New Detail Shows Financial Scope of Redman Loss

A federal court case between a Bentonville businessman and a Chinese manufacturer took a big turn last month when the original suit was amended to include updated information on the catastrophic loss of a contract.

Mel Redman, founder and CEO of Bentonville toy supplier Redman & Associates LLC, amended his suit against Chinese manufacturer Sales Chief Ent. (Hong Kong) Co. Ltd. to add more clarity to the damage suffered by his company as a result of losing a lucrative purchase agreement with Wal-Mart Stores Inc.

Redman’s attorney, Fayetteville lawyer Mark Henry, filed the 37-page amended suit in the U.S. District Court for the Western District of Arkansas in Fayetteville. The original $20 million lawsuit was filed in September, after R&A alleged Sales Chief changed contract terms and improperly interfered with the company’s business contracts and relationships.

The amended suit revealed that on Sept. 15, just 10 days after the original lawsuit was filed, Anne Marie Kehoe, vice president of toys at Walmart U.S., notified Redman that the retailer was canceling a signed purchase commitment with his company, a contract valued at more than $70 million.

Henry filed the amended complaint after Sales Chief — through its attorneys David Lackowitz of Moses & Singer LLP in New York and Shannon Fant and Vincent Chadwick with Bassett Law Firm in Fayetteville — entered its response Feb. 13 to the original lawsuit. In the response, the attorneys argued the lawsuit should be dismissed “for failure to state a claim.”

“No one should be able to complain what the extent of our damages are now that we have amended our lawsuit,” Henry said. “Our hope in amending the lawsuit is to streamline the issues.”

Sales Chief has until March 8 to respond. Redman is still seeking a jury trial. Because of the financial burden caused when Sales Chief abruptly changed terms of its contract with R&A, the company was forced to stop the ramp-up of a dedicated production line last September and lay off two dozen employees at its new Rogers manufacturing facility.

After the layoffs occurred, Walmart ended its purchase agreement.

“It is unfortunate that a lawsuit became necessary in an initiative that was intended to provide American-made products and jobs,” Redman said in a prepared statement. “Redman & Associates was a proud participant in the on-shoring initiative because we believe products need to be made in the USA, but clearly that transition is not going to be seamless. The actions by Sales Chief cost jobs for American manufacturing workers, and attempted to damage our business relationships with Walmart. We look forward to our day in court.”

 

Shift in Payment

The federal lawsuit stems from R&A’s announcement in October 2013 of an $8 million investment to open a 275,000-SF manufacturing and distribution facility in Rogers. The news conference — attended by then-Gov. Mike Beebe as well as officials from Walmart and the Arkansas Economic Development Commission — came just a few months after Walmart revealed plans to boost sourcing of its U.S. products by $50 billion over the next decade. The plan was labeled by Walmart as the “Made in the USA” initiative.

Redman, himself a former Walmart executive, said at the announcement his company had developed a three-year plan to eventually move all production of its popular Disney and Marvel ride-on toys, manufactured at Sales Chief and sold exclusively at Walmart, from China to the Rogers facility.

Walmart, according to the amended filing, had contracted to buy a minimum of 520,000 ride-on toys every year in 2014, 2015 and 2016. According to the contract, not all units had to be made in the U.S. in the first two years, so R&A developed a plan to continue working with Sales Chief to supplement its domestic production.

In May 2014, however, Sales Chief unexpectedly wanted up-front payment on a substantial shipment of goods that already had shipped to ports in California, with the threat that supply (during the holiday shopping season) would be disrupted if terms weren’t met, according to court documents.

Sales Chief claimed that as of Aug. 15, 2014, R&A owed $10.2 million.

The shift in payment terms was made, R&A contends, to “deliberately cause maximum disruption” ahead of the holiday season, according to court documents, and to disrupt R&A’s supply chain and its ability to fill orders and generate revenue.

“Sales Chief knew that a major disruption to R&A’s supply chain would devastate R&A’s finances as well as its relations with Walmart, and Sales Chief knew that the month of May was the ideal time to surprise R&A with a knot in the vital supply line,” court documents state.

 

Scheming for a Meeting

Sales Chief had built Redman’s Monster Trax, a popular, battery-operated ride-on toy since 2012, and hadn’t previously required payment for the toys until 60 days after they had shipped.

So why a change of business philosophy? R&A alleges in its lawsuit that Ellen Liu, Sales Chief’s executive director, “made clear her intention to derail the ‘Made in the USA’ initiative.”

To that end, R&A’s amended complaint details Liu’s efforts to have a meeting with Walmart without R&A being present.

Redman contends in the amended complaint that an email exchange from Aug. 18 to 21 between Liu and Craig Mikita, a senior buyer in the toy category at Walmart, outlined Liu’s intention to circumvent R&A and sell toys directly to Walmart or through another vendor not involved in the “Made in the USA” initiative.

Traditional lines of communication, R&A asserts, typically involve the manufacturer contacting the retailer through the vendor.

On Aug. 18, Liu wrote to Mikita: “I write – reluctantly – to seek your assistance is (sic) resolving Redman’s delay to pay considerable sums owed to Sales Chief. Despite repeatedly acknowledging that millions of dollars are owed to Sales Chief, and despite repeated assurances that this balance would be paid down, Redman has refused to abide by its obligations and we are left no choice but to seek your assistance.”

An auto-reply email from Mikita notified Liu that he would be out of the office until Sept. 1.

On Aug. 21, Liu again sent Mikita an email that included the following introduction: “I want to be clear that I am not asking for you to resolve the issue of Redman’s unpaid debt to Sales Chief. I am asking for your guidance on ways to deliver the remaining goods to Walmart without any inconvenience to Walmart and without further damage to any of the parties.

“I am planning to be in the U.S. in early September and would like to visit you in Bentonville. At that time, we can personally discuss these matters and, as we have done in the past, come to an amicable solution.”

On Aug. 26, Kehoe notified Redman about Liu’s communications with Mikita, a highly irregular practice within the Walmart retail system.

Henry wrote in the amended complaint: “If not for Walmart’s insistence on acting above-board, R&A might never have learned the true extent of [Sales Chief’s] intentional interference with R&A’s valuable business relationship with Walmart.”

Walmart representatives eventually did meet with Liu on Sept. 4, according to court documents, and a representative of R&A accepted Walmart’s invitation to attend, as well.

But on the following day, according to the amended complaint, Liu was able to meet privately with Mikita. The meeting occurred off Walmart premises. During the meeting, R&A claims Liu made a blunt appeal to Walmart to sell its ride-on toys directly to the retailer without R&A’s involvement.

Henry wrote in the amended complaint, “Sales Chief’s conduct represents intentional interference with R&A’s existing business relationships, made with the specific desire to cause a loss to R&A and maximize return for Sales Chief.”

Chris Neeley, an executive at a Bentonville firm called Made in USA Works that helps manufacturers in their on-shoring efforts, told the Reuters news agency that R&A’s complications with Sales Chief highlight difficulties other firms may face.

“From what we can tell, there is some pushback from Chinese suppliers as U.S. companies try to move back home,” Neeley told Reuters. “China does not want to lose any manufacturing.”