An Arkansas toy supplier is suing a Taiwan-based manufacturer for breach of contract and other civil allegations in a legal dispute that not only threatened delivery of some battery-operated, ride-on cars to Wal-Mart Stores Inc., but is being characterized as an attempt to undermine the retail giant's Made in the USA initiative.
Redman & Associates LLC (R&A), which supplies consumer products to retailers, says in a 20-page lawsuit that Sales Chief Enterprise Co. Ltd. (SC) revoked its credit terms and is demanding immediate and full payment for goods, which, in turn, has disrupted R&A's supply chain and its ability to fill orders and generate revenue.
R&A, which is based in Rogers, Ark., is seeking more than $20 million for an alleged breach of contract, tortious interference with a business relationship, misuse of trade secrets and breach of warranty.
In a phone interview with Plastics News from Shanghai, Ellen Liu, general manager for Sales Chief said the company is preparing its legal response to the lawsuit, which was filed Sept. 5 in U.S. District Court in Fayetteville, Ark.
“I gave this case to my [U.S.] attorney,” Liu said. “I don't know if I should make any comment right now.”
However, she did state that business issues between Sales Chief and R&A aren't related to Wal-Mart's commitment to buy $250 billion of U.S.-made goods over the next 10 years.
“Nothing that happened between our two companies has anything to do with this project,” Liu said.
Sales Chief and R&A had done $62 million of business together since March 2012 under terms that invoices would be paid within 60 days, according to the lawsuit. However, the terms allegedly changed this year as R&A moved forward with a plan to transition full production of a six-volt, battery-operated ATV toy for children from overseas to Arkansas.
The ride-on toys used to be manufactured and assembled solely in Chinese plants but the job of producing the unit's main body was given to Bentonville Plastics Inc., a custom injection molder in Bentonville, Ark. After all the pieces were made, R&A then assembled the vehicles, packaged them and shipped the toys to Wal-Mart.
R&A's main product line is battery-operated, ride-on cars for children, which are sold under the R&A label and the Monster Trax brand. The company's plan to reshore the manufacturing of all parts of the six-volt vehicles to the United States over a three-year period received a good deal of publicity after Wal-Mart announced its goal to buy more U.S.-made goods.
At first, Sales Chief promised continued cooperation in manufacturing and shipping, and it worked with R&A on a production schedule to fill Wal-Mart orders for 6- and 12-volt toy ride-on cars for 2014, the lawsuit says. But according to the lawsuit, things changed in March after Sales Chief learned more about R&A's domestic roll-out plan, which calls for introducing a Captain America-themed, six-volt vehicle as its first product to symbolize its Made in the USA program.
“Evidently, Chinese manufacturers are extremely resistant to any effort by American companies to re-domesticate manufacturing,” the lawsuit says.
In May, Sales Chief allegedly revoked R&A's credit and refused to release shipped goods without up-front payment. R&A was forced to deplete much of its working capital and credit to release some goods and maintain an uninterrupted supply to Wal-Mart, according to the lawsuit. A hold remains on other goods and R&A is incurring “excessive” freight, storage and logistical fees of $1.4 million and counting, the lawsuit says.
“SC is a seasoned importer who understood that it would devastate R&A's ability to continue business as usual by materially changing the credit terms and disrupting the flow of goods at a critical point during the annual toy distribution cycle,” the lawsuit says. “SC's purpose was to obstruct R&A's cash flow to prevent the startup Made in USA manufacturing business from having enough funds to begin operations.”
R&A ultimately wants to develop a $350,000 machine capable of producing a non-assembled, six-volt car every 31 seconds at a 270,000-square-foot facility next to its headquarters, according to a Sept. 8 article in Arkansas Business.
Attempts to reach R&A officials and the company's attorney by phone weren't successful.
The lawsuit says Sales Chief is trying to “make an example” out of R&A “with the larger goal of forestalling Wal-Mart's on-shoring efforts before they get off the ground.
“SC is on the front lines of the Chinese manufacturing industry, and it has made known that it intends to disrupt and undermine any efforts to relocate manufacturing back in the United States,” the lawsuit says. “During in-person meetings with R&A representatives in 2014, which were after the parties had committed to a production schedule for 2014, SC's executive director, Ellen Liu, made clear her intentions to derail the Made in USA initiative.”
On Sept. 5, Sales Chief officials allegedly met with Wal-Mart representatives to get permission to sell the retailer ride-on toys without R&A's involvement. Sales Chief formulated an enticing offer using trade secret pricing information and other confidential data to bypass R&A and secure the ride-on toy business for itself, the lawsuit says.
Also on Sept. 5, 14 workers were laid off from a unofficial partnership business between R&A and Bentonville Plastics that is called Nuvzn Technologies LLC, according to the news outlet Arkansas Business. Nuvzn was going to manufacture 100,000 of an estimated 600,000-unit order for six-volt toy cars in 2014 while Sales Chief would produce the rest.
Nuvzn had received half of a $2 million grant from the Arkansas Economic Development Commission to pay for molds and assembling equipment.
R&A is suing Sales Chief for damages in excess of $17 million for breach of contract and interference with a business relationship; $3.8 million for breaching a warranty that a 2012 product didn't infringe on any U.S. patents; and compensation for attorney fees and legal expenses.
The breach of warranty allegation is related to R&A's 2012 request for Sales Chief to design and manufacture a children's ride-on dune buggy to be named the Monster Trax Dirt Racer 22. R&A purchased the product from Sales Chief and sold it through Wal-Mart stores until March 2013, That's when Fisher-Price Inc. said the Dirt Racer 22 infringed on five of its patents. A federal lawsuit followed and the court ruled against R&A. The product was pulled from Wal-Mart shelves and R&A alleges it lost $3.8 million of potential profit.
Plastics News China correspondent Kent Miller contributed to this story.