Beyond Meat hits back at former co-manufacturer as shareholders file lawsuit: ‘We simply couldn’t get Don Lee Farms to meet our standards’
Beyond Meat - which has just been hit with a fresh lawsuit** (see box below) filed on behalf of shareholders accusing it of securities fraud following a “precipitous decline” in its share price - added: “At Beyond Meat, we are known for our rigorous product standards. That is why we stopped working with Don Lee Farms in 2017.
“We simply couldn’t get Don Lee Farms to meet our standards, no matter how many times we tried. Rather than risk the industry learning of their repeated safety shortcomings, Don Lee Farms sought to change the narrative by filing a baseless lawsuit against Beyond Meat.
“We are currently in the process of litigating this matter and intend to vigorously defend ourselves against the claims.
Fraud and negligent misrepresentation
Don Lee Farms sued Beyond Meat in California in May 2017*, three years after they entered into an exclusive supply agreement. (Click here to read about the litigation in Beyond Meat's latest 10Q filing.)
According to Don Lee Farms, Beyond Meat wrongfully terminated the parties’ fixed term contract “under the guise of purported health & safety concerns,” and misappropriated trade secrets by sharing with subsequent co-manufacturers the processes for manufacturing Beyond Meat products, including the Beyond Burger (processes which Don Lee claims to have developed).
Beyond Meat then countersued, alleging that Don Lee breached its supply agreement "as certain of our products manufactured by Don Lee Farms were contaminated with salmonella and other foreign objects, and that Don Lee Farms did not take appropriate actions to address these issues."
In March 2019, Don Lee Farms filed a second amended complaint to add claims of fraud and negligent misrepresentation against Beyond Meat, which it alleged had employed lax food safety practices and provided an altered copy of a food-safety audit of its manufacturing facilities.
Since then Beyond Meat has suffered a series of setbacks in the dispute, with its motion to dismiss the fraud and negligent misrepresentation claims denied on May 30, 2019 and subsequent attempts to designate documents as confidential also rejected by the court.
In a lawsuit** filed on behalf of Beyond Meat shareholders on January 30, 2020, lawyers at Pomerantz LLP argue that, “As a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s securities, Plaintiff and other Class members have suffered significant losses and damages.”
While Beyond Meat’s 10-Q SEC filings referenced its dispute with Don Lee Farms, says the complaint, it misled investors by issuing “generic disclaimers that were not tailored to Beyond Meat’s actual known risks with respect to the Don Lee Litigation, given the Company’s knowledge of its own conduct with respect to the Supply Agreement and its collaboration with Don Lee."
Judge: Don Lee Farms has ‘established the probable validity’ of its breach of contract claim
The latest setback came on January 22, when filings from the L.A. County Superior Court seen by FoodNavigator-USA show that Judge Mary H. Strobel granted a motion for a writ of attachment, essentially forcing Beyond Meat to hold a certain mount of money [to pay Don Lee] in escrow.
She also noted that Don Lee Farms had “established the probable validity of the claim upon which the attachment is based,” but has not ruled on the ultimate case on the merits. (A trial date is set for February 8, 2021.)
Legally, such a claim is deemed to have probable validity where it is “more likely than not that the plaintiff will obtain a judgment against the defendant on that claim,” noted Judge Strobel.
Don Lee contends that Beyond Meat breached the parties' written exclusive supply agreement by failing to pay for around $431,000 of product shipped by Don Lee Farms, which alleges that once late fees laid out in the supply agreement are added, it is owed just under $629,000.
While Beyond Meat argued that Don Lee’s products were defective, Don Lee presented evidence that the goods at issue "were tested for pathogens and passed inspection before shipment”, said the court, noting that the agreed-upon protocol for challenging defective goods was to return them and seek a refund in a timely fashion, something Beyond Meat did not do.
Don Lee Farms: ‘The facts are clearly on our side’
According to Don Lee Farms, in a separate motion before a different judge (which FoodNavigator-USA has not seen), the court also granted Don Lee Farms’ request to name Beyond Meat CFO Mark Nelson, Senior Quality Assurance Manager Jessica Quetsch and Director of Operations Anthony Miller in fraud claims which allege they “intentionally doctored and omitted material information from a food safety consultant’s report, and then delivered that doctored report to Don Lee Farms and affirmatively represented that it was the complete opinion of the consultant.”
According to Don Lee Farms - a leading supplier of plant-based burgers to multiple retailers including Costco - the omitted portions “discussed significant food safety issues at Beyond Meat’s facility.”
In a press release issued on January 27, Don Lee Farms president Donald Goodman said: "The facts are clearly on our side. Our claims have been shown to several judges and each one has ruled in our favor… but it is just the beginning. We will prove our claim that Beyond Meat misappropriated our trade secrets to manufacture the Beyond Burger and other products.
“We will prove the breach of the Exclusive Supply Agreement and fraud claim committed by Mr. Nelson and others.”
Attorney: ‘It doesn’t rule that Beyond Meat is guilty of breaching its agreement with Don Lee – but it doesn’t look good’
So what do legal experts make of the case?
Kevin Bell, partner at Arnall Golden Gregory LLP, told FoodNavigator-USA: “This [granting of a motion for a writ of attachment] is a nice win for Don Lee Farms because it creates a perception that they will win, but the motion is more of a procedural one. It doesn’t rule that Beyond Meat is guilty of breaching its agreement with Don Lee – but it doesn’t look good. Sometimes, that is helpful in a well-planned litigation strategy."
The allegation that Beyond Meat executives “intentionally doctored and omitted material information from a food safety consultant’s report,” is far more serious, however, noted Bell.
“These are very detailed allegations. If Beyond Meat altered a food safety report, that’s beyond significant, forget about breach of contract, you’re talking about allegations of fraud in a food company about public safety issues and the FDA would probably have to look into this and [look into what the] food consultant found.”
Attorney: ‘The Don Lee Farms litigation is clouding up the financial future and tarnishing the reputation of Beyond Meat’
Adam Fox, partner at Squire Patton Boggs, added: “However significant one might assess the litigation brought by Don Lee Farms against Beyond Meat, it has now become the cornerstone of a putative federal class action alleging securities fraud based on Beyond Meat’s denials of the allegations made by Don Lee Farms in its registration statement, prospectus and quarterly reports.
“Although one might envision Beyond Meat’s invocation of Noerr-Pennington immunity with respect to its denials in these public documents, and their mere repetition of legal positions that appear in court papers—not to mention cautionary statements about how Beyond Meat could lose the lawsuit—there is no question that the Don Lee Farms litigation is clouding up the financial future and tarnishing the reputation of Beyond Meat.”
He added: “Given the multiplication of litigation now facing Beyond Meat, it will be fighting on multiple fronts, and the settlement of all claims may not be a simple matter. Nevertheless, without digging into the facts—and whether they actually support the allegations—it is difficult to predict whether these lawsuits pose any real threat to the future of the company.”
*The case is Don Lee Farms vs Savage River Inc (d.b.a. Beyond Meat) Case #: BC662838 in Los Angeles County Superior Court, CA
** The case is Larry Tran et al vs Beyond Meat Inc, Ethan Brown, and Mark Nelson Case: 2:20-cv-00963 filed in the US district court central district of California, January 30, 2020.
