In a groundbreaking legal case, Smashmallow, a gourmet marshmallow company backed by Sonoma Brands, secured a $21 million judgment from a Sonoma County Superior Court jury. The lawsuit was against Tanis Food Tec, a Dutch food processing company, for breach of contract involving a faulty production machine.
The Contract and the Machine
Smashmallow, co-owned by Jon Sebastiani, had entered into a contract exceeding $2 million with Tanis Food Tec for a specialized production machine. The machine was intended to ramp up the production of Smashmallow's flavored marshmallows, including popular flavors like "cinnamon churro," "chocolate chip," and "root beer." However, the machine not only failed to meet production goals but also created an unsafe working environment.
Engineers from Tanis Food Tec misled Smashmallow by claiming that samples were machine-produced when in reality, they were handmade—a process Smashmallow was already employing. The machine was supposed to produce 2,200 pounds per hour but only managed an average of 844 pounds. On most days, the machine would "blow a gasket," according to David Kwasniewski, the attorney representing Smashmallow.
Safety and Waste Concerns
The machine posed significant safety risks by emitting toxic dust and particulates, requiring workers to wear respirators. It also generated a staggering 4,000 pounds of waste. To rectify the flawed filtration system, Smashmallow had to spend nearly $90,000 on consulting services, a replacement filtration system, and a dust collector.
Financial Impact and Missed Opportunities
Before the fiasco, Smashmallow was on a growth trajectory, doubling its revenue to $10 million within two years of its launch in 2016. It had also received $43 million in venture capital. The company was listed on the Inc. 5000 national list of fast-growing companies but missed out on capitalizing on its innovation due to the faulty machine.
Despite the overseas location of Tanis Food Tec, Dutch laws are expected to facilitate the enforcement of the $21 million judgment. The verdict is a significant but bittersweet win for Smashmallow and Sonoma Brands, as the company has wound down its operations but is not entirely closed.
The case serves as a cautionary tale for startups and investors, emphasizing the importance of due diligence and the potential pitfalls of scaling operations. While Smashmallow may be down, it is not out, and the legal victory offers some solace and financial relief.