The question I am most frequently asked about the litigation is when it will end.
It is a good question, and deserves a good answer, which I will now provide.
But first, here is a glib answer, which is true in important ways, but unsatisfying:
"No, it will never end. There will be appeals, and then follow-on cases for infringement, and then enforcement litigation after that, each with its own procedural nightmares. It. Will. Never. End."
And that's just how it is for businesses that own something valuable, like Apple, Disney, or Pfizer. Big companies routinely in-source an entire law firm that is permanently employed just to manage the endless litigation. The big banks and insurers employ HUNDREDS of attorneys in-house.
So the better question isn't when this litigation will end,
but when investors should stop caring about this litigation.
I will argue that that point has already occurred.
It is in the past. It happened sometime between when the PTAB rejected Elysium's challenge to the '807 Patent and when ChromaDex filed its Fourth Amended Complaint.
I cover the Elysium-ChromaDex litigation because I find it interesting. But I don't think investors should follow my blog because there remains any significant uncertainty in the outcome. Investors should only be reading about this because it's really interesting!
Why Might Investors Care About This Litigation?
There are two potential reasons why this litigation might be important to investors. First, there is the potential risk to ChromaDex if Elysium were able to impair ChromaDex's intellectual property. Second, there is the potential for a big payday if ChromaDex were to recover a massive judgment against Elysium.
I do not believe there is a significant potential for either outcome.
Instead, the litigation has now shifted to being an ongoing cost of business, which, if managed well, may sooner or later ease up and free some additional capital to be invested elsewhere.
Eventually that will happen, but ChromaDex can't exert much control over when. As long as people keep paying the $400 filing fee to file complaints in federal court, ChromaDex will have to defend against every one of them.
I would go further, though, and suggest not only that there is no potential legal win for Elysium, but that there never was.
Elysium's purpose with the litigation was never to win the litigation. The reason I believe this is because Elysium's primary weapon was a Doomsday machine -- Mutually Assured Destruction via the invalidation of the patents that both companies need to survive -- and Elysium fired that weapon early, not as a last resort.
So it makes much more sense to guess that the litigation plan all along was to create pain for some strategic purpose OTHER than to achieve some self-destructive legal outcome. Most likely, the goal was simply to create enough duress at ChromaDex to dictate terms of a settlement.
But that didn't work, and so the game is now over, and ChromaDex is simply running out the clock.
But What About ChromaDex's Big PayDay?
But what if ChromaDex wins the litigation? Won't it be entitled to a big fat judgment from Elysium, including treble damages for willful infringement, and treble damages for willful and malicious theft of trade secrets?
Indeed, Elysium might eventually confront such a judgment, but the odds of Elysium's PAYING the big bucks to ChromaDex are a lot lower. Elysium is much more likely to keep its cash low and its assets encumbered, so that a Chapter 7 bankruptcy filing can leave unsecured judgment debtors like ChromaDex with nothing to show for their efforts.
It would be different if Elysium were a big business with big profits and a bright future. But so far Elysium looks more like a small company with a single product, and no future if that product goes away.
Which means there will be nothing left but a bag of bones and a shitty trademark if ChromaDex wins a big judgment against Elysium.
But, But, But...?
So given that ChromaDex can't lose and Elysium can't win, what are they actually litigating about?
ChromaDex's biggest liability is the cost of the litigation itself, which is actually quite a bit in excess of any amount that Elysium can reasonably claim to have been harmed by ChromaDex's allegedly improper behavior. So ChromaDex's primary goal is to end the litigation, which means, paradoxically, that goal of the litigation is to stop litigating.
Elysium, by contrast, still apparently wants to maneuver ChromaDex into a position where it can negotiate a favorable settlement.
Early on, Elysium might have dreamed of a favorable settlement that involved absorbing ChromaDex entirely, or acquiring ChromaDex's most valuable assets -- or at least getting privileged distribution rights.
But all that is gone. Now the only thing that Elysium can hope for is to survive long enough to migrate its business to some sustainable model, which means at least selling a product that doesn't obviously and concededly infringe someone else's apparently unassailable intellectual property.
Why Can't the Case Just Settle?
I do not see a scenario where Elysium forces ChromaDex to settle. That would require some kind of financial duress, and ChromaDex has lots of cash and ready access to more.
I also can't see a scenario where ChromaDex WANTS to settle with Elysium, because Elysium doesn't have enough to offer. ChromaDex doesn't want Elysium's brand, doesn't need their expertise, and will get their customers anyway.
The only thing Elysium can offer that would be really valuable would be to end the litigation. That WOULD be valuable -- probably worth a million dollars per month or more. But what would ChromaDex give up in exchange for that?
I can see Elysium making the following offer: "We'll just pretend this whole thing never happened. Elysium agrees to stop selling NR and pterostilbene, and ChromaDex agrees to not pursue any damages or claims based on Elysium's past sale of NR and pterostilbene."
I can't imagine ChromaDex accepting a deal like that. Not only does it set a bad precedent for future infringers, and leave shareholders demanding some sort of reparations for all the money spent and lost, but it also leaves Elysium as a competitor with no obvious incentive to not begin once again infringing on ChromaDex IP when the weather improves.
It's one thing to not be able to recover any damages because your opponent declared bankruptcy; it's entirely different to allow your opponent to walk away unharmed.
That's why I think ChromaDex would insist in any settlement on significant payments, which would likely be ruinous for Elysium, which is why settlement is not possible.
So Why Can't ChromaDex Lose?
Okay, so I get it that the matter won't settle, and ChromaDex can't recover a big judgment. But isn't there a risk that Elysium wins its claims and ChromaDex's claims get denied?
The primary difference between the claims asserted by ChromaDex and the claims asserted by Elysium is this:
ChromaDex's claims are really easy to prove, and Elysium's claims are really hard to prove. And Elysium's affirmative defenses will be even harder to prove.
Is it fair to say that ChromaDex almost certainly will win?
Absolutely.
Let's start with the most important claim of all, the one lurking beneath all the others: Elysium is allegedly infringing ChromaDex's patent on Nicotinamide riboside formulated as a health supplement that increases NAD. That's the '807 patent.
There is no doubt in the world -- everyone agrees -- that Niagen and Basis are both health supplements containing nicotinamide riboside and formulated to increase NAD.
And Elysium ALREADY LOST its challenge to the '807 patent. So even if every other patent in ChromaDex's portfolio magically disappeared -- and they certainly will not -- Elysium would still obviously be infringing. So ChromaDex already won the most important battle.
Elysium may yet attempt to articulate some new invalidity and non-infringement affirmative defenses, but they haven't yet, and I haven't heard of any, and so absent some theory, there is simply no basis to think that Elysium has not been infringing the '807 patent for the past 18 months and won't eventually be called to account.
But What About Elysium's Affirmative Defense?
Elysium also asserts an affirmative defense of Patent Misuse, which could mitigate or even eliminate Elysium's liability for infringement.
But Judge Carney has already ruled that in order to establish this defense, Elysium will have to show "that it was forced to buy the license for the trademarks" (page 18 of Judge Carney's first opinion) -- in other words that Elysium was not just required to license or use ChromaDex's trademarks, but that it paid money to do so.
Anyone in the world is free to read the actual agreement, which makes crystal clear that the royalty payments are for sales of Niagen, not for the use of trademarks. Indeed, common practices in the industry will show that licensees always have to agree to terms upon which trademarks may be used -- it's a boilerplate contract -- and never have to pay for the trademarks (they pay for sales of trademarked goods).
Elysium doesn't even propose a reason why ChromaDex would be charging it for trademark use, since ChromaDex is free to charge whatever it wants for the patented product. It is unlikely to be true that Elysium was required to pay for trademarks, if for no other reason than simply because there is no reason for the parties to have structured things that way. And Elysium has nowhere in its pleadings explained why such an unprecedented thing might nonetheless have happened. And then even if it did happen, why the actual contract seems to say just the opposite.
Judge Carney has been very indulgent in allowing Elysium to attempt to prove its novel theory, but we don't have to wait for discovery to be completed before we can evaluate Elysium's odds of successfully proving it.
Go ahead, read the Royalty and Trademark License Agreement to see if it says anywhere that Elysium is "buying," or paying money in exchange for, the use of ChromaDex's trademarks. It doesn't. Moreover, anyone can check industry standards to see if paying royalties for optional trademark use ever happened in the past. [I went over this at length here.] And finally, anyone can read ChromaDex's explanation of what actually occurred instead.
Here, read ChromaDex's explanation and decide if it makes sense and is more likely to be proved. This is from ChromaDex's Motion to Dismiss the Patent Misuse Claim:
Rather than payment for a trademark license, Elysium’s royalty payments are a deferred portion of ChromaDex’s compensation for the supply of NIAGEN. When first negotiating with Elysium, ChromaDex “sought to require upfront cash payments, minimum purchase commitments, royalties and even [an] equity position[]” in exchange for its supply of NIAGEN. Because it was a start-up with “limited resources,” Elysium “could not meet” all of ChromaDex’s requirements. The final agreement between the parties—the NIAGEN Supply Agreement plus the Royalty Agreement—memorializes the compromise between what ChromaDex wanted and what Elysium could pay, and when. Because Elysium could not pay the full cost of NIAGEN up front, ChromaDex agreed to accept a portion of that compensation in deferred royalties based on Elysium’s sales. [citations omitted] [emphasis added]
and in ChromaDex's Reply Brief for the same motion:
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. Instead, the license is directed to protecting the integrity of ChromaDex’s marks if Elysium optionally uses those marks, by reserving to ChromaDex a “right of prior approval” and providing “Brand Usage Guidelines.” Whether Elysium actually uses the ChromaDex trademark is entirely at Elysium’s option and the trademarks are simply not a “required product.” [citations omitted] [emphasis added]
So Elysium is not going to be able to prove its affirmative defense of Patent Misuse -- the facts simply don't line up with the allegations.
And because Elysium's affirmative defense fails, that means Elysium really needs to not be infringing.
But as we have seen, there is no current challenge to the patent's validity, and no known reason to think that Elysium isn't infringing the '807 patent.
ChromaDex's other claims are like that, too. For example, Judge Carney has ruled that the information Elysium allegedly received from ChromaDex's employees constituted trade secrets, and there seems little doubt that the emails and documents revealed in discovery establish that Elysium in fact received the secret information and used it. So this isn't going to be a hard claim to prove; it's just about damages.
So that's why I say ChromaDex's claims are easy to prove.
Elysium's Claims
Elysium's claims aren't anything like that.
Elysium's fraudulent inducement claim is based on a novel legal theory that a negotiating position -- a statement of the terms on which one is willing to do business during a contract negotiation -- can constitute fraud if it later turns out that one would have been willing to do business on other terms. ChromaDex isn't alleged to have misrepresented its ability to produce Niagen, or Niagen's qualities, or ChromaDex's ability to comply with its obligations under the contract -- just the terms under which it does business.
Elysium's breach of contract claim also rests on the interpretation of an intrinsically ambiguous contract clause -- the "most favored nation" clause that gives Elysium some rights IF they have the most purchase volume, but does not specify the period in which the volume must be measured. The most in a single order? A month? A quarter? A year? Ever? However the contract gets interpreted, it's not a slam-dunk, and hardly the basis of a fraud claim.
And for reasons I have already thoroughly covered, (e.g., here), Elysium's claims in New York are very likely to be dismissed.
So that's why I say that ChromaDex is almost certain to win, and Elysium is almost certain to lose and Elysium is ALSO unlikely to be able to successfully assert any important claims against ChromaDex.
So that's why investors shouldn't care very much about this litigation. It will continue indefinitely, maybe forever, probably until Elysium is exhausted. And it will be a drain on operating resources until Elysium finally does something different.
But, for the reasons I have described above, the risk and the expense associated with the litigation isn't likely to play a big role in ChromaDex's long-term fate.
________________
But there is more to the litigation than just the technical legal issues, and that is why I will explain in a companion piece, which I hope to publish later this week, how we know that Elysium's goose really is cooked.
Stay Tuned!
________________________________
DISCLAIMER
I own shares of ChromaDex (NASDAQ:CDXC), and I am a former customer of Elysium Health. I have no official relationship with either company.
I am an attorney, so I have been tracking this litigation, analyzing events, and gathering the litigation documents, mostly as a service to shareholders, journalists, and industry observers who are interested in the dispute.
Anyone who believes that ChromaDex might own patents on a Fountain of Youth could be forgiven for wondering whether they should consider buying a piece of the company. It is an unusual opportunity, since most tiny companies with such big dreams are privately held; normal people can't buy shares.
ChromaDex probably wishes that it WERE privately held, because by becoming a public company it exposed itself to a number of significant risks, such as hostile takeovers and short attacks, which have in fact left the company embroiled in costly litigation.
Whether ChromaDex eventually succeeds or fails as a company is not a sure thing, and depends on many factors, such as the outcomes of the various legal actions, the quality of ChromaDex's intellectual property, their ability to defend against pirates, how the science evolves with NR, and whether comparable or better alternative methods of elevating NAD emerge. So I don't particularly recommend that anybody enter the high-risk world of microcap nutraceuticals.
But regardless of whether being a ChromaDex shareholder is a good thing, I feel pretty certain that being a ChromaDex customer is a good thing.
ChromaDex isn't allowed to say that NR treats any disease, because the FDA has not approved that. But the FDA does not regulate me, so I am free to tell you that the scientific evidence is growing that NR supplements replenish cellular NAD, which can protect against MANY ailments, including Alzheimers, Heart Disease, Parkinson's Disease, Breast Cancer, alcohol-induced liver poisoning, chemotherapy-induced peripheral neuropathy, organ injury from sepsis -- and in my own experience, Restless Legs Syndrome (RLS).