MSJ Analysis Part 1: ChromaDex's Motion
There's so much information to get through, we're going to have to take it in steps. The attorneys have been assembling this data for years, but most of it hit us suddenly and now we to make sense of all these little pieces that add up to a big picture. I'll say this, though: I now have a great deal of empathy for the Cooley attorneys when they asked for a few extra pages to summarize it all:
Although the legal principles at issue are straightforward to apply, each counterclaim requires its own dedicated factual recitations and analysis. Because the parties and third parties together have produced over 96,000 documents and will have taken 25 depositions by the time the motion is filed, it is entirely reasonable to permit ten extra pages to both sides so that all of the issues may be addressed in mutual omnibus briefs.
It was not one of Judge Carney's better moments when he subsequently denied this motion on the grounds that:
"The legal principles in this case are relatively straightforward to apply,"
simultaneously repeating and disregarding Cooley's actual argument.
So ChromaDex was only able to provide a 25-page guide to the 96,000 documents and 25 depositions instead of a 35-page guide, but that 25-page guide is still by far the single most important document for understanding this stage of the litigation.
For people who don't want to wade into the exhibits, everything essential is in the brief, even though an awful lot of fascinating color is buried in the exhibits.
Part 1 -- today's blog entry -- will focus on ChromaDex's motion. We'll look at the legal arguments, the supporting facts, predict some outcomes, and guess the implications.
Part 2 will do the same for Elysium's motion.
Then Part 3 will dive into the exhibits to get a richer sense of the factual background against which this legal drama is playing out. For example, it may not have much legal import, but it appears from one of the depositions that after stiffing ChromaDex on its big order, Elysium then jerked around its first supplier of Mystery NR, who in the deposition called Dan Alminana a "bullshit artist" for not being upfront and for stringing the supplier along until Elysium had secured another supplier and then out of the blue told their original supplier to stop all production. "Clearly," said the anonymous deponent, "that was orchestrated all by Dan and that's the way he does business. It is not the way I do business so, and with all the ChromaDex stuff going on, you know, it became apparent that, you know, there is a pattern here of behavior..." (Exhibit 76). But we get ahead of ourselves.
Before we get started, two more points.
First and most important, a caveat: Opposition Briefs are going to be filed in ten days, on August 28, and both parties are going to tell us why the other is not entitled to summary judgment. Those briefs might tell us that some facts that appear to be uncontested are actually in dispute, or that the law isn't as it was described. (I am especially expecting to hear that with respect to Elysium's account of the law governing calculation of trade secret damages, but we'll save that for Part 2.) Until we hear these counterarguments, we will have to temper our conviction that one side has proved its point so indisputably the summary judgment is warranted.
Second, let's get an overview of the legal context for summary judgment requests -- the universe of claims on both sides, and which ones might be disposed of before trial. In this California litigation,
ChromaDex is asserting eight claims:
1. Breach of PteroPure Supply Contract
2. Breach of Niagen Supply Contract
3. Trade Secret Theft (state law)
4. Trade Secret Theft (federal law)
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)
Elysium is asserting six claims
9. Breach of Niagen Supply Agreement (multiple ways)
10. Breach of Implied Covenant of Good Faith and Fair Dealing
11. Fraudulent Inducement
12. Patent Misuse
13. Unjust Enrichment
14. Breach of Confidentiality provision in Niagen Supply Agreement
Of these fourteen claims, ChromaDex is requesting that all six of Elysium's claims be thrown out in part or entirely before trial, and Elysium is requesting that all eight of ChromaDex's claims be thrown out in part or entirely before trial. Elysium is also requesting judgment in its favor before trial on part of its breach of contract claim.
So in theory, after the summary judgment motions are resolved, either or both sides could be left with far, far fewer claims than they started.
That risk is what the Magistrate Judge will waive menacingly at the parties this coming Thursday morning when he tries to convince them to settle their differences or maybe take nothing at all.
ChromaDex has a nice intro to its motion, which I reproduce not only because it is a good summary of what is happening right now, but also because it seems to introduce a new theme:
Elysium’s dishonesty brought an end to that relationship by, among other things, placing huge orders and refusing to pay for them; misappropriating ChromaDex trade secrets and confidential information to create an alternate source of a patented ingredient; recruiting a ChromaDex executive to act as an inside agent before he quit to work at Elysium; and attempting to undermine critical relationships between ChromaDex and both its patent licensor and supplier. ChromaDex filed this case in December 2016 and, through discovery, uncovered more and more evidence of the brazen misconduct by Elysium and its agents. ChromaDex eagerly awaits its opportunity to present this damning evidence to the jury.
Elysium, for its part, has filed several factually and legally defective counterclaims. Some will be defeated at trial; some are subject to summary judgment. This targeted motion addresses the latter set of counterclaims, each of which should be resolved before trial because there are no genuine issues of material fact. Discovery has not been kind to those counterclaims, and the time has come for them to be put to rest... (emphasis added)
I don't recall previously hearing that Elysium was attempting to undermine ChromaDex's relationships with its patent licensor (Dartmouth?) and supplier. We'll keep an eye on that.
ChromaDex's statement of facts is essential for understanding its arguments for summary judgment, so I recommend it and reproduce it in part here.
One of the amazing things about this filing, different from anything previously seen in this litigation, is that practically every sentence has citations to supporting evidence -- testimony, emails, business records, etc. -- supporting the assertion.
For readability, I have omitted those citations, but I would encourage anyone curious to visit the original document and check the sources. You can bet that the Court will. All the exhibits are available here.
A. CHROMADEX AND ELYSIUM
Founded in 1999, ChromaDex has evolved from a testing and standards company into a science-based nutraceutical company devoted to improving the way people age. ChromaDex’s current business is focused on NR, a novel form of vitamin B3 clinically proven to increase nicotinamide adenine dinucleotide in humans, a key component of cellular health. Since July 2012, when ChromaDex licensed key NR patents from Dartmouth College, the company has spent years and tens of millions of dollars to commercialize NR and ensure that it is safe for human consumption. Because of these efforts, ChromaDex’s NR—under the trade name “NIAGEN”—has received from the U.S. Food and Drug Administration (“FDA”) two New Dietary Ingredient Notifications and the determination that NIAGEN is Generally Recognized As Safe (“GRAS”), and a positive opinion from the European Food Safety Authority. In 2013, ChromaDex began selling small amounts of NR under the brand name NIAGEN®, and in 2014 started to supply NR in commercial quantities to companies marketing direct-to-consumer (“DTC”) products.
One of those companies was Elysium, a Manhattan-based startup founded in 2013 by a stock broker and a venture capitalist. In 2015, Elysium began selling its one and only product, a dietary supplement called Basis, which contains NR and another ingredient called pterostilbene (“PT”). Elysium sourced its NR and PT from ChromaDex until June 2016, after which it never ordered from ChromaDex again. In March 2017, in part because Elysium’s actions as described in more detail below, ChromaDex acquired an established direct-to-consumer company and now sells an NR-containing dietary supplement called TRU NIAGEN®.
B. CHROMADEX’S SUPPLY RELATIONSHIP WITH ELYSIUM
In 2013, Eric Marcotulli, Elysium’s CEO, reached out to ChromaDex because he wanted to start a company selling a consumer product with ChromaDex’s NR ingredient. NR was still a very new ingredient in 2013 and was only commercially available because of ChromaDex’s efforts. ChromaDex had only one supply agreement for NR with a well known company called Thorne Research, Inc. (“Thorne”). In comparison, Marcotulli and his partner, Elysium’s COO Daniel Alminana, had no experience running a company or selling dietary supplements.
ChromaDex and Elysium heavily negotiated the terms of their NR supply agreement, with the parties exchanging many rounds of revisions over a few months. Negotiations began in September 2013 and Elysium sent the first draft of the agreement on November 9, 2013. The draft was considerably more generous to Elysium than ChromaDex expected and proposed many highly favorable terms for Elysium, such as a sublicense to ChromaDex’s patent rights, exclusivity in the direct-to-consumer sale of dietary supplements, the same price in Thorne’s agreement ($1,200 per kilogram), most favored nation (“MFN”) pricing, a cGMP warranty, and terms regarding product safety and latent defects. The terms favorable to ChromaDex included mandatory minimum purchase commitments, royalties based on Elysium’s product sales, and equity in Elysium. The parties agreed that Elysium would pay royalties in order to compensate ChromaDex for Elysium’s “startup risk.”
On December 13, ChromaDex returned a heavily edited draft of the agreement that entirely removed the provisions for a patent sublicense, product safety, a cGMP warranty, and latent defects. ChromaDex further edited the draft to make MFN pricing contingent on the “volumes” Elysium ordered, as compared to third parties, and added a limited warranty provision.
During the negotiations, Elysium sought a concession whereby it would not be required to use the NIAGEN trademark on its product label. ChromaDex agreed and did not ask for anything in exchange. However, ChromaDex indicated that Elysium would still need to sign a permissive trademark license agreement that would govern in the event Elysium later decided to use ChromaDex’s trademarks. In a December 13 email attaching a new draft of the supply agreement, Frank Jaksch—ChromaDex’s then CEO—noted that the parties would “need to split [the deal] into two separate agreements” and that the “royalty and equity section will transfer over to the brand license agreement.” That transfer was to simplify the supply agreement, although Elysium understood that it would still be paying the royalty for “the supply of NR.”
Negotiations continued with a phone call on December 16, 2013, which resulted in significant changes to the draft. The next version, sent December 20, no longer granted ChromaDex equity in Elysium or granted Elysium any sort of exclusivity. It also substantially decreased Elysium’s minimum purchase requirements, while in return raising Elysium’s royalty rates and per kilogram price. On December 27, ChromaDex sent the next version of the supply agreement and a draft of the TLRA, which contained guidelines for Elysium’s permissive use of the trademark as well as the same royalty provisions, copied from the supply agreement.
Elysium returned drafts of both contracts on January 10, 2014. In the supply agreement, Elysium reinserted provisions concerning latent defects and product safety, edited the limited warranty term to include a cGMP warranty and language limiting Elysium’s liability, and deleted the (now duplicative) royalty provision. Elysium also expressly integrated the supply agreement and the TLRA. For example, Elysium edited the supply agreement to state: “This Agreement and the [TLRA] . . . contains the entire understanding of the parties.” Elysium did the same for the TLRA. Elysium provided further edits to the supply agreement on January 20, and the parties executed the two contracts on February 3, 2014. On June 26, 2014, ChromaDex and Elysium executed another contract whereby ChromaDex agreed to supply Elysium with PT. Elysium launched its Basis product in February 2015.
At the end 2015, Elysium again sought exclusivity over the sale of DTC products with NR. On February 19, 2016, after negotiations, ChromaDex and Elysium signed an amendment to the NR supply agreement that, among other things, required Elysium to purchase minimum amounts of NR and PT and granted it the exclusive right to sell products combining “NIAGEN and pTeroPure (or ingredients substantially similar thereto)” (the “Exclusivity Provision”).
C. CHROMADEX’S SUPPLY RELATIONSHIPS WITH OTHER COMPANIES
Because NR was so new, ChromaDex sought to sell NR to multiple customers and thereby decrease its marginal manufacturing costs. Under that strategy, ChromaDex supplied NIAGEN to almost 100 customers. Each supply relationship was a “unique discussion,” negotiated on a case-by-case basis, considering factors such as “what the customer’s plans were, where they intended to go, what their product was going to look like, how they were going to approach the customer base, [and] what volumes they might give.”
Most of these customers affirmatively sought to use ChromaDex’s NIAGEN trademark in connection with their NR products. Reflecting the various priorities of ChromaDex’s customers and the contract negotiations, some of the NR supply agreements contained an obligation, while others gave permission, to use the NIAGEN trademark as part of the product label. ChromaDex also sold NR to some customers on a product order basis, without a supply agreement (and thus without an obligation to use the NIAGEN trademark). Many of ChromaDex’s customers never had an obligation to use the NIAGEN trademark. ChromaDex maintained control over the use of its NIAGEN brand by having any customer that may use its marks sign a trademark license agreement. Under the Brand Usage Guidelines incorporated into these contracts, ChromaDex suggested that the NIAGEN mark appear on the back of the product label under the facts panel.
D. ELYSIUM AND MARK MORRIS TARGET CHROMADEX
In March 2016, Elysium began considering Mark Morris, ChromaDex’s Vice President of Business Development, for a position at Elysium. On May 29, 2016, during a conversation about his potential employment, Morris gave Alminana ChromaDex trade secret information concerning the prices and volumes of another customer’s NR purchases. Elysium never disclosed that it had these trade secrets. Over the next month and a half, Elysium solicited Morris for more ChromaDex trade secrets and confidential information. Morris provided all they wanted while begging Alminana to hire him so they could "make [ChromaDex's] worst nightmares come true!" and "get rid of the scumbags holding this magnificent technology." Morris, in his own words, wanted to "destroy [ChromaDex]!"
Further, despite still being a ChromaDex executive, Morris began helping Elysium obtain a new source of NR by supporting (1) its efforts to purchase NR directly from W.R.Grace & Co. ("Grace"), which manufactured NR for ChromaDex in an exclusive arrangement, and (2) developing a strategy whereby Elysium would jumpstart its production of NR by copying ChromaDex's NR manufacturing process. To that end, Morris provided Elysium with a list of potential manufacturers, one of which was [redacted]. Further, Morris acted as Elysium's inside agent as it sought to obtain a stockpile of NR and PT on credit from ChromaDex to use as a bridge until it had a new source of NR. Elysium launched that plot on Jun 28, 2016, by submitting to ChromaDex large orders at a price far lower than it had ever received. On a June 30 phone call, Elysium requested from Chromadex the same sales information it had already obtained from Morris and promised to place further large orders before the end of 2016. Contrary to its representations, Elysium intended that the orders would last well into 2017. Because Morris kept Elysium's plans secret, ChromaDex agreed to sell to Elysium on credit 3,000 kilograms of NR (at $800/kilogram) and 580 kilograms of PT (at $1,000/kilogram) (the "June 30 Orders). The June 30 orders represented $2,983,350 worth of ingredients.
Morris also supported Elysium's plan to baselessly accuse ChromaDex of wrongdoing to avoid paying anything. On July 1, Alminana informed Morris that he planned to "drop" an email accusing ChromaDex of violating the Exclusivity Provision "the second our ingredients" from the June 30 Orders were in Elysium's possession. In response, Morris surreptitiously provided Alminana with information about other ChromaDex customers to help Elysium levy accusations against ChromaDex. Morris finally left ChromaDex for Elysium on July 15. True to his word, on August 10 -- the day Elysium received confirmation that the last of the June 30 order had shipped -- Alminana sent ChromaDex an email accusing it of breaching the NR supply agreement. Elysium thereafter withheld payment for the June 30 Orders and declined to even discuss a resolution with ChromaDex for the next several months. By the end of 2016, with Elysium still refusing to pay, ChromaDex terminated their supply agreements effective February 3, 2017.
E. ELYSIUM TAKES DESPERATE ACTION TO OBTAIN NR
Elysium's plan was to coast on the ingredient stockpile, for which it never paid, and use the resulting profits to help finance the development of a new source of NR that infringed on ChromaDex's NR patent rights. That plan hit a snag in late 2016, when Elysium realized that its new manufacturer, [redacted], would not be able to deliver a commercial batch of NR before 2017. Elysium was running out of NR. Aware that running out of NR inventory would cost it both customers and investors [redacted] (noting "we are most likely going to recommend shutting down all advertising activity until the commercial supply is established.")
By May 2017, Elysium was so desperate for NR that, instead of waiting to accept shipments of NR that met its product safety specifications, Elysium ordered [redacted] to change the safety specifications so that it could accept the NR. Specifically, Elysium had set the specification for acetamide, an NR manufacturing by product, at 40 parts per million ("ppm"). When [redacted] informed Elysium that the NR it was manufacturing would have more than 40 ppm of acetamide, Elysium raised the safety specification to 200 ppm, a five-fold increase, and commanded [redacted] to "pull the...NR batch from the reactor." When testing showed the batch contained over 200 ppm of the suspected carcinogen, Elysium again raised the safety specification, this time all the way to 275 ppm. Elysium paid [redacted] per kilogram for that batch of NR, far more than it had ever paid ChromaDex for NR.
Elysium finally obtained finished product made with that batch of NR the week of [redacted]. Knowing it contained significantly more acetamide than ChromaDex's NIAGEN, Elysium deliberately sold Basis with NIAGEN into California to satisfy Prop 65, and sold Basis with the contaminated NR into the rest of the country. In September, after "stringing [redacted] along" with promises that it would continue to purchase NR into the future, Elysium abruptly switched NR manufacturers to [redacted], leaving [redacted] with "a hole in [its] facility" and [redacted] for which Elysium had not paid. That same month, [redacted] began delivering commercial quantities of NR to Elysium. [Redacted] still supplies Elysium with its NR today.
So those are some of the facts drawn from the "damning evidence" that "ChromaDex eagerly awaits its opportunity to present" to a jury. Let's see how Elysium's claims against ChromaDex stack up against that evidence.
Trials are about discovering the facts, and the jury is the "finder of fact." But where the facts are undisputed, the Court can apply the law to the facts and resolve the matter without a trial. That's what summary judgment is about.
ChromaDex begins its argument with Elysium's Patent Misuse counterclaim, undoubtedly because that is the most important claim that ChromaDex needs to get thrown out. Right now the mere presence of the unadjudicated patent misuse claim is preventing ChromaDex from seeking patent infringement damages in Delaware.
We have, from the start, called Elysium's Patent Misuse claim "bogus," because it seems to be based on made-up facts -- that ChromaDex is allegedly charging money for the use of its trademarks, thereby improperly extending its patent monopoly into a new market (the market for goods with ChromaDex's trademarks). Not only is that crazy-talk (why would ChromaDex do such a thing, rather than just charge for ingredient sales?), the underlying trademark agreement doesn't say that, and we have been highly confident that when evidence around the parties' negotiations finally emerged, we would find that the parties knew all along that the royalties were payments for Niagen sales, not for trademark use. We were not disappointed.
Here is how ChromaDex describes it:
Elysium’s novel and unsupported theory of patent misuse would, if sustained, severely curtail widely acknowledged rights of patent holders and reverse decades of accepted business practices related to ingredient branding strategies. For myriad reasons based in both fact and law, Elysium’s counterclaim should be dismissed. On summary judgment, one weakness is particularly obvious: the record lacks any evidence showing that ChromaDex “conditioned access to its products (through an implied license) on the purchase of a trademark license.” (emphasis added)...
Elysium provides no evidence that any ChromaDex customer—not one—was forced to accept a mandatory-use provision in its supply agreement against its wishes...ChromaDex never refused to sell NR to a customer simply because that customer did not desire to use or license the trademark. Thus, many customers—including Elysium—were under no obligation to use the NIAGEN mark. Elysium, just a startup at the time, itself negotiated not to use the mark, also showing that ChromaDex did not coerce customers to use it.
Elysium’s only other ground for arguing that there was a tying arrangement is that ChromaDex conditioned access to NR on Elysium’s payment of royalties, allegedly, for the trademark license alone. However, the unvarnished facts show that Elysium voluntarily agreed to pay royalties as part of an arm’s length negotiation. From the very first exchange of terms, Marcotulli himself recognized that Elysium’s payment of royalties was to compensate ChromaDex “for [Elysium’s] perceived startup risk.” Elysium witnesses admitted that royalties were paid “for the supply of NR.” And as Elysium concedes, the royalty provision was moved to the TLRA in order to simplify the supply agreement, not to modify the consideration for those royalties...
Elysium’s argument is that the mere existence of supply agreements containing mandatory trademark use provisions—a minority of all of ChromaDex’s supply relationships—constitutes illegal tying. Not so. A “branded ingredient” strategy, like the one at issue here, is a long-recognized and widely-practiced marketing strategy deployed by patent holders.Well-known examples include NutraSweet®’s patented aspartame...and Intel’s famous “Intel Inside®” campaign (where an Intel mark on computers helped consumers recognize that they contained Intel’s microprocessors). Branded ingredient strategies are acknowledged as inducing procompetitive behavior in markets by improving consumer information, reducing search costs, and assuring consumers of the quality and safety of products, a particularly important procompetitive effect in the health and nutrition industries. Common practices such as the conduct at issue here cannot constitute misuse in the absence of any evidence of coercion. Because Elysium cannot “show that [ChromaDex] has actually forced customers to buy both products,” its patent misuse counterclaim must be dismissed.
That is a one-two-three knockout punch to the Patent Misuse claim, and I predict it will finally be dismissed, as it should have been from the start.
When Judge Carney allowed Elysium to assert the Patent Misuse claim in the first place, he was very specific:
...ChromaDex asserts that the trademark rights under the express terms of the Trademark License and Royalty Agreement are “wholly optional” and Elysium need not use the trademarks, but instead must pay royalties on products sales “to compensate ChromaDex for that portion of the product purchase price that Elysium claimed it could not afford to pay upfront, when it placed a purchase order.” (Id. at 13.) This argument fails because Elysium does not complain that it was forced to use the licensed trademarks, only that it was forced to buy the license for the trademarks in order to have access to NR. (emphasis added)
In other words, Judge Carney gave Elysium the chance to prove that it PAID for the trademarks, and that the effect was anticompetitive. However, the smoking gun evidence in the exhibits makes it crystal clear that the royalties were in exchange for the sale of Niagen. The royalty provisions were included in the very first supply contract -- proposed by ELYSIUM, no less! -- and they were only later moved into the trademark agreement, and there was no suggestion at any time by any party that the royalties were FOR the trademarks.
I would very, very, very much like to see Rule 11 Sanctions invoked if the evidence is showing that all parties knew from the start that the royalties were not for the use of the trademarks, and that the Skadden-coined phrase "royalty-bearing trademark license" was intended as a cloak of deception concealing the fact that the Patent Misuse claim was not well-grounded in fact when the legal papers asserting the claim were submitted to the Court. I can dream.
Anyway, I have made a very short argument why the Patent Misuse claim should finally be thrown out. ChromaDex has made a more thorough argument: (1) There was no coercion to use the trademarks; (2) Payment of royalties was not in exchange for trademark use; (3) Mandatory trademark use provisions are not the kind of anti-competitive condition that Patent Misuse law addresses.
Elysium's unjust enrichment claim was really just a damages recovery mechanism based on the alleged patent misuse, so that goes away, too. Really, there was no more to the Unjust Enrichment claim than that:
FIFTH COUNTERCLAIM FOR RELIEF (Restitution for Unjust Enrichment)
...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. Elysium paid royalties under the License and Royalty Agreement. The License and Royalty Agreement was unlawful and unenforceable. ChromaDex is and was unjustly enriched by retaining royalties paid under an unlawful and unenforceable agreement...
So that's that.
Breach of Contract -- Product Safety
Next ChromaDex tries to knock out the portion of Elysium's breach of contract claim based on the alleged presence of Acetamide in Niagen. There are a LOT of exhibits related to this allegation, and an interesting back-story, but ChromaDex's argument is simple:
Elysium alleged that ChromaDex knowingly sold it NIAGEN that “contained [acetamide] in levels that far exceeded” the No Significant Risk Level (“NSRL”) set by Prop. 65. But Elysium has provided no reliable evidence that the NIAGEN it received did, in fact, contain levels of acetamide above the NSRL limit; in contrast, reliable and uncontroverted testing shows that the NIAGEN sent to Elysium did not exceed the NSRL limit....ChromaDex’s expert, Dr. Carla Kagel, reviewed the test method and results produced by Elysium and found them “unreliable, inaccurate and invalid” for numerous reasons. Elysium declined to offer a rebuttal opinion to Dr. Kagel or to even depose her.
In other words, Elysium made this allegation, but couldn't prove it, and ChromaDex actually disproved it, and Elysium has not challenged ChromaDex's rebuttal evidence.
So this breach of contract claim should be dismissed also.
The interesting back-story is here:
Discovery revealed something else: Elysium knew that its test results had serious deficiencies. For example, Elysium (1) knowingly selected a laboratory that had never tested for acetamide before; (2) directed that lab to use a testing method that Elysium was warned would generate “false positives” for acetamide; and (3) ignored repeated warnings that the method was not suitable for testing finished products...
And if you read the back-and-forths between the attorneys on this issue, where Cooley asked for the factual basis for this acetamide claim (Exhibits 59 & 60), it gets even worse, and makes you start to wonder whether this was another instance of bad-faith framing, or even a pattern of behavior, but such questions are for another day.
Breach of Contract -- cGMP
The issue here is whether the Niagen delivered to Elysium met the food-grade standard or the pharmaceutical-grade standard. Elysium drafted the contract, and inserted a requirement that it be pharmaceutical-grade. ChromaDex took it out. But somehow it got put back in. ChromaDex did not intend to deliver pharmaceutical grade NR. So this looks like a mutual mistake case. But the legal issue at summary judgment turns on something else:
Elysium waited too long to complain about the alleged defect. The law says you have a reasonable time to report a warranty breach, and after you have sued someone is too late.
In addition to the legal requirement, there was a contractual requirement in the parties' agreement to provide notice of the problem within 30 days, so that is an independent ground of waiver.
In any case, Elysium suffered no damages from the difference in quality grade, because it sold all the product at the normal price. Elysium is going to argue that it incurred lab fees testing and legal fees complaining, but that seems to me an extreme case of boot-strapping.
These arguments all seem strong to me. Maybe if there were serious damages you'd look closer at whether there was a waiver, or maybe if they didn't waive the claim you could find some kind of nominal damages, but this looks more like a waste of the court's time and I predict it will be treated thus.
Breach of Contract -- Safety, Confidentiality, Implied Covenant
You have to show that you were damaged to assert a claim, ChromaDex says that Elysium offered no such evidence with respect to its claims that the ChromaDex's Niagen was unsafe, that ChromaDex improperly divulged confidential information, and that ChromaDex breached the implied covenant of good faith and fair dealing.
With respect to the first two, I think ChromaDex is right and the claims will be dismissed. The evidence is quite clear that Elysium sold all the product it took at the full price. Here is how ChromaDex describes it:
Elysium vaguely stated that it sought “damages arising out of” the claimed breaches. When asked to identify “all facts that support Your damages calculations,” Elysium refused and mistakenly objected to the Interrogatory as calling for expert testimony. But Elysium’s damages expert did not provide any opinions on damages arising from any of those three counterclaims.
I'm not as sure about the Implied Covenant claim:
For the implied covenant counterclaim, Elysium failed to state that it seeks damages in both its initial and supplemental initial disclosures. In response to an Interrogatory asking Elysium to identify its damages, Elysium did not remedy that omission, even in its supplemental response months later.
That sounds like Elysium abandoned all three claims, but maybe we'll find in Elysium's Opposition Brief some references to evidence in the record that look like they aren't abandoned. I'll withhold my guess on this, noting, however, that any damages on the safety and confidentiality claims are not likely to be significant, whereas the covenant of good faith and fair dealing is potentially a larger deal (although you would think, from the totality of evidence, that a jury might decide that Elysium was living in a glass house when it comes to good faith and fair dealing and ought not throw stones). We'll check back in a couple weeks.
Breach of Contract -- Exclusivity Provision
The issue here is a late (Feb 2016) amendment to the Supply Agreement that gave Elysium exclusive rights to sell the combination of NR and PT, or PT analogues. The question is whether Resveratrol was a PT analogue. I have argued not. But the legal issue on summary judgment is different:
ChromaDex claims that Elysium has failed to establish that it was damaged by the alleged non-exclusivity -- first, because Elysium lacked the capacity to make any additional sales, and second, because Elysium's estimate of lost profits was entirely speculative.
These are the first arguments we have seen in the brief that do not appear to be slam dunks.
There certainly is evidence in the record that Elysium was trying to put the brakes on sales after its original manufacturer ran into delays trying to produce Mystery NR.
ChromaDex's says that Elysium's expert estimated that Elysium might have captured anywhere from 10%-90% of the sales for the excluded combinations -- a huge range of uncertainty -- and that "allowing Elysium to present these theories to a jury would invite a speculative and factually unsupported award."
That's plausible, but I can imagine a judge going the other way and saying the evidence is weak, but it's still for a jury to decide. Same for capacity to deliver -- whether Elysium had excess capacity might be something to let the jury decide.
I do think that this claim is bogus for different reasons (Resveratrol is not substantially similar to Pterostilbene in my view), and I think ChromaDex's arguments on this motion suggest that any damage award is going to be very small, and maybe not even worth going to trial on, but I'm not sure that ChromaDex is entitled to judgment was a matter of law.
If I had to guess, I'd guess that summary judgment will be denied on this ground, but it is at least a close call.
ChromaDex tucked that last one in second to last, and now finishes strong with Fraudulent Inducement. I have been very critical of Elysium's theory of recovery here -- that asserting the terms on which you are willing to do business during a contract negotiation can be fraud. But the legal issue on summary judgment, again, is different.
The alleged fraudulent inducement occurred when Frank Jaksch allegedly told Elysium that everyone has to sign a separate trademark license and royalty agreement.
ChromaDex argues that it did not happen. There is no record of the statement being made, Jaksch denies making it, nobody present remembers him saying it, and Eric Marcotulli's deposition testimony was inconsistent with Frank's having said it.
"Given the utter dearth of evidence," says ChromaDex, "No reasonable juror could find that Mr. Jaksch made the specific alleged statement."
And even if he did make the statement, says ChromaDex, there is no evidence that it was false, because "It cannot be disputed that, as of that date, every ChromaDex customer who had signed a supply agreement for NR—and there was only one: Thorne— also paid royalties and signed a trademark license agreement."
That ought to be enough to get to summary judgment.
So on ChromaDex's side of the equation, I think the law cited in the briefs and the evidence drawn from the exhibits will be sufficient to get all of Elysium's major challenged claims tossed, although maybe a few smaller claims survive.
That wouldn't end Elysium's legal case entirely, because the MFN pricing dispute remains, and the exclusivity provision breach might well survive, too. But the most likely scenario is that Elysium proceeds to trial in California asserting only the MFN pricing claim, and some very small contract claims, once its claims for Patent Misuse, Fraudulent Inducement, and Unjust Enrichment get tossed, as I am sure they will be.