MANHATTAN (CN) - Slim Fast claims in court its exclusive supplier coerced it to pay excessive fees to manufacture its ready-to-drink products and threatened to destroy the business after receiving a contract termination notice.
KSF Acquisition Corp., which does business as Slim Fast sued Gehl Foods LLC Thursday in New York State Supreme Court.
As recounted in the 34-page complaint, Slim Fast exercised its right to terminate its exclusive supplier contract with Gehl Foods in June 2016.
Prior to that, the lawsuit says, Gehl Foods had been the longtime, exclusive supplier of Slim Fast's ready-to-drink diet products, and under the terms of the contract, the supplier was obligated to continue to provide the drinks to Slim Fast for one year following the contract termination.
Slim Fast says this obligation was vital because it depended on Gehl Foods to sustain its product line, which comprised about 70 percent of its business.
Moreover, Slim Fast says it did not have an alternative source of supply that could immediately fulfill its production requirements.
Any potentially new manufacturer would need time to produce products that met Slim Fast's requirements and that were proven consistent with the existing product like, the complaint states.
Slim Fast says the one-year period allowed any new supplier "to get up to speed before Slim Fast's supply source would be cut off."
According to the complaint, Gehl Foods knew that Slim Fast depended on its obligation to carry out the one-year period, but did just the opposite.
Nevertheless, the lawsuit says, Gehl Foods cut off all communications with Slim Fast after receiving the termination notice, and refused to respond for numerous requests for information.
"Gehl suddenly claimed to encounter a variety of production problems, denied product to Slim Fast based on these purported production issues at the same time Gehl was actually providing competing product to other customers, and then denied Slim Fast contractually required access to Gehl’s facility to inspect the supposed production problems," the complaint states.
Slim Fast says as a result of these actions, Gehl Foods forced it to choose between two unacceptable options: receiving a shipment of only those drinks that had been produced when the contract was terminated -- a fraction of what Slim Fast expected for the year -- or getting a larger number of bottled drink that was not ready to sell and needed to be finished by somebody else.
Slim Fast says this latter option would have caused it to incur additional costs and confront it with a number of other hurdles.
As described in the complaint Gehl Foods later refused to provide Slim Fast with its product unless the company agreed to increase in the per-bottle wholesale cost from $0.178 to $0.39.
Knowing that Slim Fast had no alternative, the complaint says, Gehl Foods presented this demand as a "take it or leave it" offer, and gave Slim Fast two days to accept or reject it.
Slim Fast says Gehl Foods made its demand for a rate increase at the beginning of the so-called diet season -- late November -- which is Slim Fast's busiest time of year.
As the result, Slim Fast says it had no choice but to agree to what it describes as the supplier's coercive demands.
"Because Slim Fast had no alternative source of supply and was unable to transition all of its product lines to another supplier at that time, Slim Fast was deprived of its free will and forced to pay the extortionate price sought by Gehl in the amendment under economic duress, " the complaint says.
Slim Fast says it eventually learned that Gehl Food's alleged production problems were a sham. It claims that during this period, Gehl Foods was producing substantial amounts of similar products for other customers.
Slim Fast seeks unspecified damages on claims of breach of contract, creation of economic duress, and breach of duty of good faith and fair dealing.
The company is represented by Margaret Ciavarella with Winston & Strawn LLP in New York.
A representative of Gehl Foods did not immediately respond to a request for comment.
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