Manufacturer’s lawsuit under contract: Goli Nutrition led the company to bankruptcy

Better Nutritionals, a prominent manufacturer of gum contracts, declared bankruptcy last month, just a day after it sued its biggest customer, Goli Nutrition, to recover what it says were huge overcharges.

The lawsuit, which seeks hundreds of millions of dollars in damages, was filed in the US District Court for the Central District of California against various Goli entities and the company’s founders, Michael Pitinsky and Deepak Agarwal.

In the lawsuit, and in a statement filed by Better Nutritionals founder Sharon Holman as part of its Chapter 11 bankruptcy filing, the company alleged that Goli urged the contract manufacturer to significantly expand its manufacturing capacity to supply Goli’s high demand for finished products.

Goli has built its reputation on fast-selling apple cider vinegar products and has expanded into other product categories, including ashwagandha.

Better Nutritionals claimed Goli’s sales forecasts were several times higher than what the brand ultimately received, leaving the contract manufacturer with a significant amount of unsold inventory now nearing the end of its useful life. The suit alleged that this wasn’t just a massive miscalculation on Jolie’s part – the sales projections were cast in bad faith.

In addition to the large amount of inventory that Goli claimed it needed but did not accept to deliver, the suit also detailed the complex financial transaction entered into between the two parties, presumably to help pay for the finished goods.

Goli acquired a 25% stake in Better Nutritionals in exchange for a 3% stake in Goli. In the lawsuit, Better Nutritionals said it found that Goli’s 3% stake was worth significantly less than the ownership interest Goli acquired.

Oddly enough, the same legal counsel represented both parties to the stock swap deal, which should have had major implications for better nutrition. Jolie was responsible for 93% of Better Nutritionals’ business, said Max Volkenflick, lead attorney for Better Nutritionals, at the time, and the relationship appeared to be strong. (The law firm in question, DLA Piper, is also named as a defendant in the suit.)

“At the time of the stock exchange, Better Nutritionals was the exclusive manufacturer of Goli, and their interests were completely in sync, or at least that’s what Better Nutritionals and Sharon Hoffman thought,” Volkenflick told Natural Products Insider.

The lawsuit alleged that Goli originally approached Better Nutritionals in 2018 seeking an apple cider vinegar gummy product, offering a competitor-made product as an example of what was needed. According to the lawsuit, Better Nutritionals devised a proprietary approach to make the gummies smell and taste like applesauce, not vinegar. The suit further alleged that Goli lobbied for patents on that technology in its name, in return for a promise of vigorous patent defense and exclusivity for Better Nutritionals. In the end, the lawsuit alleged, neither promise was kept.

The dollar amounts involved in the lawsuit and bankruptcy filing are staggering, given that Better Nutritionals was a small company to begin with. The initial relationship was very profitable for Better Nutritionals before it went sour.

In 2018, Better Nutritionals said it had about 18 employees and annual revenue of about $4 million, with profits of about $1 million, or a very healthy margin of 25%.

As the relationship with Jolie blossomed, it became clear that more abilities were needed. The lawsuit alleged that in 2019 Jolie expected he would need millions of bottles per month, up from the 400,000-bottle-per-month capacity Better Nutritionals had at the time. The suit asserted that those expectations had risen to as much as 12-15 million bottles a month.

Responsibility for a new plant

To meet these demands, Better Nutritionals opened a 420,000-square-foot facility in Norco, Calif., which needed “tens of millions of dollars” in capital improvements, which included a $350,000-a-month lease, up from $10,000. per month. One month rent for its original facility.

Better Nutritionals also installed an expensive batch of manufacturing equipment specified by Goli that ended up costing $70 million. At one point, the number of company presidents had grown to 600.

In July 2021, the lawsuit alleged, Jolly ordered $281 million worth of finished goods and verbally placed a purchase order for 300 million bottles to be used in future production runs. But according to the lawsuit, only Goli paid $180 million for the finished goods order and nothing was paid for the $300 million bottle order. By August of that year, Goli had allegedly lowered its sales forecasts by more than 90%.

tThe lawsuit alleged that Jolie’s sales forecasts were fraudulently set too high to attract investment capital. In October 2021, private equity firm VMG Partners invested $100 million in Goli, a deal that gave it two seats on Goli’s board of directors.

Shortly thereafter, the lawsuit alleging production of the gum, which contained Better Nutritionals’ trade secrets, was transferred to competing contract manufacturer Merical (VMG Partners and Merical are also named in the lawsuit).

Curiously, the agreement that led to the construction of the new manufacturing plant did not appear to include a clause preventing Goli from seeking other manufacturing partners nor a single clause imposing a minimum purchase.

Better Nutritionals is seeking “at least $200 million” in damages.

As of the time of publication, Goli, VMG Partners, Merical and DLA Piper did not respond to requests for comment. None of the accused has yet appeared in court.

Contract Manufacturer Agreements: See Before You Leap

Sources in the dietary supplement industry contacted regarding this story said the condition can be seen as a by-product of what not to do when it comes to managing the manufacturer-customer relationship.

“Before you sign a lease for a larger facility like this, you must have an exclusivity agreement and applicable minimums,” said attorney Erica Stamp, who has represented a variety of clients in the industry.

At the very least, Better Nutritionals should have implemented procedures to keep its trade secrets from getting out of the house, according to Stump.

Non-compete agreements are not enforceable in California, but they could have had some non-disclosure agreements. [nondisclosure agreements] She said. “When you go from something like 10 employees to over 500 overnight and you’re just trying to keep up with demand, sometimes you’re not doing your due diligence, and that’s what can happen.”

Attorney Mark Ullman emphasized the need for an organization like Better Nutritionals to retain its own counsel when dealing with some of the issues highlighted in the lawsuit.

“The lesson from this story is … that there is a threshold where you need to have your own attorney,” said Ullman, counsel to Rivkin Radler LLP. There were huge value contracts and complex securities transactions here. Without a judgment on the merits of the case, based on what is in the complaint, there was no protection mechanism in place the creator Beyond trusting the customer’s good faith.

Scott Steinford, who runs Trust Transparency Consulting, has experience on both sides of the fence, having run both a finished product marketer as well as a contract manufacturer. Without seeing the defendants’ side of the story yet, Steinford notes that it remains true that it takes two people to tango.

“Post-verification of facts is an essential element of confidence,” he said. Transparency must be mutual and meaningful; None of these facts existed on either side. There is no responsible verification when one party is represented and both sides are audited.”

It is not clear who is at fault, concluded Steinford.

“It is conceivable that it takes two to break a trust because both parties are, on some level, complicit in the actions that caused the harm,” he said. “It will be interesting to see how this case plays out and how it is resolved, but the truth is that a great deal of lessons can be learned from reading this complaint.”

Manufacturer’s lawsuit under contract: Goli Nutrition led the company to bankruptcy

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