such a thing would be self-defeating. Similarly, Luminara v. Liown involved Disney's ability to license to its affiliates. The Court rejected the alleged infringer's claims that Disney's broad affiliate licensing capability destroyed exclusiveness for the licensee who was asserting the patent infringement suit without joining Disney. Why? Because the parties' intent was to confer standing on the licensee to bring suit against the infringer. Who said that? CAFC in 2016.

Elysium favorably cites Delaware federal Judge Richard Andrews' opinion in Acceleration Bay, a completely different case in which the patent owner was not a party, but forgot to cite another opinion from Judge Andrews the same year (Impax Labs v. Lannett Holdings, 2017), in which Judge Andrews upheld standing for two affiliates and a licensee in a situation that sounds a lot more like ours: "The 2012 licensing agreement purports to bind AZUK and its affiliates...Because there is a valid assignment of the patents to AZAB, AZAB has consented to an exclusive license to Impax, and there is no evidence that the Dearn patents have been assigned outside of the three plaintiffs, I find that within the plaintiff class there is standing." (emphasis added) That sounds to me like multiple exclusive licensees is just a normal thing.

Another case in which two related corporate entities seem to have identical exclusive patent licenses is Sanofi-Aventis v. Glenmark Pharmaceuticals (D.N.J. 2011). The Court specifically acknowledges that both entities have standing to sue as exclusive licensees with the same rights. There is no suggestion that if two related corporate entities are both exclusive licensees then the license becomes unenforceable. It's a very novel idea.

Perhaps the best illustration in a case before the CAFC might be Spine Solutions v. Medtronic, which involved a patent assignee and its sister company that practiced the invention. The Court did not allow the sister company to join the suit because there was no evidence that the sister company was an exclusive licensee. In our case, ChromaDex has done exactly what the CAFC said in Spine Solutions that you had to do, which was to expressly in writing make the sister company an exclusive licensee. And now Elysium says that following the guidance of the CAFC to create exclusivity would have instead destroyed exclusivity by creating two entities both capable of licensing the patent? It just can't be.

Practical Law is the gold standard for "best practices," and Practical Law's form patent license specifically suggests offering a license to the licensee "and affiliates":

So when it comes to standard practice, it appears that ChromaDex and Dartmouth did this exactly right.

Elysium says that you can't have multiple exclusive licensees. The cases they cite involve scenarios different from ours. If that were the law, it would disturb a common and reasonable practice of allowing affiliates and subsidiaries to be exclusive licensees. Worse, it would allow infringers free reign whenever they trod on multiple licenses.

The CAFC is free to upend the common practice of exclusively licensing an entity and its affiliates or subsidiaries (if the SCOTUS agrees), but there is no good reason to do so. In fact, it would make the world more difficult for both licensors and licensees. And there would be no obvious gain in changing the law as Elysium suggests, other than the benefit to alleged infringers that have harmed multiple exclusive licensees. And there is especially no cause to do so on our facts, because it is perfectly clear in our situation exactly what the parties intended, and the purposes of the standing rules are well-served by allowing the affiliates to both sue.

Finally, changing the law as Elysium suggests would create a giant loophole for infringers, and thus deeply undercut the effectiveness of patent law.

I am eager to see what Covington & Burling and/or Haley Giuliano have to say in their reply brief. Those guys know a million times more about this than I do. They'll be able to explain better than I can why Elysium's proposal is outlandish, and why it should be laughed out of court. And I'll report what they say when they say it.

But even I can see that what Elysium is proposing makes no sense.

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UPDATE May 17, 2020: Because I apparently can't help myself, I have been researching this issue more deeply to try to anticipate what will be in Covington & Burling's reply brief on Tuesday. If anything, I am more confident than before that Elysium is barking about nothing.

Writing for Bloomberg Law, two Alston & Bird attorneys state that: "When a prior license grants the licensee the ability to assign and license the asserted patent to related entities, such as subsidiaries and affiliates. This limited right, when confined to only related parties, does not defeat standing." The the likelihood that Alston & Bird is misstating the law is extremely low, but they don't source this statement, so I can't confirm it.

But I think I have in any case located the crux of the matter -- the exact moment when Elysium slips a logical error into its argument.

Compare this close reading of the CAFC's opinion in WiAV with Elysium's argument in our case:

WiAV: "The key question in determining whether WiAV has standing to assert the Mindspeed Patents against the Defendants is not, as the Defendants would have it, whether WiAV has established that it has the right to exclude all others from practicing the patent. The question is whether WiAV has shown that it has the right under the patents to exclude the Defendants from engaging in the alleged infringing activity and therefore is injured by the Defendants' conduct."

Elysium: "Either company [ChromaDex or Healthspan] could license Elysium’s allegedly infringing activity, and neither has the power to independently exclude Elysium from engaging in that activity. Because neither has exclusive rights, neither has standing to sue for patent infringement."

 Do you see the trick? The actual rule is whether the licensee has the ability to exclude the defendant. In our case, both ChromaDex and Healthspan have the ability to exclude Elysium. Elysium's only chance at a license would be to go to Dartmouth, but Dartmouth already granted exclusive rights to ChromaDex and its affiliates. Elysium is not an affiliate, so Dartmouth can't license to Elysium, either, even if it wanted to (which it does not, because it is also a plaintiff if the lawsuit!). In other words, both licensees, ChromaDex and Elysium, have the ability to exclude Elysium, and that makes them exclusive licensees.

But Elysium cast the question differently -- not whether ChromaDex could exclude Elysium, but whether ChromaDex could cause Healthspan to exclude Elysium (and vice-versa). That is not the test.

What Elysium is essentially demanding is that ChromaDex be able to prevent anyone in the world from licensing the patent. But, as the WiAV court stated explicitly, the test is not whether the licensee can exclude all others, but whether the licensee can exclude Elysium. Both licensees can exclude Elysium, so both are exclusive, and both have standing.
 
 That's what Covington & Burling is going to say on Tuesday, I predict, and the Court will agree, finding it an easy call. The motion to dismiss will be denied, and the motion to amend the complaint to add Healthspan as a plaintiff will be granted, and the litigation will proceed.