MSJ Analysis Part 2: Elysium's Motion
Earlier we looked at ChromaDex's motion for summary judgment and decided there was an excellent chance that Elysium's claims for Patent Infringement, Fraudulent Inducement, and Unjust Enrichment would get tossed out, and probably some of Elysium's breach of contract claims, too, but not all of them.
Elysium is similarly trying to get most of ChromaDex's claims dismissed, and trying to win without trial on one of Elysium's own breach of contract claims. Let's take a look at Elysium's arguments. I have once again omitted the citations to the record for readability, but you can find those in the original brief:
and of course Elysium's 68 supporting evidentiary exhibits can all be found here.
Elysium makes four arguments:
1. ChromaDex clearly breached the MFN agreement; the only question for trial is damages;
2. ChromaDex cannot prove damages for trade secret misappropriation;
3. ChromaDex cannot show damages for its remaining breach of contract and breach of fiduciary duty claims;
4. The July confidentiality agreement is unenforceable.
I will conclude that the facts are actually not undisputed on argument 1, so summary judgment would be improper. Elysium's own authority does not support arguments 2 and 3. I'm not sure what to think about argument 4, and I'm not sure that it matters. Therefore I predict that ChromaDex will get to trial on its main breach of contract and trade secret claims. But I will probably put more conviction behind that prediction after we see ChromaDex's Opposition brief next week.
Elysium's Preliminary Statement
Elysium's framing of the issues in its preliminary statement deserves some attention. Elysium says,
ChromaDex overcharged Elysium by more than $4 million in breach of the “most favored nations” provision of the parties’ supply agreement, hid evidence of its wrongdoing from Elysium...
The $4M overcharge assumes a NR price of $100/kg, which is what P&G allegedly got, and is not only one-tenth of what Elysium paid, but also likely far below ChromaDex's cost. We'll need to see more evidence to understand how that could possibly be what the MFN agreement required.
...and then terminated their relationship as part of ChromaDex’s plan to “[b]e our own ‘Elysium’” by pushing Elysium out of the DTC market it had successfully created.
There is strong evidence that ChromaDex only got serious about restructuring the company for DTC in November 2016, after Elysium had left, so it is not fair to say that overcharging it and terminating the relationship was part of a plan to push Elysium out.
Over the course of this years-long case, ChromaDex has continually sought to expand it, adding claims for trade secret misappropriation, breach of confidentiality agreements, and breach of contract and fiduciary duties against Elysium employee Mark Morris...
It takes quite a bit of chutzpah for Elysium to be complaining that ChromaDex has been expanding the litigation, given Elysium's penchant for litigation. But it's not the only example of chutzpah in this brief.
Elysium's Statement of Facts
The framing in Elysium's statement of facts is also instructive:
In 2016, Elysium raised concerns about whether it was receiving the pricing to which it was entitled under the MFN Provision. As ChromaDex’s former CFO testified, it was Morris’s responsibility to inform Elysium if it was entitled to adjustments to its pricing under the MFN Provision. After some preliminary discussions with Morris, Elysium brought its concerns to ChromaDex’s then-CEO, Frank Jaksch.
In this whistling-past-the-graveyard account, Elysium suggests-without-saying that sharing confidential pricing information with Elysium was Morris's job, and therefore couldn't be illegal, and then Elysium responsibly took its concerns to the CEO. What Elysium does not here address is whether Morris told Elysium WAY more than was necessary to do his job, and whether Elysium told the CEO, "We have learned from your employee Morris the following things, which raise concerns," or if something very different was conveyed to Mr. Jaksch.
Here is another half-truth in Elysium's statement of facts:
In emails sent in advance of the call, Jaksch told Elysium that Live Cell was a lower volume customer than Elysium, and that it had placed its last significant order in the third quarter of 2015.
Here is a fuller account of what Jaksch actually told Elysium in emails sent in advance of the June 30 call (CDXC Exhibit 35). Jaksch in emails to Elysium:
Up until [Q1-2016], Elysium was not our largest client, and now that you guys have vaulted up, you are acting no better than Live Cell research did last year, which I openly discussed with you guys. I am not sure why you are treating us/me like we have been unreasonable, because we have never acted that way in discussions with you, as far as I know...In 2015, Elysium was in our top 5 customers for overall volume of Niagen. We adjusted price from the $1300 to $1000 in Q3 of 2015 as you know. Compared to your $1000/kg pricing as we ended 2015, only one other customer [Live Cell] had lower pricing. That customer took over 3X the volume as Elysium in 2015. For 1st half 2016, to date, Elysium is ahead of that customer on volume and we are prepared to adjust pricing for Q3 and Q4 (and for any order placed for shipment this week) in line with our agreement. As we did not specify the frequency of review in our agreement, we think this adjustment is fair in keeping with the spirit and the terms of our agreement.
In other words, a better statement of facts would have been that Live Cell was a higher volume customer than Elysium when Live Cell placed its last significant order in the third quarter of 2015.
Elysium places the two clauses in reverse temporal order and replacies "when" with "and," thereby implying the opposite of what Mr. Jaksch said in the emails.
I would refer the parties to Swinomish Indian Tribal Community v. BNSF, 2019 WL 3074050 (9th Cir. May 22, 2019), wherein the Ninth Circuit took a dim view of a large law firm's creative characterizations of the facts and opposing arguments. In that case, after large law firm Munger Tolles was called on to explain how its brief candidly represented the facts and the parties' arguments, the opposing party complained that it had wasted a lot of valuable pages debunking misrepresentations, which prevented it from properly making its arguments before the Court. The Ninth Circuit has not yet ruled on the matter.
There is a certain temptation to complete the analysis right here and just conclude that (1) Elysium is playing games with the facts, (2) they wouldn't do that if they didn't have to, and (3) it's not going to work, and be done.
But instead we will soldier on.
In 2016, Morris approached Elysium and stated a desire to resign from ChromaDex. Morris gave notice to ChromaDex on July 12, 2016, and his last date of employment was July 15, 2016.
The phrase "In 2016" is peculiarly inspecific. Something happened some time in 2016, and then suddenly we jump to July 12, 2016.
Elysium seems to be preparing to argue -- as Eric Marcotulli did in his deposition (Elysium Exhibit 37) that Elysium didn't consider Morris for a position until after Morris approached them and said he was leaving ChromaDex, some time between April 1 and June 30 2016. And if Morris was leaving ChromaDex anyway, Marcotulli testified, then it would make sense for Morris to join the Elysium team. "We moved pretty quickly from there," testified Marcotulli.
Of course we know from the Alminana/Morris text messages that Morris texted Alminana before April 1 -- on March 12, in fact. Morris said, "Thanks for the call! You have me so pumped up that I could literally run to New York right now. I would like to email you some thoughts from my personal account..."
On March 19, the two discussed an opportunity for Morris to meet with Marcotulli and Alminana in New York. Morris said, "I am truly honored to have this opportunity with you and Eric. I can't wait!" Alminana replied, "It will be great to sit down with you and have you meet some of the team!"
On March 23, they agreed to meet for an hour then have lunch. Alminana said, "Cannot wait to see you and the deck you put together!" Morris replied, "I cannot wait to meet with you and Eric!"
The courtship was apparently consummated, because on April 5, Morris texted Alminana, "I wanted to make sure the family as onboard with a relocation. I am beyond excited to continue our conversation and determine if there is a role for me at Elysium! Thank you so very much!"
On April 21, Morris, apparently getting antsy, texted Alminana, "It is a good time for me to move on...I was approached by an ingredient company to build their...sales team...but...Elysium is where I want to be."
The text messages do not show that Elysium's courting Morris was in response to Morris's stating he would leave ChromaDex, although that might be demonstrated by other evidence.
But it is clear from the text messages that once they began talking with Morris about a position, it was not the case that Elysium "moved pretty quickly from there." More than three months passed between when Morris traveled to New York, met the team, gave Elysium a deck to review, and Morris got his family on board with a relocation before Morris "gave notice to ChromaDex on July 12, 2016."
So both of those sentences that Elysium recited might be true -- some time in 2016 Morris approached Elysium, and on July 12 Morris gave notice -- but the wording seems to conscientiously leave out a big part of the story, which is Why did Elysium NOT in fact move pretty quickly from there?
Here is one last example of a suspiciously blurry timeline from Elysium's statement of facts:
Unbeknownst to Elysium, starting in 2015, ChromaDex had devised a plan to sell an NR-containing product directly to consumers, in competition with Elysium. It would do so by taking a stake in a company called Healthspan Research LLC (“Healthspan”)—a company ChromaDex helped create by partnering with its now CEO, then a Board member of ChromaDex. During 2016, ChromaDex began negotiations to purchase Healthspan outright, and internal memoranda from that time show that ChromaDex intended to phase out its ingredient business – including by eliminating NR sales to customers, like Elysium, in the DTC market – to become a DTC business and “[b]e our own ‘Elysium.’” One month before ChromaDex closed on its purchase of Healthspan and began to compete directly with Elysium in earnest, ChromaDex’s termination of the NR Supply Agreement took effect.
The reason I call this a blurry timeline is because the references are only to years -- "starting in 2015" and "during 2016." A more candid and specific account would read like this:
In August 2015, ChromaDex agreed to supply Niagen to Healthspan, a company in which it invested, which allowed it to participate in the DTC market. (Elysium Exhibit 12)
In November 2016, after the relationship with Elysium had entirely gone to hell, ChromaDex executives met to consider using Healthspan to transform ChromaDex into a DTC business. (Elysium Exhibit 9)
"Elysium's supply contract terminated in February 2017, and the following month ChromaDex began its DTC business."
The problem with my formulation is that it does not give the false impression that ChromaDex was planning to become a DTC company all along, like Elysium's account does. The reason I find Elysium's account suspiciously, blurrily, misleading is because of this email, which Frank Jaksch wrote to ChromaDex's board members on November 20, 2016:
"If we are going to seriously consider an option where we would restructure ChromaDex, which is an ingredient company, into a consumer products company, ie. Be our own Elysium, I think we need to see a very detailed business plan outlining what this strategy would look like." (Elysium Exhibit 9)
It seems pretty obvious from this email that months after Elysium abandoned ChromaDex and started building its own supply chain, ChromaDex was not at all certain what ChromaDex as a DTC business would look like and whether it made sense.
Elysium has been suggesting all along that ChromaDex was plotting to cut Elysium out of the NR business and take over the business that Elysium had built. I thought that was unlikely, given what we know about ChromaDex.
But now that we have the evidence showing that the order of events was the opposite of that -- ChromaDex started a DTC in response to Elysium's departure; ChromaDex did not cut off Elysium because it was planning to start a DTC -- I can't believe Elysium is pushing this narrative in a legal filing to which refuting evidence is actually attached.
I imagine that Cooley has a fun time -- and makes good money! -- unraveling all the knots that Baker Hostetler has made of the facts and of the law, but a normal person would find it offensive.
The MFN Clause
Elysium argues that it is uncontested that Innovations4Health received a redacted amount at a redacted price in February 2014, whereas Elysium paid more than that for its first order in June, 2014.
Moreover, Elysium argues, Procter & Gamble received a redacted quantity of Niagen at a redacted price in February, 2015, but Elysium paid more than that for Elysium's eight subsequent orders.
And that's it. It seems like Innovations4Health could be explained away simply enough because Elysium was not taking any Niagen at that time, and so the MFN clause did not yet apply. Elysium's broad reading seems to say that ChromaDex can never raise the price for all customers. That seems to me an unlikely interpretation, and whether the parties agreed to that or not seems to be a disputed fact, not an undisputed fact.
P&G might be a harder case, because that sale occurs between two Elysium orders for a higher amount. If only we could see the redacted prices and/or amounts, we might have a better sense of what's actually going on!
Happily, Elysium did not redact this data in Exhibits 66 & 67, its damages calculations.
In Exhibit 67, we see that Innovations4Health paid $1,000/kg for 1kg. Elysium only claims to have paid more than that when it bought 410 kg for $1,300. So the potential damages resulting from Innovations4Health, if any, would be $300 * 410kg or $123,000. That's assuming that the Innovations4Health sale isn't precluded by timing, and that the 1kg quantity doesn't suggest that it was a sample, rather than a product sale.
In Exhibit 66, we see that P&G paid $100/kg for its Niagen. That really IS a low price. Like, crazy low.
Assuming ChromaDex was aiming for a gross margin of 50% on a thousand-dollar sale, then ChromaDex's cost was $500. It's hard to imagine that ChromaDex was selling NR for 10x its cost, and easy to imagine that it sent a small sample to Proctor & Gamble at a loss to let P&G test the product. As far as I know, P&G did not ever sell an NR product. Does the MFN clause apply to product samples to potential future distributors? Doubtful.
What's SUPER-interesting about this part of Elysium's argument is that there is no mention of Live Cell. We saw in Elysium's statement of facts that it complained that
"Elysium and ChromaDex had a phone call in which Jaksch informed Elysium that ChromaDex had sold NR to a company called Live Cell for $800/kg, which was $200/kg below the price ChromaDex had been charging Elysium for its most recent orders. In emails sent in advance of the call, Jaksch told Elysium that Live Cell was a lower volume customer than Elysium, and that it had placed its last significant order in the third quarter of 2015."
I complained above that when you read the actual emails from Frank Jaksch, that's the opposite of what he said. And then, weirdly, when we get to Elysium's actual argument on MFN, Live Cell is not to be found. Is it possible that Elysium agrees, contrary to its own statement of facts, that LiveCell only received a lower price while it was ordering a greater volume?
I don't get it. Maybe ChromaDex's Opposition Brief will shed some light. To me, it looks like disputed facts as far as the eye can see. Therefore, I don't think the MFN issue is ripe for summary judgment.
Trade Secret Damages
Elysium makes a bizarre argument on trade secret damages. By common sense, you'd think that showing damages from trade theft would be pretty easy - things like lost profits and impaired competitive position. ChromaDex hired a damages expert, Lance Gunderson, to write a lengthy report on the subject.
But somehow Elysium argues that there isn't enough evidence to go to trial. Here is the core of Elysium's argument:
Gunderson does not purport to calculate damages by alleged act of wrongdoing, or by Claim, or even by defendant, much less apportion damages on a trade secret-by-trade secret basis. Nor does he provide the methodology to do so. Instead, he bundles all of ChromaDex’s alleged damages together and takes the position that all of those damages are available for each and every Claim individually, notwithstanding that the legal and factual bases of the Claims vary substantially. These errors—the failure to apportion damages on a trade secret-by-trade secret basis, and the failure even to separate damages among ChromaDex’s various claims—leave ChromaDex without sufficient proof on the damages element of its trade secret claims, entitling Elysium to summary judgment on ChromaDex’s Third and Fourth Claims. (emphasis added)
That strikes me as just wacky and delusional. It would lead to the nonsensical conclusion that if I steal one trade secret, damages are easy to prove, but if I steal 1,000 trade secrets, damages will be impossible to prove because you'd have to apportion them in ways that would be unknowable and highly speculative, and possibly illogical, not to mention expensive and time-consuming. That can't be the law.
Elysium's exhibit 53 seems to show that ChromaDex is claiming that almost 150 trade secrets were taken. I would think the right calculation would be that the sum total of the trade secrets taken allowed the defendant to do certain things that it would not otherwise have been able to do, and because it was able to do those things, the defendant's actions resulted in damages of X.
I would understand if Elysium argued in this motion that the things taken were not secret, or that Elysium's actions based on the secrets did not cause any harm. But the idea that you have to individually value each trade secret in order to recover for actual, demonstrable harm -- are they SMOKING their Basis?
Elysium claims that there are only twelve trade secrets misappropriated, and of the twelve, two of them -- the pricing spreadsheet and the Live Cell order information -- can't be proved as trade secret thefts. And since the expert report provides no basis to calculate damages for just the other ten, not counting those two allegedly non-provable secrets, there is no proper proof of damages at all.
I don't believe that's the law.
Here is one of the cases that Elysium cites for that law:
This collective approach to trade secrets damages is “useless” where, as here, the plaintiff cannot prove each and every alleged misappropriation on which its damages opinion is based. O2 Micro Intern. Ltd. v. Monolithic Power Sys. Inc., 399 F. Supp. 2d 1064, 1079 (N.D. Cal. 2005).
The fact that Elysium can only quote one word out of context for this proposition of law raises suspicions, like those movie reviews that say "Amazing," but the full sentence was, "It is amazing that anyone thought this movie should get made.". Let's go read the case and see if 02 Micro actually says that.
[pause to read]
I don't think it does say that. First, 02 Micro is not on summary judgment, so the standard is different. And one important aspect of that difference is that the Court in 02 Micro did not ignore the damages evidence and send the plaintiff home, but instead figured out a proper way to award damages (reasonable royalty). Then, on the page that Elysium actually (but incorrectly) pinpoint cites, the Court TREBLES that award as exemplary damages. So Elysium's suggestion that failing to allocate damages by trade secret is its get-out-of-jail-free card is not supported by the case it cites for the proposition.
Elysium also cites LivePerson v. 7, 2018 WL 6257460 (N.D.Cal. 2018) for its remarkable claim that failure to apportion damage by trade secrets blocks the claim. LivePerson, although closer, still doesn't say that.
Here is what the Judge Tigar said in LivePerson: "Dr. Choi's opinion must be excluded because he does not apportion trade secret misappropriation damages among particular alleged trade secrets, and offers no methodology for the jury to calculate trade secret misappropriation damages on fewer than all of the 28 alleged trade secrets in the case."
First, LivePerson involves a motion to exclude evidence, not a motion for summary judgment. So Elysium is combining three different legal moves into one -- a kind of advanced legal athletic that in another context might be admirable.
Elysium is essentially arguing that (1) Some of ChromaDex's trade secret claims will inevitably fail, and (2) ChromaDex's witness's testimony will inevitably be excluded, and so (3) summary judgment should be granted based on a legal assumption that the trade secret claims will somehow be removed (although they have not yet been), a motion for exclusion will be forthcoming (although it has not occurred yet), and that the Court will necessarily grant that future motion, because something kind of similar happened elsewhere once.
So this case is not relevant yet, and does not present a strong justification for a summary judgment.
However, skipping forward to the next part of the argument, LivePerson is only KIND-OF similar because in LivePerson the expert "offered no methodology for the jury to calculate trade secret misappropriation damages on fewer than all of the 28 alleged trade secrets in the case." Or, technically, the expert did say each trade secret could be valued equally, and damages awarded pro rata. Judge Tigar thought that approach defied common sense.
In our case, by contrast, Lance Gunderson, did in his deposition say that he thought a jury could apportion damages for fewer than all claims, and it wasn't pro rata.
On the other hand, Gunderson, like me, was kind of taken aback by the suggestion that every trade secret had to correspond to a discrete damage award. He told the Baker Hostetler attorney in his deposition,
"It's a very complicated thing you just asked me because there's hundreds of different pieces of information here, and you're saying, 'Hey Mr. Gunderson, ignore all that other stuff and just say there's one little thing they had,' and I'd have to think about that."
The reason it's nonsensical and illogical to require this is because trade secrets have potential synergies. So stealing A might not allow me to do anything, and stealing B might not allow me to do anything, but stealing both A and B together unlock an opportunity. So you can't value each of them individually. Surely the same is true of the alleged thefts in our case.
However, I am just speculating.
One thing we know for sure is that Elysium is citing LivePerson for the proposition that if you don't apportion trade secret damages by claim then you lose your case.
Another thing we know for sure is that Elysium only cited the 2018 opinion in LivePerson, and failed to bring to the Court's attention that Judge Tigar issued a subsequent opinion last month in which he ALLOWED the same expert's testimony: LivePerson v. 7, 2019 WL 3254226 (N.D.Ca. July 19, 2019).
It turns out that after Judge Tigar excluded the expert's testimony due to non-apportionment in the case Elysium cited, the Court then granted leave to LivePerson to file a supplemental damages report that solved the apportionment problem.
Judge Tigar did not deny LivePerson the right to collect damages entirely, just like the judge in 02 Micro did not deny the plaintiff the right to collect damages entirely.
Neither case teaches, as Elysium tells us, that failure to apportion damages among multiple trade secrets kills your case.
This creative lawyering, where you make a case seem to call for an outcome that it does not in fact call for, is obnoxious, like the loose characterization of the facts we saw earlier in the brief, and reminds us of what Judge Carney wrote in his most recent opinion in this case:
...Many of the cases cited by [Elysium] do not even address [the governing statute]...Or Defendants' cited cases deal with letters or oral agreements, to which [the governing statute's] presumption does not apply. ChromaDex v. Elysium, 369 F.Supp.3d 983 (C.D.Cal. 2019)
We also know for sure is that Elysium is not offering a case where summary judgment was granted based on a lack of apportionment of trade secret damages, which presumably means it's never happened. Why not? I'll defer to ChromaDex's Opposition Brief when it is filed next week, and we'll have a better sense of whether Elysium is about to make new law, or just making things up again.
Breach of Fiduciary Duty
Elysium makes the same integrated damages argument with respect to ChromaDex's other claims (e.g., Breach of Fiduciary Duty), making a big thing out of the possibility that Morris could be found liable on a contract claim for harms that Elysium caused under a different contract that didn't involve Morris, "which is manifestly improper."
Again, I don't know whether this is actually a problem, and if so whether it gets dealt with in motions to exclude, or at trial, or in the jury verdict form, or requires a do-over by the damages expert (as in LivePerson), but I don't think it warrants summary judgment. I can't imagine that Elysium holds a get-out-of-jail-free card based on the damages expert's failure to anticipate and quantify every possible combination of trade secret theft.
But that's not quite the end of the story, because Elysium seems to have raised a legitimate question about how damages get calculated. Although summary judgment isn't the right answer, we don't know what the right answer is yet, and we're likely to see the question again at Motions in Limine, and then again at jury instructions, and then again on appeal, so it would be nice to have this bit nailed down a little better than we do.
We'll likely see a barrage of contrary authority and explanation from ChromaDex next week in the Opposition Briefs, which should shed some light on the subject, and I'll be content to wait for that.
July Confidentiality Agreement
Finally, Elysium reprises its argument from earlier this year that the July confidentiality agreement is unenforceable for lack of consideration, and adds a new argument that the agreement was rendered unenforceable because of the actions of the HR rep during the exit interview.
Again, this doesn't look to me like the land of undisputed facts -- e.g., whether Morris received a benefit from the exchange. So this doesn't look like summary judgment to me.
On the other hand, it is important to remember that Morris has three different confidentiality obligations -- the February agreement, the July agreement, and his fiduciary duties as an officer. Elysium's potential success in knocking out one source of a confidentiality obligation wouldn't appear to be all that important -- Elysium would want to take out all three.
I don't have a guess on this one.
Elysium might eventually win the MFN argument, but I don't think they get to win on summary judgment; I think the facts are disputed, and Elysium's interpretation of the MFN clause seems unreasonable.
Elysium's theory that the lack of apportionment of damages by trade secret requires summary judgment appears to be novel, and I think crazy and wrong-headed. The authorities Elysium cites do not support summary judgment for this reason.
I don't know whether Morris's third confidentiality obligation -- the July agreement -- is enforceable or not, or how much it even matters. We'll wait for ChromaDex's Opposition brief.