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  • Writer's pictureShelly Albaum

Judgment on the Motions to Dismiss

The federal district court dismissed both of ChromaDex's tort claims -- fraudulent deceit and trade secrets -- although ChromaDex is entitled to amend its complaint and assert with more specificity why the thing that Elysium allegedly stole was a trade secret.

The federal district court refused to dismiss Elysium's fraud and patent misuse claims, but did dismiss Elysium's unfair trade practices claim.

I find this preliminary resolution deeply unsatisfying.

First, I think the Court got the law wrong.

Second, even though the parties have a right to present evidence on some tort claims, I think the odds of ANY of the allowed or potentially allowed claims succeeding at trial are not great.

This puts the parties in the stupid legal position of being entitled to continue exhausting each other, but probably for no good purpose.

Gentle Reader, you would be excused for reading no further, since the Court ruled pretty much the exact opposite of what I predicted. However, keep in mind that the reason appellate courts exist is because courts sometimes get it wrong, so my judgment might yet be vindicated.

But if you stay on, I will opine on what the Court got wrong, why, and what might happen next.

First, it is worth noting the intrinsically tragic nature of the litigation process. Nearly a million dollars worth of legal brains were assigned to working out every detail in the pleadings and motions, all of which was distilled to a mere HUNDREDS of pages of claims and analysis. That in turn got reduced to a 21-page opinion, which itself is mostly just recitation of the claims, without much analysis. That is partly because the Court does not care about this dispute as much as the parties do, and if the parties don't like it they can take it up with the 9th Circuit. I really do not agree that the Economic Loss rule should bar ChromaDex's fraud claim. ChromaDex very specifically alleged that Elysium plotted to cheat it and impose economic duress in ways and for purposes that were entirely outside the contractual relationship. The Court seems to be ignoring the factual context of the allegations, which involves much more than a failure to pay, and an attempt to impose harm much greater than merely breaching the contract. Moreover, the Court's legal analysis is demonstrably flawed: It is incoherent to require "personal damages" as a prerequisite to a fraud claim. Fraud is a tort aimed at causing economic loss, not personal injury.

The Court also really botched the legal analysis in three ways. First, ChromaDex was not obligated to fill the unreasonably large orders -- that's first-year Contract law. Second, the four recognized exceptions recited in Robinson Helicopter are a hodgepodge, and thus should be treated as examples, not a discrete universe of categories. Third, even outside the four Robinson Helicopter exceptions, the three criteria cited by the Court are in fact met: (1) Fraud, (2) Deceit, and (3) Intent to Cause Substantial Consequential Damages.

That is EXACTLY what ChromaDex pled, so dismissal for failure to state a claim is just plain wrong, and might be reversed on appeal -- but we'll talk about whether an appeal makes sense.

I was never a fan of ChromaDex's trade secrets claim, but if ChromaDex amends its complaint to allege a protectable trade secret (which it ought to be able to do), then we get to endure a new motion to dismiss to consider Elysium's other challenges to the pleading of this claim (Court's footnote 3).

On the other side of the equation, I am not shocked that the Court is allowing Elysium to prove that it discovered late in the game that it had been misled from the start, since that is Elysium's actual complaint even if they can't prove it yet. But boy that kind of liberal indulgence of the pleadings ought to have been applied to ChromaDex's fraud claim, too.

Allowing the Patent Misuse claim is just baffling. If you read the Royalty and Trademark Agreement, it's completely obvious that the royalties are not for use of the trademark, and so the scenario that the Court is inviting Elysium to prove runs counter to the facts that the Court is entitled to judicially notice. And anyway, what is the point of a Patent Misuse declaratory judgment in the absence of a patent dispute? The Court says, "That ChromaDex has not threatened Elysium with patent infringement is immaterial." I heard what the Court said, but I can't guess why it is true. The case cited by the Court involves an entirely different kind of dispute. Dismissing Elysium's Unfair Trade Practices claims was obviously correct -- this is a commercial dispute, not an unfair trade case. If ChromaDex appeals the dismissal of their fraud claim they might well get it reinstated, because the kind of intrigue ChromaDex is alleging is way beyond breach of contract damages, and the elements are all right there, even if you apply the standard articulated by the Court.

But what a hassle.

And especially so when Elysium is going to have to really work to actually prove for its own fraud claim that the false statement occurred, that there was reliance, that there were damages, etc.

And I can't imagine anything important coming of Elysium's patent misuse claim, given the actual circumstances.

Now that ChromaDex has announced the significant curtailing of its distributor relationships, there is REALLY no chance that Elysium will ever be allowed to distribute Niagen and PteroPure unless Elysium conditions settlement on continued access to ChromaDex ingredients.

Elysium might instead choose to continue hurling itself toward bankruptcy, with mounting legal fees and revenues that are about to fall off a cliff when it runs out of product to sell.

If I were ChromaDex, I'd appeal the dismissal and try to regain the upper hand in this litigation. If I were Elysium, I'd use this moment to try to stay in business by negotiating a position as one of the few remaining Niagen distributors. Both parties ought to want to put this behind them more than they seem to want to.

If I see anything new on the docket, I'll keep you posted.

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