Kraft Seeks Injunction Against Starbucks

NORTHFIELD, Ill. ( TheStreet) -- Kraft Foods ( KFT) is seeking a preliminary injunction against Starbucks ( SBUX) for breaking a coffee-distribution agreement the pair inked years ago.

Kraft said Monday it is seeking a preliminary injunction in the U.S. District Court for the Southern District of New York against Starbucks.

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Kraft said "Starbucks is attempting to unilaterally end the strategic partnership that provides Kraft with the exclusive rights for the sales, marketing and distribution of Starbucks roast and ground coffee in grocery and other retail outlets."

In seeking an injunction, Kraft wants Starbucks to stop moving ahead with business operations as if the agreement had already been terminated. Kraft argued "the contract is still in force."

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Last month Kraft started an arbitration proceeding, challenging Starbucks' decision to terminate their 12-year supermarket distribution partnership.

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"Starbucks is proceeding with flagrant indifference to the terms of the contract and customary business practices," said Marc Firestone, Kraft's executive vice president, corporate and legal affairs and general counsel. "Instead of executing its rights under the contract to buy back the business, Starbucks has chosen a remarkably aggressive strategy that publicly disparages our achievements, interferes with our customer relations and threatens to harm Kraft."

In response to Kraft's statement, Starbucks said Monday it "believes that 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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"We have both the capabilities and experience to make this a seamless transition for our customers. Kraft's self-serving and blatantly disruptive actions risk creating unnecessary confusion for our shared customers, and in turn their consumers. Starbucks will vigorously oppose any action on Kraft's part that would prevent Starbucks from rightfully assuming full control of our brand and business, and look forward to presenting our case through the pending arbitration process," Starbucks' statement concluded.

Kraft reiterated Monday its contract with Starbucks renews automatically for successive 10-year periods, with no expiration date. Under the agreement Starbucks could take control of the business "to pursue a different arrangement."

"The extreme nature of Starbucks actions supports our seeking an injunction," said Firestone. "Starbucks has essentially ignored our attempts to get them to honor the contract terms and is demonstrating indifference to the potential harm to Kraft. Our logical next step is therefore to go to court to protect the interests of Kraft and its shareholders."

Starbucks has said it did want to end the agreement, and claimed that Kraft mismanaged store displays and marketing and failed to take measures to "address the erosion of Starbucks market share." Starbucks' claims were found in an Oct. 5 letter from Starbucks' attorney Aaron Panner to Deanie Elsner, president of North American beverages at Kraft.

Unless Kraft fixed the breaches within 30 days, the letter said, their deal -- in which Kraft sells Starbucks and Seattle's Best bagged coffees at grocery stores and other retail chains -- would end next March.

Starbucks, in another letter, dated Nov. 5, released hours after its stellar quarterly earnings report, said Kraft "made no effort" to cure the breaches and so the deal would end.

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Kraft, on Nov. 29, fought back, maintaining that the contract remains in effect indefinitely, subject to "certain limitations and protections," and that Starbucks can't just walk away from their deal.

"Starbucks unilaterally and unjustifiably declared in public statements the agreement's termination, needlessly risking confusion among customers about the agreement's status," said Firestone on Nov. 29.

Under the protections of the indefinite agreement, Kraft needs to be given sufficient adjustment period to deal with the end of their partnership and must be compensated with the fair market value of the Starbucks business partnership, plus, possibly, a premium of up to 35% of that value, Kraft said.

"Frankly, after a successful 12-year partnership, it's difficult to understand Starbucks overt hostility and sudden change of view toward Kraft's performance," said Firestone. "Their latest allegation is that Kraft is not assisting in the 'transition plan' that they launched on their own. Of course, we would cooperate in a transition, if there were a valid termination. But that's the point, there hasn't been. For them to complain about this makes no sense."

Kraft argued that it helped Starbucks build its retail grocery coffee business significantly over the years, from $50 million in annual revenues in 1998, when their partnership was formed, to $500 million today.

This argument was repeated in Monday's statement, adding that year-to-date revenue for coffee in the U.S. grew 8% on volume and market share growth. Kraft added that Starbucks, most recently in April of this year, commended the role Kraft played "in building a 'highly profitable' CPG business, citing Kraft's 'world-class' capabilities in manufacturing, research and development, marketing and distribution."

"In effect, Starbucks is trying to walk away from a 12-year strategic partnership, from which it has greatly benefited, without abiding by contractual conditions. Kraft reasonably expected Starbucks to honor the contract," Firestone declared.

-- Written by Miriam Marcus Reimer in New York.

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