Elysium's Crazy-Risky Legal Strategy
IN WHICH...Elysium reveals that its goal with the Patent Misuse claim is to establish that ChromaDex's patents "remain unenforceable" -- apparently because Elysium sells NR that is not sourced from ChromaDex. To achieve this legal end, Elysium is relying on a patent misuse claim that is demonstrably at odds with the law and with the facts, and also requires an extraordinary legal interpretation of what it takes to purge a patent misuse. Although the Court has allowed Elysium to attempt to prove the Patent Misuse, there is virtually no chance that Elysium will succeed in its proof. And when Elysium fails, nothing but the IPR proceeding will be left to protect it from any patent infringement liability that results from its alternate sourcing arrangement. (Although we do not know whether Elysium is infringing, the language that Elysium introduced in these amended counterclaims suggests that it really wants ChromaDex's patents to not be enforceable.)
Okay, so we now have Elysium Health's second-amended counterclaims, which you can read for yourself here:
Elysium filed this amended document, you will recall, because Judge Carney asked that Elysium explain why its Patent Misuse claim remains viable after ChromaDex stopped doing whatever it was that was bothering Elysium.
So the changes to this document from the prior version that I will focus on involve the Patent Misuse claim.
I must be the stupidest attorney in the world, because I have not had a clue as to why Elysium was obsessing over this bogus Patent Misuse claim. I speculated that Elysium's goal was to drive up litigation costs in hopes of settling on more favorable terms.
I had to have Elysium spell it out for me, which they did in this second amended counterclaim, and my jaw is ALL THE WAY down on the floor.
Cutting to the chase, here are the parts that blew my mind:
1. ChromaDex is the only commercial supplier of Nicotinamide Riboside:
2. Elysium sources its Nicotinamide Riboside from someone other than ChromaDex (I'm not sure how to reconcile these two mutually inconsistent statements, unless it's just sloppy lawyering by Foley):
3. ChromaDex committed Patent Misuse by forcing Elysium to sign a "Royalty-Bearing Trademark License agreement:"
4. ChromaDex failed to purge its Patent Misuse not only because Elysium has not yet been paid whatever credits might be due, but also because Elysium suffered consequential damages, including (1) Lost time value of money, and (2) Money spent on attorney fees:
5. Because ChromaDex's Patent Misuse has not been purged, ChromaDex's patents remain unenforceable (emphasis added).
To understand why this is so illuminating, and why it is so mind-blowing, we are going to have to take a closer look at the law of Patent Misuse. But first, let's double-check the procedural posture of this case.
We are very early in this litigation. The Court has not made any findings of fact or wrongdoing by anybody. These early motions are simply about clarifying exactly what the parties' gripes are about, and especially checking whether the allegations are even actionable.
So when the Court finds that ChromaDex has stated a claim for breach of contract, or that Elysium has stated a claim for Patent Misuse, the Court is NOT finding that Elysium did breach the contract or that ChromaDex did misuse its patent. It is only deciding that IF the allegations were proved, then it might be a violation of the law. So when you read Elysium's assertions that ChromaDex misused its patent, or that ChromaDex enforced an unlawful agreement, that's Elysium talking, not the Court talking.
However, I'll kill the suspense and break the news right now that the Court will not find any Patent Misuse, and you won't have to wait until the trial next year to find out why, because all of the facts and law we need to consult are already in the public record, and we'll look at those shortly.
For now, just keep in mind that when Elysium claims that, "ChromaDex's patent rights remain unenforceable," that is a compound prayer that requires two separate proofs: First, that the patent rights were EVER unenforceable, and second that they remain unenforceabler today.
Now the substance.
The RIGHTS of Patent Holder.
When a person is granted a patent for an invention, that is a legal monopoly. The purpose of the patent is to allow you to license your invention on any terms you wish, at any price you wish, or not at all. You get that limited monopoly right for 20 years from when the patent application was filed in exchange for teaching the world how to make the invention.
So when you read in the counterclaims that ChromaDex has monopoly power in the market for Nicotinamide Riboside or that it is threatening to enforce its patent rights, none of that is intrinsically wrong or troubling. In fact, that is the entire PURPOSE of patent protection. The court's job is to PROTECT ChromaDex's right to do those things, not to prevent it.
The WRONGS of a Patent Holder.
The potential problems for the would-be patent-monopolist only arise if the patent was improperly granted in the first place (which Elysium is claiming in a separate Inter Partes Review proceeding before the Patent & Trademark Appeals Board (PTAB)), or if the patent was misused in some respect (which Elysium is claiming in this proceeding).
A patent-holder can't misuse a patent just by acting like someone with a legal monopoly -- the patent-holder IS someone with a legal monopoly, and they are free to flaunt it -- for 20 years, anyway.
However, a patent-holder CAN misuse a patent if they abuse their monopoly power by, for example, requiring a customer to buy a non-patented item as a condition of receiving the patented item. So, for example, if I have a patent on an orally administrable version ofNicotinamide Riboside, and I require that you buy all of your office supplies from me as a condition of getting access to my patent, that could in theory be a misuse of the patent.
But not necessarily. As a patent owner, I can charge any price I want for my patented item, and then I could give away free office supplies with every purchase. So Courts don't just look to whether an item was tied, but also to whether there is an anti-competitive effect. This is from the Patent Law Handbook, by Lawrence Sung:
In order for competitive behavior to amount to patent misuse, one must impermissibly broaden the scope of the patent grant with anticompetitive effect. Thus, in the cases in which the restriction is reasonably within the patent grant, the patent misuse defense can never succeed. Moreover, no patent owner otherwise entitled to relief shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having refused to license or use any rights to the patent...The basic rule is that the patentee may exploit his patent but may not use it to acquire a monopoly not embraced in the patent...He may not condition the right to use his patent on the licensee's agreement to purchase, use, or sell, or not to purchase, use, or sell, another article of commerce not within the scope of his patent monopoly...(emphasis added)
In determining whether a particular licensing condition has the effect of impermissibly broadening the patent grant, the courts have noted that the patentee begins with substantial rights under the patent grant, including the right to suppress the invention while continuing to prevent all others from using it, to license others, or to refuse to license, to charge such royalty as the leverage of the patent monopoly permits, and to limit the scope of the license to a particular field of use.
So that's what Patent Misuse is and is not.
We are going to look to see whether ChromaDex impermissibly expanded its patent by forcing Elysium to purchase another article of commerce with anti-competitive effect. And if so, has ChromaDex purged any misuse.
Purging a Patent Misuse
What if a Patent Misuse occurred? The patent-holder cannot enforce the patent until the patent misuse is purged. How does one purge a patent misuse? This is the VERY subject of the current dispute! Here is what Robert Matthews' Annotated Patent Digest has to say about it:
"The effects of misuse are often deemed dissipated when the public understands that the restraints imposed by the patentee on competition no longer exist. Thus, where a patentee commits misuse by licensing provisions, dissipation can occur where the patentee replaces all of the offending licenses with new licenses and otherwise lets the industry know it can engage in conduct originally prohibited by the misuse without adverse consequence from the patentee."
Callmann on Unfair Competition says,
"...voluntary relinquishment of an illegal clause will overcome the defense of patent misuse."
So now we know what it takes to misuse a patent, and what it takes to purge a misuse.
There are two big reasons why no patent misuse ever occurred in the first place, and that is how ChromaDex will win. But first...
Was Any Patent Misuse Purged?
Even if there were a patent misuse, the purge that is required by the legal system is about ending the offensive behavior and removing the anti-competitive effects, and does not involve providing any kind of tort recovery to an offended licensee.
In fact, courts are very clear that there can be no damages recovery for patent misuse; the only penalty for the patent-holder is temporary non-enforceability of the patent, and the only remedy for the licensee is the restoration of fair competition. You don't think the law says that? Here is a federal district court saying exactly that last year:
"Monetary damages may not be awarded under a declaratory judgment counterclaim based on patent misuse, because patent misuse simply renders the patent unenforceable." Princeton Digital Image Corporation v. Office Depot Inc., 2016 WL 1533697 (USDC, D. Delaware, March 31, 2016)
By demanding compensation for every perceived consequential harm resulting from the alleged patent misuse, Elysium is essentially demanding monetary damages as a remedy for patent misuse, which is not permitted.
The Court in the same Princeton Digital case went on to state, in the very next sentence,
"To the extent [the patent holder's] assertion of the '056 patent may have constituted patent misuse, such misuse has now been purged by [the patent holder's] dismissal with prejudice of all claims against Defendants in the above-captioned suits."
Did you hear the court say that the licensee's attorney fees need to be paid? Or that the licensee needs to be made whole in any respect? Nope. The payment of consequential damages is NOT required to dissipate a patent misuse. I have found no case indicating otherwise.
So Elysium's assertions about what it takes to purge a patent misuse are REALLY novel, and they are not likely to be recognized.
Patent Misuse -- Did It Happen?
But let's get to the meat of it: Did ChromaDex misuse its patents, or not?
It did not, and there are two reasons why: Law and Fact. Let's start with the Law:
The Thing ChromaDex Allegedly Did Is Not Illegal
We saw above that ChromaDex is free to charge any rate it wants to license its patents. What it can't do is to force Elysium to buy another article of commerce with anticompetitive effect. But that is precisely what Elysium says that ChromaDex did! I excerpted it above, but read it again. Here is Elysium:
What product did ChromaDex allegedly require Elysium to buy? ChromaDex trademarks. And with what anti-competitive effect? God knows. ChromaDex has a legal monopoly both on its own patents and on its own trademarks. There is no market for ChromaDex's trademarks that could be impaired.
Once ChromaDex set the legal price that Elysium had to pay for NR, it TOTALLY does not matter from a Patent Law standpoint whether the parties structured that as license fees or patent royalties or whatever. There was no product being tied, there was no competition being impaired.
We'll see in the next section that Elysium is utterly mistaken as a matter of FACT when it says that ChromaDex tied its patent rights to a "royalty-bearing trademark license." That did not occur. But even if it did, the principles of Patent Misuse would not be implicated, because the equitable purposes for which the patent misuse doctrine was created are not implicated.
Elysium's argument is so crazy-novel that no court has EVER held that tying a patent license to a trademark license for the SAME PRODUCT was a patent misuse. Never in history. How do I know this -- did I read all 5+ million cases in American case law?
No, but I West editors did, and I searched the West headnotes for ("patent misuse" /s trademark), and it appears to have never happened. There only nine results in all of history, and most of those are incidental references to the Patent AND TRADEMARK office.
There is one case, Windsurfing Intern. Inc. v. AMF, Inc., 782 F.2d 995 (C.A.Fed. 1986) in which it was held that it was NOT patent misuse to tie a patent right to a trademark -- Requiring the licensee to acknowledge the validity of invalid trademarks couldn't be Patent Misuse unless the patent holder knew that the trademarks were invalid. So that is no help to Elysium.
A 1976 case looks, on the surface, more favorable to Elysium: Koratron Co., Inc. v. Lion Uniform, Inc., 409 F.Supp. 1019, (USDC, N.D. California. 1976) involved a patent misuse premised on the illegal tying of a trademark with anti-competitive effect!
But in fact, Koratron is the OPPOSITE of our facts, because in Koratron,
"The Court described the complex web of tying agreements that Koratron imposed on those licensees as a condition of granting licenses under its patent. The most significant of these for present purposes was the requirement that garment maker licensees agree to affix the Koratron trademark to all garments made by them under the license." (emphasis added)
In our case, ChromaDex expressly did NOT require Elysium to use its trademarks. Moreover, in Koratron there was a separate market in shirts that was being influenced with the trademarks, whereas in neither our case nor Koratron was there a market for the trademarks themselves!
A 50+ year old case, Waco-Porter v. Tubular Structures, USDC, S.D. Cal.1963), 220 F.Supp. 724, involved a trademark licensing deal in connection with a patent misuse claim, but the court found no patent misuse:
"Agreement requiring patent licensees to use patentee's trademark on patented devices, including those made by licensees, did not constitute patent misuse, in absence of showing that effect thereof was to substantially lessen competition or to tend to create monopoly in line of commerce."
And that is IT. In other words, no court in history has ever embraced the proposition that Elysium is advancing. That is, in part, because courts have not frequently encountered this claim. But the REASON they have not encountered it is because it is absurd.
In other words, requiring Elysium to license Niagen and its trademarks together would not be a patent misuse.
ON TO THE FACTS
But let us assume for the moment that tying a patent license to a trademark for the SAME PRODUCT could be an unlawful use of a patent, let's check to see if there is any reason to believe that that actually happened.
Well, one reason to believe it happened is because Elysium SAYS it happened. Let's read it again:
What's REALLY WEIRD about this scenario, is why would ChromaDex demand royalties for a trademark and yet fail to require that the trademark be used? In fact, as Elysium recounts it, the royalties were COMPLETELY UNRELATED to its use of the trademark. Here is Elysium:
Wow, that is CRAZY WEIRD!!! On the one hand, Elysium swears that this is a "royalty-bearing trademark license" and at the same time swears that the royalty obligation is "unconnected to use of ChromaDex's trademarks" and that the royalty rate "changes for reasons unrelated to use of any trademarks."
Elysium, get your story straight, please: Is this a royalty-bearing trademark license, or are these royalties NOT related to the trademark license?
It is an unsolvable mystery. There's NO WAY to know! Or wait..what if we took a few minutes to read the "Trademark License and Royalty Agreement." Look, I found it!
It LOOKS from reading it that this document embodies two separate agreements.
Sections 1-8 deal with trademark usage, specifying the terms under which Elysium may use ChromaDex's trademarks if it wishes. There is no requirement that it do so. Section 9 requires the payment of royalties on net sales. [Sections 10-12 are unrelated boilerplate.]
The word "royalty" does not appear in Sections 1-8. The word "trademark" does not appear in Section 9.
I do not see one word, not a SINGLE WORD in this agreement that suggests that the royalty payments are IN EXCHANGE for the trademarks. Why does Elysium say otherwise?
It looks instead like the parties agreed that in addition to paying in advance for Niagen via the supply agreement, Elysium would also pay a small additional amount after the sale based on net sales -- the greater the sales, the higher the royalty rate (ranging from 5% to 7.5%).
There is absolutely nothing wrong with the parties structuring their deal so that there are both upfront payments and after sales payments. There is no patent misuse involved in setting up payments entirely up front, or entirely as royalties for past sales, or as some mix.
Similarly, the trademark licensing provisions are entirely routine and non-controversial -- licensors of trademarked products routinely enforce rules about how you use their trademarks. For example, if you want to sell Mickey Mouse watches at your store, Disney will tell you the permissible ways you can use their marks. You can't draw a mustache on Mickey. You can't change the color of Mickey's eyes. You can't use your favorite font to render the word "Disney." The terms of ChromaDex's trademark license are the most routine thing in the world. It just says, if you are going to use our marks, here is how you have to do it.
So we have this strange mystery, which is that Elysium says they are paying money to use ChromaDex's trademarks, but they also admit there there is no relationship between the money paid and the trademark use, and there is no indication whatsoever in the agreement itself that that Elysium is in fact paying to license trademarks that it does not want. It looks instead like Elysium is paying a royalty on net product sales, which is totally different, and totally legal.
What is going on? I can't bear to wait until Discovery is complete to see if the parties have some other explanation for this arrangement. But we don't have to wait, because ChromaDex explained the situation in its Motion to Dismiss Elysium's Patent Misuse Claim:
Rather than payment for a trademark license, Elysium’s royalty payments are a deferred portion of ChromaDex’s compensation for the supply of NIAGEN. When first negotiating with Elysium, ChromaDex “sought to require upfront cash payments, minimum purchase commitments, royalties and even [an] equity position” in exchange for its supply of NIAGEN. (CC ¶ 44.) Because it was a start-up with “limited resources,” Elysium “could not meet” all of ChromaDex’s requirements. (CC ¶46.) The final agreement between the parties—the NIAGEN Supply Agreement plus the Royalty Agreement—memorializes the compromise between what ChromaDex wanted and what Elysium could pay, and when. Because Elysium could not pay the full cost of NIAGEN up front, ChromaDex agreed to accept a portion of that compensation in deferred royalties based on Elysium’s sales.
So ChromaDex's explanation makes perfect sense, and it is exactly consistent with the actual language of the contract.
Elysium's contrary explanation not only finds no support in the contract language, but it also makes no commercial sense whatsoever. WHY would ChromaDex charge for trademarks that it did not expect to see used, when it had no legal need to allocate the payments that way? ChromaDex could charge whatever it wanted for Niagen, and it could structure that as upfront fees or after-the-fact royalties, or both. Why involve trademarks? It makes no sense, and it is completely unsupported by the ONLY contract involved, which is in the record and judicially noticeable.
So we have found no reason to believe Elysium's story, and every reason not to believe it.
So why all my histrionics about jaw-dropping?
Here is why. I have said from the start that Elysium was going to lose on its bogus Patent Misuse claim, either because the trademark tie did not even occur (true) or because that kind of tying isn't a patent misuse (also true). Or, in any case, whatever the problem might have been, ChromaDex purged it by disclaiming its royalty rights under the Royalty Agreement.
Nonetheless, Judge Carney decided to let Elysium try to prove that ChromaDex tied its patent to a trademark in some non-competitive way.
But you, kind reader, have now seen the law and the facts, so you KNOW just how likely it is that Elysium will be able to prove that a Patent Misuse occurred: Approximately ZERO.
And if the Court eventually determines that no patent misuse ever occurred, then ChromaDex's patents not only do not "remain unenforceable," as Elysium wishes, but were NEVER unenforceable.
And yet Elysium has pretty much admitted in this new set of Amended Counterclaims that its entire business is now built on a prayer that it is entitled to "sell Basis using NR that is not sourced from ChromaDex" because "ChromaDex's patent rights remain unenforceable."
The whole world can see now that those patents do NOT remain unenforceable, and they were never unenforceable. Instead, Elysium appears to be a willful infringer, liable for treble damages under the Patent Act and maybe even attorney fees.
If Elysium were just another litigious piece of litigant trying to extort a nuisance settlement, then I'd think they were despicable, but perhaps rational. Patent trolls and inverse patent trolls make a good living, no doubt about it.
But if Elysium's whole business is not patent extortion, but is actually counting on an eventual finding that ChromaDex's patents are not enforceable, I don't see any reasonable hope that it is going to come out that way. At least not in the Central District of California. We'll see what happens before the PTAB.
That's why I say that Elysium has a crazy-risky legal strategy.
The Wheels of Justice Turn Slowly,
But They Grind Exceedingly Fine.