ChromaDex Opposes Elysium's Motion to Dismiss the FAC
ChromaDex has filed its opposition to Elysium’s Motion to Dismiss the new claims in ChromaDex’s Fourth Amended Complaint. You can read it here:
Cooley does an outstanding job summarizing the dispute, and I will quote a few pages of that below.
Reading this shocks the conscience.
Skadden seems to think that there is some legal incantation that can transmute plainly illegal and immoral activity into legally unassailable activity.
I do not think that there are any words that can accomplish this, and Skadden's words certainly do not.
Cooley also decisively rebuts most of Elysium’s pleading gripes, and I have no doubt that ChromaDex will prevail on those.
Preemption of the conversion claims under CUTSA and the Economic Loss Doctrine may be a closer call, so we will touch on time those.
But first, an interesting window into the litigation.
Local Rule 7-3 requires litigants to meet and confer a week before filing dispositive motions so that the parties can sharpen the issues before briefing them.
Cooley says that Skadden failed to do that, and that it represents independent grounds for denying Elysium’s motion. Cooley cites authority from the Central District in California where the Court did precisely that.
So there is a decent chance that Judge Carney will deny Elysium’s motion without considering the issues, but so far Judge Carney has been fairly solicitous of Elysium’s thirst to litigate, and I don’t expect that has changed – although based on the new allegations it might have.
So ChromaDex has submitted a great brief, and I suggest you read the entire thing, but at least read the part below, which recounts the history of the litigation, which I reproduce here in lightly edited form to remove citations, footnotes, and references to pleading standards. Emphases are mine.
This case is about Elysium Health, Inc.’s (“Elysium’s”) theft of ChromaDex, Inc.’s (“ChromaDex’s) product, Elysium’s misappropriation of ChromaDex’s trade secrets, and Elysium’s conversion of ChromaDex’s valuable material. Now, after Elysium has spent more than a year playing hide-the-ball in discovery, ChromaDex has obtained irrefutable evidence to support these claims, including communications showing that Elysium covertly recruited key ChromaDex employees and directed them to undermine ChromaDex operations from within. The evidence finally obtained in discovery further shows that one of these agents abruptly quit ChromaDex on a Friday, became an Elysium employee on a Monday, and on that same day provided Elysium with valuable ChromaDex trade secrets and proprietary information. Elysium then converted much of this material for its own use by simply removing ChromaDex markings and replacing them with Elysium identifiers.
Exploiting what it misappropriated from ChromaDex, Elysium began producing knockoffs of ChromaDex’s patented products in an effort to drive it from the market. These facts have come to light only through ChromaDex’s persistent efforts to obtain routine discovery from Elysium, despite Elysium’s campaign from the moment this lawsuit was filed to shield its documents and those of its principals from production. Only recently, for instance, has Elysium produced text messages that clearly reveal its unlawful activities. These materials should have been produced long ago.
Although Elysium willingly stipulated to the filing of the Fourth Amended Complaint (“FAC”), it now seeks to dismiss the third, fourth, and fifth claims brought by ChromaDex. But the FAC’s allegations easily satisfy the liberal pleading standards articulated by the Ninth Circuit and thus cannot be dismissed under Federal Rule of Civil Procedure 12(b). Elysium’s arguments to the contrary are unpersuasive, especially in light of the specific details that the FAC provides with respect to Elysium’s willful misconduct. It is incontrovertible that Elysium misappropriated ChromaDex’s “Ingredient Sales Spreadsheet,” a document containing valuable trade secrets, such as the purchasing history of every single ChromaDex customer for every single sale, including dates and amounts, since at least 2012. The Spreadsheet appeared on Elysium’s computers the very same day that ex-ChromaDex employee Mark Morris started working at Elysium. And the FAC clearly pleads the independent economic value of, and ChromaDex’s damages arising from, Elysium’s theft of the Spreadsheet.
ChromaDex also properly pleads that Elysium converted at least seven ChromaDex documents by wrongfully obtaining possession of them, removing ChromaDex markings, and then using the documents as its own. Elysium challenges the conversion claim by arguing that it is (1) preempted by federal copyright law, (2) superseded by California’s Uniform Trade Secrets Act (“CUTSA”), and (3) barred by the economic loss doctrine. These arguments are unconvincing. First, as Elysium admits, ChromaDex pleads the extra elements necessary to avoid copyright preemption. Second, the claim is not superseded by CUTSA because ChromaDex’s property rights are not grounded in the confidentiality of the documents. And third, the claim is not barred by the economic loss doctrine because Elysium interfered with ChromaDex’s property rights in the material.
Nor do Elysium’s arguments that the FAC does not sufficiently plead ownership of, or damages from, some of the converted documents pass muster; the FAC provides more than sufficient detail at this stage of the case. And Elysium’s half-hearted argument that the FAC does not allege that Elysium violated its confidentiality obligations is belied by both the contracts and the factual allegations.
Elysium’s Motion is also procedurally improper because Elysium violated Local Rule 7-3 by filing it the same day as the required meet and confer. Elysium did not even request a conference until six days before it filed the Motion, and that “request” did not identify the substance of Elysium’s contemplated Motion. Nor does Elysium have any excuse for its failure to comply with proper procedure: Elysium received the FAC on May 17, 2018, engaged in repeated meet-and-confer sessions—during which Elysium never notified ChromaDex that it would oppose the FAC—and stipulated to ChromaDex filing the FAC. Because Elysium’s unwarranted delay is inexcusable and prejudices both this Court and ChromaDex, the Court should deny the Motion.
II. STATEMENT OF FACTS A. Elysium Executes Its Strategy To Destroy ChromaDex.
ChromaDex develops and sells ingredients to customers in the “dietary supplement, food, beverage, skin care, and pharmaceutical markets,” and competes directly with Elysium. ChromaDex was the “sole United States commercial source and supplier” of NR and had made “substantial investments . . . in advancing NR and pterostilbene in the market and clearing regulatory hurdles necessary to produce and market the ingredients.” Elysium once purchased NR and pterostilbene—branded NIAGEN and pTeroPure, respectively— from ChromaDex. But Elysium, realizing the immense value of what ChromaDex had created, plotted to steal ChromaDex’s ingredients, its employees, its business secrets, and finally—and shamelessly—even the foundational documents and presentations that made ChromaDex function as a going concern. Elysium wrongfully claimed ChromaDex’s property, information, and knowledge as its own, and maliciously turned it against ChromaDex.
To accomplish its plan, Elysium began recruiting Mark Morris, then- ChromaDex Vice President of Business Development, in April 2016. In May 2016, to gain favor with his new secret employer, Morris secretly funneled confidential ChromaDex sales information to Elysium in a spreadsheet (the “Pricing Spreadsheet”). Elysium hid its possession of that information while simultaneously using it to harm ChromaDex, deploying a mis-interpretation of the NIAGEN Supply Agreement as a pretext for its coming bad behavior. The very same day, Elysium’s COO, Daniel Alminana, lied to ChromaDex’s CEO, Frank Jaksch, by requesting the same information under a false pretense, and despite knowing that it was confidential. While Jaksch attempted to resolve the issue in good faith, Elysium continued to plot in bad faith.
Elysium’s next move was to stockpile as much NIAGEN and pTeroPure as possible to provide a stream of income and give it time to copy ChromaDex’s patented product. On June 30, 2016, Elysium placed extraordinarily large orders, totaling nearly $3 million of ingredients. ChromaDex promptly filled them, relying on Elysium’s lies that it was “ramping up its sales” and “expected to use all” of the ingredients “in the next few months” and would “place additional large orders.” No sooner had the final order been shipped than Elysium reneged on its contractual obligation to pay, and still has not paid. For several months, Elysium—sitting on its stockpile of ingredients—strung ChromaDex along by engaging in bad-faith discussions while it used ChromaDex’s documents to develop competing sources for its ingredients.
Elysium’s TAC alleges that its “best efforts” to settle the dispute “were hampered by ChromaDex’s refusal to provide information to Elysium necessary to calculate the credit due for ChromaDex’s breach,” but the Pricing Spreadsheet reveals that Elysium wrongfully possessed that information all along.
B. Elysium Recruits ChromaDex Employees And Steals Its Trade Secrets.
Once secure in its possession of ingredient stockpiles, Elysium ordered its agents—Morris and Ryan Dellinger, the ChromaDex Director of Scientific Affairs—to quit and come to work at Elysium. Morris left on July 15, 2016, only two weeks after the final order of NIAGEN was shipped. He lied to ChromaDex, failing to disclose that he had been secretly, and would now officially be, working for Elysium. Elysium immediately tasked him with developing a competing source of NR. Dellinger resigned the same day Elysium informed ChromaDex that it would not pay for the June 30 orders: August 10, 2016.
He also refused to say that he had been hired by Elysium in the same position he held at ChromaDex: Director of Scientific Affairs. Dellinger used his knowledge of ChromaDex’s scientific operations for Elysium’s benefit, often by using wrongfully- obtained ChromaDex material.
On July 18, 2016, his first day at Elysium and only three days after re-affirming his confidentiality obligations to ChromaDex, Morris provided Elysium the central document to ChromaDex’s entire business: the Ingredient Sales Spreadsheet. The Spreadsheet is a highly-confidential document that tracks “all sales for all ingredients by quarter since 2012,” and “contains the detailed purchasing history of every customer who purchased any ingredient from ChromaDex—including customer names, prices, volumes, and dates of purchases.”
Elysium willfully and maliciously obtained the Spreadsheet, and all of the trade secrets it contained, through its agent Morris, notwithstanding Morris’s obligation to not use or disclose the Spreadsheet outside of ChromaDex. And once in possession of the Spreadsheet, Elysium unjustly enriched itself by wrongly accessing and using the sales information, both to obtain an advantage in the marketplace and in its negotiations with ChromaDex.
C. Elysium Violates Its Confidentiality Obligations To ChromaDex And Converts ChromaDex Documents.
Elysium was not satisfied with just stealing ChromaDex’s trade secrets; it wanted the entire market for NR and pterostilbene. To that end, Elysium disclosed several key ChromaDex files in violation of its confidentiality obligations to ChromaDex. (Id. ¶¶ 126, 137.) These include:
1. The NRCl Analytical Method, which “ChromaDex developed for analyzing the concentration of NR chloride by high-performance liquid chromatography.”
2. The NR Specifications, which “described ChromaDex’s specifications for the range of acceptable results for several analyses that were regularly performed on the NIAGEN ChromaDex sold.”
3. The pTeroPure GRAS Report, which “detailed the safety of pterostilbene” and supported regulatory submissions to the U.S. Food and Drug Administration (“FDA”).
4. The NR Study Data, which “concerned the data from a ChromaDex human study examining the effects of NR on NAD+ levels.”
ChromaDex invested its knowledge, experience, and resources into developing the content of these documents and the documents themselves. And Elysium wrongly disclosed them by sending the NRCl Analytical Method and NR Specifications to its alternative NR manufacturer to use as a shortcut in developing a competing supply of NR,, sending the pTeroPure GRAS Report to its third-party regulatory consultants as the basis for its own regulatory filing, and presenting the NR Study Data to dozens of potential investors to solicit much-needed capital.
But Elysium did not stop there; it also converted at least seven ChromaDex documents for its own use. In addition to the NRCl Analytical Method, the NR Specifications, and the pTeroPure GRAS Report, Elysium stole:
1. The Pricing Spreadsheet, or the information contained therein, which detailed ChromaDex sales of NR to another customer.
2. The NR Presentation, which “explain[s] the science supporting the health benefits of” NIAGEN.
3. The Pterostilbene Presentation, which “explain[s] the science supporting the health benefits of” pTeroPure.
4. The NR GRAS Dossier, which “contains extensive information developed and compiled by ChromaDex showing the safety of NR for human consumption” and “details the methods and processes by which NR is manufactured.”
…Elysium’s uses for the converted ChromaDex documents were numerous. First, it used the Pricing Spreadsheet to gain an unfair advantage in contract negotiations with ChromaDex. It also claimed several documents as its own to jumpstart the production of an alternative source of NR to compete with ChromaDex’s, including the NRCl Analytical Method, the NR Specifications, and the NR GRAS Dossier. And it converted the pTeroPure GRAS Report to “update” and claim as its own regulatory submission to the FDA. Finally, Morris and Dellinger took the NR and Pterostilbene Presentations from ChromaDex, which Elysium then converted by (a) removing ChromaDex’s logos and references and replacing them with Elysium’s and (b) claiming and using them with a potential investor. Elysium also misused the NR Presentation by showing it, now with Elysium markings, to the National Advertising Division of the Better Business Bureau in response to an inquiry on Elysium’s marketing claims.
D. The Truth Of Elysium’s Misconduct Slowly Emerges.
On December 29, 2016, ChromaDex—still in the dark about how thoroughly Elysium had raided its business—filed suit to recover the $3 million Elysium refused to pay. Elysium answered and alleged counterclaims on January 25, 2017. Realizing that more than just its shipments had been taken, ChromaDex alleged its first trade secret claim in its First Amended Complaint on February 15, 2017. The Court dismissed the claim merely because ChromaDex could only allege at that time that Elysium had stolen “contact information of its potential customers and partners.”The Court noted that the claim could “be cured through additional factual allegations,” and allowed leave to amend.
On May 24, 2017, still without the benefit of discovery from Elysium, ChromaDex alleged a trade secrets claim as to the “Safety Report” and “Study
Proposal.” When Elysium informed ChromaDex that those specific documents were likely not trade secrets, ChromaDex freely withdrew the claim, and has not re-alleged them in the FAC. ChromaDex’s legitimate suspicions about Elysium’s theft of its trade secrets have now been vindicated through discovery…The Court Should Decline To Hear
Elysium’s Motion Because Elysium Failed To Comply With Local Rule 7-3.
Under Local Rule 7-3, “counsel contemplating the filing of any motion shall first contact opposing counsel to discuss thoroughly . . . the substance of the contemplated motion and any potential resolution,” and that conference “shall take place at least seven (7) days prior to the filing of the motion.” Courts in this District strictly enforce this rule because it “isn’t just a piece of petty pedantry put down to trip up lawyers. Nor is Local Rule 7-3 a mere formalism simply there to be checked off by lawyers.”
…the required meet and confer conference occurred on July 9, 2018, the same day Elysium filed its Motion. That is plainly a violation of Local Rule 7-3, and the Court should thus deny the Motion…
Both ChromaDex and this Court are prejudiced by Elysium’s blatant disregard for proper procedure…
Elysium’s refusal to meaningfully meet-and-confer gave it 47 days (between May 17 and July 3) to secretly prepare its Motion, while its violation of Local Rule 7-3 deprived ChromaDex of half of the fourteen days that it should have had to consider and respond to Elysium’s arguments. Additionally, had Elysium followed Local Rule 7-3, the parties could have “focus[ed] and clarif[ied]” the dispute, which is the very purpose of the Rule…
The Court should reject Elysium’s attempt to litigate by surprise and deny Elysium’ Motion.
The rest of ChromaDex’s opposition goes to pleading and legal standards, convincingly arguing that:
ChromaDex adequately pled that the sales spreadsheet was a trade secret
ChromaDex adequately pled that it was damaged by Elysium’s theft of the sales spreadsheet
ChromaDex adequately pled damage from conversion
ChromaDex adequately pled violation of the confidentiality agreements
ChromaDex also argues at length why Copyright Law, California’s Trade Secret Act (CUTSA), and the Economic Loss Rule do not preempt ChromaDex’s conversion claims.
There is enough needle-threading in the second two of these anti-preemption arguments to make me uneasy.
Copyright. The core of the argument is that Copyright Law does not pre-empt Conversion because ChromaDex’s conversion claims include additional elements beyond Copyright – e.g., wrongful use. This is compelling.
Trade Secrets. CUTSA allegedly does not preempt the conversion claims because ChromaDex is not ONLY asserting trade secrets, but also is asserting tangible ownership of the documents, as shown by copyright law.
That makes me uneasy because ChromaDex seems to be asserting that the converted documents are trade secrets for purposes of the trade secret claim, but are not necessarily trade secrets for the purpose of the conversion claim, and they were pled differently for each claim. Maybe this kind of pleading in the alternative is permissible, but the mandarins are likely to ponder it.
Here is an example of two different parts of the brief that appear to be asserting inconsistent positions:
[Spreadsheet IS a Trade Secret]:…ChromaDex States A Claim For Trade Secret Misappropriation. Elysium wrongly contends that the FAC fails to plead its brazen theft and misuse of an incredibly-valuable ChromaDex document: the Ingredient Sales Spreadsheet. (Mot. at 23–25.) The FAC easily satisfies the liberal standard for alleging that the trade secret is protectable and that Elysium’s possession and misuse of it damaged ChromaDex…
[Spreadsheet is NOT a Trade Secret]: …because none of the documents that Elysium converted are alleged to be trade secrets in the FAC, they are not preempted.
Economic Loss Rule. The same kind of dance occurs with the question of whether the Economic Loss Doctrine precludes the conversion claims. ChromaDex explains that the breach of contract (a contract claim) occurred when Elysium used and disclosed the proprietary information; the conversion (a tort claim) occurred when Elysium wrongfully gained possession of the documents that it subsequently used and disclosed, so the two claims can be asserted distinctly.
Normally that’s a perfectly reasonable legal distinction, and the kind the Judge Carney has in this litigation shown a strong partiality toward. But I am a little uneasy that Elysium in fact could not disclose the documents in breach of the agreement if it did not first obtain them, which would suggest that the conversion claim is necessarily collapsed into the breach of contract claim, and the economic loss rule might be invoked. We’ll see.
Some Additional Interesting Points
Two additional items of interest. It has been debated among observers whether Elysium was allowed to use ChromaDex’s GRAS information to establish the safety of its own product, because the GRAS information was publicly disclosed to the FDA. In the context of making a different argument, ChromaDex says No:
…ChromaDex’s right is “capable of exclusive possession and control” because GRAS status is determined according to specific manufacturing methods and granted to a specific “substance” or “food ingredient” for a specific “intended use.” 21 C.F.R. § 170.30(a), (b), (g); see also 21 C.F.R. § 171.1(c), (h)(2), (h)(4). No other entity may market a product as GRAS based on ChromaDex’s documents.
I argued last week that Elysium was being frivolous in suggesting that Elysium’s alleged entitlement to SOME information in the pricing spreadsheet meant that Elysium's theft of the spreadsheet was not a trade secret violation. ChromaDex makes the point another way:
…As for the Pricing Spreadsheet, there is no provision in the NIAGEN Supply Agreement stating that Elysium was “entitled to information” concerning other customers’ purchases. Elysium does not plead such a contractual right in its counterclaims. If such a right actually existed, Elysium would not have needed to surreptitiously obtain the information and keep its possession secret from ChromaDex (and even this Court).
I’m pretty sure that Elysium’s motion to dismiss will be denied mostly or entirely, either on substantive or procedural grounds. In general, Judge Carney has been indulgent of Elysium’s fanciful assertions. I’ll be listening to His Honor’s order to detect whether the developing evidence inspires a more skeptical approach.
But first, we await Elysium’s Reply Brief.