UPDATE: Feb. 5, 2020: A securities class action lawsuit for Beyond Meat investors who lost money because of this case was filed in a California federal court, according to a release. This complaint states Beyond Meat made false or misleading statements about the termination of its agreement with Don Lee Farms and by having "doctored and omitted material information" on a food safety report.
- A California court ruled Beyond Meat is likely to be liable for $628,689 worth of unpaid invoices for breaching its manufacturing agreement with former co-packer Don Lee Farms, according to a tentative ruling filed last week.
- In a separate matter, a judge allowed Don Lee Farms to name Beyond Meat officials in claims dealing with food safety. The officials who will be named include Beyond Meat Chief Financial Officer Mark Nelson, Senior Quality Assurance Manager Jessica Quetsch and Director of Operations Anthony Miller.
- "We are pleased with where we are today but it is just the beginning," Don Lee Farms President Donald Goodman said in a press release. "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.”
This latest set of rulings in the sprawling case in California Superior Court are putting a damper on what has been a good start to Beyond Meat's year, which already has seen product improvements, expanded partnerships and supplier agreements. But they're also leading some who watch the market to be cautious. The accusations in Don Lee's lawsuit are not insignificant, and could shake up the plant-based meat company's C-suite and manufacturing operations.
The lawsuit was filed in Los Angeles County in May 2017, after Beyond Meat ended its relationship with Don Lee Farms, which was also in the plant-based meat business. The two companies entered into a contract in 2014, which included a non-disclosure agreement in which Beyond Meat promised to protect Don Lee's trade secrets. The lawsuit accuses Beyond Meat of stealing these trade secrets after the two companies ended their agreement. It also says Beyond Meat provided unusable and unsafe raw materials to Don Lee Farms, did not compensate Don Lee for products it manufactured and did not ensure Don Lee had operational equipment and personnel to make its products.
As the case docket became longer, more charges and claims have been added. According to internal documents shown to Bloomberg, Don Lee reported finding plastics, cardboard and a metal nozzle among the ingredients supplied by Beyond Meat. One time, a Beyond Meat truck had come to a Don Lee facility with a white powder contaminating the ingredients.
A food safety audit ordered by Beyond Meat showed "more than adequate" conditions, Bloomberg reported, but in a countersuit from Beyond Meat, the company says that Don Lee left a temperature stick, glove, wood fragments and parchment paper in its burgers. And, Bloomberg reported, Beyond Meat said salmonella was found in an unfinished batch of food, so the company deemed the plant unsuitable. However, Don Lee's lawyers claim Beyond gave the company an altered copy of a food safety audit, which led to the fraud charges.
With so many issues at hand, it's hard to know what the courts will decide as the case continues. A trial date is now set for May this year. However, the rulings in favor of Don Lee don't look promising for Beyond Meat, which still relies on co-packers for its Beyond Burgers, sausages and grounds. Last summer, CEO Ethan Brown said on an earnings call that the company has five facilities for making and processing its products, including co-packers. A legal filing associated with the Don Lee and Beyond Meat case states co-packers include Georgia-based FPL Foods and Texas-based ProPortion Foods.
Unlike the current co-packers, Don Lee is in business for itself in the plant-based meat space. It's produced vegan products for more than 15 years and last year launched its Better than Beef Burger, which is currently sold at Costco and H-E-B stores. And because of Don Lee's own business history and current product line, it has keen motivation to keep the legal fight against Beyond Meat going.
A judgment of more than $600,000 isn't likely to do much lasting financial harm to a company that had $92 million in net revenues in its most recent quarter, especially because Beyond Meat is posting a profit — a milestone reported for the first time in its most recent earnings.
However, fraud and food safety-related charges, if they stick, could damage the company and the plant-based meat sector. A majority of consumers said eating plant-based foods made them feel healthier, according to a 2018 study from DuPont Nutrition and Health. However, if this case paints a major manufacturer of plant-based meat as careless about food safety, some consumers may turn the other way. And while three out of 10 consumers will buy recalled meat as soon as it returns to shelves, according to a study by Category Partners, the type of careful and thoughtful consumers who choose plant-based meat might not be so forgiving.