Ultimate Guide to the Elysium-ChromaDex Litigation -- 2019
Just a reminder that although I am a ChromaDex shareholder, I am NOT recommending that anyone buy or sell the stock.
ChromaDex and Elysium have been embroiled in complex and costly litigation for years. I write this summary partly to assist industry observers, investors, and citizens who are curious about what is happening, but lack the legal knowledge to make sense of it -- but especially for journalists who want to cover the NR and NAD stories, but don't understand the litigation, and therefore ignore it completely (as Time Magazine did), which is itself deceptive and leaves the public regrettably in the dark about the products those journalists cover.
So I will try to cut through the procedural complexity and legal jargon to explain in straightforward terms what the fight is about, what is at stake, and how it is likely to play out.
Much has changed since we last summarized the ChromaDex-Elysium litigation, a titanic battle for control over the most efficient and effective method of maintaining healthy cell metabolism -- which to some, based on mouse-studies, looks like the Fountain of Youth.
In this article we will look at the roots of the dispute, then examine each of the four federal lawsuits (California, New York, Delaware, and USPTO), and finally make some predictions about where it will all end up.
Almost twenty years ago, Dr. Charles Brenner, then a biochemistry professor at Dartmouth College, discovered that Nicotinamide Riboside (NR), a previously known molecule, had some previously UN-known properties. Specifically, NR could function as a vitamin, because Dr. Brenner discovered a metabolic "pathway" that allowed cells to use NR to generate the NAD they need to survive.
This was important because (1) NAD levels decline with age, and (2) that NAD decline appears to cause some of the symptoms of aging. Dr. Brenner's paper announcing the discovery of the NR Kinase pathway was published in 2004.
Dr. Brenner's discovery was not NR's existence as a molecule -- NR was already known. What was new was the discovery that NR might function as a type of B3 vitamin and be a better way of replenishing NAD than existing vitamins.
Dr. Brenner eventually received two particularly important patents for using NR to to replenish cellular NAD -- one patent for NR as a health supplement (the '807 patent) and one patent for NR as a pharmaceutical (the '086 patent).
Dr. Brenner's reputation grew, and he eventually left Dartmouth to found the Charles Brenner Lab at the University of Iowa, where Dr. Brenner is the Roy J. Carver Chair of Biochemistry and Professor of Internal Medicine. The Brenner Lab's research focuses on the role of NAD in cancer, NR-based neuroprotection, and the maternal and neonatal effects of NR.
In 2014, Dartmouth licensed the '807 and '086 patents to a small ingredients supply company called "ChromaDex." ChromaDex gave Nicotinamide Riboside the more familiar (and trademarked) name "Niagen," and licensed it to many distributors to re-sell.
One of those distributors was a brand new company called Elysium Health, which combined ChromaDex's nicotinamide riboside with another ChromaDex patented ingredient -- Pterostilbene -- and called the combination of the two ingredients "Basis."
Elysium's Basis had the numbers of the '807 and '086 patent, which ChromaDex had licensed from Dartmouth, printed on the bottle.
The supply contract between Elysium and ChromaDex was to last three years -- from February 2014 to February 2017. Two important points about the contract are (1) at the end of three years either party could terminate the agreement, and (2) Elysium was entitled to receive the lowest price for NR, as long as Elysium ordered more NR than anyone else.
Things seemed to go okay for two years, but in the third year things went terribly wrong.
The parties do not agree about what happened next, and there has not been a trial, so we do not know for sure. However, from reading almost 200 court documents we have a fairly good idea as to the stories each side is telling, and we even have a sense of the evidence that will be presented. The following account is drawn from those documents.
As Elysium tells it, ChromaDex wrongfully planned to take advantage of Elysium's good work in building the market for NR by cutting out Elysium and taking Elysium's customers. The way ChromaDex allegedly intended to do this was by having ChromaDex insiders create their own branded product, and then selling NR to the insiders at a lower price than Elysium was getting, and then eventually terminating Elysium's NR supply.
Elysium claims that it was an "exemplary customer," and but for an inadvertent disclosure ChromaDex might have succeeded in convincing Elysium that ChromaDex was getting the lowest price for Niagen, when in fact it was not.
Elysium makes a big deal in its complaint about ChromaDex's "plot to eliminate Elysium" from the NR market after Elysium had built its customer base, but it is important to note that ChromaDex had no legal obligation to sell to Elysium after three years, and had no legal obligation to refrain from introducing its own competing product.
Elysium's only strong legal argument from these facts is that it may have overpaid for NR. But that is just a garden variety commercial dispute that could be resolved without years of litigation in four different federal courts.
ChromaDex tells a very different story.
According to ChromaDex's court filings (CA, NY), Elysium wanted control over the NR patents right from the start. If Elysium couldn't buy ChromaDex or force ChromaDex to license the patents on Elysium's terms, then it would take control of the NR market through improper means.
There seems to be no question that starting around February 2016, a year before the three-year license was to expire, dealings between the two became frosty. In February, Elysium demanded new restrictions on ChromaDex's ability to sell NR and Pterostilbene to others.
A few months later, with offers of employment, Elysium induced Mark Morris, then ChromaDex’s Vice President of Business Development, to act as Elysium's "inside agent" while he was still a ChromaDex officer.
In May 2016, Morris began feeding Elysium confidential and proprietary information on ChromaDex’s sales to other customers, including detailed and comprehensive documents and information about ChromaDex’s business that allowed Elysium to learn the exact prices and volumes of Niagen that Elysium’s competitors were purchasing as well as their purchasing trends and strategic business decisions.
Elysium and Morris further conspired to "trick" ChromaDex into providing Elysium with a huge stockpile of ingredients for Elysium to sell while they used ChromaDex’s proprietary and confidential information to develop an alternate source of NR for Elysium. After Elysium submitted two extraordinarily large purchase orders for Niagen and Pterostilbene, on June 28, 2016, at less than half the parties’ agreed price, Morris facilitated a call between Elysium and ChromaDex management to discuss the orders.
On the call, Elysium’s management falsely stated that Elysium intended to be a good business partner to ChromaDex and explained that Elysium was ramping up, which was the reason the June 28 orders were far larger than their past orders.
In reliance on Elysium’s statements and promises, ChromaDex agreed to a discounted price for Niagen, accepted $2.95 million in purchase orders from Elysium on June 30, 2016, and filled the orders on July 1, 2016 and August 9, 2016.
Before Morris left ChromaDex, he used his personal email account to send Elysium a list of manufacturers who could potentially produce NR for Elysium. He also attached a ChromaDex document that described the manufacturing process for NR. Morris also saved copies of several ChromaDex documents, some containing trade secret, confidential and/or proprietary information, with the intent of using that stolen information for Elysium’s purposes.
Morris also helped Elysium recruit another ChromaDex employee, Ryan Dellinger, ChromaDex’s Director of Scientific Affairs.
On July 15, 2016, Morris ended his nine-year tenure at ChromaDex with only one week’s notice and began working at Elysium as its Head of Scientific Technology immediately thereafter. Dellinger resigned effective immediately on August 10, 2016—the same day Elysium notified ChromaDex that it refused to pay its past due invoices, and immediately began working at Elysium.
Morris acted as Elysium’s inside agent at ChromaDex for nearly two months in breach of his fiduciary duty to ChromaDex and its shareholders before terminating his employment with ChromaDex and beginning official employment with Elysium.
The day after ChromaDex completed its fulfillment of those orders (August 10, 2016), Elysium "falsely accused" ChromaDex of violating the parties’ supply agreement and refused to pay ChromaDex the $2.95 million balance for the orders it placed on June 30 and had already received. To date, Elysium has not paid anything to ChromaDex for the ingredients, which Elysium used to produce Basis capsules that it sold to consumers for millions of dollars.
At Elysium, Morris began working with a third-party manufacturer to develop a new commercial supply of NR, independent of ChromaDex.
So to sum up, in February 2016, one year before the scheduled expiration of Elysium's license to use NR and pterostilbene in Basis, the parties relationship was intact.
But six months later, in August 2016, Elysium had ordered a year's supply of ingredients, hired two of ChromaDex's employees, received trade secrets, refused to pay for the ingredients they had ordered, and set about creating their own supply of NR.
Who Is Telling the Truth?
People tend to look at this and perceive a he-said/she-said dispute, and are inclined to wait until a jury hears the evidence and decides who to believe.
There's obviously nothing wrong with that approach, but there are three reasons to believe a jury would side with ChromaDex.
1. Magnitude of Claims. First, it's important to note that both sides' stories could simultaneously be true. It might be that Elysium was in fact an "exemplary customer" on May 29, 2016, when it requested pricing information and claims to have discovered that ChromaDex had cheated it on price, and then went rogue in retaliation and did all the things that ChromaDex claims.
So one way to think about this is to look not at whose story is the most believable, but whose story, if true, has the most serious legal consequences.
ChromaDex's alleged misbehavior would not have given Elysium the right to poach trade secrets or infringe on valid patents, and might warrant damages worth far less than the legal fees spent. Elysium's alleged misbehavior, however, is quite a bit more severe, and could lead to a huge judgment against it. So if the jury believes everyone, it won't be a happy day for Elysium.
2. Supporting Evidence. On the other hand, we have caught glimpses of the evidence, as a result of the amended pleadings and discovery disputes, and ChromaDex claims that it has seen text messages and doctored documents -- very specific evidence! -- supporting its version of events. In addition, ChromaDex claims to have received "a cornucopia of smoking gun communications in which Elysium’s principals discuss—often in colorful and salty language—their conspiracy to drive ChromaDex out of business."
In New York ChromaDex alleges, "Before Morris left ChromaDex, he used his personal email account to send Elysium a list of manufacturers who could potentially produce NR for Elysium. He also attached a ChromaDex document that described the manufacturing process for NR."
It is unlikely that ChromaDex would be misrepresenting the evidence when making its long series of specific allegations about dates and documents, so, after discovery, there is good reason to suspect that ChromaDex "has the receipts" for its allegations.
3. Inconsistencies. There is another reason, too, why a jury is more likely to believe ChromaDex's story than Elysium's story, and that is because the emerging timeline seems to contradict Elysium's account. Elysium says that it had been an "exemplary customer" on May 29, 2016, when it learned that ChromaDex had given someone else a better price. But ChromaDex seems to have evidence that Elysium was plotting with Mark Morris and receiving confidential information before that -- not at all the behavior of an "exemplary customer."
The Short Attack
Something else occurred during this six-month period, too.
ChromaDex had been a public company traded over the counter, but was not approved to be added to the NASDAQ until April 2016.
On May 6, 2016, ChromaDex's CEO rang the NASDAQ opening bell, and there was much rejoicing at ChromaDex.
It didn't last long, though.
On June 30, Chris Drose, a notorious short-seller, writing as "Bleecker Street Research," published a severely negative article on Seeking Alpha, and ChromaDex's stock price dropped precipitously. On June 30, Bleecker Street apologized and withdrew its article as misleading, but the damage had been done, and ChromaDex's share price did not recover.
June 30, you will recall, was also the day that ChromaDex agreed to deliver Elysium a year's supply of NR that Elysium never did pay for.
The possible connection between these events, which seems to have been a subject of discovery in the litigation, is that they both contributed to ChromaDex's being in dire financial straits by the end of 2016. ChromaDex had paid its own suppliers for a year's supply of ingredients that Elysium was using to make Basis, but ChromaDex had not in turn been paid for those ingredients. Moreover, the collapse of ChromaDex's share price made it difficult for ChromaDex to raise money through an equity offering.
The Litigation -- Four Actions
With its share price cut in half and stuck with a huge uncollectible debt owed by its largest customer, ChromaDex in December 2016 sued Elysium for breach of contract in California federal court.
What at first looked like a garden variety breach of contract case and pricing dispute rapidly spun out of control. Elysium hired one of the world's most expensive and aggressive law firms, Skadden Arps, to sue back hard in California.
In July 2017, around the time that Elysium seems to have finally used up its supply of ChromaDex ingredients and had begun to distribute its own NR, Elysium opened a second litigation front by initiating an action before the USPTO to invalidate the Dartmouth NR patents that ChromaDex had licensed.
In August 2017, ChromaDex complained to the FDA that Elysium's new version of Basis was different from when Elysium used ChromaDex ingredients and was contaminated with a toxic substance (toluene), and Elysium was therefore selling a new ingredient without having filed the required paperwork.
In September 2017, Elysium responded to ChromaDex's FDA petition by opening a third litigation front in New York federal court, accusing ChromaDex of false advertising and unfair business practices based on the FDA petition.
In October 2017, ChromaDex responded in New York with its own unfair competition and false advertising claims against Elysium, and the two actions were consolidated.
One year later, in September 2018, ChromaDex opened a fourth litigation front by suing Elysium in Delaware federal court for infringing the two Dartmouth patents.
Litigation -- Current Overview
Before we look at each of the individual cases to see what has happened and where they are going, let's get a big-picture view.
The California Litigation mostly involves breach of contract (by both parties) and trade secret theft (by Elysium and Mark Morris). That case has been going on for 2.5 years. Discovery is nearly complete, and trial is scheduled to begin in a few months, on October 29, 2019. (Update: Now October 15, 2019) (2nd Update: Now October 22, 2019)
The USPTO Litigation was Elysium's attempt to have the two Dartmouth patents invalidated. The tribunal below, called the "PTAB," narrowed one of the patents, but did not invalidate either of them. Both parties appealed, and Court of Appeals will likely issue a decision in the first half of 2020.
The New York Litigation now mostly involves false advertising and unfair competition claims -- Elysium's original concerns regarding the FDA petition were dismissed by the court. This case is currently in discovery, and a trial is tentatively scheduled for the first half of 2020, although there is not a firm date. (Update: more likely summer 2020)
The Delaware Litigation is ChromaDex's attempt to recover damages for patent infringement, and Elysium can assert additional reasons why the Dartmouth patents are invalid. The judge in Delaware has put the case on hold pending the outcome of the California trial, but the Delaware case should re-commence before year's end.
So later this year we'll have the outcome of the California case. Next year we should have the outcomes of the USPTO appeal and the New York case. The Delaware case will probably not be resolved until late in 2020, or more likely 2021. And, of course, any of these outcomes might be subject to additional appeals.
The prospect of years of trials followed by years of appeals gives the litigation its feel of endlessness, but in fact the Courts have already narrowed the issues by dismissing claims, and the parties have learned in discovery enough to have amended their complaints many times.
As a result, we do have a much better understanding of the dispute than we had a year ago, and we can make some predications as to how this all will come out.
In California, I predict that ChromaDex will win its breach of contract claims and its trade secret theft claims. Only a few million dollars are at stake with the contracts, but the trade secret theft claims could lead to much more serious damages. I also predict that Elysium might well win its breach of contract claims, too, which would shave off some of the $3M it would otherwise owe ChromaDex, but Elysium will lose its claims for fraud and patent misuse, leaving ChromaDex the overall winner -- and possibly a big winner.
In the USPTO, the Court of Appeals for the Federal Circuit is very likely to deny Elysium's appeal. ChromaDex has a stronger case to reinstate some of the claims that the PTAB dismissed, but it won't matter too much for this dispute if the CAFC does strengthen ChromaDex's hand, because there is no challenge to the '807 patent -- which is the one that covers Niagen as a health supplement -- and even the one intact claim on the '086 patent would expose Elysium to potential liability if it attempted to sell NR as an NAD-raising pharmaceutical.
In New York, I predict that most of both parties' False Advertising claims will be dismissed, or will result in minimal or no damages. The Unfair Competition claims present a closer call, and we have no sense of how Discovery is going, but ChromaDex appears to have the stronger argument, and will probably emerge the net winner in New York.
In Delaware, I predict that Elysium will fail to invalidate the Dartmouth patents on any additional grounds -- it has probably already taken its best swing and missed -- and ChromaDex will easily show that Elysium has infringed the patents. The fight will then be about damages -- how much, and whether they should be trebled, and to what extent damages already awarded in California for trade secret theft are duplicative of damages proved in Delaware, and therefore would require an offset.
To see why I would make these predictions, let's look at each of the individual cases more closely.
The California Litigation
This is the one that started it all! It's the furthest along -- trial begins in less than three months! -- and we know the most about it.
ChromaDex is on its 5th Amended complaint, and Elysium is on its 4th amended/restated counterclaims, so the parties' positions have evolved significantly. In addition, there have been six discovery disputes resulting in docketed orders from the Magistrate Judge. That's why we know so much more about this litigation than the others.
As it has shaken out, ChromaDex has eight claims against Elysium, but they fall into two primary categories: (1) Elysium hasn't paid for the ingredients that it ordered, and (2) Elysium and Mark Morris took confidential information from ChromaDex.
Elysium, by contrast, has six claims, which fall into these categories: (1) ChromaDex overcharged for NR; (2) ChromaDex breached other terms of the contracts (e.g., confidentiality, exclusivity); (3) ChromaDex tricked Elysium into licensing its trademarks, and (4) ChromaDex misused its patent by requiring its trademark licensees to pay to use the trademarks.
Let's start with ChromaDex's claims.
ChromaDex's breach of contract claims appear to be slam-dunks. The parties don't dispute that Elysium took product and failed to pay for it. Elysium's defense is that ChromaDex owed it money, too, or that ChromaDex's other violations of the contract rendered in unenforceable. But ChromaDex's other alleged violations of the contract appear to have caused no damages (e.g., product purity provision) or they probably weren't violations at all (e.g., encouraging vendors to combine resveratrol and Niagen). So we would expect ChromaDex to recover some fraction of $3.M on this claim.
ChromaDex's trade secret theft claims appear to be even stronger. ChromaDex claims to have obtained through discovery documentation of communications and documents showing that Elysium did indeed enlist Morris to assist Elysium while Morris was still at ChromaDex, and did indeed task Morris with setting up an alternative supply chain, and did indeed receive a number of confidential documents from Morris that would have been helpful not only in obtaining a new source of NR but also with other projects.
Willful trade secret theft can warrant treble damages, and the damages might be all of Elysium's business resulting from the reformulation of Basis if it would not have been possible without ChromaDex's secret data. ChromaDex alleges in New York that the use of ChromaDex's secret data "allowed [Elysium] to do in nine months what it took ChromaDex several years to do, and for a fraction of the cost."
Elysium's core breach of contract claim relies on a point of law that we do not know the answer to. There was a lowest-price obligation in the contract (commonly referred to as a "most favored nation" or "MFN" clause).
But the clause (section 3.1) was ambiguous, because it contained an exception for if another distributor ordered more than Elysium ordered. The ambiguity had to do with time periods -- more on a particular day, month, quarter, year, or lifetime?
We don't know anything about Elysium's orders, so it is possible that in a particular quarter Elysium didn't place an order, and some other provider ordered more. If so, then would ChromaDex have been legally free to give the other provider a lower price than Elysium? That's one of the issues yet to be resolved.
But it is certainly possible that Elysium is correct, and ChromaDex owes Elysium a refund of some past money paid and a credit against its big order. We don't know the facts or the law on this issue, but it is one of the few claims Elysium asserts that I think has a reasonably high probability of succeeding and generating significant damages.
I don't see how Elysium will be able to establish damages for the other alleged breaches, which means that they either are not actionable at all, or will be relatively inconsequential.
Elysium's claim that it was tricked into licensing ChromaDex's trademarks, in particular, is problematic for several reasons. First, it is not at all clear that ChromaDex's alleged statement during contract negotiations that all distributors were required to sign a trademark license can be falsified by showing that at a different time some distributor was not required to do so. Elysium's is an especially weird claim because Elysium says that it would have negotiated harder if it had thought there was some give in those terms.
However, the rule among sophisticated parties is that you get the deal you negotiate. It is not at all obvious how ChromaDex is liable for stating the terms on which it is willing to do business, even if those terms were a negotiating position subject to revision.
Judge Carney let this claim go to discovery apparently because Elysium specifically alleged that ChromaDex lied about its past licensing practices in order to induce Elysium to -- I guess -- "focus its efforts on other aspects of the NR agreement." (Elysium's words, Paragraph 55.) That kind of phrasing not only makes what ChromaDex allegedly did sound non-actionable during contract negotiations, but it also raises the question of whether there were -- or could be any -- damages?
But rather than dig into the philosophy of contractual negotiations, I think it would be better to step back and see if something entirely different is actually going on behind the scenes.
If you actually LOOK AT the trademark licensing terms -- the ones that Elysium alleged it was tricked into signing -- they are just exactly the kind of terms that any manufacturer would require of any distributor. Things like:
"To the extent that you use ChromaDex marks...product packaging and promotional materials may include...a legend that ChromaDex owns such ChromaDex marks...ChromaDex has the right to supervise and control the Licensee's use of the ChromaDex marks...You shall always use the proper spelling and proper trademark symbol for the ChromaDex marks..." (emphasis added)
This is completely routine stuff. Of course all licensees are required to make such commitments, and no licensee would object. Nobody who wants to sell Mickey Mouse watches gets to misspell Mickey's name, or give Mickey red eyes. Disney always requires its licensees to comply with its trademark guidelines, and nobody would every doubt its right to do so, or considerable such a thing negotiable.
So why would Elysium conceivably be arguing that the trademark license agreement was an important negotiating point?
Because right after eight consecutive provisions specifically addressing trademark and brand guidelines comes a seemingly entirely unrelated series of provisions -- 9.1 to 9.8 --called "Royalties."
The Royalty provisions state, "Elysium shall pay to ChromaDex the following royalties...on cumulative worldwide Net Sales of all Qualifying Products by Elysium Health..." It goes on for a page discussing payments, accounting, audits, payment terms, and withholding taxes, and does not even once mention the word "trademark" or "brand."
Then Provision 10 goes right back to discussing the terms of the use of the trademarks. It looks for all the world like a royalty provision on net sales was simply inserted into the middle of a trademark license -- because (1) There is no indication anywhere in the trademark use provisions that there would be a royalty for using them, and (2) there is no indication anywhere in the royalty provisions that the royalties are in exchange for trademark use. On the contrary, the entire focus is on net sales. There isn't even a requirement that trademarks be used.
So it requires a great leap of faith and logic to assert, as Elysium does, that the royalties are in exchange for the use of the trademarks.
And it defies common sense and common business practice, too. When Disney licenses Mickey Mouse, they allow you to use the trademarks and charge you for sale of the trademarked goods.
So the text of the license fails to support Elysium's assertion.
Standard commercial practices are different from what Elysium is alleging happened.
And Elysium's account is entirely nonsensical in light of the admitted fact that Elysium was not required to use ChromaDex's trademarks.
Wouldn't it be far, far more logical for the parties to have said, "We'll supply you with NR, and you will pay a royalty on net sales. You need not use our trademarks or even attribute the NR to us, but if you do use our marks, you must use them properly."
And isn't that what the text of the Trademark License and Royalty Agreement actually says? Yes. That's exactly what it says.
Elysium's next claim, for Patent Misuse, gives up the game:
ChromaDex’s requirement, under the License and Royalty Agreement, that Elysium purchase a license and pay royalties for ChromaDex’s trademarks, in exchange for access to ChromaDex’s supply of NR and to ChromaDex’s patent rights, was unlawful and constituted patent misuse. (paragraph 183, emphasis added)
In other words, if Elysium can convince a court that ChromaDex was selling trademarks, not selling NR, and that in order to license the patent you had to buy the trademarks, then that could constitute "Patent Misuse."
And the penalty of Patent Misuse is that you can't enforce the patent!!!
So that's why I have concluded that Elysium's fraudulent inducement and patent misuse claims are bogus. Those claims are based on a "fictional" account of the contract negotiations, in which ChromaDex was selling trademarks instead of selling Niagen, because if that fiction were true, then Elysium would be able to argue that the patents were unenforceable -- which would be REALLY CONVENIENT if Elysium were planning to infringe on those patents!
But ChromaDex is not in the business of selling trademarks, and there is nothing in the trademark license and royalty agreement that suggests otherwise. So Elysium is very likely to lose in court when the true facts of the negotiation come out.
That leaves, however, two big questions.
First, why is there a royalty provision in the trademark agreement at all?
Second, if Elysium is inevitably going to lose the Patent Misuse claim anyway, then why assert it in the first place?
As to the first question, ChromaDex has explained in its filings what was going on:
ChromaDex wanted upfront cash payments, minimum purchase commitments, royalties and even an equity position in Elysium. Elysium had limited resources and could not meet all of ChromaDex’s requirements, but still wanted to purchase Niagen from ChromaDex. In particular, Elysium did not want to agree to either (1) the full upfront asking price for Niagen, or (2) to pay a lower upfront price supplemented by a deferred product sales royalty as compensation. Because ChromaDex is the sole supplier of nicotinamide riboside in the United States, however, Elysium had no choice but to pay in order to secure its supply. Nevertheless, both parties compromised on many issues. Elysium successfully negotiated for the MFN pricing clause and a lower upfront purchase price, but did not obtain a patent license; ChromaDex compromised by accepting a lower than desired upfront purchase price and foregoing equity in Elysium, but instead negotiated successfully for product sales royalties as deferred compensation for supplying Niagen.
In other words, the deferred compensation royalty model appears to be a late addition to the deal that got memorialized in the Trademark License Agreement, which became a "Trademark License and Royalty Agreement." But, ChromaDex suggests, not only is there nothing in the agreement indicating that the royalties were payment for use of the trademarks, there was also nothing in the parties' negotiations like that, either.
As to the second question, Elysium has benefitted greatly from its assertion of the Patent Misuse claim, even if the claim eventually fails (as it almost certainly must, barring the presentation of some evidence that we have not seen referenced and cannot even imagine). First, to the extent that Elysium's goal with the litigation was ever simply to impose costs and bad publicity on ChromaDex, the Patent Misuse Claim -- which has been the subject of numerous motions -- has certainly accomplished that.
And to the extent that Elysium would like to delay the adjudication of its alleged patent infringement, the Patent Misuse claim has been immensely useful. As we will see later, after granting a de facto stay of the patent infringement proceedings for seven months, the Court in Delaware apperas to have rejected every ground Elysium advanced for a stay EXCEPT for the pending Patent Misuse claim, and hence the Delaware patent infringement action was then stayed for an ADDITIONAL 4-5 months while the patent misuse claim was pending in California.
The USPTO Litigation (PTAB)
The United States Patent and Trademark Office's (USPTO's) Patent Trial and Appeals Board (PTAB) hears challenges to patents that might have been improperly granted.
The Rise of the Patent Troll:
In the past, too many patents had been improperly granted, which resulted in non-practicing entities (NPE's) with bogus patents shaking down practitioners by threatening patent infringement suits. These "Patent Trolls" were typically willing to settle for less than the cost of the litigation necessary to successfully defend the patent.
The success of the Patent Trolls inspired Congress to create a summary adjudication process whereby bogus patents could be inexpensively invalidated. This process was called "Inter Partes Review" (IPR).
The PTAB used IPR as a blunt force weapon, so aggressively invalidating patents that the IPR process became known as a graveyard for patents. So fast and furious did the PTAB invalidate patent claims that a new phenomenon arose: The "REVERSE Patent Troll," who would demand a settlement in exchange for not initiating Inter Partes Review against an apparently valid patent. A former Chief Judge of the Court of Appeals for the Federal Circuit (CAFC), quoted in the Wall Street Journal, said that the new process has done more harm than good, and that “too many patent owners feel that the deck is stacked against them and that they have the burden to prove their patents valid.”
Against this backdrop did Elysium petition the USPTO's PTAB to invalidate two Dartmouth patents claiming a method of using NR to increase NAD.*
According to Elysium, Dr. Brenner's invention of using isolated NR in a health supplement or pharmaceutical to raise NAD was already disclosed in the 1920's when Joseph Goldberger, an epidemiologist attempting to combat a million cases of pellagra in the south, showed that pellagra in dogs was cured when the dogs ingested buttermilk.
BUT, according to Wikipedia,
Though Goldberger established a clear link between pellagra and diet, he never discovered the exact nutrient deficiency that caused it. It was not until 1937 that Conrad Elvehjem discovered that pellagra is caused by a dietary lack of the B vitamin niacin, along with reduced levels of the essential amino acid tryptophan....Goldberger died on January 19, 1929.
At the time of Goldberger's experiment, Nicotinamide and Nicotinamide Riboside had not been discovered, and the details of NAD synthesis were unknown. Dr. Goldberger was not an enzymologist and was the first to admit that he did not know what in the milk cured the dogs' pellagra or how. So tell me again how he could have disclosed something he did not know?
Although experiments in the 1930's showed that Niacin and Nicotinamide could cure pellagra, the discovery of Nicotinamide Riboside's role as a vitamin was still decades away.
So it's pretty darn crazy for Elysium to suggest that the 1920's dog experiments disclosed isolated NR as an NAD precursor. The NR in the milk wasn't isolated, and NAD precursors were unknown.
But it's even more absurd and inexplicable that Elysium's expert witness, Dr. Joseph Baur, managed to assert in his deposition (pp 15-17) that he believes that the Goldberger experiment disclosed using isolated NR to raise NAD, even though he admits that he doesn't know what in the milk was increasing NAD biosynthesis, and he admits that it could have been Nicotinamide or Tryptophan, both of which are present in milk in greater concentrations than NR.
Obviously the Goldberger experiment did not even reveal isolated NAM or Tryptophan as an NAD precursor, and it certainly did not reveal NR's effect, because NR wasn't shown to have a vitamin effect until almost a hundred years later. And when the vitamin effect of NR was discovered, it was big enough news to have been published in Cell, one of the top three medical journals at the time. Nobody said, "Oh, we already knew that from Goldberger."
Therefore, ChromaDex argued before the PTAB (on behalf of Dartmouth) that a pharmaceutical requires an active agent, not merely something that is incidentally present. ChromaDex argued that although pharmaceuticals can be incorporated into food, not every food is thereby a pharmaceutical -- and buttermilk is not one. ChromaDex argued that no one knows whether NR was present in the milk fed to the dogs, and if it was present, no one knows whether it or one of the other precursors cured the dogs. In addition, ChromaDex argued that the NR in the dog's milk was not "isolated."
The PTAB rejected all of Elysium's arguments with respect to the '807 patent for health supplements -- which is the patent that covers how NR is sold today in Tru Niagen and Elysium Basis -- but instituted review of the '086 patent for NR in pharmaceuticals, and eventually ruled mostly against Dartmouth's patent, invalidating four of the five claims, but conceding that "isolated" had to mean something, and that the NR in the milk fed to the dogs was not "isolated." That's how the PTAB upheld Claim 2 of the '086 Patent.
Both sides appealed -- Dartmouth/ChromaDex petitioned to have Claims 1, 3, 4, and 5 reinstated, and Elysium to have Claim 2 invalidated along with the others.
Elysium needs to invalidate ALL of the Patent claims of both patents to really win, because even if Elysium were only infringing a single claim, they would still be infringing. And Elysium has so far not even made a dent in the more important '807 patent, which governs health supplements.
ChromaDex needs to revive the four invalidated claims to have broader patent protection than the single claim offers, but does not need to revive those claims in order to prevail against Elysium, because Elysium's product would appear to infringe all of the claims if it were offered as a pharmaceutical.
Elysium has filed its appellate brief before the CAFC, and it is not an impressive piece of work -- which is not to say that Elysium's attorneys did anything wrong, but that they were dealt a difficult hand. The PTAB already delivered Elysium quite a bit -- it would be a big enough challenge to merely protect those gains, let alone expand upon them before a less receptive tribunal.
ChromaDex's appellate briefs -- its opposition brief to Elysium's attempt to invalidate Claim 2, and its opening brief in defense of claims 1, 3, 4, and 5, are due on August 28.
I predict there is a good chance that the CAFC will find that Elysium's citing of the dog experiment from a time when NR was unknown to be a mockery of the concept of prior art disclosure -- or will at least find that the PTAB has misapplied the rule of inherency in implicitly concluding that the dogs MUST have been cured by nicotinamide riboside rather than some other molecule in the milk.
I believe the odds are very low that Elysium will successfully get Claim 2 invalidated. Elysium's arguments were already rejected by the PTAB, which would be the most receptive possible audience.
There is no specific timetable for an outcome in the CAFC, but the history of similar matters suggests that early-to-mid-2020 would be a reasonable guess. If either party is dissatisfied, they could then appeal to the SCOTUS, but this does not seem like the kind of case the SCOTUS would hear, so that will probably be that.
The New York Litigation
The New York litigation has evolved more than any of the others. It initially began as a dispute over ChromaDex's citizen petition to the FDA, which Elysium alleged was an unfair trade practice.
However, ChromaDex used the New York case to introduce its grand unified conspiracy theory of Elysium's nefarious plan to destroy ChromaDex and take over the NR market by using exclusive contracts to make it dependent upon Elysium, then creating financial duress by ordering goods without paying for them, and perhaps also by somehow participating in the June 2016 short attack.
The Court eventually dismissed Elysium's claims based on the FDA petition, finding that ChromaDex had a First Amendment right to petition the government on legitimate grounds regardless of its motives in doing so, but not before Elysium amended its complaint to add a large number of additional claims for false advertising and unfair competition.
Then ChromaDex amended its complaint, too, accusing Elysium of stealing ChromaDex's pedigree.
Then Elysium amended its complaint again, adding more claims for false advertisement and copyright infringement.
All of these claims are now in discovery, and it's not clear whether any additional motions to dismiss will be filed.
It would be too much to explore every one of the New York false advertising and unfair competition claims. They are largely petty complaints. For example, Elysium complains that:
Dr. Brenner didn't discover NR's existence, but only discovered NR's unique and special properties
ChromaDex shows results from a study that used a higher dosage than what ChromaDex recommends
Elysium's Basis may be unlicensed but isn't "counterfeit"
There's a longer list here. I suppose that Elysium is technically correct that all of these are inaccuracies in ChromaDex's marketing materials, but the legal standard for a Lanham Act claim isn't that a statement is inaccurate and a competitor believes that customers might be confused. The legal standard for a Lanham Act False Advertising claim requires that the advertising be:
(1) False or misleading
(2) Actually or likely deceptive
(3) Material in its effect on buying decisions; and
(4) Actually or likely injurious.
The first element is arguable, the second is doubtful, and Elysium will have a devil of a time proving elements 3 & 4.
Elysium's claim that ChromaDex used one of Elysium's drawings in a ChromaDex ad might be true, but any damages would seem to be insignificant -- the price of the drawing? Times three? That wouldn't even cover the cost of amending the complaint to add the claim.
ChromaDex's false advertising claims against Elysium fare no better. ChromaDex complains:
Basis contains less than the advertised amounts of NR
Elysium fails to warn consumers that Basis appears to raise LDLs
Elysium falsely claims that it is an exclusive licensee of an NR patent
Elysium claims a synergistic effect between NR and PT that is not substantiated
I expect these complaints all have merit, but I'm not sure I would make a federal case out of them.
If Elysium were short-changing customers on the amount of NR in Basis, that could be a devious plan, or it could just be a quality control issue potentially spawning breach of warranty claims by Elysium's customers.
Is Elysium required to tell its customers about potential negative side effects of its products? Maybe this goes to Elysium's character rather than to a legal obligation.
The same for Elysium's allegedly purporting to license a denied patent application to fool customers into thinking Basis was more special than it is. Bad character, perhaps, but how likely is this to be actually injurious or materially impact buying decisions?
However, there is one thing in the New York complaint that I think represents a very strong position for ChromaDex. It is not any of the little things that Elysium has done that ChromaDex finds objectionable, but the overall pattern of behavior that seems to indicate a strategy that really does look like it might be unfair competition.
Here is how ChromaDex describes it:
Elysium is a dietary supplement start-up that was founded in 2014. Elysium has one product, Basis®, which contains two active ingredients, including NR and another ingredient called Pterostilbene (“PT”). Elysium specializes in marketing Basis to consumers.
For years, ChromaDex was Elysium’s sole supplier of NR.
Elysium saw the growth and potential of the anti-aging supplements market and wanted complete control over the NR market. It wasn’t satisfied with purchasing ingredients from another company and merely processing and packaging those ingredients for sale to the consumer market.
Elysium’s goal was to own the NR market. When it could not buy ChromaDex, or gain ownership or exclusivity over Niagen, Elysium decided to take control of the market through improper means.
Elysium poached ChromaDex’s personnel, stole proprietary and confidential information and trade secrets, withheld payment from ChromaDex on nearly $3 million in product while it developed an alternate source for NR, and knocked off ChromaDex’s ingredients.
However, Elysium lacked the pedigree and track record that ChromaDex had in the dietary supplement and anti-aging space.
So, just as it had done with ChromaDex’s personnel, proprietary information, and products, Elysium decided to steal ChromaDex’s pedigree, rather than investing the time and money to obtain its own bona fides in the anti-aging supplement market.
This action describes how Elysium misappropriated every aspect of ChromaDex’s pedigree in its marketing materials for the purpose of deceiving consumers about its Basis product. Specifically,
Elysium falsely claims to be “first” to market and the only supplement clinically proven effective, when ChromaDex’s products were first and the clinical study cited by Elysium was actually a study of ChromaDex’s products;
Elysium provides consumers with the false impression that it was materially involved in the research and science behind the ingredients in Basis, when it was not;
Elysium falsely claimed that the FDA has approved or endorsed Basis, by referring to ChromaDex’s NDINs and GRAS submissions to the FDA;
Elysium falsely represents to consumers that Basis is backed by clinical studies, when both of its completed clinical trials were performed on ingredients provided by ChromaDex—not on the ingredients used in Basis today; and
Elysium—which, as ChromaDex’s customer, claimed to sell a patented product, based on ChromaDex’s patents—now claims to be the exclusive licensee to a Harvard and Mayo Clinic patent on the use of NR for “dietary supplement applications in the slowing of aging and age-related diseases.” In reality, Elysium’s license relates to a patent application for which all of the claims were either abandoned by the inventor or rejected by the U.S. Patent and Trademark Office as obvious and anticipated by prior art.
As an example of Elysium’s highly deceptive marketing, Elysium, and its cofounder and Chief Scientist Leonard Guarente, frequently state that Elysium’s product Basis is the culmination of 25 years of aging research and Guarente’s discoveries related to the activation of certain proteins. What Guarente and Elysium do not tell consumers is that the claimed health benefits of Basis stem from the active ingredient NR, while Guarente’s research relates, indirectly, to the other active ingredient in Basis, PT (which has no proven health benefit and creates a serious risk to consumers of increased bad cholesterol). Elysium’s marketing campaigns use sleight of hand to make consumers believe that Guarente’s research is directly relevant to, and even responsible for, the health benefits of Basis, when in fact, Guarente has no scientific experience with the source of those benefits: NR.
Elysium attempts to compensate for the fact that its stolen pedigree is merely smoke and mirrors by stacking its “Scientific Advisory Board” with a blue ribbon panel of eight Nobel laureates and nineteen other scientists and by touting associations with leading institutions and organizations. Unlike ChromaDex’s scientific advisors (which have directly relevant experience and aid ChromaDex in advancing the research and development of NR), these scientists and institutions had nothing to do with Basis or the science behind NR. Elysium borrows their credibility to give consumers the false impression that they were involved in the science and discovery behind the Basis product, and vouch for its safety and efficacy.
Elysium’s commercial persona—as crafted by its marketing and public relations campaigns—consists of its claims that its product is backed by 25 years of scientific experience, headed by a PhD from MIT, and supported by Nobel laureates. As described below, each of these claims is misleading and used by Elysium to successfully deceive consumers about the nature of Elysium as a company and the science behind Basis. (emphasis added)
That's not a ticky-tack pot shot at the technical accuracy of some words in an ad -- that's an indictment of Elysium's entire business model as deceptive and unfair to the core, and stolen from ChromaDex, just as Elysium infringed on ChromaDex's patents and stole its trade secrets.
I don't have a guess as to the fate of all the specific little claims that each party is asserting -- they might get dismissed, or they might result in very minor damages. However, it is easy to imagine how a jury might look at the big picture story that ChromaDex is telling about a stolen pedigree and find that Elysium's entire business was improper.
ChromaDex is requesting treble damages and attorney fees of at least $200M, as well as that Elysium be required to publish corrective advertising -- specifically, 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...
With a little luck, this will go to trial early next year.
The Delaware Litigation
It has been almost a year since ChromaDex filed its patent infringement lawsuit against Elysium in Delaware, and nothing has happened.
Elysium immediately moved to put the case on hold based on the pending actions before the PTAB, and an inevitable appeal, and the action in California.
You'd think that if Elysium had much faith in their legal position, they would be eager to finish the job of getting ChromaDex's patents invalidated. But instead, Elysium is doing what it can to postpone this particular reckoning.
That might be in part because one of Elysium's best alternative arguments for invalidating the patents -- that health supplements made from naturally occurring molecules are not patent-eligible because they simply describe a natural process or a natural law -- recently died.
That argument actually won the day before a federal judge in San Diego, in the case of Natural Alternatives v. Creative Compounds, but on March 15, 2019, the Court of Appeals for the Federal Circuit -- which handles all patent appeals -- reversed, finding that the fact that the active ingredient in the supplement is a molecule that occurs in nature and is consumed as part of the human diet does not render the supplement ineligible for patent protection. Although the molecule may exist in nature, the quantities being administered do not:
The supplement is not a product of nature and the use of the supplement to achieve a given result is not directed to a law of nature. We do not see, therefore, how a claim to the manufacture of a non-natural supplement would be directed to the law of nature or natural product.
Obviously, ChromaDex could not wish for anything better than to have the second-highest court in the land clarify that inventions incorporating natural ingredients into health supplements in non-natural quantities to obtain specific results at effective doses -- which is precisely what the Dartmouth patents describe -- are patent-eligible.
There are only so many ways to invalidate a patent.
Elysium's best Novelty challenges have failed before the PTAB, and aren't likely to do any better on appeal.
Elysium's best hope for Ineligibility was just dashed by the Court that will be hearing the appeal in this case.
It doesn't seem that there would be any opportunities for Elysium to argue that the patents in question are not Useful or that the inventions were inadequately Disclosed.
And there was nothing Obvious about NR's function as a vitamin -- Dr. Brenner's discovery was published in one of the most prestigious and selective academic journals.
So, although we don't know what invalidity or non-infringement defenses Elysium is going to assert in Delaware, it doesn't look like they have a very good case, which may be why stalling seems like an attractive option.
The Delaware case is on hold until the California court resolves the bogus Patent Misuse claim. Trial on that issue begins October 29 (Update: Now October 15, 2019), so the Delaware action is likely re-commence in November or December.
And when it does, we predict that Elysium will eventually be found to have infringed valid patents.
It certainly is an indictment of the US legal system that an inventor can patent an invention, then a university can license that patent to a manufacturer, and then manufacturer can spend millions of dollars building an entire business around commercializing that patent -- which patent is an exclusive right recognized in the US Constitution and guarantied by federal law -- and THEN some band of rogues can just disregard the patent entirely and sell an infringing product for years and hope that the patent owner becomes exhausted or dies while the legal system ties itself in knots trying to think about the problem.
It is often said that justice delayed is justice denied, and that is certainly true for victims who die, and for companies that go bankrupt, before the legal system gets around to setting things straight.
We have learned that the US civil justice system does not charge to the rescue like the cavalry. Unless you are rich enough and strong enough to fend for yourself for a few years, the civil justice system will let you die.
However, it is also said that the although the wheels of justice turn slowly, they grind exceedingly fine.
We are seeing the slowly turning wheels. I expect we will eventually see the finely ground product.
And when we do, I expect that it will all seem unremarkable in retrospect: A patent was granted. It was infringed. The infringer was forced to disgorge their profits. Rights were vindicated, lessons were learned, lawyers were paid, and the system functioned as it was supposed to. History will not record the drama, uncertainty, and suspense that attended what will, in retrospect, look like an open-and-shut case.
* This USPTO section was updated on August 2, 2019, to include additional detail and sources regarding the history of NR and Goldberger's dog experiments.