There was a thread the other day about Sriracha going to shit. A lot of the commenters knew that Huy Fong, Sriracha's producer, screwed over their supplier, but the details were all over the place; some blamed an MBA daughter, some didn't know the degree to which Huy Fong screwed over their partner, etc. So, I figured I'd just summarize what actually happened. Details are taken directly from the court judgment where this stuff was all recorded. Anyway, here's what went down:
Huy Fong was founded in the 1980s by David Tran. Since 1988, he got his peppers from a local farmer, Underwood Ranches. Over time as Huy Fong grew, they started buying more and more peppers, almost entirely from Underwood. Eventually the parties grow so close that they start just kind of making handshake deals as opposed to using formal written agreements. Huy Fong also wants Underwood Ranches to specialize in peppers (they previously had a pretty diversified farm), and so, to assume some of the risk in case there's a bad pepper harvest or w/e, they start paying Underwood by acres of peppers under cultivation (as opposed to paying them for the peppers they produce). Underwood duly begins specializing in peppers.
Everything goes extremely well. Huy Fong keeps encouraging Underwood Ranches to expand. They do so. Underwood leases enormous amounts of land, some of which were very long leases, for millions of dollars. Huy Fong by this point also accounts for the vast majority of Underwood Ranches' revenue. Huy Fong says, don't worry about the investments, the leases, the rental fees etc., we'll be buying your peppers, so keep growing. They assured the owner of Underwood that Huy Fong would buy his entire pepper crop no matter what. Due to Underwood's specialization, Underwood starts developing special machinery and techniques to maximize their pepper harvest.
So, the year is now 2015. Underwood and Huy Fong have had this mutually beneficial business relationship for over 25 years. They've prospered together, and Sriracha has become one of the most well-known hot sauce brands out there. This is also where things start going south. At some point Huy Fong's founder David Tran starts up another company, Chilico, to source peppers for Sriracha. Hmmm. In May 2015, David Tran also tries to poach Underwood's COO, who had developed the special machinery; the COO turned Tran down and chalked up the job offer to some wires getting crossed somewhere. HMMMM.
Fast forward a bit. The year is now 2016. Underwood Ranches has massively expanded and has entered into a bunch of leases for farmland. As I said, Huy Fong tells them to keep going. Curiously, Huy Fong also asks to take drone footage of the 2016 pepper harvest, where all that special machinery is being used. They had never asked this before, but they're good partners, so Underwood lets them do it. Underwood says Huy Fong can only use the footage for their own personal use. Unbeknownst to Underwood, Huy Fong also enters into a contract with their spin-off company, Chilico, to buy all of their peppers from Chilico. Afterwards, on 1 November 2016, Huy Fong meets with Underwood, and they agree that Underwood would cultivate a few thousand acres of peppers. Huy Fong agrees to give them about $18 million in pre-payments to offset costs while they cultivate the peppers. You may ask how Huy Fong could buy peppers from Underwood if they had designated Chilico as their new exclusive supplier. Well...
The date is now 9 November 2016. This is when shit starts hitting the fan. Huy Fong, including founder David Tran, invites Underwood's COO to their factory to pick up some equipment. Huy Fong does this when they know Underwood's owner is out on vacation, and so won't be attending. When the COO gets there, they tell him that he's now working for Chilico. COO tells them to fuck off. David Tran gets pissed and says, Underwood has to sell chillis to them for $500/ton, because Huy Fong can get Chinese pepper mash for $300/ton - he wants Underwood to compete on price. Underwood can't. Underwood's costs alone average $610/ton. They'd be selling at a loss. Huy Fong then says, well, we don't care. Also, we want you, Underwood, to sell your peppers to Chilico rather than directly to Huy Fong. Huy Fong refuses to guarantee any contracts with Chilico, so if Chilico defaults on the contract, Underwood would be screwed b/c Chilico is basically a shell company with no assets. Also, Huy Fong tells Underwood that if they don't agree, Huy Fong weren't going to provide that $18 million in advance payments. Huy Fong then tries one more time to hire Underwood's COO. The COO tells them to fuck off once again. However, at this point, Underwood is now facing imminent financial catastrophe - they've already been induced to enter into all these leases, they've entered into commitments with others, in short, they're on the hook for a LOT of money.
Fast forward to January 2017. Underwood's founder emails Tran, saying that they had an agreement, but Huy Fong subsequently changed it, and they couldn't agree to the new terms. Underwood advises them that the start date for planting had passed, there were no plants in the nursery, and they wouldn't be able to supply Huy Fong with peppers. Huy Fong responds by contracting with other farmers to get their peppers, and the kicker? They used that confidential video of Underwood's harvest to show those other farmers how to maximize their own pepper harvests for Huy Fong's gain.
Subsequently, Underwood failed to get out of many of its leases, and also lost a lot of production. They had to fire 40 people and took something like $8.5 million in losses for 2017, and another $6 million in losses for 2018. Underwood's founder says, if they had just had a few years' advance notice, they could have found new customers and wouldn't have lost anything. It was the rug-pulling which screwed them over.
Later, obviously, there's a lawsuit. Funnily enough, it wasn't actually Underwood who sued Huy Fong. It was Huy Fong who sued Underwood, seeking refunds for payments it had made earlier under their contracts. Underwood turned around and counterclaimed for breach of contract and fraud and a bunch of other shit. Underwood succeeded - there was a unanimous jury verdict in their favor - and got awarded about $13 million in compensatory damages, and another $10 million in punitive damages (these are only awarded where you've done something so outrageous that it's quasi-criminal; it's to deter other people from doing similar things).
Now, Underwood Ranches makes their own Sriracha sauce using their own peppers, and Huy Fong is presumably using some of their cheap low-quality pepper mash or w/e, which is probably why it now tastes like shit.
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