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  • Shelly Albaum

ChromaDex: Lift the Stay in Delaware!


Enough is enough, says ChromaDex, as it files a fiery demand that Judge Connolly lift the stay in Delaware and allow the patent infringement case to proceed. You can read the brief here:


ChromaDex's Motion to Lift Stay


There are three interesting things to discuss:

1. The factual recitation

2. The legal arguments

3. The evidence revealed in the exhibits


We will take them in order.


1. FACTUAL RECITATION

ChromaDex CEO Rob Fried mentioned in today's investor call that although ChromaDex is eager to get to trial so the world can see the truth about what has transpired between ChromaDex and Elysium, the facts are laid out in ChromaDex's most recent motion, and are worth attending to.


He is right.


Click through and read the whole thing.


But in case you do not, here is an excerpt:

B. ChromaDex’s Supply of NR to Elysium


ChromaDex first sold NIAGEN in 2013, and in 2014 began to supply NR in commercial quantities to companies marketing direct-to-consumer products. One of those companies was Defendant Elysium Health, Inc. (“Elysium”), a Manhattan- based startup founded in 2013 by a stock broker and a venture capitalist. (Ex. A at 9:15–23.) In 2015, Elysium began selling its only product, a dietary supplement called “BASIS®” that contains NR and another ingredient called pterostilbene (“PT”). (Id. at 9:21–23, 14:7–17.) Until June 2016, Elysium sourced all of its NR and PT from ChromaDex.

C. Elysium’s Efforts to Obtain an Alternative Supply of NR Through Theft of Trade Secrets, Breach of Contract, and Patent Infringement


Beginning in 2016, Elysium’s principals got greedy, and developed a plan to seize ChromaDex’s intellectual property covering NR and either subvert ChromaDex’s supply of NR or develop a competing and infringing NR supply. Elysium began its plot by luring ChromaDex’s Vice President of Business Development Mark Morris from ChromaDex to Elysium with promises of future

employment and stock bonuses. (See Ex. B at 360–62.) On May 29, 2016, during a conversation about his potential employment, Morris divulged ChromaDex trade secrets to an Elysium executive. (Ex. B at 367–68.) Over the next month and a half, Elysium asked Morris for additional ChromaDex trade secrets and confidential information and schemed with Morris to develop a “game changing” patent strategy. (Ex. N at 455.) As described by Morris, the strategy was straightforward: “make [ChromaDex’s] worst nightmares come true!” and “get rid of the scumbags holding this magnificent technology.” (Ex. B at 376.) Morris, in his own words, wanted to “destroy [ChromaDex]!” (Id. at 393.)


As part of this plan to “destroy [ChromaDex]!,” and despite still being a ChromaDex executive, Morris began helping Elysium obtain a new source of NR, including by attempting to steal away ChromaDex’s exclusive NR manufacturer, and in the alternative by developing a strategy whereby Elysium would jumpstart its production of NR by copying ChromaDex’s manufacturing process. (See, e.g., Ex. C.) To that end, Morris provided Elysium with a list of potential NR manufacturers and acted as Elysium’s inside agent as it sought to obtain a stockpile of NR on credit from ChromaDex to use as a bridge until it had a new source of NR. (Ex. D at 413.) On June 30, 2016, Elysium ordered large quantities of NR and PT to give it a stockpile that would last it for many months while it sought its new NR source. At the same time, Elysium intended to put enormous financial pressure

on ChromaDex by not paying for the $3 million worth of ingredients it had ordered.

On August 10—the day Elysium received shipment confirmation for the last of its large orders—Elysium sent ChromaDex an email accusing it of breaching the NR supply agreement and thereafter withheld payment for the large orders it had placed. (See e.g., Ex. E at 449–50.) By the end of 2016, with Elysium still refusing to pay, ChromaDex terminated its supply agreements with Elysium effective February 3, 2017. (Ex. F at 457.)


At the same time that it obtained this large quantity of ingredients (for which to this day it has not paid a dime), Elysium attempted to undermine ChromaDex’s exclusive relationship with Dartmouth in an effort to obtain rights to the patents-in- suit. As part of this underhanded effort, Elysium’s agents secretly visited Dartmouth and attempted to convince Dartmouth to terminate its exclusive license to ChromaDex. In so doing, Elysium made multiple misrepresentations about ChromaDex to Dartmouth employees, including that ChromaDex was insolvent, had serious problems with the U.S. Securities and Exchange Commission, and was in material breach of its license agreement with Dartmouth. (Ex. G at 427). With the exception of the assertions that ChromaDex was in financial distress (which resulted from Elysium’s failure to pay for the NR it had ordered), none of these assertions were true, as Elysium knew. Elysium also sought to cut ChromaDex off from its exclusive contract NR manufacturer, W.R. Grace & Co. (“Grace”), again attempting to leverage the financial distress it had created through non-payment to convince Grace to cut ties with ChromaDex. (Id.) Elysium’s efforts to disparage ChromaDex to Dartmouth and Grace failed.


D. Elysium’s Loosening of Safety Requirements to Accommodate Deficiencies in Its Alternative Supply


Elysium had planned from the start that if it were unable to replace ChromaDex as patent licensee and take over Grace as its NR manufacturer, it would use the revenue generated from the $3 million in ChromaDex ingredients 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 would not be able to deliver a commercial batch of NR before the stockpile it had obtained from ChromaDex ran out. Aware that running out of NR inventory would cost it both customers and investors, Elysium severely reduced its marketing to limit its growth and conserve the supply it had. (See, e.g., Ex. H at 517 (noting “we are most likely going to recommend shutting down all advertising activity until the commercial supply is established”).))


By May 2017, Elysium was desperate for NR. It was so desperate that, when its alternative manufacturer produced a batch that did not meet safety specifications, Elysium chose to dramatically loosen those safety specifications and accept the NR rather than wait to sell consumers product that met those safety specifications. Specifically, Elysium had set the specification for acetamide, a byproduct of the NR manufacturing process and known carcinogen, at 40 parts per million (“ppm”). (Ex. I at 1.) When its new manufacturer informed Elysium that the NR it had manufactured had levels of acetamide over 40 ppm, Elysium raised the safety specification to 200 ppm, a five-fold increase, and commanded the manufacturer to “pull the ... NR[] batch from the reactor.” (Ex. J at 1.) When testing showed the batch contained over 200 ppm of acetamide, Elysium again raised the safety specification, this time all the way to 275 ppm, so that it could accept NR with high levels of acetamide. (See Ex. K at 4.)


We probably haven't paid enough attention to the Acetamide in Elysium Basis. We know that Elysium's original supplier, PCI Synthesis, struggled mightily to produce NR for Elysium, and when they did finally produce some, many months later than Elysium expected it, the NR was contaminated with acetamide.


I might try to tell you just how toxic acetamide is, but instead I will quote Jennifer Ellis of Nutrasource, which was Elysium's regulatory consultant:


She told Elysium on April 19, 2017, that the limit for acetamide under California's Proposition 65 was 10 micrograms -- or, in a one-gram sample -- 10 parts per million. If Basis is ingested at just 250mg per day, and consumers weren't taking a double-dose of Basis at that time, like I was, then you could have 40 ppm and still be at just 10 micrograms. That might be why, two days later, Mark Morris at Elysium, apparently relying on Nutrasource's guidance, and in agreement with (apparently) Andy Sweet, Director of Regulatory Affairs at PCI Synthesis, originally set their acetamide tolerance threshold at 40ppm:

But that's not all Jennifer Ellis at Nutrasource said. She also told Elysium that "available toxicity data for acetamide indicated that it was clearly carcinogenic in both mice and rats, and although the mechanism of tumour formation is unknown, the possibility of a genotoxic mechanism cannot be discounted":


"Hope this helps!" said Jennifer Ellis in closing.


It did not help.


Less than a month later, on May 10, Elysium was running out of the NR that it had taken from ChromaDex without paying, and there was still too much acetamide in the NR that PCI Synthesis was manufacturing. So Elysium decided to increase the allowable acetamide level to 200ppm, five times the Prop 65 limit:

Apparently that did not help, either, because a batch of NR made the following day, on May 11, a measured at 230 ppm, above even the new 200ppm limit.


But as you can see from the Certificate of Analysis below, Elysium's acceptable acetamide standard had by the following day been raised again, this time to no more than 275ppm.

How did Elysium plan to sell NR that was more than 5x higher than that allowed by Proposition 65 in California? I believe the plan was to deliver ChromaDex NR to people like me in California -- I was an Elysium customer at this time, so I would have received ChromaDex NR with no acetamide -- and to the rest of the country they would deliver NR containing acetamide that was illegal to sell in California even though, as Elysium's own consultant had warned Elysium the prior month, "...available toxicity data for acetamide indicated that it was clearly carcinogenic..."


2. LEGAL ARGUMENT

ChromaDex tells us -- the transcript of the June 18 stay hearing isn't available on PACER -- that Judge Connolly "made clear that the decision to grant the stay was a 'close call.'"


But last month the California court vacated the trial date without rescheduling it based on part on its expressed skepticism of the validity of Elysium's patent misuse claim in light of ChromaDex's purge of any potential patent misuse in mid-2017, more than two years ago. Says ChromaDex, "Any possible misuse was purged more than two years ago, and there is no credible argument to the contrary." And since there is no longer a trial scheduled in California, what was once a six-month delay of the Delaware litigation has now become indefinite, and that indefinite stay was based on an issue that even the California court doubts could be viable.


Meanwhile, says ChromaDex, the prejudice that it suffers has increased substantially -- what was once a six-month delay is now indefinite. Worse, Elysium continues to compete with ChromaDex, probably costing ChromaDex market share and good will. Or, far worse, the competition that Elysium contemplates, says ChromaDex, is to "destroy" ChromaDex, which has greatly delayed ChromaDex's timeline for becoming a profitable company. Moreover, Elysium's willful infringement of Dartmouth's patents means that Dartmouth is missing out on royalties for every wrongful sale by Elysium, thereby depriving innovators and research institutions of the lifeblood that allows them to research and development medical breakthroughs like NR.


"Importantly," says ChromaDex, "not only is Elysium infringing, it is doing so unethically and in a way that could harm the public. As noted above, when it was running low on the NR it had acquired from ChromaDex (but not paid for), Elysium repeatedly raised the levels of acetamide (a carcinogen) that were allowable in the NR from its new manufacturer, and subsequently put that unsafe product into the stream of commerce and unnecessarily endangered the public by knowingly selling a contaminated product containing a known carcinogen to the public.


"Beyond the immediate impact to customers purchasing these products, Elysium's actions also stand to negatively impact the public's confidence in properly formulated NR supplements like ChromaDex's Tru Niagen as safe for human consumption."


So that's Factor 1, will the plaintiff be prejudiced by the length of the stay. Powerful argument.


Factor 2 is whether the stay will simplify the Delaware litigation. ChromaDex says that prospect is a lot less likely now that the California court has, unprompted, noted that "In response to ChromaDex's motion in limine to preclude introduction of evidence regarding the Purge, Elysium does not argue that the Purge was insufficient or otherwise improper. It appears, then, that certain of Elysium's requested damages on this claim may be unrecoverable." Even if Elysium continues to argue that the Purge was inadequate, argues ChromaDex, the California Court's expression of doubt nonetheless makes it less likely that the resolution of the California action will simplify matters in Delaware.


Factor 3 is whether discovery has begun. That factor has not changed, but the weight of the other two ought to tilt the scales against continuing the stay.


That strikes me as a powerful argument. Elysium's response is due this Friday, November 15.


3. EXHIBITS

Chromadex offers the Delaware Court some interesting new exhibits to chew on.


Dartmouth Licensing

Exhibit G offers new details about Elysium's attempt to convince Dartmouth to revoke its patents from ChromaDex. We had previously seen evidence that Elysium met with Dartmouth, and that the person they spoke to appeared initially receptive to the proposal, but later changed her mind.


But now we can see an email exchange in which Dartmouth's Adi Ilani presses Elysium CEO Marcotulli for evidence that ChromaDex has in fact been improperly sublicensing its patent.


"We are struggling to have a legal opinion that Chromadex is in fact sublicensing...According to our legal advisors we can't terminate the agreement otherwise." Ilani appears to summarize the arguments that Marcotulli has offered or that they have discussed:


Confidential Production Processes

Exhibit C consists of Mark Morris on August 1st sharing with "Ed" -- possibly Ed Price, presumably someone at PCI Synthesis -- the confidential method for producing Nicotinamide Riboside Chloride. This is the actual substance that PCI ended up producing, and it is THE central issue in the California Trade Secrets claims -- whether this information was secret, and whether receiving the information allowed PCI Synthesis to manufacture Mystery NR in time to save Elysium's business.


Morris says, "Hi Ed - The attached document is highly confidential and outlines the process for the API of interest - nicotinamide riboside chloride. I look forward to speaking with you in a bit." The attachment is 10 pages long and includes a great deal of technical detail.


Elysium is now arguing in California that this information was not actually confidential, and/or PCI did not rely on it. We'll have ChromaDex's side of the story later this week.


Acetamide Levels

Exhibit K consists of PCI certificates of Analysis, showing that the acetamide levels in Elysium's NR were over 200ppm on May 11, 2017, and were still as high as 195ppm six weeks later on June 26, 2017.





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