ChromaDex Trade Secret Claims To Proceed
Judge Carney issued a clear, concise opinion that is just about what we expected, dismissing ChromaDex's conversion claims as preempted by CUTSA (California Uniform Trade Secrets Act), but allowing ChromaDex's trade secret claims to proceed. You can read Judge Carney's decision here:
Before we get into the details, let's clarify that this is a big win for ChromaDex.
It's a big win FIRST because before the FAC ChromaDex only had contract claims, and now it has tort claims, too, which means the potential damages went way up.
It's a big win SECOND because now ChromaDex is entitled to discovery on its trade secret claims, which means it is in a better position to figure out exactly what Elysium did to it and the damages that it incurred.
The conversion claims would have been good to assert for all kinds of reasons, but the reason they are preempted is literally because the wrong involved is counted as fully addressed by the CUTSA claim.
The primary loss for ChromaDex might be the potential for general punitive damages for conversion. But that is somewhat speculative, and there will now be enough damages to go around anyway.
It is worth noting, also, that Judge Carney did not have a great deal to say about the parties arguments. We have previously covered the buckets of ink Elysium spilled in its brief denouncing ChromaDex's behavior.
Judge Carney ignored all that.
The opinion says:
(1) CUTSA preempts conversion of trade secrets, and I decline ChromaDex's invitation to construe that rule narrowly
(2) Elysium says ChromaDex did not allege a trade secret, but in fact ChromaDex did
(3) Elysium says ChromaDex did not allege damages, but in fact ChromaDex did
In footnote 2, Judge Carney also disposes of Elysium's content that the FAC's new breach of contract allegations -- breach of the confidentiality agreement -- fail to state a claim. A claim is in fact stated, says Judge Carney.
Judge Carney did not address any other issues, like whether the conversion claims might also have been preempted by Copyright Law or barred by the Economic Loss Rule, because they were unnecessary to his decision. Judge Carney also noted, but refused to engage with, the Rule 7-3 fiasco.
First, theft of trade secret damages have the potential to be much greater than mere breach of contract damages.
Plus, on top of that larger number, CUTSA allows the recovery of treble damages -- 1x damages for actual damages, including loss of royalties and unjust enrichment -- plus 2x exemplary damages if willful and malicious misappropriation exists (California Civil Code 3426.3).
Treble damages is less than the general tort punitive damages that might have been available with a conversion claim, which can be a multiple-higher-than-two of actual damages, but willful and malicious conduct is an easier standard to establish than for general tort damages. Willful and malicious looks well within the realm of possibility, and treble the actual damages, royalties, and unjust enrichment award could be a very large number.
The federal statute -- Defense of Trade Secrets Act -- appears similar to CUTSA in the important respects, including damages allowed. We'll see if any important differences emerge between these two claims, but probably it is just two roads to the same place. Although, because DTSA was enacted May 11, 2016, there may be a question as to whether all of Elysium's alleged misdeeds are subject to the federal statute.
So ChromaDex now heads into discovery and trial with new breach of contract claims, and new trade secret claims, that include a very plausible path to treble damages. Dismissal of the conversion claim allowed Elysium to bail a little of the water out of its boat, but the boat continues to sink.