Elysium Opens Third Litigation Front
Well, knock me over with a feather.
On September 27th Elysium sued ChromaDex in New York federal court because Elysium does not like the petition ChromaDex filed with the FDA.
I read that petition, and I reported on that petition, not once, not twice, but three times, and yet it did not for even a moment occur to me to ask whether there might be something illegal about filing a citizen petition with the FDA alerting the FDA to test results regarding a supplement that arguably was in non-compliance with some regulations.
But unlike the clever attorneys at Skadden, I couldn't have even conjured up some theories about how it might be illegal to file a citizen petition. But THAT is how you get those last few points on law school exams that get you the A, that get you onto law review, that get you into the Big Firms, with the Big Dollars -- creative lawyering!
But before we get ahead of ourselves...
These documents I hereby liberate from PACER:
I encourage you to read them yourself because they defy summarization.
Elysium is now suing ChromaDex in three different venues for three different purposes:
1. USDC, Central District of California
Breach of Contract, Fraud, Patent Misuse
2. United States Patent and Trademark Appeal Board (PTAB)
Inter Partes Review (challenging the validity of two patents)
3. USDC, Southern District of California
False Advertising, Trade Libel, Deceptive Business Practices, Tortious Interference
Who knew, when I wrote my first legal blog last February, that the dispute I was documenting would explode into one of 2017's most vexatiously multiplied and irrational litigation fiascos!
Down into the weeds we go:
There are two levels for us to review: (1) The actual legal issues, and (2) The underlying "story" that Elysium is attempting to tell.
The actual legal issues are very boring, and stupid, and I can't believe we have to even discuss this.
The underlying story is lurid and fascinating and absurd, and we'll spend even less time on it for precisely that reason.
Now, a normal, rational person reads the First Amendment and thinks that there is some kind of Constitutional Right to PETITION the government for redress of one's grievances, and so a Citizen's PETITION to the FDA requesting that the FDA enforce its rules doesn't seem like anything actionable.
But as any lawyer will tell you, there is always an exception, especially when Skadden is back in the saddle.
SO...WHAT IF...ChromaDex's FDA petition was actually a false and misleading statement intended to smear Elysium, and what if ChromaDex was guilty of the very things it accused Elysium of doing, and what if the people involved in ChromaDex had low morals, and what if ChromaDex conspired to tell everyone about their public petition, and what if there was nothing that the FDA deems unsafe about the Toluene residue in Basis?
Even if all those things were true, you might get your federal complaint dismissed with prejudice, because it's not against the law for ChromaDex to be a hypocritical conniving a-hole, if that's what the allegations in fact are.
Now, if you just judged the complaint and the motion to dismiss based on emotional affect, rather than content, you'd probably say that the complaint was a wild-eyed, hydrophobic dog, and the motion to dismiss was a grown-up just come on to the scene.
Part of the fulminating involves the phrase "sham petition," as in, by publishing and disseminating its "sham petition" ChromaDex conveyed a false and misleading message regarding the relative safety of the two products that was highly material to consumer purchasing decisions.
That "sham petition" language is a good bit of fun (which Cooley echoes in its motion to dismiss when it refers to "Mystery NR" twelve times).
In the Central District litigation, Elysium talks endlessly about a "fraudulent spreadsheet." Reaching into the same micro-bag of rhetorical devices, Elysium's counsel have invented the phrase "sham petition" to help sustain the shrill throughout the entire performance -- the phrase "sham" occurs 71 times in 37 pages. I don't know, maybe they get off on that kind of energy in the Southern District of New York. I was taught that you were supposed to tone it down, at least in federal court.
Or maybe that's the legal definition of "sham:" If you call something a "sham" 71 times then it MUST be one. After all, no one would call it a "sham" 71 times if it wasn't actually a sham.
I am having a difficult time putting my finger on exactly what Elysium is upset about. It seems to go something like this: (my summary)
The only reason ChromaDex filed the FDA petition was to harm Elysium's business, and it DID harm Elysium's business -- 12 customers unsubscribed after mentioning toluene. So ChromaDex's petition should be treated like a false advertisement, or at least if ChromaDex tried to get the petition circulated on blogs like this one (as well as reputable blogs), then that's for sure an advertisement, and a false one. And because the petition falsely suggested that Basis was unsafe, that's trade libel, and a deceptive business practice. And we actually were thinking about finally releasing another product, something involving "Glycoside," but after reading the FDA petition, the supplier who was going to help us won't work with us, which will delay us 18 months and cost us $2.4M, and there are other supply chain partners that expressed concerns about working with us, too, after reading the FDA petition.
There is so much rage in the complaint that I'd almost think it was sincere. But (as I will describe later) I don't believe Elysium has its facts right, and even the inferences it tries to draw from those facts seem cross-wise to me.
For example, Elysium says that the false and misleading message regarding the respective safety and product quality of Elysium's and ChromaDex's competing nicotinamide riboside products conveyed by the statements in the Sham Petition is highly material to consumer purchasing decisions. Oh, look, here they are saying it:
The presence of trace amounts of toluene in the reformulated Basis was so "highly material to customer purchasing decisions" that Elysium is able to identify twelve canceled subscriptions worth about $10K that might have resulted from toluene concerns. Having Skadden file the complaint cost more than about $10K, I'd bet, so if it were me I would conclude from Elysium's showing that the information in the petition was NOT highly material to Elysium's customers. Unless that's all Elysium HAD was 12 customers, so I don't know.
Also, it's not clear to me that there are any false statements in the ChromaDex petition. When I read the petition, it said that there was a toluene residue of a particular amount, the residue is not present in Niagen, that toluene is dangerous, and that there is no safe level indicated for food. I think those are all true statements.
Elysium seems to think that the statements in the petition are misleading because some people might conclude that trace amounts of toluene represent a health hazard.
Of course, no one really knows for sure what is safe or not. Regulatory agencies are free to change their minds about such things, and they often do, as the CDC did here with respect to lead exposure in children.
And people are free to disagree with government safety assessments. I know people who are extremely risk averse when it comes to food, and who would prefer not to consume even trace quantities toluene, even if Elysium and every government agency on earth assured them that it was safe. Such people believe, rightly or wrongly, that even if the risk is infinitesimal, they would prefer zero risk, and therefore they would choose to avoid trace amounts of toluene if possible.
Incidentally, I know a LOT of people like this, who would strongly prefer a zero-toluene-residue product if it were available. These people are not relying on ChromaDex or the FDA to inform them about whether toluene traces are safe; they are relying on ChromaDex and the FDA to inform them about whether toluene traces are present. They are perfectly content to make their own judgments about safety.
So I can understand Elysium's business decision to sell a product with trace residues of toluene, and I can understand if the FDA decided that trace quantities were not a big enough risk for it to care about.
What I cannot understand is how it could be wrong to inform the public of the apparent presence of trace amounts of toluene, for those who care. And why would it be wrong to do this via a petition to the FDA alerting the FDA that an NDIN that they previously approved that covered the ingredients in the old version of Basis does not account for what's in the new version of Basis? That seems like exactly the purpose of the public forum.
Elysium says it WAS wrong, because, for example, the FDA DID set a safe limit for toluene in pharmaceuticals! And just because Toluene is unsafe doesn't mean Basis with trace amounts of toluene is unsafe! And ChromaDex once sold some Pterostilbene that had some toluene residue in it!
So? That doesn't mean what ChromaDex wrote is false. Consumers get to decide for themselves what is important; Elysium doesn't get to decide which facts are known to the public and which are suppressed.
But ChromaDex's motion to dismiss only spends a few pages discussing the substance of Elysium's allegations. ChromaDex says that Elysium has failed to state a claim for false advertising, trade libel, unfair trade, or tortious interference because:
The FDA Petition isn't an advertisement, and alerting people to the existence of the petition isn't an advertisement, so the false advertising statute doesn't apply. The unfair trade practices statute doesn't apply because there was no false statement, and because Elysium is only alleging harm to itself, not harm to the public. The Trade libel claim failed to plead malice, and inadequately connected customer concerns about toluene to any misleading statement. (I think the argument here is that if Elysium's lost customers did not want to consume trace amounts of toluene then they were not misled.) Similar fate for Tortious Interference: Elysium might have lost a supplier, but did not allege that ChromaDex even knew about the relationship or harmed the relationship by making a false or misleading statement or by other improper action.
Instead, ChromaDex spends almost all of its brief arguing that it has a legal right to petition the FDA about this, whether Elysium likes what is in the petition or not.
The three protections at issue are:
Back to law school. What was Noerr-Pennington again? Oh, yeah. Petitioning the government for legal action cannot be a violation of unfair trade laws, unless the petition was a sham.
Hence the phrase "sham petition" 71 times.
Hey Wikipedia, What constitutes a "sham?"
The Supreme Court has articulated a two-part test to determine the existence of "sham" litigation. First, such suits must be "objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits." If that threshold is met, the court will inquire whether the suit demonstrates evidence of a subjective intent to use governmental process to interfere with a competitor's business.
Elysium says the petition was a "sham" because ChromaDex didn't expect the FDA to act on the petition, and only intended to harm Elysium.
I find ChromaDex's response convincing:
Given the “serious health concern” posed by toluene, and the fact Basis is being sold without an NDIN, there was unquestionably probable cause to file a petition requesting that the FDA evaluate and investigate the issue and enforce the laws at its discretion...
Elysium fails to allege any facts from which it can be inferred that ChromaDex had no genuine interest in seeking government action. ChromaDex had every reason to genuinely seek the FDA’s action. The train of logic is easy to discern from the Complaint: ChromaDex found toluene in Basis, toluene is toxic, Plaintiff represents that Basis contains NR, Basis formerly contained ChromaDex’s NR, and ChromaDex is the only known producer of NR in the commercial market. In addition to protecting public safety, ChromaDex had a reasonable motive to preserve its commercial reputation and business by disassociating its NIAGEN® ingredient from Plaintiff’s new, and potentially harmful, Basis.
So Noerr-Pennington immunity should apply, and that should be the end of it.
I'll skip the Litigation Privilege, which provides an absolute immunity for defamatory statements made during or in anticipation of litigation.
What's really interesting to me is the Anti-SLAPP argument.
SLAPPs are Strategic Lawsuits Against Public Participation. A SLAPP is a lawsuit that is intended to censor, intimidate, and silence critics by burdening them with the cost of a legal defense until they abandon their criticism. Twenty-eight states have anti-SLAPP laws, including New York, but not the federal government.
In this case, ChromaDex argues that New York's anti-SLAPP law applies because Elysium, as a supplement seller, has some obligations to the FDA, and this lawsuit against ChromaDex is related to an attempt by ChromaDex to report on, comment on, or challenge Elysium's execution of its obligations to the FDA.
That shoe seems to fit. If the Anti-SLAPP statute is found to apply and to have been violated, then ChromaDex could recover its attorney fees -- although the motion does not request attorney fees, and only asks the court to throw out Elysium's case.
It is hard for me to read Elysium's complaint without the vertigo feeling of having stepped into some alternate universe. If I understand Elysium's factual recitation correctly, the world looks like this:
1. ChromaDex did not just license some patents and attempt to take products to market, which is how patents are supposed to work, and what Patent Law is designed to assist; instead, ChromaDex is an arrogant monopolist with a stranglehold on the worldwide supply of NR.
2. ChromaDex did not decide that for a variety of reasons its third-party distribution strategy was not working well (too many distributors, inadequate retail price maintenance, and at least one distributor that placed a big order and then refused to pay); instead, spurred by the loss of its largest distributor, ChromaDex was forced to become its own distributor.
3. I'll just quote the the complaint: "Its patents at risk and its relationship with its largest customer in shambles, ChromaDex sought to undermine Elysium to pave the way for its own competing nicotinamide riboside product." And hence the FDA petition, to undermine Elysium.
4. According to Elysium, Elysium WANTED and "sought over several months to work in good faith" to resolve the amount of credits or refunds that ChromaDex might be owed, whereas ChromaDex only wanted to fight.
5. "ChromaDex (was) forced, in earnings call after earnings call, to defend its disappointing financial performance resulting from the loss of Elysium, formerly its largest customer. Beyond these slumping sales..."
Actually, I'm just going to stop there. There's more, but this is too crazy.
1. Arrogant Monopolist
I said this before, but it is relevant again here: 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 Elysium complains here about "ChromaDex's control over the worldwide supply of NR," or that "ChromaDex CEO Frank Jaksch has regularly stated, 'I am NR,'", those are features, not bugs. If patents did not confer monopolies, or if inventors like Professor Charles Brenner and patent assignees like Dartmouth College were not able to effectively assign their exclusive patent rights to businesses like ChromaDex, then important inventions would not be brought to market.
There are such things in the world as arrogant monopolists, but those are people who have cornered markets and have illegal monopolies, the kind that the Sherman Act busts up. Patent licensees are playing by the rules, and the court's job is to PROTECT ChromaDex's ability to commercialize the patents that they license. So the suggestion here that licensing an exclusive patent right reflects baldy on the licensee ("ChromaDex has long relied on its patents to maintain its stranglehold on the nicotinamide riboside supply market" (emphasis added)), I think, constitutes overly aggressive lawyering and misrepresents what is going on.
2. Spurred to Enter the Market
The idea that ChromaDex forced the end of the Elysium relationship seems counterfactual, simply because of the actual chronology: ChromaDex filled Elysium's final order -- it was Elysium that refused to pay.
But at a deeper level, I never got the sense of strategic panic from ChromaDex. ChromaDex had had plenty of willing distributors -- arguably too many. Now check out this provision of the Niagen Supply Agreement, signed February 3rd, 2014:
Translating the legal-speak, this says, "Elysium did not negotiate a long-term supply agreement. ChromaDex can simply cut Elysium off as a distributor effective February 3, 2017, for any reason or for no reason, by giving written notice on or before November 5, 2016." The actual notice of termination was sent on October 31, 2016.
Once you realize that ChromaDex had the contractual right to turn off Elysium's Basis in the fall of 2016, for any reason or for no reason, then it makes more sense that ELYSIUM would be the party in a strategic frenzy, and would be desperately placing huge orders, and -- if they believed that ChromaDex was going to cut them off anyway -- refuse to pay.
So I absolutely do not buy the factual recitation that the loss of its largest distributor spurred ChromaDex into competing with Elysium. The exact opposite seems more likely to me -- faced with the imminent loss of its supply, Elysium chose to stop being a distributor.
But in particular it is strange to read that ChromaDex was spurred to enter the NR market "in competition with Elysium." Manufacturers compete with their channels all the time -- Apple sells computers direct, but also through Walmart and Best Buy. ChromaDex still has distributors, and there is nothing strategically unusual about opening a direct-to-consumer channel. What's weird is that Elysium thinks that they get to compete with a patent licensee, by selling the same product, only without licensing the patent. So it's kind of backwards again -- ChromaDex isn't trying to compete with Elysium; Elysium is trying to compete with ChromaDex.
3. Patents at Risk
I also do not recognize the factual scenario that Elysium spins when Elysium says, "Its patents at risk and its relationship with its largest customer in shambles, ChromaDex sought to undermine Elysium to pave the way for its own competing nicotinamide riboside product."
I honestly do not think that that is how ChromaDex views the world. I don't think ChromaDex has ever thought its patents were at risk. And if my hunch is right, ChromaDex was planning to legally, contractually terminate Elysium's supply ANYWAY, so what Elysium is describing as "shambles" and "risk" I think was for ChromaDex just how they were executing their business plan.
I see no evidence whatsoever that ChromaDex felt like it needed to "undermine Elysium" in order to succeed.
On the contrary, from ChromaDex's standpoint, Elysium's mere PRESENCE in the market was not a problem. First, to the extent that Elysium is busy marketing NR, that helps everyone, including ChromaDex, as long as that continues. Second, to the extent that Elysium either ran out of supply or was unable to find an alternative legal supply, Elysium's continued presence was not a long-term possibility. Or, third, if Elysium intended to compete by willful infringement, the law is perfectly capable of resolving that situation -- no drastic self-help measures would be necessary.
So Elysium's story here that ChromaDex had some desperate need to undermine Elysium, which would cause them to file an FDA petition for an improper purpose, just strikes me as batty.
ChromaDex has explained two perfectly reasonable motivations for the petition -- (1) The company has peculiar expertise in ingredient purity and cares about public health, and (2) "ChromaDex had a reasonable motive to preserve its commercial reputation and business by disassociating its NIAGEN® ingredient from Plaintiff’s new, and potentially harmful, Basis."
IF ChromaDex understood itself to be in some desperate position with respect to its intellectual property and its market, then you can start to imagine it would be tempted to make desperate and improper moves to remove its vulnerability. But I don't think that's what's motivating ChromaDex at all, and I can't find any facts that suggest otherwise.
What I think is going on -- no special knowledge here, just my intuition -- is that ChromaDex finds itself with a competitor that is purporting to sell a very-similar-but-different product (NR), with a significant risk of confusion because until recently it WAS the same product (ChromaDex Niagen), and ChromaDex has a sincere and legitimate business interest in advancing the public interest by giving the market accurate sourcing information. That allows my friends decide for themselves whether they care about trace residues or not (public interest).
That is also why it is ironic that Elysium would be raising a Lanham Act section 1125(a) claim. Here is the Lanham Act provision that governs Elysium's false advertising claim:
The Lanham Act is a trademark law, significantly concerned with accurate sourcing of goods. In my view, the whole point of what ChromaDex is doing is about advancing the concerns animating the Lanham Act, not violating it.
4. Work in Good Faith
Elysium also advances as a factual claim that it tried really hard to resolve the credits/refund issue resulting from its MFN claim, but that ChromaDex refused to talk. That may be so; I wasn't there. But Elysium's behavior since then has been quite the opposite -- ChromaDex has consistently offered to enter into settlement talks, and Elysium has asserted that it was premature (See, e.g., Rule 26(f) conference report filed March 28, 2017 ("ChromaDex has offered to immediately mediate this case. Elysium has indicated that mediation is premature in its view"), and August 25, 2017 ("ChromaDex has offered to promptly mediate this case. Elysium has indicated that mediation is premature in its view.")
5. Slumping Sales
And then we have this factual recitation:
"ChromaDex (was) forced, in earnings call after earnings call, to defend its disappointing financial performance resulting from the loss of Elysium, formerly its largest customer. Beyond these slumping sales..."
I was on those calls; that's not how I read it. My understanding was that sales were going great. There were no "slumping sales." My understanding was that Elysium was selling millions of dollars worth of ChromaDex ingredients; it just was not paying for those ingredients, which was a legal problem, being handled by legal counsel.
To the extent that Elysium's non-payment suggested a problem with ChromaDex's business model, it was the over-reliance on third-party distributors. So here, Elysium is trying to convince us of ChromaDex's desperate state of mind -- "existential threat," "destabilization," "fading business" -- but what the evidence shows, to me, is that ChromaDex had every rational reason to change its distribution strategy, and ChromaDex's behavior is completely explained without needing to conjure a fictional mindset of desperation.
My guess is that the Southern District of New York will grant ChromaDex's motion to dismiss on immunity grounds without a whole lot of discussion. But I have been wrong before, so we'll see.