ChromaDex Drops The Hammer
[In which Skadden finds itself pressed hard against the ropes. Remind me never to be sued by COOLEY]
So here is ChromaDex's brief in support of its motion to dismiss Elysium's fraud claims. It is a work of art.
If you want to save yourself a lot of time, just know that Elysium's goose is cooked, and move on.
If you want to save yourself a little time, I'll explain briefly what happened and why it matters, and predict what will happen next.
If you have some free time and want to enjoy the legal artistry, click through and read the brief -- it is like a perfectly turned double play. Or even better than that. It's a shame there aren't stadiums full of fans cheering big league attorneys who turn in big league performances. We lawyers don't get the appreciation we deserve. But ChromaDex got their money's worth, that's sure. [I was wondering why ChromaDex waited until the last minute to file this, but obviously they were polishing it to perfection.]
ChromaDex carved Elysium's arguments into small pieces, then destroyed each piece, then welded shut every possible exit. Much of the magic is in the footnotes. The ChromaDex brief is so carefully constructed that it reads like the Ninth's Circuit's opinion reversing the lower court's denial of ChromaDex's motion to dismiss, which is why we won't be seeing any lower court denials of ChromaDex's motion to dismiss.
ChromaDex gives us more detail about the negotiation that led to the agreements, showing why the litigation is properly framed as a garden variety commercial contract dispute.
ChromaDex next shows that even after two tries Elysium has been unable to allege a fraudulent statement or reasonable reliance, or even that the alleged false trademark assertion could be the foundation of a fraud claim, thus cutting off Elysium's third counterclaim at the elements.
ChromaDex dispenses with the fourth counterclaim -- the frivolous tying claim ("creative," says ChromaDex politely) -- by showing why a product and its trademark can't be the subject of illegal tying. I had asserted as much in prior posts, but ChromaDex explains the reason why: there must be two separate markets for the products, which cannot occur for a product and its trademark.
But, as with the rest of the brief, it is not enough for ChromaDex to merely defeat Elysium's claims; they must be destroyed. So ChromaDex adds that the tying claim would fail anyway because if you read the contract more closely it turns out that the royalty payments were not for trademark licensing, but instead represented deferred compensation (cast as royalties) for the Basis ingredients. [This actually makes way more sense than a trademark license, given the alleged structure of the deal, because the royalties are tied to Niagen sales, not to trademark usage]. The end result is that there was no tying at all, legal or illegal. So goes the fourth counterclaim.
But ChromaDex saves its most thorough work for the fifth counterclaim, providing compelling proof backed up by mandatory authority that contract plaintiffs do not get to cast their grievances as unfair competition claims. ChromaDex explores a variety of potential theories, showing that for each one Elysium lacks the necessary legal and/or factual basis.
I don't know how many times Elysium gets to keep amending its counterclaims to try to state a claim? I have frequently read compelling majority opinions, only to be smitten by the dissent. So prudence might suggest caution until we see Elysium's reply brief. But my guess is that the Court will decide to put all three of these counterclaims out of their misery, and there is not much Elysium can say to prevent it.
So Then What?
That will leave the the parties with their dueling breach of contract claims. If I am correctly recollecting the original complaint, Elysium seems to have taken delivery of about $3-4M worth of ingredients and failed to pay for them. Probably the amount in controversy is what Elysium wanted to pay for them (about 40% of the contract price) and what ChromaDex agreed to (about 80% of the contract price, again, if I recall correctly).
That means Elysium will have to cough up at least about $1.2M, but possibly $3.2M or $4M.
And that assumes that ChromaDex's own fraud claims get thrown out, and it is not obvious to me that it will. There seems to me prima facie evidence to support these hard words from ChromaDex's motion:
"In 2016, Elysium tried to cheat ChromaDex by (1) fraudulently inducing ChromaDex to fill extraordinarily large purchase orders of NIAGEN and pTeroPure, but never paying for, or intending to pay for, the upfront purchase price or the back end royalties for the products; and (2) simultaneously poaching two ChromaDex employees and conspiring with them to steal certain of ChromaDex’s proprietary trade secret data and information."
It will be a pyrrhic victory indeed for Elysium to win a big discount on its prior purchases (paying just 40% on the dollar!), but (1) paying the balance to Skadden in legal fees, and (2) going out of business because it has permanently lost access to both Niagen and PteroPure. I have not heard anybody argue that ChromaDex lacked the right to terminate Elysium's future supply pursuant to the terms of the contract.
So that means Elysium's only options are: (1) settle the lawsuit quickly and convince ChromaDex to enter into a new contract in exchange for payment of some portion of the disputed amount PLUS the immediate cessation of legal fees; or (2) rebuild Elysium's business on a new and different product line to be developed in the future.
If Elysium continues the litigation to a judgment, ChromaDex will have very little incentive to renew commercial relations with Elysium. What little leverage Elysium has right now is waning every day that the legal fees accrue.
That is, unless Elysium thinks that Skadden is going to pull some rabbit out of its, uh, hat and rescue Eysium's fraud claims from the cage that Cooley has built. I doubt even Houdini could do that. But we'll see.