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  • Shelly Albaum

Patent Misuse -- Third Time's the Charm?


So now we have ChromaDex's most recent motion to dismiss Elysium's bogus Patent Misuse claim, and Elysium's snarling opposition:

ChromaDex's Motion to Dismiss Patent Misuse

Elysium's Opposition Brief

The Patent Misuse claim, you will recall, is predicated on Elysium's apparently counter-factual assertion that ChromaDex charged it royalties in order to use ChromaDex's trademarks -- forcing Elysium to purchase a product it did not want as a condition of licensing ChromaDex's patents, a license restriction that thereby extended the patent monopoly beyond the grant, Elysium alleges.

Elysium's claim is nonsensical in two dimensions -- first, trademarks for the patented product aren't a separate product; second, it didn't happen: the royalties are for the sale of Niagen. There is no indication in the contract that the royalties are in exchange for trademarks, and no conceivable reason why the parties would have structured the deal that way.

ChromaDex reminded the Court in footnote 4 to its original reply brief that

The agreements between the parties do not bear out Elysium’s assertion that it had to purchase a trademark license. The Court can interpret the contracts—which are incorporated into the FACC by reference—on this motion to dismiss, and need not credit Elysium’s allegations about them.

At my law school graduation ceremony, the featured speaker gave the newly minted lawyers some good advice: "Before you sign a contract, read it!"

That was a laugh-line, but it's not funny now, because we do indeed have a signed contract that the Judge and his clerk refuse to read. Judge Carney concluded in his original opinion denying the motion to dismiss that IF Elysium "was forced to buy the license for the trademarks in order to have access to NR" (emphasis in the original) that would be sufficient for a tying claim in the Patent Misuse context. My opinion is that when the Court finally gets around to reading the contract it will conclude that Elysium was not forced to buy a license for the trademarks, and it will feel played, and it will consider sanctions.

However, that day may never come, because ChromaDex has mooted the Patent Misuse concern by disclaiming whatever revenue it might be entitled to under the royalties -- it was only about 5%-7% in deferred compensation on the Niagen sales anyway.

Somebody on the discussion boards -- Marshmallow -- hilariously suggested that Elysium appears to be a shell company whose sole purpose is to transfer its assets to its lawyers via legal fees.

You have to take Marshmallow's suggestion seriously when Elysium refuses to accept victory on their Patent Misuse claim, and instead wants to keep fighting, because they don't WANT to win royalties, they aren't ACTUALLY aggrieved by having to have paid extra for trademarks -- what they really want is for the court to find a continuing violation that makes ChromaDex's patents unenforceable until purged -- presumably because Elysium is infringing.

Here is the actual language that ChromaDex uses in its Third Amended Complaint mooting the Patent Misuse claim by purging any conceivable misuse:

"ChromaDex denies that it has ever engaged in any act of alleged patent misuse and specifically denies that it has engaged in patent misuse by “tying [] access to its patent rights to a royalty-bearing trademark license” (FACC ¶ 111) and, “in some instances,” by “requir[ing] purchasers not only to license, but also to use ChromaDex trademarks in order to obtain a supply of nicotinamide riboside” (FACC ¶ 39). ChromaDex further denies that Elysium’s allegations constitute patent misuse as a matter of law. (emphasis added)

"However, to eliminate an issue from this litigation, to conserve the parties’ and the Court’s resources and to streamline this action, and without prejudice to ChromaDex’s arguments and contentions, ChromaDex restates that it has already terminated the Trademark License and Royalty Agreement on February 2, 2017 and further, hereby unequivocally renounces any rights to collect, charge, or obtain royalties under the Trademark License and Royalty Agreement with Elysium..."

This was a routine and responsible move by ChromaDex when it filed these words with the Court on June 7, 2017, essentially stating: "You are wrong about Patent Misuse, but it would be cheaper to just pay you off than to spend the next six months fighting about it."

Elysium would obviously rather fight than win, because we DID spend the next six months fighting about it, but look what Elysium wrote in their most recent opposition:

A case or controversy still exists regarding ChromaDex’s conduct, which it now effectively admits constituted unlawful patent misuse. (emphasis added)

This kind of scandalous behavior is what I hate about Elysium or its attorneys. You can read for yourself in the bolded text above ChromaDex is in no way admitting patent misuse. But Elysium is not done -- that was just page 1. Here is page 2:

ChromaDex’s admission that the trademark agreement it imposed on Elysium was unlawful is not grounds for striking Elysium’s allegations. (emphasis added)

And page 6:

In its latest brief, ChromaDex affirmatively admits that the Trademark Agreement is unenforceable, effectively conceding that ChromaDex has engaged in patent misuse. (emphasis added)

It is a revelation to me that you can sign up with a big law firm like Skadden or Foley and walk into federal court and misrepresent the facts or the other party's position and no one bats an eye. I was taught not only that it was wrong to do so, but that there would be consequences. We will find out whether Judge Carney continues to have the patience of Job.

ChromaDex's Argument

Here is what ChromaDex wrote in their brief:

I. INTRODUCTION

On September 26, 2017, the Court directed defendant and counterclaimant Elysium Health, Inc. (“Elysium”) to amend its counterclaim for declaratory judgment of patent misuse to “clarify whether Elysium seeks any relief beyond ChromaDex’s covenant not to sue for royalties under” the parties’ Trademark License and Royalty Agreement (“TLRA”). (ECF 63 at 2.) Instead of following the Court’s instructions, Elysium filed a Second Amended Counterclaim (ECF 65 (“SACC”)) that attempts to allege a new injury and a new cause of action purportedly giving rise to the Court’s jurisdiction. However, Elysium’s new theory is directly contrary to binding Federal Circuit precedent, which holds that damages are not recoverable in a patent misuse declaratory relief claim, and further that interest, lost opportunity costs, and attorneys’ fees are not available. Moreover, Elysium relies on a non-existent “implied” threat that ChromaDex will sue it for patent infringement, which is insufficient as a matter of law to invoke this court’s Article III jurisdiction. (SACC ¶ 99.) Contrary to Elysium’s rhetoric, the SACC allegations show that ChromaDex has never accused Elysium of patent infringement, let alone taken any affirmative acts indicating that it will imminently file such a suit.

Elysium’s SACC also exceeds the Court’s directive and disregards Federal Rule of Civil Procedure 15, by adding a new counterclaim for unjust enrichment, which is merely a remedy in California, and not a cognizable cause of action. The alleged predicate of this phantom claim are the royalties Elysium paid to ChromaDex under the Trademark License Agreement (“TLRA”) and that ChromaDex already bound itself with this Court to return as a credit against the $3 million that Elysium owes ChromaDex for failing to pay for product it purchased. Both of Elysium’s claims would require the Court to litigate the relief that ChromaDex has already covenanted to provide in this proceeding. Both of Elysium’s latest creative attempts should fail...

Despite being given another chance to allege facts supporting the Court’s subject matter jurisdiction, Elysium failed to plead a justiciable case or controversy for patent misuse regarding the assertion or enforceability of ChromaDex’s patent rights. No actual dispute regarding ChromaDex’s patent rights presently exists between these parties and no potential controversy is of sufficient immediacy to warrant a declaratory judgment. Elysium is asking for a pure advisory opinion where no case or controversy exists....Elysium has already obtained all relief potentially available to it under a declaratory judgment counterclaim—the cessation of the enforcement of the TLRA.

Elysium's other argument for the existence of a live controversy warranting the Court's adjudicating ChromaDex's patent rights is Elysium's subjective fear that ChromaDex is right on the verge of filing a Patent Infringement claim for Mystery NR.

Here is ChromaDex's rejoinder:

Two vague allegations are insufficient to establish that it fears a patent infringement suit. First, Elysium states that “[d]espite the termination of the NR Supply Agreement, Elysium in fact does intend to continue, and has continued, to supply its customers with Basis, both now and in the future.” (SACC ¶ 94.) Second, Elysium states that “Elysium sells Basis using NR that is not sourced from ChromaDex.” (SACC ¶ 95.) These statements lack a crucial element necessary to show an existing dispute—they do not admit or even state that Elysium’s sales infringe ChromaDex’s patents... Elysium failed to allege the crucial element—the sine quo non of the claim—and accordingly, there are no grounds to assume, let alone conclude, that Elysium’s conduct subjects it to the risk of a patent infringement lawsuit.

In other words, there is no reason to fear a lawsuit unless you are infringing, and nobody has said you are infringing. Are you in fact infringing?

Striking the Patent Misuse Allegations

Deep in the weeds, ChromaDex continues to try to limit the scope of the litigation, asking the Court to strike from the complaint any allegations of Patent Misuse to prevent an explosion of Discovery on this moot point:

Litigating the patent misuse allegations would entail a significant burden on the parties and the Court, which is perhaps Elysium’s improper objective. Evidence going to the question of patent misuse in this case would be the subject of extensive fact discovery and expert testimony, covering antitrust-like issues such as defining the relevant market in which ChromaDex operates, determining whether ChromaDex has market power, and determining if ChromaDex’s conduct actually hurt competition in that market... If the allegations are not stricken, the parties would also litigate ChromaDex’s defense that it has purged the alleged misuse—further extending the scope of the inquiry. The extensive nature of the issue is demonstrated by Elysium’s first set of requests for production. Twenty-nine of the eighty requests are directed at the patent misuse counterclaim. (Declaration of Jon F. Cieslak ¶ 3.) Further, sixty-one of 150 paragraphs in the SACC are directed solely at this issue. (See SACC ¶¶ 5–6, 21, 28 41, 55–60, 90–109, 132–143, 145.) Neither ChromaDex nor the Court should be required to litigate these immaterial phantom issues when they have no bearing on any claims in the action... (emphasis added)

I will let the bolded phrase speak for itself.

Elysium's Opposition

In addition to falsely asserting that ChromaDex has admitted patent misuse, and reasserting its highly improbable core claim that "Elysium was required to pay royalties for a license to ChromaDex’s trademarks, regardless of whether Elysium used ChromaDex’s licensed trademarks," Elysium subtly shifts its prayer for relief:

Elysium’s counterclaims allege more than sufficient facts to support a declaratory judgment that ChromaDex’s patents are unenforceable.

I had understood that this was a Patent Misuse claim, and the declaratory judgment would relate to Misuse (whether it ever occurred, and whether it was purged), not to the validity of the Patents, which is an entirely different inquiry.

This all strikes me as "Alternative Reality Pleading."

Then comes a very long section in which Elysium expresses great outrage that ChromaDex ended its three-year license pursuant to the terms of the contract, as if legally terminating a contract somehow confers upon Elysium new legal rights -- a kind of legal bereavement that somehow entitles Elysium to a judicial finding that even if the contract is terminated, the rights it enjoyed under the contract remain available.

This is just totally beyond me. Maybe you can make more sense of it.

#CDXC #ChromaDex #Litigation #ElysiumHealth

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