Ad Hoc Lawyers Roundtable -- How Does Elysium Have a Fraud Claim?
While we are waiting for Elysium to amend their complaint so that Judge Carney can decide how it might be possible to assert a patent misuse claim when the predicate for the misuse no longer exists, let's pause for an ad hoc lawyers roundtable meeting so you can hear somebody besides me evaluate one of the claims that Judge Carney is allowing Elysium to try to prove: Fraudulent Inducement.
I wasted all this money going to law school, only to find that even the most basic "first year" legal principles can be ignored by a federal judge.
That is, at least, how I have sometimes felt watching the ChromaDex/Elysium litigation.
But the more likely explanation is that I am crazy, not the judge. So I thought I would check with some other lawyers to see if they think I am crazy, too.
I found a lawyers-only, anonymous general discussion group and asked the gang what they thought about Elysium's fraudulent inducement claim against ChromaDex.
You will recall that Elysium is primarily upset about two things*. First, they were promised the lowest price and they believe they did not get it. The actual contract language says, Elysium gets the lowest price "provided Elysium Health purchases equal volumes or higher volumes than the third party." ChromaDex says someone else placed a bigger order, and so we will find out in discovery who is right.
Second, Elysium is upset that they were required to sign a Trademark License and Royalty Agreement (TLRA) even though they do not want to use the Niagen or ChromaDex trademarks.
Based on the requirement that Elysium sign the TLRA, Elysium proffers a bogus Patent Misuse claim, which we will not discuss, and a bogus fraud claim, which we will discuss.
The fraud claim goes like this: ChromaDex said during negotiations that it required all of its customers to sign TLRA agreements, but in fact we know that one customer that predates Elysium was not required to sign such an agreement. Here is the actual claim in the complaint so you can read it yourself:
I call this claim "bogus" for two reasons:
First, ChromaDex's present statement of the terms on which it does business cannot be falsified by showing that in the past or future it enforced different terms.
Second, a bargaining position taken during negotiations cannot be deemed fraudulent just because the party changes their mind later; otherwise, every settlement negotiation that begins, "I won't settle this for less than $1M," would become the foundation for a later fraud claim if the person subsequently decided to settle for $500K.
So I asked my ad hoc, anonymous legal community whether a present statement of the terms on which a firm does business contains an actionable implied representation that it has always been so. I simplified the scenario thus:
A runs a lemonade stand. B wants lemonade. During lengthy arms-length negotiations, B demands a discount, and also wants the lemonade delivered in special containers. A refuses, saying, "We don't give discounts, and we don't do special containers." They sign a contract that provides B with no discounts and no special containers.
Years later, B learns that (1) a few months before negotiations, A provided a discount to another customer, and (2) a few months after negotiations A allowed delivery in special containers.
I have a federal judge who says B stated a claim for Fraud.
I feel like I am failing a first-year torts class. Either it isn't fraud because a negotiating position isn't an assertion upon which one can have reasonable reliance, or it isn't falsifiable because A is authoritative on present policies, which can't be disproved by showing past or future policies.
A spirited discussion among the attorneys resulted in this top comment (12 upvotes):
Seems like either you're leaving something out or the judge got it horribly wrong. If it's the latter, appeal that ish.
Here are some other comments:
1. Sellers change prices and delivery terms all the time. If a buyer accepts, they've got no recourse. Don't want it? Buy from someone else.
2. What is B claiming? That if he knew A had previously supplied a discount (doesn't mean he would do so later) and that A would later provide it in special containers (doesn't mean he would have done so earlier), he would have somehow forced A to do so with better negotiation? I can't imagine how this could be actionable as fraud. The person got what they bargained for.
3. Where's the duty to provide any kind of accurate information on how you sell your item? It's certainly commercially important that you would provide better terms if the other person negotiated harder. But it's not fraud, just as in this example it wouldn't have been fraud if at some point during negotiations the buyer said "I won't purchase unless you provide a discount and special containers."
One attorney offered a longer analysis:
This is infuriating.
Was [A] talking to [B] and the other customer at the same time, walking back and forth between rooms? If not, go pound salt. Did [B] offer to purchase the same or more volume, under the identical packaging, payment and delivery terms as the prior customer? That's sounds like starting point, but - go pound salt because [B]'s circumstances are only half (actually 25%) of the equation.
Was the production running at the identical capacity as with the prior customer? Is this a closely held company where the shareholders have changing financial needs from the company? Did [A] have an informal or formal policy shift - for any reason? Sure as hell did, go pound salt!
Was the old customer a long-term or favored customer or guy in a tough spot who needed something to get his business going? What's wrong with doing another customer a favor you're not willing to do for everyone!
I know that just opens the door for the dispute but it just shows this judge has never owned a business or been in any sort of management position. Price discrimination is standard practice and shouldn't be questioned by someone sitting on a bench.
The bench needs to step away from this one. I can accept some legislating from the bench but codifying some sort of negotiation principle like this? Give me a break.
The judge is really stepping into a world of hurt here.
One commenter thought it was a really weak claim, but could survive a 12(b)(6) motion -- but this commenter's reasoning is mistaken, because it invokes a consumer sales transaction context (car dealership) that is subject to different rules than a commercial distribution agreement:
Well, if A lied about their business practices and what they do and don't actually offer to their customers, that seems to be a misrepresentation of a material fact. Am I missing something? If you go to a car dealership and ask for a discount, and they tell you "oh, we never give discounts, everyone pays sticker price," and then you can prove that they actually have given discounts to other customers recently... wouldn't that be enough to at least survive a 12(b)(6) motion?
It doesn't seem like a strong claim, but I probably wouldn't dismiss it on 12(b)(6) or demurrer if I were the judge. I don't do a lot of work on fraud--I actually just recently filed my first ever complaint alleging (among other things) fraud--but it struck me when I looked up the elements that it seems pretty easy to allege a claim, and probably much harder to prove it.
If my scenario accurately reflects Elysium's complaint, and if you believe in the wisdom of crowds, then the Central District of California is not on very strong ground here.
* Elysium also asserts a bogus good faith and fair dealing claim that we haven't discussed too much that asserts that Pterostilbene and Resveratrol are so similar that ChromaDex's obligation not to allow other suppliers to combine Niagen and Pterostilbene also prelcuded ChromaDex from allowing other suppliers from combining Niagen and Resveratrol. This claim is ridiculous and laughable because the whole point of Pterostilbene is that it has higher bioavailability than Resveratrol -- in other words, Pterostilbene works and Resveratrol doesn't, which makes the two significantly different, not significantly similar. Elysium's argument that the two substances are chemically similar is shameful sophistry calculated to prey upon technologically naive lawyers. Water and Hydrogen Peroxide are chemically similar -- H2O versus H2O2. Just adding that one little Oxygen molecule changes it from essential to life to poisonous. Obviously "substantially similar" should be measured by its effects, not its structure, which is why I call this claim bogus.