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  • Shelly Albaum

CDXC's Opposition to Elysium's Motion to Dismiss the 5AC


We now have ChromaDex's brief opposing Elysium's motion to dismiss the new claims asserted in ChromaDex's Fifth Amended Complaint, and it's a beaut. You can read it here:

ChromaDex's Opposition Brief (MTD 5AC)

When Cooley filed its summary judgment brief in New York in October, I had nothing but superlatives for it. I said,

There is no conceivable way for me to properly characterize or summarize the kevlar-clad mountain of a battleship that Cooley just piloted into New York harbor. Wow. The arguments are so clear, so compelling, and so well-supported that you should just allow yourself to be dazzled, and if the Court denies this motion for summary judgment I will be shocked.

I felt kind of bad not to be able to give some flavor of the arguments, because they deserved the world's brightest spotlight, but I felt that if I displaced even one word there would be diminishment; paraphrase an idea, and the structure would fall. It was an absolute beauty.

Well, the rest was history. Judge McMahon granted that summary judgment motion so hard that Elysium barely knew what hit them (although they have since figured out what hit them, and they have filed a motion for reconsideration, which we shall review in a future post).

The brief that ChromaDex filed in opposition to Elysium's motion to dismiss the 5AC is of similar calibre, and I will once again go out on a limb and assert that I will be shocked if Elysium's motion is granted.

Let's see why.

Review

As Judge Carney summarized, ChromaDex's Fifth Amended Complaint adds Mark Morris as a defendant, and asserts several claims against Morris and Elysium based on Morris's alleged misdeeds and Elysium's participation in that:

ChromaDex seeks to add Morris as a defendant and assert five causes of action against him, including misappropriation of trade secret claims, breach of certain confidential agreements between Morris and ChromaDex, and breach of fiduciary duty. ChromaDex also seeks to add two new causes of action against Elysium for aiding and abetting Morris’s breach of fiduciary duty and for breach of contract with respect to Elysium’s confidentiality obligations to ChromaDex.

Elysium moved to dismiss on the following grounds:

  • Morris's contractual obligation to keep secrets fails for lack of consideration

  • A claim based on Morris's breach of fiduciary duty is preempted by CUTSA

  • Since Morris is not liable, there is nothing for Elysium to have aided and abetted

Cooley comes out of the box breathing fire:

Defendants Elysium Health and Mark Morris improperly seek dismissal of the sixth, seventh, and eighth claims of the Fifth Amended Complaint (“FAC”). Defendants’ Motion to Dismiss ignores controlling authority on pleading contract formation, contorts trade secret law beyond recognition, and misconstrues key factual allegations in the FAC. The Court should deny the Motion.

Lack of Consideration

As for lack of consideration, ChromaDex makes three arguments:

(1) Consideration is presumed

(2) CDXC's failure to search Morris on the way out was consideration, and

(3) CDXC has detrimentally relied on Morris's promise, so no consideration is necessary

Here is how that reads in the brief:

Defendants are wrong, for several reasons. Under California law, ChromaDex is not required to allege consideration for the July Confidentiality Agreement because the Court presumes consideration for a written agreement. Cal Civ. Code § 1614; Henke v. Eureka Endowment Ass’n, 100 Cal. 429, 432-33 (1893). Even if ChromaDex were required to allege consideration, it does: Morris had access to ChromaDex confidential information after he signed the contract and, based on his agreement that he would protect that information, ChromaDex took no further steps against Morris to ensure his fidelity. Lastly, even if consideration were not adequately alleged (and it is), Morris should be estopped from arguing his promises were “nothing but gratuitous,” because he knowingly and voluntarily signed the July Confidentiality Agreement under an affirmative duty to be truthful. ChromaDex relied on his promise to its detriment.

How strong are these arguments? I'd say it's a slam dunk.

The first argument is the strongest, and the reason for that involves a technical legal issue, which is the pleading standard. A motion to dismiss tests the allegations, not the evidence, and it doesn't matter if the plaintiff is unlikely to win in the end. The question is simply whether each element is adequately alleged. If consideration is presumed when the contract is written, then that presumption would satisfy the pleading standard, even if later at trial Elysium manages to rebut the presumption.

So let's take a quick look at the laws that ChromaDex' cites for the proposition that consideration is presumed when there is a written contract.

First, they cite an 1893 case, which is how you make fun of your opponent, by pointing out that the law they are tangling with is way, way, way settled. Here is what the California Supreme Court said in Henke v. Eureka (in 1893):

When the plaintiff averred in her complaint that the defendant executed a contract in writing...she stated facts from which the law presumed a consideration; hence, it was unnecessary to aver it specially...The necessity of pleading a consideration for the contract is obviated by the fact that it is in writing.

So, that is exactly what Henke says, and there's no indication that the law has changed. The statute that Henke relies on, Cal Civ. Code § 1614, is also still the law, so that should be that, at least on a motion to dismiss, and I doubt the court will bother to consider the second two grounds.

But should the Court choose to do so, at first you'd wonder whether allowing Morris to leave without searching him or otherwise hassling him would constitute adequate consideration for a contract. But "consideration" isn't really a substantive requirement, but a structural requirement.

To determine whether an agreement is a legally enforceable contract, rather than an unenforceable promise, courts look to whether there was some kind of exchange of value, and courts do not care about the amount of value exchanged -- even a "peppercorn" would be adequate value.

So one might reasonably ask, Why would Mr. Morris agree to sign the document if he were in the act of dishonestly defying the document while he signed it, as alleged? Why wouldn't he just say, "No, I won't sign this, I'm taking whatever information I think I'm entitled to!" The answer would mostly likely be that he did not want to alert ChromaDex to his plans, because then ChromaDex might have taken some action against him, which is precisely what ChromaDex alleges it would do. So that DOES look like an exchange of value occurred.

As for the third ground, detrimental reliance on a promise, that seems obviously to apply, too.

So I see very little chance that ChromaDex's contract claim against Morris gets dismissed.

Breach of Fiduciary Duty

Is ChromaDex's breach of fiduciary duty claim preempted by CUTSA, the California Uniform Trade Secrets Act? ChromaDex says no:

Defendants move to dismiss ChromaDex’s seventh and eighth causes of action, which allege that (1) Morris breached his fiduciary duty to ChromaDex by acting as Elysium’s agent and lying to ChromaDex while still an executive there and (2) Elysium aided and abetted Morris in his breach. Defendants do not contest that the FAC plausibly alleges that Morris had a fiduciary duty to ChromaDex and breached it. Defendants also appear to admit the sufficiency of the allegations that Elysium encouraged and directed Morris’s misconduct. Defendants could hardly suggest otherwise, given these claims are based on smoking-gun admissions found in contemporaneous documents. Instead, Defendants suggest only one thin reed for dismissal: that the California Uniform Trade Secrets Act (“CUTSA”) preempts the claims. Not so. Defendants’ actions, as alleged in the FAC and described below, cover far more than merely the theft of ChromaDex documents. Document after document produced by Elysium in this case reveal Defendants’ shocking efforts to undermine and destroy ChromaDex, efforts that in many instances were successful because of Morris’s willingness to deceive and betray his employer. Because the breach of fiduciary duty and aiding and abetting claims arise from Defendants’ egregious behavior, and not the theft of confidential documents, they are not preempted. (emphasis added)

The distinction that Cooley is drawing here is between breaching a fiduciary duty by stealing trade secrets, which might well be pre-empted by CUTSA, and breaching a fiduciary duty by competing with ChromaDex, lying to ChromaDex, and undermining ChromaDex while still employed by ChromaDex, which might not involve trade secrets at all. Stealing trade secrets would be one way to accomplish that, but not the only way, and ChromaDex has alleged other kinds of acts, like "encouraging ChromaDex to fulfill the June 2016 orders, even though he knew that Elysium did not intend to pay for them." That's a breach of a fiduciary duty that doesn't involve trade secrets, and ChromaDex mentions others in the brief.

So I can imagine that CUTSA might limit some of the bases upon which ChromaDex could assert a fiduciary duty breach, but it certainly cannot immunize all of Morris's alleged conduct from a fiduciary duty claims. Or, as Cooley puts it,

Morris was perfectly capable of both stealing ChromaDex documents and information for Elysium’s benefit and breaching his fiduciary duty to ChromaDex, and the FAC alleges that he did both. Defendants may not conflate those separate strands of Morris’s unlawful behavior simply to escape liability.

Aiding and Abetting

And since the breach of contract and breach of fiduciary duty claims against Morris aren't going to be dismissed, neither is the aiding and abetting claim against Elysium.

#CDXC #ChromaDex #ElysiumHealth #Litigation

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