Chromadex, Inc. v. Elysium Health, Inc.

301 F.Supp.3d 963

CHROMADEX, INC., Plaintiff,

v.ELYSIUM HEALTH, INC., Defendant.

Elysium Health, Inc., Counter Claimant,

v.Chromadex, Inc., Counter Defendant.

Case No.: SACV 16–02277–CJC(DFMx)

United States District Court, C.D. California, Southern Division.

Signed May 10, 2017

Michael A. Attanasio, Anthony M. Stiegler, Barrett J. Anderson, Eamonn Joseph Gardner, Jon F. Cieslak, Sophia Marie Rios, Cooley LLP, San Diego, CA, for Plaintiff.

Bradley E. Honigman, Pro Hac Vice, Joseph N. Sacca, Pro Hac Vice, Spencer A. Gottlieb, Pro Hac Vice, Michael M. Powell, Pro Hac Vice, Skadden Arps Slate Meagher and Flom LLP, New York, NY, Donald R. Ware, Pro Hac Vice, Marco J. Quina, Pro Hac Vice, Foley Hoag LLP, Boston, MA, Peter Bradley Morrison, Julia M. Nahigian, Skadden Arps Slate Meagher and Flom LLP, Los Angeles, CA, for Defendant.

ORDER GRANTING IN SUBSTANTIAL PART DEFENDANT'S MOTION TO DISMISS CLAIMS AND GRANTING IN PART PLAINTIFF'S MOTION TO DISMISS COUNTERCLAIMS

CORMAC J. CARNEY, UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

Plaintiff ChromaDex, Inc. ("ChromaDex"), brings this action for breach of contract, fraudulent deceit, misappropriation of trade secrets in violation of California Civil Code §§ 3426 et seq. , and misappropriation of trade secrets in violation of 18 U.S.C. § 1836 against Defendant Elysium Health, Inc. ("Elysium"). (See generally Dkt. 26 [First Amended Complaint, hereinafter "FAC"].) Elysium counterclaims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, declaratory judgment of patent misuse, and unlawful and unfair business practices in violation of California's Unfair Competition Law ("UCL"), California Business & Professions Code §§ 17200 et seq . (Dkt. 31 [First Amended Counterclaims, hereinafter "CC"].) Before the Court is Elysium's motion to dismiss ChromaDex's fourth, fifth, and sixth amended claims, (Dkt. 30), and ChromaDex's motion to dismiss Elysium's third, fourth, and fifth amended counterclaims, (Dkt. 34). For the following reasons, Elysium's motion is GRANTED IN SUBSTANTIAL PART and ChromaDex's motion is GRANTED IN PART.¹

II. BACKGROUND

"ChromaDex is Elysium's sole supplier of the two active ingredients in Elysium's only product: a dietary supplement named ‘Basis.’ Specifically, ChromaDex supplies Elysium with NIAGEN®, a patented, proprietary health ingredient that is comprised of nicotinamide riboside (‘NR’), and pTeroPure®, a patented, proprietary health ingredient made of pterostilbene, in return for product payments and sales royalties for NIAGEN." (FAC ¶ 2.) ChromaDex is apparently the sole commercial supplier of NR. ( CC ¶ 4.) Elysium began discussions with ChromaDex to obtain a supply of NR in the summer of 2013. (Id. ¶ 42.) Elysium expressed concern regarding ChromaDex's "onerous" terms, such as "upfront cash payments, minimum purchase commitments, royalties and even equity positions from businesses seeking to use ChromaDex as a source for the supply of [NR]." (Id. ¶ 43.) After negotiating and exchanging draft agreements in November and December 2013, (id. ¶¶ 43–54), the parties entered into a NIAGEN (NR) Supply Agreement on February 3, 2014, a Trademark License and Royalty Agreement on February 3, 2014, and a pTeroPure (pterostilbene) Supply Agreement on June 26, 2014. (FAC ¶¶ 16–18; id. Exs. A–D.)

According to ChromaDex, ChromaDex and Elysium's commercial arrangement was "expanding but unremarkable" prior to June 2016. (Id. ¶ 20.) Then, in the first quarter of 2016, Elysium ordered nearly double the amount of NIAGEN it had ordered in all of 2015, and in the second quarter of 2016, Elysium first raised concerns about pricing under the NIAGEN Supply Agreement. (Id. ¶¶ 20–21.) Elysium allegedly refused or ignored ChromaDex's offers to resolve its concerns, however. (Id. ¶ 21.) On June 28, 2016, "without any prior discussion or advance notification, Elysium submitted two extraordinarily large purchase orders for NIAGEN and pTeroPure."

(Id. ¶ 22.) These orders were approximately four times larger than any previous orders and more than double the sum of all Elysium's prior orders. (Id. ) They also included a demand for two products at less than half of the previously agreed upon price. (Id. )

ChromaDex set up a call with Elysium about the price of these orders on June 30, 2016, and Elysium allegedly stated that because it was "ramping up," Elysium expected to use all of its ordered products over the next few months and would place additional large orders in the third and fourth quarters of 2016. (Id. ¶¶ 24–27.) Based on this representation, ChromaDex offered Elysium a discounted price for NIAGEN, which Elysium was "not entirely satisfied with" but accepted. (Id. ¶¶ 27–29.) ChromaDex alleges that Elysium "intended to induce ChromaDex to inadvertently supply large amounts of NIAGEN and pTeroPure to Elysium at grossly discounted prices." (Id. ¶ 23.) ChromaDex filled the orders on July 1 and August 9, 2016, and sent Elysium invoices totaling $2,983,350. (Id. ¶¶ 30–31.)

On August 10, 2016, however, Elysium informed ChromaDex that it would not pay the past due invoices until other concerns raised on the June 30, 2016, call were resolved according to Elysium's terms. (Id. ¶ 34.) Elysium has allegedly refused to pay the amount due or engage in discussions about a resolution. (Id. ¶ 38.) Elysium apparently has not ramped up its business or placed additional orders with ChromaDex as promised. (Id. ¶ 42.) ChromaDex further alleges that Elysium's false promises were motivated by the fact that it "was seeking financing during the middle of 2016 and at least into November 2016, [and] has been able to improve its balance sheet by continuing to sell its product for millions of dollars in revenue without paying ChromaDex a dime for the supply, likely engaging in fictional book keeping and deceiving potential or actual investors about Elysium's financial condition." (Id. ¶ 43.)

Accordingly, Elysium has allegedly breached the pTeroPure Supply Agreement by failing to pay 30% of the amount due within 30 days of the date of the invoices and the remainder within 60 days of the date of the invoices, and it has allegedly breached the NIAGEN Supply Agreement by failing to pay the amount due within 30 days of the invoice. (Id. ¶¶ 45–56.) Under the terms of the Royalty Agreement, Elysium has also breached its obligation to pay royalties to ChromaDex based on its net sales of its product containing NIAGEN and to furnish quarterly reports detailing such royalties. (Id. ¶¶ 57–67.) ChromaDex estimates these royalties will amount to no less than $1 million. (Id. ¶ 67.)

Elysium also allegedly conspired with two ChromaDex employees, Mark Morris (Vice President of Business Development) and Ryan Dellinger (Director of Scientific Affairs), to steal ChromaDex's "confidential and proprietary information" to injure ChromaDex for Elysium's benefit. (Id. ¶¶ 68–72.) Morris allegedly informed Elysium of ChromaDex's "confidential business dealings and information ChromaDex had acquired about one or more potential partners" on or around April 28, 2016. (Id. ¶ 73.) "On or around May 25, 2016, Morris made an unusual request for the contact information for one of ChromaDex's research partners from Dellinger, which Dellinger provided. Less than a month later, on or around June 24, 2016, Dellinger was contacted by that ChromaDex partner, who informed him that he had been contacted by Elysium. Dellinger encouraged that ChromaDex partner to talk with Elysium and did not inform anyone at ChromaDex about Elysium's activity." (Id. ¶ 74.) Morris resigned from ChromaDex on July 16, 2016, and shortly thereafter joined Elysium. (Id. ¶ 75.) Dellinger resigned from ChromaDex the same day Elysium notified ChromaDex that it would not pay the past due invoices (August 10, 2016), and joined Elysium soon after. (Id. ¶ 76.) ChromaDex alleges that Morris and Dellinger disclosed additional proprietary and confidential business information, but the full extent is not now known and "can only be uncovered through discovery." (Id. ¶ 77.)

Based on these allegations, ChromaDex brings claims for breach of the pTeroPure supply agreement, breach of the NIAGEN supply agreement, breach of the Royalty agreement, fraudulent deceit, and misappropriation of trade secrets under both state and federal law. (Id. ¶¶ 79–121.)

Elysium's counterclaims, in turn, stem from its allegations that "ChromaDex has committed patent misuse and engaged in unfair competition by leveraging its market power in the supply of [NR] to impose conditions on its customers that impermissibly broaden the scope of the patent grant with anticompetitive effect." ( CC ¶ 6.) ChromaDex's market power apparently comes from, among other things, patents it has in-licensed relating to NR, including U.S. Patent Nos. 8,383,086 ("the '086 patent"), 8,197,807 ("the '807 patent"), 8,106,184 ("the '184 patent"), 8,114,626 ("the '626 patent"), and 7,776,326 ("the '326 patent"), which are assigned to third parties and exclusively licensed to ChromaDex. (Id. ¶¶ 32, 35–36.)

Elysium alleges that ChromaDex has conditioned its sale of NIAGEN on purchasers' agreement to license ChromaDex trademarks and pay substantial royalties as a result. (Id. ¶ 6.) Elysium claims that ChromaDex conditioned the execution of the NIAGEN Supply Agreement on Elysium's simultaneous execution of the License and Royalty Agreement, "which forces Elysium to pay a substantial royalty to ChromaDex on all Elysium products containing ingredients supplied by ChromaDex under the [NIAGEN] Supply Agreement, even if Elysium does not use, and does not want to use, any ChromaDex marks." (Id. ) "Not only is the royalty obligation unconnected to use of ChromaDex's trademarks, but the royalty rate also changes for reasons unrelated to use of any trademarks. Instead, for example, the royalty rate increases as Elysium's annual worldwide net sales of products containing ingredients supplied by ChromaDex...