CA Court Denies Elysium's Motion to Dismiss
Judge Carney in California this week denied Elysium's motion to dismiss ChromaDex's new breach of contract and breach of fiduciary duty claims against Mark Morris and Elysium Health. You can court's decision here:
Order Denying Elysium's Motion to Dismiss 5AC
ChromaDex's 5th Amended Complaint alleged that Mark Morris violated his contractual confidentiality obligations and breached his fiduciary duties when, ChromaDex alleges,
Using Morris's information, Elysium purportedly conspired with Morris and hatched a plan to obtain a market advantage over its competitors, including over ChromaDex. Under this plan, Elysium would order a twelve-month supply of Niagen and pTeroPure from ChromaDex. After obtaining a stockpile, Elysium then planned to seek out alternate sources of ingredients and eventually compete with ChromaDex in the manufacture of NR and synthetic pterostilbene. While still at ChromaDex, Morris apparently knew of Elysium's plans to displace ChromaDex in the market. Elysium then put its plan into action...
Elysium had argued that one of Morris's contracts was unenforceable because it was a mere promise (lacking exchange of value) signed on the day that Morris left.
Elysium also had argued that ChromaDex could not pursue a breach of fiduciary claim against Morris because the alleged breach of fiduciary duty involved trade secrets, and thus could only be asserted as a trade secrets claim.
Judge Carney smited down those two arguments with stunning precision and force.
Argument 1 Smited:
Defendants argue that California courts “regularly grant motions to dismiss breach of contract claims based on written agreements” for a lack of consideration. But many of the cases cited by Defendants do not even address California Civil Code § 1614...Or Defendants’ cited cases deal with letters or oral agreements, to which section 1614’s presumption does not apply...Given the presumption under California Civil Code § 1614, the Court finds that ChromaDex adequately alleges that the July Confidential Agreement is supported by sufficient consideration.
Argument 2 Smited:
ChromaDex’s breach of fiduciary duty claims are premised on two theories distinct from the misappropriation of confidential information. First, ChromaDex contends that Morris breached his fiduciary duty by encouraging ChromaDex to fulfill Elysium’s extraordinarily large purchase orders in June 2016. Morris never disclosed that he had accepted an offer of employment from Elysium. Morris also did not inform ChromaDex that Elysium’s orders were expected to last for nine months, that Elysium did not intend to pay for the orders, and that Elysium was preparing to compete with ChromaDex by obtaining an alternate source of NR. Second, while a ChromaDex fiduciary, Morris allegedly helped Elysium recruit another senior ChromaDex employee, Ryan Dellinger. This conduct allegedly harmed ChromaDex because ChromaDex continued to pay Morris while he recruited Dellinger and Dellinger’s resignation, with less than one day’s notice, required the company to scramble to find a new Director of Scientific Affairs. Since ChromaDex’s breach of fiduciary duty claims are premised on conduct broader and different from the taking of confidential information, they are not preempted by CUTSA. [citations omitted]
So there are a few interesting things here.
First and foremost, of course, good for ChromaDex, they get their day in court on these additional claims. When trial begins in July, ChromaDex will now be asserting eight claims against Elysium and/or Morris:
1. Breach of pTeroPure Supply Agreement (Elysium)
2. Breach of Niagen Supply Agreement (Elysium)
3. Misappropriation of Trade Secrets (state law) (Elysium and Morris)
4. Misappropriation of Trade Secrets (federal law) (Elysium and Morris)
5. Breach of February Confidentiality Agreement (Morris)
6. Breach of July Confidentiality Agreement (Morris)
7. Breach of Fiduciary Duty (Morris)
8. Aiding and Abetting Breach of Fiduciary Duty (Elysium)
Second, the Court did a great job summarizing ChromaDex's complaint. Because this is a motion to dismiss, the Court is not agreeing with ChromaDex's version of events, but only articulating ChromaDex's version of events to evaluate the legal significance if proved. However, it is important for ChromaDex that the Court have a good understanding of what ChromaDex thinks happened, and Judge Carney's account clearly shows that.
Third, the Court seems to be tiring of Elysium's sophistry. I spent a fair amount of time deconstructing Elysium's arguments here -- to show that they could be defeated head-on -- but the Court took a different approach, pointing out that Elysium's own citations did not support its argument:
"But many of the cases cited by Defendants do not even address California Civil Code § 1614...Or Defendants’ cited cases deal with letters or oral agreements, to which section 1614’s presumption does not apply..."
Why does this matter? A note about judicial clerks. Judicial clerks typically serve for a year, maybe 18 months. A clerk who serves longer than that typically will not extend with the same judge but would be serving consecutive clerkships with different kinds of judges or courts. A federal judge will have 2-3 clerks at once, to whom the cases will be randomly assigned. When one clerk leaves, a different clerk will pick up the departing clerk's cases. Since ChromaDex filed its original complaint more than two years ago, the original clerk is probably no longer handling the case.
The judicial clerk is the one who reads the court pleadings, reads the exhibits, reads the briefs, does the independent legal research, and drafts the opinion. The district judge will always read the clerk's draft opinion, and usually make changes, but the judge will not usually do their own independent legal research, and will rarely read the underlying pleadings or exhibits, except in the most important or vexing cases. A litigator recently told me that for the same legal proposition he would "always prefer to cite a 10-page opinion than a 50-page opinion because it was more likely that the clerk would actually read" the shorter case.
So it is the judicial clerk who has to read through all the cases cited by the parties in their briefs, and I detect in these two sentences above not only a clerk who takes his or her job seriously, but just the slightest expression of annoyance that the cases did not support the asserted proposition -- as in, "stop wasting my time."
It is not the kind of rebuke you want your judge signing, and it suggests either that Baker Hostetler is incompetent (highly unlikely), or that Baker Hostetler is arguing weak positions on their client's behalf (highly likely), and forcing legal arguments beyond the breaking point of the supporting authority.
Well, that is exactly what I have suggested has been going on from the beginning, specifically with the Patent Misuse Defense, with the Mootness Argument, with ChromaDex's Fraud Claim (which was improperly dismissed based on a misreading of the Economic Loss Rule) , and with Elysium's Fraudulent Inducement Argument.
But now we have a savvy clerk who is actually reading all the papers and has a functioning bullshit-detector. This can only be good news for ChromaDex.