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  • Shelly Albaum

What a [Poorly Reasoned] Opinion


Preamble

It pains me immensely to write this blog article, which will attempt to shed some light on the chaos that is the court's opinion in ChromaDex v. Elysium.

It's not troubling because anything bad happened to ChromaDex; I will explain to ChromaDex fans why ChromaDex did not misuse its patent -- but more importantly, the remedy for patent misuse is that the defendant has to make up for any harm caused -- or, to quote the legal standard, "rendering the patent unenforceable until the misuse is purged." (B.Braun, 124 F.3d 1419.)

For absolute clarity, what that means is that a finding of patent misuse doesn't invalidate the patent; it just means you can't enforce it until you've set things right. In the context of Elysium's claim, that would involve some adjustment of the royalties owed.

But trust me, the patent isn't even going to be rendered unenforceable, because, putting aside all the procedural garbage, ChromaDex did not do anything wrong with their patent.

Introduction

Since I don't like the opinion, you might think I have harsh thoughts for His Honor Cormac Carney, former star wide receiver for the UCLA Bruins, who was appointed to the federal bench by George W. Bush. This was perhaps not Judge Carney's finest moment, but Judge Carney is not really the problem here.

You might also think that I am pissed at Skadden for zealously stirring up enough mud to ensure that both parties get to keep spending on attorneys endlessly and pointlessly. Reading those briefs doesn't make me proud to be a lawyer, but Cooley doesn't have entirely clean hands here, either.

The problem is with the litigation system itself, which set up the following insane outcome:

Two litigants each spent something like $500,000 each -- a MILLION dollars -- to perform Olympic class legal gymnastics, and they did it for an empty stadium.

The Heart of the Matter

The parties are free to pay their attorneys to spend a thousand hours stirring up a legal whirlwind, but nobody paid Judge Carney a million dollars to sit and read through all that stuff and make sense of it.

What the parties' briefs revealed is basically that the governing law is in a state of chaos. That's why we get exchanges like this:

Elysium: If you want to assert a claim for trade secret theft, you have to allege damages. Here is a case that says that (citing Cytodyn, Inc., 160 Cal. App. 4th at 297, which does in fact say just that.)

ChromaDex: Nuh-uh, you're wrong, you don't have to allege damages. Here are two statutes and a case that say we are right (citing At. Inertial, 545 F.Appx at 601, and the state and federal statutes, which do in fact say just that).

Now they can't BOTH be right, but what's a judge to do? There seem to be conflicting authorities, and a prudent judge would realize right away that it would take quite a bit of research and jurisprudence to sort things out. And you don't get paid extra to do it, and this is just a stupid garden variety commercial dispute that isn't getting into the newspaper (contempt for Right of Assembly Blog noted), so you can burn the midnight oil, or just pick a side and be done.

The Elements of a Trade Secret Claim

For some reason I have free time on my hands, and access to Westlaw, so unlike Judge Carney, I can get to the bottom of it. Here's what actually happened on that particular issue, Whether you have to allege damages to assert a trade secret claim:

So Elysium (Skadden) said that damages are required, and cited Sargent v. Fletcher. Sargent v. Fletcher said exactly the same thing, but cited Frantz v. Johnson & Total Care v. O'Hara, which were Nevada and Delaware cases (respectively), and thus not mandatory authority in California. Moreover, the holdings all the way through were dicta, which means they were just reciting it as background information; it wasn't actually decided in the case.

That means Elysium offered weak authority for its position, but you wouldn't know that if you didn't dig all the way in.

By contrast, ChromaDex cited a Ninth Circuit opinion (that's mandatory higher authority!), and the Ninth Circuit case specifically decided that the lower court made a mistake by requiring a showing of damages when the statute specifically allows a recovery of a "reasonable royalty" when there is no showing of damages. In the law, statutes trump cases, and the Ninth Circuit took the time to read the statute.

The problem is that the parties' 150+ (looking at you Cooley for that plus-sign)(jk) contain scores of such finessed disputes, and worse, too (I'll show some examples further down). If Judge Carney and his clerks took the weeks necessary to sort all this out there never would have been an opinion, and no other work would have gotten done in the courts, either, at least for most of the rest of this year.

So we are living in a world where one can choose from among five million cases and find some authority for just about any statement under the sun. And then when Cooley points out that the cited authority is bizarre, Skadden starts barking like a pack of pit bulls and foams out twenty more bizarre authorities.

It's perfectly legal. It's what they are paid to do. And who can blame Judge Carney for not wanting to be the one to figure out that all the federal district courts in California have been parroting bad law that was imported from Nevada and Delaware. In this particular instance, Judge Carney would have had to have overruled one of his own prior cases, because His Honor the parrot said in Teva v. Health IQ, "The elements necessary to state a claim for trade secret misappropriation in California are: “(1) possession by the plaintiff of a trade secret; (2) the defendant's misappropriation of the trade secret, meaning its wrongful acquisition, disclosure, or use; and (3) resulting or threatened injury to the plaintiff.” Wrong.

The reason we now know that's wrong is because we read the statute and there is a Ninth Circuit case actually deciding that issue and not just spreading an epidemic of bad dicta. But Judge Carney in Teva copied it from Judge Rushing in Silvaco, who cited no case at all and did not consider the issue of "resulting or threatened injury" in that case. Now you might be expecting me to show how Judge Carney ruled incorrectly on this issue in the ChromaDex-Elysium dispute, but he did rule incorrectly. He did not rule at all. He ignored it entirely, and dismissed the trade secrets claim for some other reason.

I can't take you through every one of these mud pits that Skadden and Cooley dug for each other, for the same reason that Judge Carney would not venture in -- life is too short

But the idea that the parties paid a million dollars to set up all these confounding issues and nobody bothered to seriously consider them shocks the conscience, and feels an awful lot like money being set on fire.

Of course Judge Carney did not turn away from every legal issue. He decided some correctly, some incorrectly, most were ignored, and none were treated to a great deal of analysis.

The two key issues that got screwed up, in my opinion, were Elysium's Patent Misuse claim and ChromaDex's Fraud claim. I will outline what happened with both of those and why it was obviously wrong.

Elysium's Patent Misuse Claim

Elysium's patent misuse claim is nonsense for a variety of reasons.

On the facts alone, ChromaDex did not do anything wrong. There is an agreement called "Trademark and Royalty Agreement," but the "and" is truly disjunctive: The agreement governs trademark use, and it governs royalties. It does NOT charge royalties for the use of trademarks. That's plain from reading it, and the judge was free to read it and take judicial notice of the plain language, but chose not to. So that's just the facts.

From a legal standpoint, this claim is also nonsense. Assuming for the sake of argument (which Judge Carney did) that ChromaDex did indeed charge a royalty for the use of its trademarks, that still would not be illegal. The argument between the parties went something like this:

Elysium: You misused your patent by forcing us to buy an additional, non-patented product as a condition of buying your patented product. The extra product was the trademarks for Niagen.

ChromaDex: That's silly. The royalties weren't for using the trademarks, you know that. And besides, The trademark isn't a separate product with a separate market, so there was no harm to competition. And anyway, patent misuse is an affirmative defense to trademark infringement, which we're not alleging. You broke the rules by putting an affirmative defense in your complaint. Someone had to pay a fine for doing that once.

Elysium: Who says a trademark isn't a separate product? And besides, harm to competition isn't the legal measure; the legal measure is whether the patent was extended, even if there was no anti-trust violation. And because this is a Declaratory Judgment action, we can raise any issue and we don't have to allege anything at all besides a controversy: read it and weep.

Judge Carney: Yeah, what Elysium said.

Now ChromaDex is dead right on all of this. First, there is no case anywhere that has ever found patent misuse by tying a product and its trademarks. That's just made up. I guess it could theoretically be true, but the cited cases do not show it.

Most of the case law says that the law of patent misuse and the law of antitrust have almost completely merged. Here is Linzer Products v. Sekar, which Cooley cited and Judge Carney disregarded:

"Patent misuse, which developed long before the advent of antitrust law, has largely merged with antitrust law. “Misuse is closely intertwined with antitrust law, and most findings of misuse are conditioned on conduct that would also violate the antitrust laws.

Or if Judge Carney did not disregard this case, then he must have jumped on the word "MOST," and concluded that it was possible to find improper conduct that did not violate the antitrust laws. And perhaps there is, but that doesn't mean that anything Elysium doesn't like is against the law -- there still has to be a legal standard, and Judge Carney did not say what it was or why it was met.

Instead, Judge Carney got misdirected by Skadden's citing the Declaratory Judgment statute and claiming that nothing need be alleged but a controversy to sustain any Declaratory Judgment action.

If you follow Judge Carney down the rabbit hole he dug for the parties, any controversy can justify a Declaratory Judgment action, any thing can be tied, and anything can count as tying. Therefore, any controversy over any allegedly tied thing that extends a patent in any way gets a trial.

Except for this case, ChromaDex v. Elysium, the law does not say that (or the law would be an ass).

On the issue of tying the trademarks, ChromaDex said that Elsyiums doesn't have to use them and doesn't have to pay for them; the payments relate to sales of products. Judge Carney's response is very deaf:

When ChromaDex said that the use of the trademarks was wholly optional, the point was that they were not the subject of the royalties. Judge Carney's non-sequitur response is, "This argument fails because Elysium does not complain that it was forced to USE the licensed trademarks, only that it was forced to BUY the license for the trademarks." That may well be Elysium's complaint, but it is demonstrably untrue, that that's why this is NOT sufficient for a trying claim.

Same problem with separate product analysis:

ChromaDex points out that that the trademarks are not a separate PRODUCT. Judge Carney's non-sequitur response is: "The patents are wholly SEPARATE from the trademarks," without addressing whether the trademarks are "products" at all for purposes of a tying analysis. Here is the leading Patent Court in the nation, the Federal Circuit, in Senza-Gel, stating:

"A tying arrangement cannot exist unless two separate product markets have been linked." The Senza-Gel court is quoting the US Supreme Court, so just asserting that Niagen and its trademark are "entirely different" doesn't establish that they are different products, with separate markets, which have been linked.

It's just crazy how Judge Carney's opinion ignores the law.

Economic Loss Rule

Do you want to go through the Court's analysis of the Economic Loss Rule, by which it improperly dismissed ChromaDex's fraud claim? It's just as crazy.

The Economic Loss Rule bars tort claims (like Fraudulent Deceit) when the underlying facts only involve a breach of contract. For example, if you and I contract to do some business, and I say I will pay my bills, but I was lying and I knew I wouldn't, that's not fraud, that's just breach of contract.

That's what Elysium says happened in this case -- it placed an order, and even if it did not intend to pay for the order when it placed it, that's just a breach of contract.

In order to get past Elysium's position and the Economic Loss Rule, ChromaDex has to show that Elysium's actions and ChromaDex's response were outside the contract, in addition to the contract, and created additional harm beyond merely not getting paid under the contract.

ChromaDex alleged precisely that by asserting that Elysium placed a huge, unreasonable, unanticipated order that it would not have had to fill under the contract (because it was inconsistent with the parties' expectations). The only reason ChromaDex DID fill the order (it alleged) is because of additional statements by Elysium that were intended to deceive (that demand was ramping up and they'd be ordering more soon), and that ChromaDex suffered harm outside the contract (that it was made financially vulnerable and forced to take on extra risk).

Anyone watching from the bleachers knows that this was no ordinary breach of contract. It was arguably an attempt to destroy ChromaDex, or weaken it so that it might be susceptible to takeover, and involved poaching.

ChromaDex cited case law showing that even if it was obligated to fill Elysium's requirements, it would NOT have had to fill a large order like this.

Elysium's strange response was that the contract was NOT a requirements contract. I call that a strange response because if it wasn't a requirements contract, then it was no contract at all. All first-year law students know that a contract is not valid if the material terms are not identified, and the amount to be ordered is a material term. The law makes an exception for requirements contracts, but only for reasonable requirements.

But if this wasn't a requirements contract, then it wasn't any contract, and if it wasn't any contract, then the Economic Loss Rule wouldn't apply, and the Fraudulent Deceit claim would be a slam dunk.

Here is how Judge Carney handled it:

"Elysium's purported statements were simply reassurances and representations incidental to the contract to induce ChromaDex to fill orders that it was already obligated to fill under the agreements."

As we have seen, ChromaDex was NOT obligated to fulfill such orders, whether it was a requirements contract or not. Judge Carney does not explain why the normal law of contract does not apply to ChromaDex. He just ignores the issue entirely -- ignores the law entirely.

It's just as bad on the Economic Loss Rule. Here is Judge Carney:

"A TORTIOUS breach of contract may be found only when (1) the breach is accompanied by a traditional common law tort, such as fraud or conversion (CHECK!), (2) the means used to breach the contract are tortious, involving deceit or coercion (CHECK!), or (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages (CHECK!)." (emphasis added)

The allegations fit the cause of action like a glove, because Cooley knows what it's doing, and it's not that hard a claim to spell out, especially under these circumstances. Apparently Judge Carney decided in his mind that this was a breach of contract case, and then disregarded contract law and his own cited cases, as well as the complaint.

I have a lot of other complaints about this part of the opinion -- there are other parts of Robinson Helicopter that Judge Carney seems not to have credited adequately, and the same with Erlich.

But you get the picture. To go through every aspect of every argument and every cited authority in this level of detail -- which the parties did! -- would take 1,500+ hours of Judge Carney's time, which is just not going to happen.

I conclude:

(1) our litigation process is incredibly broken;

(2) the parties paid big money to have a judge resolve their dispute and did not get their money's worth from the judge, and

(3) If ChromaDex appeals either of these rulings that I am bitching about, the Ninth Circuit will probably rule favorably, because reviewing shoddy judicial work is what the Ninth Circuit does for a living, and it's not that hard to see the errors in Judge Carney's opinion.

HOWEVER, ChromaDex is NOT going to appeal at least the Patent Misuse dismissal, because yesterday ChromaDex filed an answer to Elysium's counterclaim that effectively destroys the patent misuse claim by rendering it moot. This was a smart move (more kudos to Cooley). But you'll have to wait until tomorrow's blog entry to read more about it.

#Litigation #ChromaDex #CDXC #ElysiumBasis

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