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Underwood, Huy Fong sue each other over peppers

By   /   Friday, August 31st, 2018  /   No Comments

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For nearly 30 years, every jalapeño that went into Huy Fong Foods chili sauces — including the famous bright red sriracha with the rooster on the bottle and the green twist cap — was grown by Camarillo-based Underwood Ranches.

By 2016, growing jalapeños for Huy Fong made up most of Underwood’s business, and accounted for a good chunk of Ventura County’s total pepper-growing revenue.

That all ended last year, and it did not end well. Huy Fong and Underwood couldn’t reach an agreement for the 2017 growing season and, for the first time since the 1980s, Huy Fong bought its jalapeños from other suppliers. Underwood had to lay off 44 employees after it lost its biggest customer, according to the farming company’s court filings.

In December, Huy Fong sued Underwood, claiming Underwood owed nearly $1.5 million that Huy Fong had overpaid for the 2016 harvest, and that Underwood had at least $7 million worth of equipment that belonged to Huy Fong. Underwood countersued in February, denying the charges and accusing Huy Fong of breaching a verbal contract to buy peppers, and seeking more than $20 million in damages.

The lawsuit is scheduled for trial in Ventura County Superior Court early next year. Lawyers and executives with both companies declined to comment on the case.

Losing Huy Fong was a big hit to Underwood’s business. According to Underwood’s court filings, in the 2016 growing season, Underwood planted 1,700 acres of jalapeños for Huy Fong, and Huy Fong paid $13,000 per acre, or $22.1 million. In Huy Fong’s filings, the company says it made other payments to Underwood for a total of $30 million in 2016.

When it lost Huy Fong as its biggest customer, Underwood said it had to move to lower-value crops, sell some of its land, leave some land fallow and shrink its workforce.

“Underwood lost profits in 2017 and continues to do so,” the farm’s countersuit states.

Underwood’s jalapeño farms aren’t just in Ventura County; the company also grew peppers for Huy Fong in Kern and Los Angeles counties. But the end of the Underwood-Huy Fong relationship made a noticeable dent in Ventura County’s pepper production.

Total revenue from bell peppers and hot peppers grown in Ventura County was $61 million in 2016 and $45.8 million in 2017, the first year that Huy Fong wasn’t buying from Underwood.

Underwood claims it could not find new buyers for its jalapeños, because Huy Fong “requested specific characteristics of the peppers,” including “unique pepper varieties and growing conditions.”

For decades, Underwood had developed jalapeños specifically for Huy Fong sriracha. The sauce is made from red, ripe jalapeños, and the peppers are bred to be much spicier than the typical jalapeño.

The partnership between Craig Underwood, CEO of Underwood Ranches, and David Tran, the founder of Huy Fong, dates to 1988. Tran, a Vietnamese immigrant of Chinese descent, had been making hot sauces in Los Angeles since 1980. By the late ’80s, his business was taking off and he needed a reliable jalapeño supplier.

He found Underwood, and before long growing jalapeños for Huy Fong was the farming company’s biggest line of business. Underwood’s family also owns Underwood Family Farms, based in Moorpark, which sells produce directly to consumers.

Over the years, Underwood and Huy Fong developed a close and somewhat unusual business relationship, as described in both companies’ court filings. “The parties’ agreement was partly oral, partly written and partly established by their prior custom and practice,” Huy Fong stated in its lawsuit.

Rather than buying peppers at an agreed-upon price per pound or per acre after they were harvested, Huy Fong and Underwood would agree at the beginning of the growing season on how much Huy Fong would pay, and the sauce maker would make weekly payments throughout the year.

If the actual production fell above or below the estimate, the companies would square up later. Huy Fong also reimbursed Underwood for growing expenses and equipment purchases and maintenance, and helped finance the purchase and lease of farmland.

The relationship went from spicy to sour in 2016, when the companies were negotiating a growing agreement for the 2017 season. According to Underwood’s countersuit, Tran had told Underwood in July and again in November to go ahead with planting 1,700 acres for the 2017 harvest.

But on Nov. 9, he said he would not continue to buy from Underwood.

Huy Fong’s lawsuit accuses Underwood of withholding the $1.5 million overpayment from the 2016 harvest and holding $7 million in Huy Fong’s equipment “to punish Huy Fong for ending the parties’ relationship” and “as leverage in negotiations.”

Underwood’s countersuit claims that it applied the overpayment to its preparations for the 2017 harvest, and that any money it owes Huy Fong should come out of the damages the farming company has suffered.

• Contact Tony Biasotti at [email protected]

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