Lessons from the $23 Million Sriracha Verdict

In what can aptly be described as hot legal news, a California jury returned a $23 million verdict against the manufacturer of the popular Sriracha sauce, and in favor of the farm that grew its jalapeno pepper supply. The details of the dispute are explained in a recent LA Times article.

Essentially, in 2017, the manufacturer and the farm had a falling out, leading the manufacturer to sue the farm for the return of a $1.5 million overpayment. In response to the lawsuit, the farm filed a counterclaim against the manufacturer for its lost profits from 2017 and 2018, as well as punitive damages. After a three-week trial, the jury returned a $23.3 million verdict, which included $10 million in punitive damages.

The lawsuit is a cautionary tale for businesses involved in partnership disputes, as it appears the case could have been settled before trial. In fact, the contentious litigation highlights a number of issues that apply to many business disputes. Below are three such lessons from the fiery Sriracha litigation.

Lesson No. 1: Verbal Contracts Can be Enforced

While it is better practice to have an agreement in writing so that the terms are clear to all parties, from a legal standpoint, oral agreements are just as valid as written contracts.

In this case, the farm alleged that the terms of the parties’ nearly 30-year partnership were primarily oral and were established from the parties’ business practices. And the jury didn’t seem to have a problem enforcing the “hand-shake” agreement and rendering an eight-figure verdict.

It can be surprising to learn how many significant businesses are operated under oral, or partially oral, agreements. In fact, last year alone, I had two separate successful trials where my clients alleged a breach of an oral agreement. And the takeaway for our team was simple: the law is clear that oral contracts are valid, and juries will enforce them when the parties’ actions reflect the terms.

Lesson No. 2: Don’t Forget About Fraud

It’s important to keep in mind that despite the economic loss rule (or what’s left of it in Florida after Tiara Condominium), there are times when it’s appropriate to bring both fraud and contract claims.

For instance, if an executive makes a false statement of fact that induces a party to enter into a contract that is later breached, in addition to the breach of contract claim, the plaintiff may also have a fraud claim against the executive (and his or her employer). Likewise, a fraud claim can be brought along with a breach of contract claim when a party makes a promise knowing that it never intends to perform its obligations.

One reason a fraud claim can be important is that it may provide for additional damages. In this case, the farm sued the manufacturer for both breach of their partnership agreement and for fraud. A fraud claim can allow for punitive damages that would not be recoverable under a breach of contract claim. Notably, in this case, the manufacturer was awarded $14.8 million in lost profits, along with an additional $10 million in punitive damages.

Lesson No. 3: Watch Out for Counterclaims

Before businesses file a lawsuit, they should always consider whether it will result in a retaliatory counterclaim or third-party claim.

One interesting aspect of the Sriracha case is that the farm, which won the verdict, was originally the defendant. Only after the manufacturer brought a lawsuit seeking $1.5 million in damages did the farm file its counterclaim for in excess of $20 million. Could the parties’ dispute have been resolved without a lawsuit? Did the initial lawsuit cause an unnecessary escalation?

Just because you can file a lawsuit, does not mean you should. Too often, lawyers file baseless lawsuits at a client’s direction, instead of properly advising the client regarding the weaknesses of its claims. And it’s the client that ultimately pays the price – through the unnecessary expenditure of attorneys’ fees and, potentially, exposure to damages or sanctions from needless litigation.

Get the Right Advice

Business lawsuits, such as the Sriracha partnership dispute, raise a myriad of legal issues that may not be initially apparent to the parties. When faced with a heated situation, you should consult with experienced business litigation attorneys and learn all of your options. Getting prudent and timely legal advice will help you select the right path forward and reduce your chances of getting burned.

For a free consultation regarding a business or investment dispute, contact the Business Trial Group.

William B. Lewis is a managing partner of the Morgan & Morgan Business Trial Group and runs the Firm’s West Palm Beach office. His practice is exclusively focused on representing companies and individuals in business and investment disputes on a contingency-fee basis.