Huy Fong Foods, Inc. v. Underwood Ranches, LP

Citation281 Cal.Rptr.3d 757,66 Cal.App.5th 1112
Decision Date27 July 2021
Docket Number2d Civ. No. B303096
CourtCalifornia Court of Appeals
Parties HUY FONG FOODS, INC., Plaintiff, Cross-defendant, and Appellant, v. UNDERWOOD RANCHES, LP, Defendant, Cross-complainant and Appellant; Underwood & Son, LLC, Cross-Complainant and Respondent; David Tran, Cross-defendant and Respondent.

Latham & Watkins, Joshua G. Hamilton, New York, NY, Dixie C. Tauber, Los Angeles, CA, Roman Martinez, Charles S. Dameron, Washington, DC, Riley T. Keenan, Washington, DC; Pearson, Simon & Warshaw, Sherman Oaks, CA, Thomas J. Nolan for Plaintiff, Cross-defendant and Appellant Huy Fong Foods, Inc., and Cross-defendant and Respondent David Tran.

Ferguson Case Orr Paterson, Wendy C. Lascher, John A. Hribar, Ventura, CA, James Q. McDermott, Ventura, CA, Michael A. Velthoen, Ventura, CA and Jessica M. Wan for Defendant, Cross-Complainant and Appellant Underwood Ranches and Cross-complainant and Respondent Underwood & Son.

GILBERT, P. J.

It has been said that some contracts are not worth the paper they are written on. But oral contracts stemming from previous written contracts and long-standing business practices based on custom and trust are as valid as contracts that are worth the paper they are written on. When such a contract is breached, there are consequences.

A pepper farmer sued the manufacturer of a pepper-based hot sauce for breach of contract and fraud. A unanimous jury found for the farmer, awarding $13.3 million in compensatory damages and $10 million in punitive damages. We affirm the judgment.

FACTS

David Tran founded Huy Fong Foods, Inc. (Huy Fong), a business that produces Sriracha, a jalapeño pepper-based hot sauce. In 1988, Huy Fong contracted with Underwood Ranches, L.P. (Underwood) to purchase 500 tons of jalapeños from Underwood. Craig Underwood (Craig) is Underwood's principal. This was the beginning of a relationship that would last for 28 years.

For the first 10 years, the parties executed written agreements specifying the price per pound and volume to be supplied. Thereafter, the parties dealt with each other informally with oral agreements. Originally, Huy Fong needed more peppers than Underwood could supply, so it contracted with other farmers as needed.

Underwood's pepper sales to Huy Fong grew along with the success of Huy Fong's business. Craig testified that, by 2005, Tran was "pushing" Underwood to add more acreage.

In 2006, Tran asked Underwood to significantly increase its pepper acreage. Underwood was growing 95 percent of Huy Fong's peppers. But the peppers represented only 25 percent of Underwood's business. Underwood also farmed diverse crops such as lemons and vegetables. Craig told Tran that he was reluctant to assume the risk of growing more peppers, and rejected Huy Fong's offer. Craig suggested that Huy Fong supplement Underwood's crop with peppers from other sources.

Instead of seeking other sources, Huy Fong proposed that it would assume some of the risk. Huy Fong would pay Underwood by the acre grown instead of pounds produced. Thus, the risk of a disappointing yield would be on Huy Fong. Underwood agreed to the arrangement.

In 2007, Huy Fong advised Underwood to increase its acreage by 50 percent. To do this, Underwood had to expand its operations from Ventura County to Kern County. Craig testified that the expansion into Kern County was the biggest thing he had ever done, but he needed to do it to meet Huy Fong's increasing needs.

At the same time, Huy Fong was building a 600,000-square-foot factory in Irwindale. Tran took Craig on a tour of the site. Tran told Craig that Underwood "needed to fill it up." Tran told Craig that he should be farming at least 2,000 acres.

Due to Tran's suggestion and encouragement, Underwood invested millions of dollars in acquiring additional acres in Kern County and, to a lesser extent, Ventura County. By the end of the 2016 growing season, Underwood had acquired over 1,800 acres in Kern County. It took a year or more to prepare the ground for growing peppers. Many of the leases extended into the 2020's, 2030's, and beyond. By 2016, Huy Fong accounted for approximately 80 percent of Underwood's revenue.

Underwood made these investments because Tran and Donna Lam, Huy Fong's chief operations officer and Tran's sister-in-law, assured Underwood that Huy Fong would continue to purchase the peppers grown by Underwood into the future. Craig testified Tran and Lam made sure he knew Huy Fong was going to take all the product Underwood would produce. They repeatedly told Craig, "You grow it, I'll sell it."

Huy Fong Video Records 2016 Harvest

Craig, along with Underwood's chief operations officer, Jim Roberts, developed a mechanical harvester for the peppers. The 2016 harvest was the first time the entire harvest was performed by the harvester. Mechanical harvesting saved substantial money.

In October 2016, Tran requested Underwood's permission to take video footage from an aerial drone of Underwood's harvesting and sorting operations. Roberts granted permission for Huy Fong's personal use only. Huy Fong had never before requested to record the harvest.

Chilico, LLC

In 2014 or 2015, Tran formed a new company that he later called Chilico, LLC. Chilico's purpose was to obtain peppers for Huy Fong. In May 2015, Tran offered Roberts a job. Roberts declined the job offer and attributed the offer to a mistake.

Tran officially formed Chilico in 2016. He gave 100 percent ownership to his sister-in-law Lam. Tran testified that he wanted to give Lam a significant salary increase, but his son and wife, who were on Huy Fong's board, would object.

Huy Fong contracted with Chilico to buy all its chilies peppers from Chilico. The contract diverted millions of dollars from Huy Fong to Chilico.

2017 Contract

On November 1, 2016, Craig, Roberts, Tran, and Lam met at the Huy Fong factory to plan for the 2017 pepper season. The parties discussed ongoing field preparations for the upcoming season. Underwood was already preparing the ground. Because it is a continuous process, Underwood could not wait.

Underwood and Huy Fong agreed that for the 2017 season Underwood would plant 1,700 acres for $13,000 per acre. Tran also agreed to advance payments of $18 million.

Breach of Contract

On November 9, 2016, Lam asked Roberts to come to the Huy Fong factory to pick up some equipment. Lam and Tran knew Craig was on vacation and would not accompany Roberts.

When Roberts arrived, Tran told him that he was forming a new company. Lam was going to operate the company. Tran told Roberts that Roberts would be working for the new company.

When Roberts declined the job offer, Tran was not happy. Tran told Roberts that Underwood would have to deliver peppers for $500 per ton to compete with Chinese pepper mash that sold for $300 per ton. When Roberts told Tran that Craig makes the decisions for Underwood, Tran replied that he would make Craig take $500 per ton.

Underwood was suddenly facing imminent catastrophic financial consequences. It could not grow peppers for $500 a ton. Its costs averaged $610 a ton.

Further negotiations with Huy Fong proved unfruitful. Lam insisted that Huy Fong needed to purchase peppers for under $500 per ton. Tran refused to provide Underwood with prepayments needed to finance the crop. Tran also insisted that Underwood contract with Chilico rather than Huy Fong. Chilico did not have the assets to ensure that Underwood would be paid and Huy Fong refused to guarantee the Chilico contract.

Tran made a final attempt to hire Roberts away from Underwood.

In early January 2017, Craig sent an e-mail to Tran stating that in October 2016 they had an agreement to move ahead with production for 2017; subsequently, Huy Fong decided to change the agreement; and it is impossible for Underwood to comply with the modified terms. The e-mail advised Huy Fong that the start date for planting had passed, there were no plants in the nursery, and Underwood did not plan on delivering any peppers to Huy Fong.

Huy Fong contracted with other farmers to provide peppers. Tran showed those farmers the drone video of Underwood's 2016 harvest that he had promised to keep confidential to show them how to harvest economically.

Consequences of Huy Fong's Breach

After the relationship with Huy Fong ended, Underwood had nothing to plant on the 1,700 acres it had. Nor did Underwood have the financing to plant acreage on speculation. It tried to get out of its leases, but was largely unsuccessful. It had to immediately lay off 40 employees. It was too late in the season to grow much of anything.

Underwood managed to obtain subcontracts for spring and summer, but it lost 8.5 million in 2017. Underwood was having difficulties in 2018, and lost over $6 million that year.

Roberts explained that with two or three years’ notice, Underwood could have avoided the losses. He testified: "[W]e would have compressed the acreage on the peppers. We wouldn't have worried about the [crop] rotation. I could have shed property at the same time as growing peppers and generated revenue from those. It would have given me–that entire first year when we had absolutely nothing to grow, that would have been covered. So, that massive loss in the first year would have been eliminated. And in the second year, we would be taking on new customers. Then if we could work it out, reduce our pepper acres, add the new acres of other crops, it might have been seamless. Might not have had any loss."

Roberts testified that growing peppers for Huy Fong required planning three years ahead of time.

Procedure

Huy Fong brought an action against Underwood seeking a $1.4 million refund of payments Huy Fong had made for the 2016 season.

Underwood cross-complained alleging breach of contract, promissory estoppel, and fraud against Huy Fong, and intentional interference with prospective economic relations and intentional interference with contractual relations again Tran.

The trial court granted Tran judgment...

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    • James Publishing Practical Law Books California Objections
    • March 29, 2023
    ...if there is no possibility of reconciling the findings with each other. Huy Fong Foods, Inc. v. Underwood Ranches, LP (2021) 66 Cal. App. 5th 1112, 1125, 281 Cal. Rptr. 3d 757. If a special verdict is inconsistent, the proper remedy is to order a new trial. Missakian v. Amusement Industry, ......
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    • James Publishing Practical Law Books California Objections
    • March 29, 2023
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