Flavoured Tequila brand 21 Seeds has sued its parent company Diageo for allegedly obscuring plans to develop a competing product with its stablemate Casamigos.
A stockholder for 21 Seeds has claimed in a complaint filed by Fortis Advisors LLC on 2 April that the spirits giant has undermined the brand’s ability to reach the sales goals tied to its earn-out targets by creating a competing product in Casamigas Jalape?o Tequila.
The complaint, filed at Delaware Chancery Court in the US, alleges that Diageo’s 2022 acquisition of 21 Seeds “was the product of fraud from the outset” and that the firm duped the brand into a deferred-payment sale structure by lying about plans to introduce a competing product.
As such, the complaint says the transaction was finalised due to a series of material misrepresentations and omissions by Diageo.
“Diageo’s deception and bad faith continues to permeate its operation [of 21 Seeds] to this day,” the complaint states. “Fortis brings this action to redress Diageo’s violation of California securities laws, deceit, and deliberate contractual breaches after the acquisition.”
Diageo acquired the brand in spring 2022 for an undisclosed sum after the three female founders sought to scale the company and penetrate the US on-premise.
The lawsuit claims that Diageo repeatedly pitched itself as the best acquirer for 21 Seeds to accomplish the founders’ goals, and as transaction discussions continued, the firm obtained detailed information about 21 Seeds’ ‘trade secrets’, required the company to obtain a written supply agreement from its distillery, and “insisted that the representations and warranties it required related to the company’s intellectual property be deemed ‘fundamental’ under the agreement after having previously not appeared to value the company’s IP [intellectual property].”
All of this, the complaint continues, prompted 21 Seeds to pointedly ask Diageo to confirm that it did not have another infused Tequila brand ‘looming on the horizon’ as it had led the founders to believe.
Consistent with its prior representations and statements to the founders, the firm responded in writing that it did not “know of any other acquisition by Diageo of another infused Tequila brand”.
Diageo CEO Debra Crew, who was the company’s president of North America at the time, said the acquisition was “in line with our strategy to acquire high-growth brands in fast-growing categories.”
The 21 Seeds range currently comprises three variants: Cucumber Jalape?o, Valencia Orange, and Grapefruit Hibiscus.
The complaint references an in-person review of the transaction agreements, at which it says Diageo stated without qualification that one of the benefits of the transaction was the company’s commitment to protect the brand “from any attempts to copy its brand and products”.
However, Fortis Advisors alleges Diageo was lying on account of the firm’s development of an “offshoot flavoured Tequila brand” with fashion model Cindy Crawford, the wife of one of the founders of Casamigos Tequila, Rande Gerber, which has been owned by Diageo since June 2017.
Casamigas Jalapeno Tequila
Competing product: Casamigas Jalape?o Tequila is available throughout the US
“The undisclosed, in-development flavoured Tequila product, Casamigas Jalape?o, was taking aim squarely at both 21 Seeds’ lead Cucumber Jalape?o-flavoured Tequila offering and the company’s core female customer base,” the complaint states.
Fortis Advisors further maintains that Diageo hid the development of Casamigas Jalape?o because revealing it to the 21 Seeds’ founders would have caused them to question Diageo’s motivations and intentions for the acquisition, and potentially reject the transaction entirely or its “illusory” earn-out structure.
“Diageo, thus, would have to significantly increase the guaranteed upfront payment or risk losing 21 Seeds to another global beverage powerhouse that actually was intent on promoting the company and growing its sales, which, in turn, would provide an even more formidable competitor for Casamigos to take on after its launch. Diageo was determined that neither occur,” the lawsuit states.
Fortis Advisors further asserts that since the acquisition, Diageo has “put 21 Seeds in mothballs, where the company remains to this day,” and has deliberately managed and operated the brand in a way that eliminates any possibility of achieving the milestones or earn-out payments, in direct breach of the acquisition agreement.
“During the three years that have elapsed since the completion of the transaction – 60% of the earn-out term – 21 Seeds has completely stalled under Diageo’s control, its sales consistently flat.
“21 Seeds’ pole position in the flavoured Tequila segment, which was obtained by three beverage industry novices operating on a relatively limited budget, has been squandered, and the company has been surpassed by competitors that have obtained greater brand awareness, market penetration and industry traction.”
The suit seeks damages and attorney fees.
In a statement to The Spirits Business, a spokesperson for Diageo said: “We invest thoughtfully in all brands across our portfolio and work diligently to help them grow and succeed.”
The Spirits Business has also reached out to 21 Seeds for comment but has not yet received a reply.