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  • Shelly Albaum

Discovery Dispute!


We have our first Discovery Dispute in the ChromaDex v. Elysium litigation in the Central District of California.

Discovery disputes are mundane and arcane affairs. The District Judges typically won't deal with them, and instead such matters are referred to a Magistrate Judge to sort out (Hon. Douglas F. McCormick, in our case).

So the format of this dispute isn't the Motion/Opposition/Reply that we're used to seeing. Instead, all of the contentions and disagreements are woven together in a single document with appendices.

Read it yourself, don't rely on me:

Joint Declaration Regarding ChromaDex's Motion to Compel

In case you did not complete your 45-page joy ride through Discovery standards, the gist of it is as follows:

ChromaDex is requesting that Elysium produce information that Elysium does not want to produce. Therefore, ChromaDex has filed a motion to compel production.

Specifically, ChromaDex would like Elysium to reveal:

  • All Documents Concerning Your representations, implicit or explicit, to any Person Concerning the supply chain for Your product Basis.

  • All Communications Concerning Your representations, implicit or explicit, to any Person Concerning the supply chain for Your product Basis.

  • All Documents Concerning Your inventory of NR

  • All Communications Concerning Your inventory of NR.

  • All Documents Concerning any efforts by You to obtain a supply of NR from any Person(s) other than ChromaDex.

  • All Communications Concerning any efforts by You to obtain a supply of NR from any Person(s) other than ChromaDex.

  • All Documents Concerning Your consideration of NR and/or pterostilbene not sourced from ChromaDex for inclusion in Your product Basis.

  • All Communications Concerning Your consideration of NR and/or pterostilbene not sourced from ChromaDex for inclusion in Your product Basis.

  • All Documents Concerning the supply chain for Your product Basis.

Why does ChromaDex believe it is entitled to this information?

It mostly turns on one of Elysium's breach of contract claims. Elysium claims that ChromaDex improperly allowed or encouraged others to sell Niagen combined with Pterostilbene or Resveratrol (which Elysium contends is substantially the same as Pterostilbene).

ChromaDex says that it didn't do that, but any Elysium damages would be limited to the amount of additional sales lost as a result of the presence of any forbidden combinations on the market. And if Elysium did not have the ability to fill any orders anyway because it ran out of Basis, then there would not be any damages. So a critical step in calculating damages, says ChromaDex, would be understanding Elysium's sales capacity.

Elysium thinks the language in the requests is too broad (probably right), but also claims that Elysium's ability to obtain an alternative supply does not matter, because ChromaDex was contractually obligated to supply Elysium.

Elysium's suggestion that it did not need to find an alternate supply because ChromaDex was contractually obligated to supply it with Niagen strikes me as jaw-droppingly specious, and just what we've come to expect from Skadden.

Any first year law student knows that if you materially breach a contract, then the other party is relieved of its obligation to perform. There is no doubt that Elysium has been in material breach of the contract. End of discussion.

The dystopian world Skadden posits here, that Elysium never has to pay its bills but ChromaDex is still obligated to keep filling Elysium's orders, is not how the law operates.

But then Skadden doubles down on un-reality by suggesting that ChromaDex's statement in its pleadings that it is the sole commercial supplier of NR is a binding judicial admission that prevents ChromaDex from suggesting that Elysium might in fact have another supplier.

If it were me, I would shoo Skadden out of the courtroom with a broom for making that kind of argument. Skadden always makes me glad that I was never smart enough to get a job working in a big law firm.

You can read the back-and-forth yourself, if you have 45-pages worth of nothing-to-do in your life; it's very boring.

But I would like to highlight one particular exchange.

Elysium says,

Notably, ChromaDex has in its answer to interrogatories admitted to conduct that violated the Exclusivity Provision. (See ChromaDex’s Responses & Objections to Elysium’s First Set of Interrogatories, attached to the Declaration of Michael M. Powell (the “Powell Declaration”) as Exhibit A, at Response No. 6.) All that remains with regard to this claim, therefore, is to determine the full extent of ChromaDex's breach and the amount of harm it caused Elysium. (emphasis added)

That struck me as unlikely, so I checked Exhibit A, Response No. 6, and it is lengthy, but here is my summary:

The exclusivity provision became effective on February 9, 2016. Before then, ChromaDex had been permissibly selling both Niagen and Pterostilbene to a number of distributors, including Life Extension and FIRST Nutrition, ChromaDex says it told each distributor that once their current supply ran out they would no longer be able to combine the ingredients.

ChromaDex also says that when it discovered that Nordic Clinical was combining the ingredients about two months after the exclusivity period began, it told them to stop. ChromaDex also asked four distributors -- Nordic Clinical, BPI Sports, MAAC10, and Thorne -- not to combine Niagen with Resveratrol, at Elysium's request, even though ChromaDex disagrees that Pterostilbene and Resveratrol are substantially similar.

You might not believe ChromaDex -- maybe it did not happen that way -- but I have a hard time interpreting that interrogatory response as "admit(ting) conduct that violated the Exclusivity Provision." It seems to me that ChromaDex's account is at least as consistent with honoring and enforcing the Exclusivity Provision.

As an attorney, I am an officer of the court, and I am well aware of my obligations of candor with respect to judicial proceedings.

In general, courts try to strike a balance between allowing both creative lawyering and the aggressive representation of a client's interests, and yet NOT tolerating irresponsibly false accounts that undermine the judicial process and waste people's time.

Rule 11 of the Federal Rules of Civil Procedure relates to papers filed with the court, and attorneys are responsible to make a "reasonable inquiry" into whether the facts and the law are as represented in their papers:

(b) Representations to the Court. By presenting to the court a pleading, written motion, or other paper—whether by signing, filing, submitting, or later advocating it—an attorney or unrepresented party certifies that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances:

(1) it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation;

(2) the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law;

(3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and

(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or a lack of information.

The Court also has inherent authority to sanction attorneys for abusing the litigation process. The US Supreme Court earlier this year clarified how that power gets used (mostly you get your attorney fees paid to make up for the time wasted; it's not supposed to be punishment). There is also a federal statute, 28 USCA § 1927, that allows the recovery of fees and costs if an attorney vexatiously multiplies the proceedings.

As I said, federal judges tend to have a pretty long fuse when lawyers are making competing arguments. The whole point of the process is that the parties always disagree and usually somebody gets selected to be the "wrong" one. So the fact that you're wrong about something isn't sanctionable. The fact that you made a false statement isn't probably going to be sanctionable, either, as long as you made a reasonable inquiry first, or were not abusing the litigation process, and not vexatiously multiplying the proceedings.

The aggressive characterization above, in which Elysium suggests that ChromaDex admitted to conduct violating the contract, is the kind of thing that I think you are allowed to do.

ChromaDex admitted to CONDUCT (which they did admit to), which conduct Elysium says violated the agreement -- that's a legal conclusion that Elysium is entitled to assert (I think). It's not that different from referring to a "Fraudulent Spreadsheet" or a "Sham Petition," which are legal assertions we have seen smuggled into factual recitations. I don't think it's really classy, but I also don't think it's sanctionable.

But you have to marvel at the aggressiveness, and I wonder what else that kind of aggressive legal culture leads to.

For example, I suggested in my last post that Elysium's factual recitations in the SDNY proceeding felt like an "alternate universe." I found parts of that universe "unrecognizable" and "batty." I said I couldn't find any facts or evidence that suggested that ChromaDex's motivations were as described by Elysium.

A false recitation of facts would be closer to sanctionable behavior, but, of course, we have know way of knowing what's true or false because (1) We weren't there, and (2) We aren't privy to discovery responses.

But once the Discovery is in, then the parties are in a position to assess any damage resulting from overzealous representation. In most cases, someone is proved wrong ("Oh, I guess you DIDN'T cheat us after all"), and that's the end of the story.

It is only in an exceptional case that Discovery shows not that a Party was mistaken, but that they KNEW their interpretation was counterfactual and advanced it anyway.

That is the situation where judges lose their patience and sanctions get imposed.

I am wondering whether one of those rare situations is developing here in the ChromaDex litigation with respect to Elysium's Patent Misuse claim.

The legal theory behind Elysium's Patent Misuse claim is that ChromaDex tied the license of its patents to the license of its trademarks by requiring Elysium to pay money to license trademarks that it didn't even want or use. By forcing Elysium to buy something they didn't want -- the trademarks -- ChromaDex unlawfully extended its patent, which could be patent misuse.

The critical point is that money has to be exchanged for the trademarks. If the trademarks were free, then the patent was not extended, and Elysium didn't pay for anything beyond the patent rights it was licensing.

So here is how Elysium describes that in their Second Amended Counterclaims:

ChromaDex has conditioned its sale of nicotinamide riboside on the purchaser’s agreement to license ChromaDex’s trademarks and pay ChromaDex substantial royalties on product sales based on that trademark license. (emphasis added)

and later:

Elysium further seeks a declaratory judgment that ChromaDex’s patent rights are unenforceable due to ChromaDex’s patent misuse in conditioning access to its patent rights to a purchase of a license to ChromaDex’s trademarks. (emphasis added)

and later:

and pay substantial royalties to ChromaDex based on that trademark license. (emphasis added)

and later:

ChromaDex coerced customers into paying for the right to use a mark they do not need or may not want to use. (emphasis added)

and later:

In exchange for the trademark license, Elysium was required to pay a substantial royalty (emphasis added)

and later:

its tying of access to its patent rights to a royalty-bearing trademark license

Elysium has pretty much committed itself to the necessary quid pro quo: The papers they filed in court say that Elysium had to pay royalties in exchange for trademarks that they did not want.

That was certainly how Judge Carney understood the proposal. His written decision on May 10, 2017, was unequivocal:

"Elysium alleges that ChromaDex has conditioned its sale of NIAGEN on purchasers’ agreement to license ChromaDex trademarks and pay substantial royalties as a result....ChromaDex’s alleged conduct (is that) it conditioned access to its products...on the purchase from ChromaDex of a trademark license...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 in order to have access to NR. This is sufficient for a tying claim."

Judge Carney got the message loud and clear that Elysium had to pay money in exchange for the trademarks, and he said that's what might be illegal.

Judge Carney did not ask the question -- because at this stage of the litigation the pleadings are assumed to be true -- WHY ON EARTH ChromaDex would charge money for trademarks?

People disagree about stuff all the time, but it would be really weird, in my opinion, for people to not know what they were paying for, especially in an aggressively negotiated contract.

When I go to the store, every item has a price, and I wouldn't leave without knowing each price. Or if I were in a buffet, where there was one price for everything, I would know what the price was and what was included and what wasn't.

So it's kinda crazy to read ChromaDex's motion to dismiss and reply briefs challenging the Patent Misuse claim last spring and asserting that the trademarks weren't for sale, they weren't sold, there was no price on them, they were free.

The Cooley attorney is shaking his head so frantically in response to Elysium's contentions that it looks like he has water in his ear. Here is Cooley (Motion to Dismiss, March 21, 2017):

The trademark license covers ChromaDex’s trademarks as well as “advertising, promotional, and/or merchandising materials” that ChromaDex may from time to time provide. (FAC, Ex. D at 1.) The license is optional—Elysium is not required to use any of ChromaDex’s trademarks or other licensed materials. (Id.) Independently, Elysium is obligated to pay royalties on its downstream sales of products containing ingredients supplied by ChromaDex, which is a deferred portion ChromaDex’s compensation for the supply of NIAGEN...The Royalty Agreement demonstrates that ChromaDex has not tied its trademark license to its patent rights...Elysium does not pay royalties for the use of a trademark license—i.e., it does not purchase the allegedly tied product...The royalties are therefore specifically tied to the supply and resale of NIAGEN, not to the use of ChromaDex’s trademarks....Elysium’s obligation to pay royalties is unrelated to its right to use ChromaDex’s trademarks...Rather than payment for a trademark license, Elysium’s royalty payments are a deferred portion of ChromaDex’s compensation for the supply of NIAGEN.

Factual assertion: The payments weren't for trademarks, they were for Niagen sales.

Here is Cooley again in the Reply Brief (April 24, 2017):

The Agreements between the parties do not bear out Elysium’s assertion that it had to purchase a trademark license. The Trademark License and Royalty Agreement does not state or suggest that there has been any consideration given by Elysium for a trademark license....The trademarks are simply not a “required product.”...The royalty portion of the agreement does...not even mention the trademark license....The royalty payments are a form of deferred product purchase consideration to accommodate Elysium’s plea that it could not pay the full purchase price upfront and the royalties are accordingly measured based on the Elysium’s resale of the NIAGEN product (“Basis”)—not the use of ChromaDex’s trademarks...There can be no tying as a matter of law because Elysium does not purchase the allegedly tied product (trademarks)...

You can't say Cooley didn't argue the point, but there is no sign that the judge's clerk ever read the Royalty Agreement, and maybe not even the Reply Brief for that matter.

But here's the rub:

Either those royalty payments were intended as compensation for trademarks, like Elysium said and Judge Carney accepted, or they were deferred compensation for Niagen sales and had nothing to do with trademarks, as ChromaDex asserts, and as common sense and the Royalty Agreement itself make pretty clear.

It strikes me as VERY unlikely that the parties signed this agreement but had completely different understandings of the terms they were signing. It happens, it could have happened, but I don't suspect that it happened in this case.

Elysium has not told us why they have adopted their interpretation of events -- for example, they haven't pointed to quid-pro-quo language in the contract, they haven't explained why ChromaDex sought to structure it that way -- what benefit ChromaDex might have gottten, for example.

But all it will take in Discovery is to come up with some contemporaneous statements -- an email, meeting notes, prior drafts, recollections shared under oath -- that convey ChromaDex's account in Elysium's handwriting, and I can easily imagine a judge, even one with a long fuse, asking, "Why did you write down that those payments were for a trademark when the evidence come to light in discovery reveals that in fact you knew that the trademarks were free and optional, and the payments were for something else?"

Rule 11 only goes so far in preventing this kind of behavior, because there is a safe-harbor for offenders. Before challenging a filing via a Rule 11 motion, you have to serve the motion on the accused party 21 days before you file it in court, in order to give the accused an opportunity to withdraw the challenged filing. In this case, I think that would be withdrawing the Patent Misuse claim.

But even were the claim withdrawn, the Court could still assess attorney fees pursuant to its inherent powers, if it found an abuse of the litigation process.

CONCLUSION

With respect to ChromaDex's current motion to compel, I predict that ChromaDex will get to conduct discovery on potential damages, as it wants, although maybe not as broadly as it wants.

If you win a motion to compel discovery, you can recover attorney fees, which ChromaDex has requested, so we'll see how that goes, too.

#ChromaDex #CDXC #ElysiumHealth #Litigation

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