August 4, 2011 / 9:01 PM / 8 years ago

AriZona Iced Tea partnership ending in legal feud

NEW YORK (Reuters) - Before they co-founded one of the most popular iced-tea brands in the country, John Ferolito and Domenick Vultaggio were just two guys from Brooklyn selling beer out of the back of a Volkswagen bus.

That was in the early 1970s. In 1992, they capitalized on the burgeoning ready-to-drink tea trend with their own line, AriZona Iced Tea, which they sold in distinctive 24-ounce cans for 99 cents.

Today, after years of rapid growth, AriZona is “clearly the biggest successful beverage brand that is still independently owned,” according to John Sicher, editor and publisher of the trade paper Beverage Digest.

In 2010, the company claimed a 33.9 percent share of the ready-to-drink tea market, edging out competition from PepsiCo’s PEP.N Lipton, Coca-Cola’s (KO.N) Nestea and even Dr Pepper Snapple Group’s DPS.N Snapple, according to Beverage Digest.

But the profitable partnership between Ferolito and Vultaggio long ago turned into a messy and hostile legal battle, as the two have repeatedly butted heads.

First, it was over management styles. Then it was over Ferolito’s attempts to strike a multibillion-dollar deal for his half of the company, which pulls in nearly $1 billion annually and employs around 1,000 people, according to court documents.

The dirty laundry from their long-running clash may soon get a public airing, if the latest case between the two men goes to trial as expected later this year or in early 2012, in state Supreme Court in Nassau County, New York.

(The parties are involved in separate litigation in New York county, regarding Vultaggio’s election to buy out Ferolito’s stake in the company.)

The partners are currently awaiting a ruling from Justice Timothy Driscoll over how much of the context of their past relationship can be admitted into the trial, which concerns claims by Vultaggio and Beverage Marketing USA Inc, the family of companies that produce and sell AriZona, that Ferolito breached his agreement to co-finance the company.

EARLY YEARS

In the beginning, Ferolito managed the company’s financial affairs and Vultaggio ran warehouse operations. But in the mid-1990s, Vultaggio decided to move into the front office to better learn the business side of the company.

Their attempts to share an office turned into “a variety of disputes” over matters large and small, according to Ferolito’s court filings. By 1997, they had come to the realization that there could only be “one captain” to steer the ship. Ferolito ceded day-to-day control over the company to Vultaggio and stepped back to pursue other business and leisure interests.

That arrangement kept the peace until 2007, when Ferolito started to explore a sale of his shares in the company to Tata Global Beverages Ltd (TAGL.NS), the world’s second-largest tea manufacturer and distributor.

Tata had valued Ferolito’s half of the company at $2.25 billion, and he said a sale to a major company could help AriZona unlock new global markets and expansion opportunities.

Vultaggio said he was amenable to the talks, until “rumblings” reached him that Ferolito intended to bolster his sale price by selling management rights as well — something Vultaggio considered his under the “one captain” agreement.

After that the gloves came off, both parties contend. Vultaggio and BMU said in court documents that Ferolito attempted to wage “major war” that would aggravate Vultaggio into agreeing to the Tata sale. Vultaggio also accused Ferolito of withholding loans to the company, in violation of a 1992 agreement.

Meanwhile, Ferolito said he had discovered examples of “wrongdoing, self-dealing and improper behavior” on Vultaggio’s part that justified the withholding of the loans. (Ferolito also denies the 1992 agreement is enforceable.)

“CAN OF WORMS”

Ferolito alleged a gamut of “criminal and civil misconduct” by Vultaggio and his associates, including “secretly” putting his sons and other associates on the company payroll, using company funds to buy his wife and others extravagant gifts, and calling Ferolito “evil” at a prayer meeting hosted on company grounds.

“Mr. Vultaggio has now opened a can of worms he surely did not want opened,” said Nicholas Gravante, an attorney with Boies Schiller & Flexner who represents Ferolito.

In a court brief, Vultaggio and BMU’s attorneys called the allegations an attempt to “hijack” the case and turn it into a “confused jumble of mini-trials” over “salacious” and “unsupported” accusations.

“There is an ample record being developed that has all the refutations,” said Louis Solomon, an attorney with Cadwalader Wickersham & Taft who is representing Vultaggio and BMU.

Meanwhile, the vitriol between the co-founders continues unabated. At a hearing last week, attorneys for both Ferolito and Vultaggio asked the court whether they could introduce their respective client’s version of a tense confrontation that occurred at Ferolito’s Florida home in 2007.

Vultaggio alleged that Ferolito made threats that “things were going to change,” including Ferolito’s decision to no longer help finance the company.

Ferolito said he never threatened his partner, but instead told him to “stop running this like it’s a local deli, committing petty crimes. We are a billion-dollar business,” according to a transcript from the hearing.

The parties are due back in court on September 8.

(The case is JMF Consulting Groups II Inc. v. Beverage Marketing USA Inc., in the Supreme Court of the State of New York, Nassau County, no. 011005/2008)

Editing by Ted Kerr

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