Lawsuit between Sriracha maker and its former jalapeño farmer now in hands of jury

Jurors heard closing arguments Thursday in a trial that detailed the unraveling of the nearly 30-year friendship and business partnership between the world famous Sriracha hot sauce maker and the farmer who grew its red jalapeño peppers.

Multimillions of dollars are at stake in the litigation between the Irwindale-based Huy Fong Foods and Underwood Ranches, which grew the peppers for the hot sauce in Ventura County for 28 years. The trial in Ventura County began on June 12. The jury is expected to begin deliberations Friday morning.

The dispute stems from a $1.46 million overpayment Huy Fong made to Underwood for the 2016 harvest season. Huy Fong sued, accusing the grower of not repaying the credit and terminating the relationship. Underwood Ranches countersued for $20 million, saying Huy Fong breached its contract and owes it for costs incurred for the next three years.

The jury must decide whether the contract between Huy Fong and Underwood Ranches was ongoing and if there was a deal in place for 2017. The jury must also decide if Huy Fong gave reasonable notice to Underwood that the contract would be terminated.

Huy Fong attorney Dan Carobini told the jury in closing arguments that his client met its burden of proof.

“We have an overpayment and an admission by (Underwood) that overpayment was made and it is owed to my client,” Carobini said.

Underwood’s attorney, James McDermott, argued that Huy Fong should have given three years’ notice. “They’re simply asking for the amount that they are owed because reasonable notice wasn’t given,” he said.

When he was on the stand, Huy Fong Foods CEO David Tran testified Craig Underwood, operator of Underwood Ranches, was “like family.” Underwood attended the weddings of both of Tran’s children.

But the relationship deteriorated in 2016. McDermott argued Tran never intended to work with Underwood beyond that year.

Carobini walked the jury through several contracts between Huy Fong and Underwood. He highlighted that every agreement was year-to-year. “There is nothing in writing of an ongoing contract,” he said.

The reason the contracts were year-to-year, Carobini said, is because farming is unpredictable — as was demand for the hot sauce.

McDermott said Jim Roberts, Underwood’s chief operating officer, and Donna Lam, Huy Fong’s executive operations officer, were constantly meeting throughout the year, “planning for the future.”

“No, they didn’t know with certainty what they would need, but they had a pretty good idea,” McDermott said.

Roberts testified it was common to make projections three years out, McDermott said during closing statements.

The contracts detailed the acreage, costs for the peppers and the amount of an advanced payment that Huy Fong would make to Underwood ahead of the harvest. Carobini called these prepayments unusual and representative of the trust between the two businessmen.

“Mr. Tran trusted the Underwoods so much … that he was willing to pay them a half-million dollars before he even received one pepper,” Carobini said.

Over time, the preseason prepayments grew to $14 million.

The relationship began to fall apart when Tran attempted to hire Roberts away from Underwood to work for a newly-formed company called Chilico that would acquire peppers for Huy Fong, McDermott said. He argued this signaled the end of deal with Underwood, and it was an unequivocal breach of contract.

“All trust was shattered,” he said.

Still, Underwood attempted to reach a deal, but McDermott said Huy Fong had no intentions to work with Underwood.

He had a theory for what was really going on: McDermott said Tran was attempting to assert control because he does not own Huy Fong Foods, rather the company belongs to his children.

“He was losing control,” McDermott said.

Carobini said Lam was using “herculean efforts” to try to salvage the relationship. She had proposed a three-year agreement, but Underwood declined the offer.

“Now they’re claiming $17 million in damages based on a proposal that they didn’t even accept,” Carobini said.

For many years, Underwood Ranches was the sole provider of the specialty red jalapeño peppers which were crushed into the hot sauce. The farm produced 100 million pounds of peppers each year on 1,700 acres of farmlands in Ventura and Kern counties. It is the biggest fresh jalapeño operation in the country. Huy Fong paid Underwood $13,000 per acre.

The Sriracha maker has faced controversy before.

In 2014, the city of Irwindale filed a lawsuit against Huy Fong saying the spicy fumes from the processing of the peppers caused neighbors of the Azusa Canyon Road factory to have health issues. That fight made international news.

Irwindale dropped its lawsuit after state officials intervened.

Tran, who is Chinese, left South Vietnam in 1978 during its Communist rule and fled to Hong Kong, where he came to the United States as a refugee on a freighter called “Huey Fong.” He began making and selling hot sauce in Vietnam and continued his business in Los Angeles where he formed his company, before moving to Rosemead and finally Irwindale as production grew.

The Underwood family, which also operates Underwood Family Farms in Moorpark, has been farming for four generations.

Carobini argued that Underwood should not be awarded any damages, but if the jury decides to award damages, he said it should be about $2.3 million for the 2017 season.

McDermott argued the award should be $8.98 million for 2017 and $17 million for three years.