The Elysium-ChromaDex Litigation Explained
As a lawyer and a Chromadex shareholder, I have been following Elysium-ChromaDex litigation closely for the past 18 months across two federal courts and in two federal agencies.
To assist journalists, industry observers, investors, and citizens, I will try to cut through the procedural complexity and legal jargon to explain in straightforward and relatively unbiased* terms what the fight is about, what is at stake, and how it is likely to play out.
If you don't want to read 7,000 words, here's what it comes to:
1. Patents. The patent challenges are the only parts of the litigation that might really matter, and ChromaDex has already won the only patent battle that matters: Elysium's challenge to the patent for NR in a health supplement was rejected.
2. California. Elysium is very unlikely to be able to prove its claims in the California litigation, and the final outcome will most likely just be a money judgment worth less than the cost of the litigation.
3. New York. Elysium's claims in New York are very likely to be dismissed, and in any case would probably be worth less than the cost of the litigation. ChromaDex has a more significant claim in New York, but it's too early to evaluate that claim's strength.
What Is The Dispute About?
The various lawsuits include claims like breach of contract, fraudulent inducement, false advertising, patent misuse, and unfair competition.
But the real story is that these two companies -- ChromaDex and Elysium Health -- are wrestling for control of the future market for a pill that has the potential to be the first serious "Fountain of Youth" of the 21st century.
There are sure to be more and better anti-aging technologies in the future, but this one is available right now and can keep people going until better treatments arrive.
Today, this supplement -- nicotinamide riboside (NR) -- generates tens of millions of dollars in annual revenue. But it has the potential to sell hundreds of millions, or even billions of dollars per year. That's what the parties are fighting over.
How Did This Get Started?
The story begins about 15 years ago, Dr. Charles Brenner, then a biochemistry professor at Dartmouth College, discovered that a previously known form of Vitamin B-3 had some previously unknown properties. Specifically, there was a previously unknown "pathway" for cells to generate the NAD they need to survive.
This was important because (1) NAD declines with age, and (2) NAD decline appears to cause some of the symptoms of aging. Dr. Brenner's paper announcing the discovery of the NR Kinase pathway was published in 2004.
Dr. Brenner's discovery was not NR's existence -- NR was already a known (though perhaps obscure) molecule. What was new was the discovery that NR might be a better way of replenishing NAD.
The research continued, and in the following years Dr. Brenner and others applied for and received many patents for methods of making and using NR.
In 2014, the journal Natural Products Insider summarized Dr. Brenner's discoveries:
In 2004, Charles Brenner, Ph.D., then a faculty member at Dartmouth College, discovered NR to be a vitamin precursor of nicotinamide adenine dinucleotide (NAD+) ...In 2007, Dr. Brenner's lab discovered a second pathway by which NR is converted to NAD+ and showed that NR can extend the lifespan of yeast cells...In the past decade, Dr. Brenner has made multiple, seminal contributions to NAD+ metabolism...Dr. Brenner's gene discoveries and characterization of the NAD+ metabolome have shed light on distinct pathways by which human cells utilize distinct NAD+ precursor vitamins. His lab continues to focus on characterizing the molecular mechanisms underlying NAD+ precursors and their impact on human health. Groups worldwide have added to Dr. Brenner's discoveries in providing evidence for unique properties of NR in neuroprotection, sirtuin activation, protection against weight gain on a high fat diet, and improvement of blood glucose and insulin sensitivity.
ChromaDex, a small lab company as nerdy-geeky as its name, was monitoring the research on NR and thought they saw a way to grow their nutritional supplement ingredient business.
Inventors in university laboratories typically assign their patents to the University, and the University then licenses the patents to businesses that can commercialize products based on the patents. The university then shares the license revenue with the inventors.
ChromaDex licensed five patents relating to the manufacture and use of NR, and in particular two of Dr. Brenner's patents assigned to Dartmouth College: one patent for NR incorporated into a pharmaceutical to increase NAD, and one patent for NR incorporated into a nutritional supplement to increase NAD.
ChromaDex also developed the first method of reliably producing NR, which allowed it to begin distributing NR to university researchers. The availability of NR in turn triggered an explosion of research into the various effects of NR supplementation. Over a 150 studies are underway or have been completed.
In its NR patent license agreement ChromaDex promised Dartmouth that it would rapidly commercialize the patents, committing to meet annual growth milestones, and to provide an up-front payment, annual payments, plus a percentage of sales.
ChromaDex was an inventor, tester, manufacturer, distributor, and supplier of ingredients, but it was not a retailer. Instead, ChromaDex relied on others to market and sell its ingredients to consumers.
So ChromaDex began distributing NR under the brand "Niagen." ChromaDex signed a contract with a multi-level marketing company, sold NR to health supplement retailers like Thorne Research, and was even able to place Niagen at CVS drugstores.
Enter Elysium Health
ChromaDex's marketing efforts were not completely successful.
CVS eventually dropped Niagen. ChromaDex's efforts to get Niagen into other large retail distributors failed. The multi-level marketing company ran into its own troubles. And Niagen was mostly sold through dozens of small online supplement vendors, competing on price and edgy health claims.
But a newly minted company, Elysium Health, saw big potential in nicotinamide riboside, and promised to turn the supplement industry upside down.
What Is Elysium Health?
Fifteen years after ChromaDex was founded, eight years after ChromaDex first learned of Dr Brenner's research, and two years after ChromaDex licensed the Dartmouth patents, Elysium Health was founded by an anti-aging researcher and two business executives: Dr. Leonard Guarente, and business executives Eric Marcotulli and Dan Alminana. Dr. Leonard Guarente was an MIT professor since the 1980's who had studied the role of calorie restriction in preventing aging. Eric Marcotulli was a Harvard MBA involved with venture capital. Dan Alminana had been VP at JP Morgan.
Together, Guarante, Marcotulli, and Alminana proposed to create a new kind of business that put nutritional supplements on a firm scientific foundation. To prove their commitment to science, Elysium hired an advisory board of decorated celebrity scientists, including several nobel laureates.
Elysium signed three-year agreements to license two of ChromaDex's patented ingredients: Nicotinamide Riboside and Pterostilbene. Elysium combined those ingredients into a single product, which it called "Basis," and started marketing Basis like crazy.
In February 2015, Elysium's Basis went live, with Elysium trumpeting Basis as the first in "a new category of scientifically validated dietary supplements."
If ChromaDex looked inexperienced and ineffective at marketing, Elysium looked like marketing geniuses. Their website was impressive, their product packaging was striking, and they gathered high-profile media attention from publications that were perhaps attracted more by the spectacle of the nobel-laureate advisory board than by the details of mouse studies demonstrating the biochemistry of NR on mitochondrial function.
Elysium became ChromaDex's largest customer.
This much we know.
We also know that Elysium had little or nothing to do with the discovery or development of either of the ingredients in Basis.
And we know that the "new category of supplements" never emerged. To this day, Basis remains Elysium's only product.
But there is much we do not know.
What We Don't Know
For example, we do not know whether Elysium's Scientific Advisory Board is much more than a marketing ploy, since the ingredients in Basis were developed before Elysium assembled its scientific advisory board, and no other product has emerged -- not even Elysium-branded versions of other common ingredients, like St. John's Wort. The fact that at least one of Elysium's Nobel advisors is a behavioral economist suggests that the word "Nobel" might matter as much or more than the ability to provide useful advice on topics like biochemistry or testing procedures for pharmaceuticals.
We also do not know why ChromaDex and Elysium got into a titanic feud that threatened to destroy both companies.
ChromaDex's Side of the Story
If you believe ChromaDex, Elysium had it in mind from the start to take control of ChromaDex, "conspiring to unjustly wrest control of the NR market ." In its New York federal complaint, ChromaDex alleges,
Elysium’s co-founder Dr. Leonard Guarente told ChromaDex Board Member Rob Fried in 2015 that it was their intention to purchase ChromaDex, presumably to obviate the need for a supplier relationship. It speaks volumes that, while ChromaDex has enjoyed successful business relationships with hundreds of customers, Elysium has tried to cannibalize its only supplier by stealing its employees, deliberately refusing to pay for goods, and suing ChromaDex three times in a relationship only three years old...
Elysium's Side of the Story
Elysium tells it different. Elysium says it was an excellent business partner until it discovered in spring of 2016 that ChromaDex was selling NR to another supplier for less than Elysium was paying, allegedly in violation of a "most favored nation" provision that entitled Elysium to the lowest price as long as it ordered more NR than any other distributor. ChromaDex says that during the period in question, a different supplier ordered more than Elysium did and thus was entitled to a lower price.
Either or both parties might be right, but the amount of damages -- the difference in price -- would not amount to a tenth of what the parties have already spent on the litigation so this clearly isn't what they are fighting over.
Elysium also alleges that ChromaDex misused its patent by requiring Elysium to pay money for the use of ChromaDex's trademarks. This is a lot like suing your neighbor for the damage to your house caused by your neighbor's fire-breathing red dragon. If you allege that you saw a large red winged reptile breathing fire on your house, that's probably enough to state a claim, but you'll have a heck of a time proving it at trial, because there is no such thing as a fire-breathing dragon.
Similarly, there is no such thing as illegally extending a patent by forcing a licensee to pay for the use of trademarks. If you read the Trademark License and Royalty Agreement, it's pretty obvious that Elysium was paying royalties for Niagen, not for trademarks. Coincidentally, the amount that Elysium claims it was charged for the trademarks is equal to a percentage of its Niagen sales.
Elysium is essentially alleging that Starbucks' $5 cup of coffee REALLY costs $2.50 for the coffee and $2.50 for the cup, and Starbucks is using its dominant position in the coffee market to sell cups. Elysium points at the menu, which says, "Cup of Coffee: $5," as evidence that the cup and the coffee are both being sold.
Actual practice, of course, is that if you go into Starbucks and ask for just a cup, or for an extra cup, they probably won't charge you. And if you ask for coffee in your own cup you'll probably pay the full price.
Elysium won't be able to prove that Starbucks is illegally selling cups, that a dragon torched their house, or that they were forced to pay money for trademarks, because that's now now the world works.
So you can spend a lot of time getting lost in the trees of the specific legal claims and miss the forest of the real dispute, which is the fight over control of the future market for NR.
In case it is not obvious how asserting farfetched legal claims could ever give Elysium control over the NR market, let's try to look at the dispute from Elysium's point of view.
The View from Elysium
If you are sympathetic to Elysium, then you might believe, against all evidence, that Elysium was trying to introduce a new category of supplements, rather than control just a single supplement.
You might also believe that they signed a three-year license with no right of renewal not because they expected to have purchased or destroyed ChromaDex in less than three years, but because they imagined that they would make themselves so indispensable to ChromaDex, by being ChromaDex's biggest customer, that they would be able to dictate favorable terms and a certain renewal.
These are smart people, these Elysium founders: We have a tenured MIT professor, a Harvard MBA, and VP at one of the world's largest banks. They couldn't possibly have accidentally invested millions of dollars to build a business around a single ingredient that they only were entitled to sell for 36 months. Whatever else they teach the MBAs at Harvard, it is at LEAST to secure access to your only product before you build a business around it. So they surely had a plan.
We don't know what the plan was -- whether it was to charm or bully their way to a license renewal, or to purchase or destroy ChromaDex (and then presumably buy its assets from the bankruptcy trustee).
We know what ChromaDex thinks. This is from their federal complaint:
Elysium’s pattern of behavior with respect to ChromaDex reflects a nefariously conceived plan to damage and/or steal ChromaDex’s NR (and)...interfere with ChromaDex’s ability to raise money and defend itself against Elysium’s multi-front litigation and deceptive advertising war. And, on further information and belief, Elysium and/or its agents are associated with or responsible for stock “short attacks” intended to drive the share value of ChromaDex down, making it a more accessible take-over target.
But from Elysium's standpoint, it is not farfetched to imagine that ChromaDex did not have Elysium's best interests at heart -- that ChromaDex had its own reasons to refuse to renew Elysium's NR license.
What if ChromaDex's plan all along was to induce Elysium to invest huge amounts building the market for NR, then cut off Elysium and introduce its own competing direct-to-consumer NR product, and transfer all of Elysium's customers and revenue to ChromaDex, leaving Elysium broke and penniless?
If you imagine that Elysium was intending to charm ChromaDex by being a good business partner, and that Elysium suddenly realized that ChromaDex had its own nefarious plan to destroy Elysium's business, you (as Elysium) might well behave the way Elysium did in spring of 2016, one year before the license could be terminated (effective February 2017).
First, you might try to gain additional contractual concessions (e.g., the exclusive right to combine Niagen and Pteropure). Second, you might scrutinize your interactions to confirm that ChromaDex was dealing with you in good faith. Third, you might place a giant order -- enough to last a year -- in case ChromaDex DID cut you off.
So from Elysium's standpoint, it is possible to tell a story in which ChromaDex was the nefarious actor and Elysium was the helpless and exploited victim.
So Which Story Is True?
We can't know for sure, because discovery has not been completed in the California case, and it hasn't even started in the New York case. So right now we are left with a he-said / she-said scenario.
And it depends on who you believe.
Which one is the naive bumpkin and which one is the sharp operator? Why would Elysium not secure itself ongoing access to NR? Why did Elysium not diversify their product line after they lost access to NR? If the contract could not be terminated until November 2016 (effective February 2017), why did Elysium poach ChromaDex's employees and refuse to pay for the ingredients it purchased several months BEFORE ChromaDex terminated the agreement? What is Elysium's legitimate business purpose in attempting to get the Dartmouth patents invalidated?
I find it difficult to construct a believable story that ChromaDex is the nefarious operator. ChromaDex has never appeared to be a particularly sophisticated business, and their dealings with every other distributor seem to be straight-forward.
Indeed, ChromaDex would seem to have had the most to gain from the success of its distributor model -- with Elysium at the vanguard -- because ChromaDex wasn't even close to being prepared to start a direct-to-consumer business. It took another 18 months after ChromaDex terminated the Elysium license before it hired a Chief Marketing Officer capable of spear-heading such an effort. And the sudden transformation of ChromaDex from a wholesale ingredients business to a direct-to-consumer nutraceutical business looks rushed and reactive, not premeditated.
In fact, that transformation resulted in the inevitable departure of the CEO who initiated it.
In other words, nothing in ChromaDex's behavior during the past 18 months has the hallmarks of a plan to destroy Elysium. Just the opposite.
So even though it is possible that Elysium was planning to build ChromaDex's business while ChromaDex was planning to destroy Elysium's, the circumstantial evidence seems to point the other way.
So What Are the Legal Implications?
But let's not get lost in speculation about the intentions of the parties, which we may never know, and which we certainly don't know today. Instead, let's look at the legal implications of what we do know.
Let's assume that ChromaDex intended to cut off Elysium and end Elysium's access to NR, and let's assume that ChromaDex did that for the worst reason: in order to take the benefits of Elysium's investment in building the NR business -- customers and a revenue stream -- and effectively transfer it from Elysium to ChromaDex, and to use its patent monopoly to achieve this.
That would be perfectly legal.
There is absolutely no doubt that pursuant to Contract Law, Elysium could have bargained for more secure access to NR and it did not. Elysium presumably would have had to pay more to secure more rights. Courts will enforce the benefit of the bargain that Elysium in fact made, and not renegotiate a better, smarter deal for Elysium in retrospect.
Patent Law also offers not much help to Elysium. Patent owners are granted a legal monopoly for a limited duration, which they can do with pretty much anything they want. There are limits to what you can do with a patent, but there is no requirement that you license your patent to anyone in particular or on any particular terms, or at all.
So while Elysium complains a lot in its pleadings that ChromaDex has market power for NR, courts won't mind that -- the purpose of Patent Law is to grant and protect the use of those limited-duration monopolies so that inventions get profitably commercialized and money can flow back to inventors and patent assignees. The courts' job is to protect and to enforce that monopoly.
Because ChromaDex, by licensing Dr Brenner's patents, obtained a legal monopoly that entitled it to do business with Elysium on whatever terms it wanted or not at all, and because Elysium only bargained for a three-year license, Elysium has been forced to make several legally farfetched arguments in its attacks on ChromaDex.
At the end of this article I will briefly evaluate some of the competing claims in the litigation, like Fraudulent Inducement, Patent Misuse, Breach of Contract, and Deceptive Advertising. But I think that the technical legal details of the specific claims are a side-show, because in the center ring there is just one big dispute: Who gets to control the future market for the Fountain of Youth?
Who DOES Get to Control the Future Fountain of Youth?
ChromaDex gets to control the future market for the Fountain of Youth -- at least this particular fountain. In the future, there will be new technologies, new NAD precursors, or even new versions of NR with time-release capability, or improved bio-availability, or other enhancements. But this particular Fountain of Youth is Dr. Brenner's, and he gave it to Dartmouth, and Dartmouth gave it to ChromaDex, so that's that.
How Can You Say, "That's That"???
Because Patent Law is extremely clear on this point. It's only purpose is to empower inventors to profitably assign and license their inventions. Patent Law does this empowering by creating a 20-year monopoly. The court system enforces that monopoly by punishing infringers, who must disgorge the profits they made from the patented invention. "Willful" infringers have to pay treble damages -- three times their profits. So that's that.
So Then Why Hasn't ChromaDex Won In Court Yet?
Well, the glib, short, but true answer is that The Wheels of Justice Turn Slowly, But They Grind Exceedingly Fine, as Elysium will eventually discover.
But Elysium would no doubt and correctly point out that not every patent is legally valid and enforceable. The idea is that patent examiners don't grant patents in the first place unless you satisfy the many requirements that Patent Law sets forth:
For example, the invention has to be new, useful, and non-obvious. It has to be fully disclosed. It has to be documented in a particular way, within particular time-frames, and every inventor must be disclosed. Once you have a patent, you can't use your patent monopoly to force people to buy non-patented goods. And of course infringers are only liable for infringement if they are in fact infringing.
So before Elysium will pay ChromaDex any damages for infringement, Elysium will be testing every conceivable way of rendering these patents invalid. Some of these tests are underway, others are yet to come.
However, patents are presumed valid, and there does not appear to be any questions about whether NR in a health supplement to increase NAD is useful or fully disclosed, and the time-frames look okay.
So Elysium's first attack was to urge the Patent Trial and Appeal Board (PTAB) to find that the known effects of milk constituted "prior art" that fully anticipated the development of a health supplement containing nicotinamide riboside chloride as the active ingredient almost a century later.
The PTAB rejected that position with respect to the supplement patent, 8,197,807 ("the '807 Patent") because the NR in milk isn't "isolated." So the '807 patent, which obviously covers Basis, since Basis contains isolated or concentrated NR (in excess of 25%) is quite apparently infringing the '807 patent and there is no current challenge to that patent. So that's that.
At least until Elysium explains some other reason why the '807 Patent is invalid or is not being infringed by Basis, but I can't think of what that would be.
But What About the OTHER Patent, the '086 Patent?
It is true, but not very relevant, that the PTAB is looking harder at Elysium's challenge to the pharmaceutical patent, 8,383,086, which purports to patent a pharmaceutical composition containing NR that increases NAD.
Elysium's position is that a "pharmaceutical composition" includes just about anything non-harmful, so any kind of food would be a pharmaceutical composition, which means the existence of food containing NR would be prior art anticipating and invalidating the '086 Patent.
ChromaDex's argument is that a "pharmaceutical composition" must contain an active ingredient, and so the '086 Patent doesn't apply to just anything that happens to contain NR, but only to a composition that has been specifically formulated with NR as an active ingredient.
ChromaDex's interpretation seems to me the more sensible one. Elysium's interpretation ignores too much context, and interprets the patent so broadly that it becomes invalid, which is not fair (there is law on that).
Also, ChromaDex's attorneys were clever enough to get Elysium's expert to testify under oath several times that NR was the active ingredient referred to in the patent, so it's a pretty straightforward argument that Elysium itself is conceding that the patent calls for an active agent. That requirement for an active ingredient excludes food, which in turn excludes Elysium's proffered prior art, which in turn rescues the patent from Elysium's challenge. So I won't be surprised if all five claims from the '086 Patent survive Elysium's current challenge.
But What's the Worst Case Scenario?
The reason I call the '086 Patent dispute largely irrelevant, is because to become an infringer Elysium only has to infringe a single patent, not every patent in the world, or every patent that ChromaDex has licensed. And there is currently no legal dispute as to the validity of the '807 Patent, which seems quite clearly to govern Tru Niagen and Basis, since both are being sold as supplements (and neither as a pharmaceutical) containing NR to increase NAD.
So even if the '086 Patent were held completely invalid, Elysium would still appear to be infringing the '807 Patent. Invalidating the '086 Patent would give Elysium fewer targets to worry about in its next invalidity challenge than if it had to invalidate both the '086 AND the '807 Patents, but unless we can think of something wrong with the '807 Patent, or someone -- i.e., Elysium -- explains what else is wrong with the '807 Patent, it's quite speculative to be worried about its validity.
Plot Twist -- Patent Misuse!
So THAT must be why Elysium is so hell-bent on pressing a Patent Misuse claim in the California Litigation. Patent Misuse, if proven, prevents a patent owner from asserting even a valid patent against an alleged infringer, until the alleged misuse is purged (e.g., the patent owner stops misusing the patent).
In other words, even if Elysium is infringing, ChromaDex can't collect any damages during a period of patent misuse, until ChromaDex stops misusing the patent. That means that if ChromaDex is misusing its patent right now, then Elysium is free to infringe without penalty until ChromaDex stops it.
So Elysium, an apparent infringer, REALLY wants it to be the case that ChromaDex is misusing its patent. My evidence that Elysium is an "apparent infringer" includes the fact that (1) Basis seems to be pretty precisely the kind of substance described in the '807 patent, and (2) Elysium is aggressively asserting claims for Patent Misuse and Invalidity that wouldn't seem to be worth the cost if Elysium were not practicing or planning to practice the art covered by the patent.
However, the case for Patent Misuse is farfetched, for reasons I describe more fully below. But briefly, Elysium's novel theory is that ChromaDex is improperly extending the NR patents by forcing NR customers to also buy a non-patented product. This is farfetched partly because the "product" ChromaDex has allegedly tied to its patent are the trademarks for Niagen, which is no product at all, and partly because the evidence that ChromaDex has in fact "tied" Niagen to its trademarks -- by forcing Elysium to pay for trademarks -- appears quite weak.
So Then What Happens?
I think the real value of the Patent Misuse claim to Elysium is not so much that Elysium could ultimately prevail, because I don't think it can, but because when Elysium finally loses the Patent Misuse claim, Elysium can then argue that its infringement was not in bad faith, was not "willful," because Elysium honestly, if mistakenly, believed that ChromaDex did not have a legal right to assert its patents. Then Elysium would only be liable for single-damages, instead of triple-damages, which is a very big deal.
I have no idea whether buried in the emails and scribbled notes documenting the negotiation of the original ChromaDex-Elysium ingredient supply license there is some smoking gun that might show that Elysium knew all along that they were paying royalties for the sale of Niagen, not for the use of ChromaDex's trademarks. If so, then Elysium might be subject not only to triple-damages for willful infringement, but also to sanctions for making a bad faith argument to the Court. It's a dangerous game, this Patent Misuse claim, in my view.
So Then Does The Litigation End?
No! Anyone paying attention knows that litigation never ends, and lawyers never stop getting rich. Apple and Samsung have been going at it for most of a decade. Companies with valuable assets are under perpetual legal attack. Some of those companies have a hundred or more lawyers permanently on staff as employees. In fact, I once was such a lawyer employed in such a giant, permanent in-house legal team.
If Elysium believes it suits their business, there will be more arguments of invalidity and non-infringement, and there could be appeals.
The litigation only ends when Elysium wins (doubtful), runs out of money (possible), or decides that it can succeed in its business goals regardless of what ChromaDex does (e.g., if Elysium migrates its revenue to a product that they are legally entitled to produce). None of these things appears imminent, however.
Okay for the Patents, But What About the OTHER Litigation?
The Patent Litigation is the only litigation that anyone should care about, and they shouldn't EVEN care about that. But we'll look at the other litigation fronts briefly.
California. Except for the Patent Misuse claim, which we have covered, the California litigation is mostly breach of contract. One party might owe the other damages, but it will be far less than the amount already spent on the litigation, so it's really just a distraction.
FDA. ChromaDex's petition to the FDA, and Elysium's angry rejoinder, aren't really litigation in themselves. The FDA will most likely ignore the whole thing, although there is a small chance that they will say some negative things, or even take some negative steps, toward Elysium.
New York. Elysium's complaint in New York is entirely based on the alleged impropriety of ChromaDex's petition to the FDA. That complaint is likely to get thrown out on First Amendment grounds (citizens have the right to petition the FDA).
ChromaDex's complaint in New York alleges that Elysium hatched a nefarious plan to harm ChromaDex. Elysium's response is that that's mostly made-up, and the facts to support it are not adequately alleged. If Elysium's claims are thrown out and ChromaDex's are not, that would be a significant thorn in the side for Elysium.
Okay, So, Seriously -- What's Going to Happen?
I am a lawyer, not a fortune teller. But there are a few possible scenarios.
Scenario 1. ChromaDex Wins
ChromaDex may do very well on all fronts. If Elysium's complaint gets tossed in New York, ChromaDex's patents emerge from the PTAB significantly or completely unscathed, and Elysium is unable to prove its commercial claims at trial in California, then at this time next year the litigation will be mostly resolved.
Not really, though, because there will be appeals, and as soon as ChromaDex asserts an infringement claim against Elysium, Elysium will uncork a new round invalidity and non-infringement defenses.
So merely winning the litigation isn't enough to end it. But it might be enough for the litigation to stop being a top-of-mind existential question for investors, and instead just become an annoying background cost.
Scenario 2. Elysium Wins
The purpose of commercial law is to bring predictability to business arrangements, but it's difficult to predict what courts will do, and frequently it requires one or two layers of appeal and/or a significant volume of litigation across jurisdictions before courts reach a consensus on how to handle a particular type of situation. Woe unto the losers in a case that gets abrogated some years later -- it is small consolation to witness the court system's eventual embrace of your legal position long after your business opportunity has been destroyed.
So it is possible that I could be correct in all my legal analysis but still wrong in predicting how the courts in this dispute will behave.
However, if Elysium were to somehow manage to win favorable judgments in New York, California, and DC (before the PTAB), it would still not be able to sell Basis without legal consequence, because the the '807 Patent is in force and not being challenged, and because the California Court would have to explain how ChromaDex could purge any theoretical Patent Misuse, which ChromaDex would then purge.
The most Elysium could expect to recover on all its claims combined would be damages that would probably not even cover the costs of the litigation. And Elysium would surely endure appeals by ChromaDex of some the novel legal judgments that Elysium may be counting on -- an incomplete and pyrrhic victory at best.
Scenario 3. Elysium Burns It All Down
I can't quite put together how both the '807 and '086 patents get invalidated, since the '807 patent isn't under attack, but let's just assume for the sake of argument that Elysium eventually manages to invalidate all of the IP protecting NR formulated as a supplement or a pharmaceutical to increase NAD. Two things result.
First, anybody would be able to manufacture and sell NR, which would lead to price wars and hyper-competition. Elysium is not well-suited to thrive in such an environment, because it is currently among the highest-price providers with what appears to be a high-cost, premium-product business model, not well-positioned to take on Walmart and Costco. So that's not an obvious win for Elysium.
Second, ironically, Elysium might still be on the hook for patent infringement regarding the OTHER active ingredient in Basis, pterostilbene. ChromaDex actually has more patents on pterostilbene that it does on NR. So ChromaDex would still have a potential patent claim against the portion of Elysium's profits that derived from pterostilbene.
Scenario 4. Elysium Diversifies
At some point Elysium may abandon the NR market and re-formulate Basis using ingredients that it has a clear legal right to sell, as opposed to ingredients subject to patents that it is unable to license.
I have assumed that Elysium would migrate Basis to Nicotinamide Mononucleotide (NMN) if it were able to do so, because NMN appears to have many of the same properties as an NAD precursor as NR does, even though there are some differences and the research on NMN is not as well developed.
I imagine that debates will rage in the future over whether NR or NMN is the best, but from Elysium's standpoint, legal availability might be a more important consideration than bioavailability.
Once Elysium believes it has a commercially viable alternative to NR and pterostilbene, it would be hard to justify Elysium's continued participation in the litigation, and one could imagine Elysium's looking for a graceful exit.
Whether a graceful exit is available, or whether Elysium ends up owing more to ChromaDex in damages than it could ever generate from a reformulated Basis, will depend in part on the outcome of the various court battles. I would note that ChromaDex has requested $200M in damages in the New York federal court.
So which scenario is most likely? I think #1 is most likely, and then #4, but they all are possible, and in any of the scenarios the litigation could go on virtually forever.
Ben Franklin was wrong when he said there are only two certainties in the world: Death and Taxes.
There is a third certainty, and that is Litigation.
And don't bother trying to kill all the lawyers, as Shakespeare suggested -- new lawyers will merely take their place, and you'll find YOURSELF in litigation, too.
I believe the various commercial claims between the parties will turn out to be a relatively small scale distraction that doesn't deserve our attention. But in the interest of completeness, I will attempt to summarize these commercial claims also.
1. Breach of Contract
ChromaDex claims that Elysium owes them about $3M because Elysium ordered, accepted, and sold ingredients it did not pay for. Elysium says it owes less than $3M. Whatever the final amount due, Elysium will end up paying interest on any unpaid amount. I think the odds that Elysium will be entitled to a setoff greater than the amount of the documented debt -- that ChromaDex will end up owing Elysium money -- is very low.
2. Unfair Competition, et al
The big claim in New York is that "Elysium Conspired to Unjustly Wrest Control of the NR Market from ChromaDex." That presumably is what drives ChromaDex's prayer for $200M in damages, and mostly results in a claim for tortious interference with prospective economic advantage. I suppose that if discovery eventually shows a nefarious plan to take over or destroy ChromaDex, that might run up quite a bill in tort. But since a motion to dismiss is pending and discovery has not begun, any opinion would be speculative. The other claims -- False Advertising and Unfair Competition -- probably represent the kind of damages at stake in the California litigation -- less than the cost of the lawsuits.
1. Fraudulent Inducement. Elysium says that ChromaDex fraudulently induced Elysium to enter into a contract by misstating the terms on which ChromaDex was willing to do business. Specifically, Elysium claims that ChromaDex said that it required all its distributors to pay for the use of its trademarks, when in fact not everybody had to.
This is a problematic allegation for several reasons. First, it's unlikely that ChromaDex required any of its distributors, including Elysium, to pay for the use of trademarks, for reasons we'll get to shortly. Second, if ChromaDex had said, "We require" as opposed to "We required," then it would be an expression of current intention, which would be hard to show was false. But most of all, fraudulent inducement typically involves false statements about the world or about one's capabilities, not about the terms on which one is willing to do business.
So, for example, if ChromaDex said that it was able to fulfill large orders when in fact it could not, or if it said that it was about to improve the quality of its product when in fact it was not, those could be the basis of a fraudulent inducement claim.
But if ChromaDex said that it was unwilling to license NR for less than a million dollars, or that it would insist on a ten-year contract term, when in fact it could have been talked out of those bargaining positions -- that does not seem to me capable of supporting a fraudulent inducement claim. Every day buyers and sellers communicate about and then change their minds about what they are willing to do to get a deal done, and that is called "bargaining."
Elysium says that if it had known that others were not required to pay trademark royalties then it could have negotiated for itself a better deal:
[Elysium] forwent the opportunity to negotiate an agreement with ChromaDex that did not require the payment of royalties, and instead focused its efforts in negotiations on other aspects of the NR agreement.
But that's not what fraudulent inducement is about. Fraudulent inducement requires that Elysium have been misled about the nature of what it bought, such that it might not have done the deal, or would have done the deal on different terms. Sellers who conceal their desperation to do a deal routinely deceive sellers into negotiating a worse deal than they could have gotten. But as long as they have not misstated the nature of the deal itself, then no actionable fraud has occurred.
Considering the situation in a different context, if you were running for President and said that you were a stable genius, when in fact you were not one, that might be fraudulent inducement. But if you said that you need me to donate $1,000 if you are to win this race, that would not be fraudulent inducement, even if it turned out not to be true that the $1,000 made any difference in the outcome.
So that's why I consider Elysium's Fraudulent Inducement claim farfetched.
2. Unfair Competition, et al
Elysium's New York complaint says that ChromaDex wrongfully alerted the FDA to the presence of trace quantities of toluene in Basis. The wrongfulness alleged is not ChromaDex's suggestion that toluene was present, but ChromaDex's propagation of the message that trace amounts of toluene were harmful. There are all kinds of legal objections for ChromaDex to raise here, like whether petitions and emails can count as any kind of advertising, let alone "false advertising."
But the pivotal legal issue, and the one that the parties spend the most time arguing, is whether ChromaDex's statements were protected by the First Amendment, because if they were protected, then Elysium's lawsuit based on those statements fails.
Whether the First Amendment applies, in turn, depends on whether there was any possibility that the FDA could act on the petition -- not that it would, but that it could. If so, Elysium loses.
The federal court in New York is free to decide on its own whether the FDA can or cannot act on the petition. However, making the call is always easier after the slow-motion replay, so my guess is that the reason that the fully-briefed motions to dismiss have languished in the Southern District of New York for more than six months is because the Court is waiting to see if the FDA does in fact act on the petitions. If so, then ChromaDex's conduct is obviously protected, and not much more needs to be said. However, even if the FDA does not choose to act, then the Court could still consider whether the FDA might have acted.
The FDA said in an interim response on February 15 that ChromaDex's petition was at that time "currently under active evaluation" by the FDA staff. However, the FDA may be relying on a non-standard definition of the word "active," so we are not holding our breath.
3. Patent Misuse
The Patent Misuse claim is kind of a bank shot, because even if it eventually fails, as it almost certainly must, its presence might be enough to limit the amount of infringement damages that ChromaDex can recover. Or, if the Court agrees with me that the Patent Misuse claim was likely asserted in bad faith, then it could magnify the damages.
Judge Carney in his decision denying ChromaDex's motion to dismiss the Patent Misuse stated unambiguously the thing that Elysium will have to prove:
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. (emphasis added)
That's a factual matter. Was Elysium only buying Niagen, or was it buying the right to use trademarks? I predict that Elysium will have a VERY difficult time proving that it was paying for trademarks and not for Niagen. Anyone who reads the agreement in question will likely agree.
You can find status updates and the actual ChromaDex-Elysium litigation documents here.
* I say "relatively" unbiased because although I am in fact a ChromaDex shareholder interested in the dispute and a former customer of Elysium's harboring negative feelings about Elysium, I will try to also represent their position based on what I think are their views of the dispute.
UPDATES! I am especially grateful to the many commenters who have suggested corrections and improvements to my articles.
UPDATE: June 21, 2018. Unlike a prior version, the article now uses the correct name for Dartmouth College, and clarifies that although NR was not a molecule that got much attention prior to Dr. Brenner's discoveries, Dr. Guarente would have known about NR long before Elysium was founded because Sirtris had licensed the Dartmouth patents before ChromaDex licensed them.
UPDATE: June 22, 2018. This version of the article includes the correct dates and sequencing for ChromaDex's transition from private to public company.