ChromaDex today proposed to file a First Amended Complaint in New York. You can read the proposed complaint, and the brief explaining why ChromaDex thinks it should be allowed to file it.
This is one barn-burner of an Amended Complaint -- I think it will prove devastating.
But before we get into the details, let's tarry a moment on the process, and then we'll take a guess at what happens next.
Background
This New York case started when Elysium filed a complaint objecting to ChromaDex's FDA petition. ChromaDex then filed its own complaint alleging a nefariously conceived plan to destroy ChromaDex, plus, tortious interference, unfair competition, and false advertising.
The Court in New York consolidated the two cases into a single action, which was then transferred from Judge Caproni to Judge McMahon.
Judge McMahon allowed most of ChromaDex's claims to go forward (unfair competition and false advertising), but dismissed ChromaDex's claims for tortious interference.
Judge McMahon subsequently dismissed Elysium's entire original complaint on First Amendment grounds, but by then Elysium had filed new claims alleging false advertising.
So what's left in New York is mostly dueling claims for false advertising and unfair competition. And all of the false advertising claims for both sides I had thought were seemed like baskets of minor stuff, like misusing the word "pure" or misrepresenting the recommended dose.
I don't think that now, though.
Proposed First Amended Complaint
ChromaDex says that it's proposed First Amended Complaint accomplishes four things:
First, it adds three new categories of alleged false and misleading statements that Elysium allegedly made in its advertising and marketing materials.
Second, it deletes facts that are no longer applicable because they related to dismissed claims.
Third, it is a complete re-write that streamlines the overall presentation of facts.
Fourth, it provides additional information regarding Elysium’s misrepresentations as to statements regarding the testing and production of Basis and the research of the science behind Basis.
Those following this litigation know that amending a complaint is a pretty routine thing, because ChromaDex recently got approval to file a FIFTH amended complaint in California, so a first amended complaint doesn't seem inherently controversial. It's true that more than a year has passed since the original complaint was filed, but the entire year was filled with dispositive motions, and, as ChromaDex explains in its brief, because discovery has not yet started, Elysium would suffer no prejudice.
So I will be very, very surprised if leave to amend is denied.
I won't be too surprised, though, if Elysium files an opposition brief, because Elysium has proven itself to be litigious, and an opposition brief might slow things down, or at least give them time to think about what is happening.
Then, regardless of whether Elysium opposes the Amendment, I won't be surprised if Elysium also files a motion to dismiss the FAC. And if so, I predict that such a motion to dismiss would be denied, too, partly because the new categories may be well-stated; partly because we already know what kinds of false advertising allegations Judge McMahon thinks state a claim; and partly due to the way the claims all fit together as described in PFAC.
So let's first take a look at the new categories of alleged false advertising and/or deceptive business practices:
New Category 1
Allegation: Basis does not contain the amount of advertised NR
The FAC alleges that while Elysium advertises that each Basis dose contains at least 250 mg of NR, many doses actually contain less than the advertised amount. testing of commercially available Basis revealed that as many as a third of Basis doses sold to consumers contain materially less NR...On information and belief, Elysium fails to conduct adequate testing to ensure that its new ingredients contain consistent amounts of NR, were as potent as advertised, and were stable after production.
New Category 2
Allegation: Elysium fails to warn consumers that Basis may raise levels of “Bad Cholesterol” and claims Basis is “safe” and “pure”
The FAC alleges that Elysium’s claims that Basis is safe and pure are false and misleading and belied by its failure to warn consumers that, according to its own research, the PT in Basis causes significantly increased risk of higher Bad Cholesterol: Elysium fails to warn consumers that the active ingredient PT in Basis has now been shown to increase low density lipoprotein cholesterol (LDL-C), often referred to as “Bad Cholesterol." Despite the fact that Elysium’s own clinical study established this risk, the Basis product labels and Elysium’s marketing materials are devoid of any warning of the increased levels of LDL-C and the associated health risks. These health risks would be highly material to the purchasing decisions of consumers. Elysium’s advertisements are not only deceptive by omission, but also contain affirmative misrepresentations. Elysium’s claims that Basis is “safe” and “pure” and that it prioritizes “quality, safety, and efficacy,” are false and misleading and are plainly belied by its failure to warn consumers about the substantial risks posed by Basis.
New Category 3
Allegation: Elysium falsely represents to consumers that it is the exclusive licensee of a patent for the use of NR
The FAC alleges that Elysium’s advertisements claiming to be the exclusive licensee to a Harvard and Mayo Clinic patent on the use of NR in supplements to treat age-related diseases are false and misleading:
On August 16, 2018, Elysium announced that it had entered into an exclusive license agreement with the Mayo Clinic and Harvard University related to the uses of NR . . . .
63(e)(iii). Elysium’s announcement is intended to make consumers believe that Elysium is the exclusive licensee of a patent obtained by Harvard and the Mayo Clinic and is now the only party that can sell NR supplements for use in connection with ageing or age-related diseases. Exclusive access to such a patent, and from such preeminent institutions, would be highly material to consumers. 63(e)(iv). In reality, Elysium has licensed a patent application—not an issued patent. Moreover, by the time of Elysium’s announcement, all of the claims in this patent application had either been abandoned by the inventor or rejected by the U.S. Patent and Trademark Office as obvious or anticipated by prior art. (emphasis added)
Analysis of the New Categories
Wow!
So the first category, that Basis allegedly short-changes customers by not providing the promised dose of NR seems like a serious deal, but I'm not sure it's a false advertising claim so much as a breach of warranty claim. I can imagine this as a false advertising claim if Elysium were intentionally or nefariously short-changing customers in order to sustain its business model. Or -- as I think ChromaDex is trying to make out -- if the shortages are just another aspect of a larger pattern of improper behavior. But if it's just sloppy quality control, by itself, that strikes me more as a product defect, better handled as a class action by Elysium's customers. So we'll see what happens there.
The second category I have some doubts about, too. I believe that ChromaDex is sincere in its concern that Pterostilbene is unhealthy, but I'm not sure that even an unhealthy side effect makes Basis inherently unhealthy. For example, could ANYBODY legally sell pterostilbene without ChromaDex's proposed warnings? Maybe that's the law -- I don't know -- but I'm not convinced that this particular side effect is so severe that it needs to be disclosed as a condition of sale.
I get it that Elysium's own data is the source of the concern, so Elysium can't claim ignorance, and it certainly casts doubt on the integrity of Elysium's general health-and-science pitch. So that's a potential reason to dislike or distrust Elysium, but does it mean they broke the law? Viewed in isolation, I wouldn't be convinced. So we'll see what the subsequent legal documents say -- but I'm not sure this claim survives. It might be more interesting to customers than to judges. But, again, if what ChromaDex is complaining about is really just another manifestation of a deeper pattern of behavior that is not legal, then this might be probative.
The third category of alleged false advertising strikes me as very strong. I was tempted to write an essay last year about Elysium's weird claim to have exclusively licensed a patent application, especially since one of the Trolls was drumming it up, because the announcement gave me the distinct impression that Elysium was saying that it had somehow obtained a legal right to sell NR that was superior to ChromaDex's or exclusive of ChromaDex. That struck me as deceptive and unfair at the time, but I actually couldn't -- or at least I didn't -- get to the bottom of exactly what their alleged intellectual property right was so I could evaluate it properly.
So it seems to me a very, very bad thing, if true, that, as ChromaDex alleges, "by the time of Elysium’s announcement, all of the claims in this patent application had either been abandoned by the inventor or rejected by the U.S. Patent and Trademark Office." The communication about the alleged license would seem to go to a specific point of competition between Elysium and ChromaDex -- who was the legal right to sell the product -- and it would seem from the allegations that Elysium was intentionally or recklessly trying to convey a false impression.
So all three of these new categories of alleged false advertising seem like they are relevant to investors, and at least one of them seems very strong on its own. We'll withhold judgment on the others until we can review the parties' arguments in the inevitable motions.
BUT...
Even though these are really interesting false advertising allegations, I would not call them "devastating."
Devastating
What I find devastating is the new, streamlined presentation of the facts in the proposed FAC. Read it here.
It's not that there's so much new in the complaint. The causes of action are the same, the $200M prayer for relief is the same, the story about Elysium's plan to take over ChromaDex is the same, although the "nefariously conceived" language is gone, as is any reference to short-selling.
Instead, what we now have is single, integrated compelling portrait of how Elysium's entire business model violates the laws against unfair competition and false advertising, instead of just alleging that numerous isolated individual advertisements do.
The proposed complaint constructs a convincing mosaic and suggests supporting evidence, that if true, would be truly devastating.
So although I don't know whether the pterostilbene allegations and quantity mislabeling allegations by themselves individually would hit their mark, I'm pretty confident that the entire story lands a knockout blow on the issue of false advertising and unfair competition.
It will still be ChromaDex's duty to prove the facts it is alleging, but I wouldn't be surprised if they could.
I would encourage anyone following this litigation to read the proposed FAC start to finish and draw their own conclusions. It is lengthy, but I cannot do it any justice by paraphrasing, because it's an integrated story, not a collection of soundbites.
But I will quote one paragraph from the prayer for relief, in which ChromaDex requests, among other things, that:
Elysium be ordered to publish for a period of not less than twelve months corrective advertising in all media cogently explaining that (1) Basis is not the subject of a filed NDIN or a successful GRAS submission to the FDA; (2) Elysium and Guarente were not involved in the development of the science behind NR; (3) the compounds used in both of its clinical studies were purchased from ChromaDex and that those ingredients are no longer used in Basis; (4) Basis was not the first NR supplement to market and was not the first NR supplement clinically proven effective; (5) Elysium does not hold a license to a patent covering uses of NR; (6) Elysium’s scientific advisors were not involved in the development or testing of Basis and do not vouch for its safety or efficacy; (6) Basis creates a risk of causing a substantial increase in LDL-C in consumers; and (7) Basis capsules may not contain the stated amount of NR;
CONCLUSION
It seems to me that we are getting to the point in the fight where the referee needs to stop it and declare a victor. The legal system doesn't have a rule like that, but I don't see how this could end well for Elysium. Maybe someone wise and trusted will break the news to Elysium that they should start putting their affairs in order.