Court of Appeal:
Gilbert Says Producer of Hot Sauce Had Duty to Alert Pepper-Grower of Its Intent to End Relationship, With That Duty Derived From Their Confidential Relationship, Evidenced by No Written Contract
By a MetNews Staff Writer
The Court of Appeal for this district yesterday affirmed a $23.3 million judgment in a fraud action against the nation’s leading producer of sriracha, holding that the sauce-maker had a duty, based on the existence of a confidential relation between the parties, to forewarn the plaintiff, a grower, of its plan to stop buying peppers from it.
In the course of his opinion, Presiding Justice Arthur Gilbert of Div. Six expressed disagreement with the view of another division in the district that a fraud action may not be predicated on an implied promise, and disapproved of a Sixth District opinion to the extent it suggested that a trial judge has the unbridled prerogative of granting a new trial based on personal disagreement with the jury’s assessment of damages.
Gilbert’s opinion affirms a judgment by Ventura Superior Court Judge Henry J. Walsh based on a jury’s award of $13.3 million in compensatory damages and $10 million in punitive damages in a cross-action by Underwood Ranches, L.P. against Huy Fong Foods, Inc. and its principal, David Tran. The Irwindale-based business manufactures the leading brand of sriracha, a chili-based hot sauce which includes sugar, salt, garlic, and vinegar. Huy Fong contracted with Underwood in 1988 for the purchase of 500 tons of jalapeños. While annual purchases were made for 10 years under written contracts, the relationship persisted for 18 more years, with no written agreement.
In the opening paragraph of his opinion, Gilbert remarked:
“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.”
Huy Fong’s breach came in the form of having induced Underwood through the years to purchase more acreage and to give up growing crops other than jalapeño peppers, expressly agreeing on Nov. 1 2016 that Underwood would plant 1,700 acres for harvesting in 2017 and would be paid at the rate of $13,000 per acre, then unilaterally proclaiming eight days later that payment would be made at $500 per ton. The cost to Underwood averaged $610 per ton.
Underwood declined to perform under the terms proposed by Huy Fong. That company then circulated to other farmers a drone video showing Underwood’s harvesting in 2016 so they could learn the techniques. Underwood had consented to the video being made on condition it be kept confidential.
The grower wound up with no crop in 2017 and laid off 40 employees. It incurred a $8.5 million loss that year and lost in excess of $6 million in 2018.
Its chief operations officer explained that with two or three years notice, it could have avoided losses by shedding acreage, turning to other crops, and acquiring new customers.
Duty to Divulge
In his opinion affirming the judgment, Gilbert said Huy Fong had a duty to alert Underwood to its intention to cut off relations with it, an intention which was inferable from circumstantial evidence it had harbored for years. Declaring the failure to disclose to amount to “fraudulent concealment,” he said:
“A duty to disclose may arise from a confidential relationship. Where there exists a relationship of trust and confidence, it is the duty of one in whom the confidence is reposed to make a full disclosure of all material facts within his knowledge relating to the transaction in question and any concealment of a material fact is a fraud….A confidential relationship can exist even though, strictly speaking, there is no fiduciary relationship….A confidential relationship may be founded on moral, social, domestic, or merely a personal relationship.”
Such a relationship between Huy Fong and Underwood “extended over 28 years,” Gilbert noted, commenting:
“Perhaps the most compelling evidence of a confidential relationship is that for many years the parties entered into transactions involving tens of millions of dollars without formal written contracts.”
Huy Fong underscored that Walsh had not mentioned “fraudulent concealment” in his instructions to the jury.
“If this was error, it is patently harmless,” Gilbert responded. “The evidence that Underwood and Huy Fong were in a confidential relationship is overwhelming.”
Huy Fong argued that even if it did impliedly promise to buy peppers from Underwood in 2017, 2018, 2019 and beyond, as alleged in the complaint, that would not give rise to a cause of action. In support of that proposition, it cited the 2011 opinion from this district’s Div. Two in Lonely Maiden Productions, LLC v. Golden Tree Asset Management, LP.
In that case, film production companies (referred to in the opinion as “film clients”) alleged in a fraud action that Axium, a service they used for payroll processing, represented that funds paid to it would be used exclusively for the purpose of making payments to the clients’ “employees and for paying associated federal and state taxes, benefit plan contributions, and residuals required by collective bargaining agreements.” Justice Judith Ashmann-Gerst said:
“[S]imply put, the film clients did not allege an actionable misrepresentation of fact or intention to perform because they did not allege that Axium’s invoices expressly stated or promised how the film clients’ funds would be used. When it is boiled down, they have essentially alleged a claim based on an implied false promise. To our knowledge, however, no such tort has been recognized by California law.”
No Authority Cited
Gilbert turned the tables, saying:
“But Lonely Maiden cites no authority for the proposition that fraud cannot be based on an implied false promise. Where the implied promise is certain enough to cause reasonable reliance, there is no reason it cannot be a proper basis for fraud. Parties may not avoid liability for fraud simply because they leave to implication what they clearly intend to communicate.”
“In any event, here there was far more than an implied promise based on vague reassurances of good feelings between the parties. Huy Fong expressly told Underwood numerous times that Huy Fong would purchase all the peppers Underwood could produce. These promises were made in the context of Huy Fong’s insistence that Underwood obtain more land, a matter that required Underwood to undertake long-term financial commitments. In addition, Huy Fong expressly agreed to purchase the 2017 harvest of 1,700 acres at $13,000 per acre.
“The jury could reasonably conclude that Huy Fong had no intention of keeping those promises when they were made. There is evidence to show that Tran had long planned to cut Huy Fong’s ties to Underwood.”
Huy Fong asserted that Walsh abdicated his duty under Code of Civil Procedure §657 which provides, in part (with italics added by Gilbert):
“A new trial shall not be granted upon the ground of insufficiency of the evidence to justify the verdict or other decision...unless after weighing the evidence the court is convinced from the entire record, including reasonable inferences therefrom, that the court or jury clearly should have reached a different verdict or decision.”
The sauce-maker relied on this remark by Walsh:
“I may be the 13th juror, but I don’t view myself as the super juror where, because I disagree with what the jury has returned in the way of a verdict, I can just, you know, run over the top of it and substitute my personal opinion for theirs.”
Huy Fong cited the 2016 Sixth District Court of Appeal opinion in Ryan v. Crown Castle NG Networks, Inc. There, then-Presiding Justice Conrad Rushing (now retired) wrote:
“When a trial court rules on a motion for new trial based upon inadequacy of the evidence, it is vested with a ‘plenary’ power—and burdened with a correlative duty—to independently evaluate the evidence.”
Rushing said that in the case at hand, the trial judge’s “refusal to exercise its power to independently evaluate the sufficiency of the award amounted to failure to exercise a discretion vested by law, which of course is error.”
Can’t ‘Run Roughshod’
“The purpose of Code of Civil Procedure section 657 is not to give the trial court permission to run roughshod over a party’s constitutional right to jury determination. Instead, the purpose is to allow the trial court to grant a new trial on those rare occasions when the jury’s verdict is so at odds with any reasonable view of the evidence that judicial intervention is required to avoid a manifest miscarriage of justice. To the extent Ryan can be read to the contrary, we decline to follow it.”
The case is Huy Fong Foods v. Underwood Ranches, 2021 S.O.S. 4164.
Representing Huy Fong and Tran on appeal were Joshua G. Hamilton, Dixie C. Tauber, Roman Martinez, Charles S. Dameron and Riley T. Keenan of Latham & Watkins and Thomas J. Nolan of Pearson, Simon & Warshaw. Acting for Underwood were Wendy C. Lascher, John A. Hribar, James Q. McDermott, Michael A. Velthoen and Jessica M. Wan of Ferguson Case Orr Paterson. Underwood is now producing its own brand of sriracha, as well as seven other jalapeño-based sauces.
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