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December 7, 2010 1:23 PM

Kraft Sues Starbucks Over $500-Million-a-Year Distribution Deal

Posted by Claire Zillman

Twelve years ago, Starbucks and Kraft entered into an agreement whereby Kraft would distribute Starbucks's packaged coffees to grocery stores and other retailers. Now the coffee giant wants out of the relationship. But the Northfield, Illinois–based food conglomerate doesn't intend to give up without a fight.

On Monday, Kraft sued Starbucks in Manhattan federal district court, seeking a preliminary injunction to block Starbucks from terminating the agreement, reports The Am Law Litigation Daily, a sibling publication.

The tension between the companies has been building for several months: In August, Starbucks offered to buy its grocery store retailing business back from Kraft for $750 million, according to the Kraft complaint. The companies' contract says Starbucks can exit the agreement if it pays Kraft fair market value for the business, plus a premium of at least 35 percent, reports The New York Times. Analysts estimate the fair market value could be more than $1 billion, says the Times.

After Kraft refused the buyback offer in August, Starbucks's lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel sent a letter in October accusing Kraft of materially breaching the parties' sales contract by failing to adequately promote the Starbucks brand, the Lit Daily reports. 

In that same letter Starbucks threatened to terminate the agreement in March 2011 unless Kraft "cured" the purported breaches within 30 days. When Kraft and its lawyers at Morgan Lewis & Bockius pressed Starbucks for more information, the coffee retailer treated the termination as a "fait accompli," according to the complaint. 

According to the NYT, the supermarket sales deal between Kraft and Starbucks started in 1998, with annual sales of $50 million. Sales now equal about $500 million, with Starbucks packaged coffee on the shelves of 40,000 stores in all 50 states. 

Kraft has turned to William Quinn and Michael Kraut at Morgan Lewis & Bockius for this matter. Kraut declined to comment. A spokesperson at Kraft referred the Lit Daily to a company statement that said Morgan Lewis also represents Kraft with JAMS arbitration against Starbucks. 

Starbucks is represented by Aaron Panner at Kellogg, Huber, Hansen, Todd, Evans & Figel, who referred the Lit Daily to a Starbucks statement, which read: "It's unfortunate that Kraft has chosen to attempt this delaying tactic through seeking preliminary injunction, a course that will ultimately prove harmful to customers. Starbucks has repeatedly said that we have terminated our agreement with Kraft and we continue to look forward to assuming full responsibility for the sales and distribution of our packaged coffee products as of March 1, 2011."

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