Snack Company Says It Lost $20 Million After Starbucks Allegedly Broke Contract

September 12, 2012, 8:15 AM

Sept. 12, 2012— -- A snack company based in Carlsbad, Calif., is claiming Starbucks breached a contract with it, leading it to struggle financially.

Eleven shareholders of Mellace Family Brands (MFB), which produced Mama Mellace's Chocolate and Mama Mellace's Organics snacks, among others, filed a lawsuit last week against Starbucks Corporation, saying complaints from Starbucks about Mellace products were actually due to a gas leak at a Starbucks facility.

The shareholders allege that because of Starbucks' breach of contract, the company has suffered damages "in an amount to be proved at trial including, but not limited to, costs of business improvement, ongoing lost business while operating and foreseeable lost future profits, all in an amount exceeding $20 million."

Zack Hutson, spokesman for Starbucks Coffee Company, said the company had discontinued business with Mellace Family Brands due to "ongoing quality issues."

Hutson said Starbucks chooses its suppliers, of which it has 14,000 globally, by inspecting their "quality, service and value."

"We're committed to meeting and exceeding the high expectations of our customers," Hutson said. "If the quality of the product doesn't meet those expectations, we have a philosophy of working with suppliers of identifying problems to improve."

Mellace and its attorneys did not return requests for comment.

In the suit, filed on Sept. 6 in San Diego Superior Court, the plaintiffs say Mellace began as a small company in the early 2000s, roasting cashews and other nuts and selling them in local shopping centers in San Diego.

The company was incorporated in 2001 and by 2007 employed more than 50 people with annual revenues exceeding $10 million. The suit says Starbucks approached Mellace in 2007 to sell its products in its coffee shops.

"Starbucks was made aware that MFB was a small, family-oriented business and that the relationship with Starbucks would cause MFB to rapidly expand and become increasingly reliant on continued product orders," the suit stated.

The value of the initial contract was not disclosed in the suit.

The company said Starbucks also knew Mellace "maintained ongoing contractual obligations to suppliers to corporations other than Starbucks including Costco, Walmart, Trader Joes, Whole Foods Markets," and other companies.

However, after the company delivered its first shipment in March 2008, Starbucks said it had "received complaints about the quality of a certain MFB product."

"After diligent investigation, a defect was detected in the level of Fatty Acid in certain almonds and Starbucks initiated a product withdrawal," the suit stated, which was due to "faulty installation and calibration of an automated roasting machine, installed and calibrated by a MFB third party vendor."

"Starbucks was reimbursed the costs related to product withdrawal through insurance proceeds from MFB's third party vendor," the suit stated.

Starbucks "is alleged to have received further complaints regarding MFB products not yet coded for a six month shelf life," and initiated a product withdrawal.

After additional dealings between the two companies, another agreement was reached in April 2010 for $1.8 million in product with additional purchase orders issued later that year, the suit said.

Based on that agreement, Mellace purchased $1 million in cashews to fulfill those orders, according to the suit.

That same month, Starbucks said it received complaints regarding the quality of cashews, the suit said. In May 2010, Mellace said it received a termination letter from Starbucks, "indicating that no new orders would be issued due to product quality concerns," the suit stated.

On May 25, 2010, Mellace said it hired an independent laboratory to test samples and found them to be "acceptable" according to specifications provided by Starbucks.

On May 28, 2010, Starbucks told Mellace it would be still taking orders for almonds. But on June 4, Starbucks told Mellace its products were withdrawn due to concerns by the Food and Drug Administration.

After the products were returned to Mellace that month, the FDA found that "certain MFB products had in fact, been tainted by a gas leak at a Starbucks facility. No defect was found in the roasting packaging of the product, done by MFB. No concerns were found in MFB product quality," the suit said.

"The FDA investigation demonstrated that Starbucks' failure to honor the then-outstanding and promised future blanket purchase agreements was unjustified. Due to Starbucks' improper product withdrawal, and failure to fulfill its promised future BPA's and then-outstanding BPA's, MFB suffered extreme financial difficulty and was forced to close its business," the suit stated.