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Kraft claims ending Starbucks deal would cause ‘irreparable harm’

By Caroline Scott-Thomas , 19-Jan-2011

Starbucks has filed for early termination of its coffee distribution agreement with Kraft Foods – but Kraft has said that ending the deal early would cause it “irreparable harm”.

Kraft said the distribution agreement provides it with about $500m a year in revenues, and has asked a federal court in White Plains, New York to reject Starbucks’ request to end the deal on March 1, 2011.

However, Starbucks said in a reply that Kraft had breached its contract, causing losses of about $100 million in potential sales.

Kraft has been distributing Starbucks packaged coffee to retail outlets since 1998, but Starbucks said it told Kraft in early October that it intended to end the distribution agreement. Kraft has objected, claiming that the contract remains in effect indefinitely – unless there is sufficient time for Kraft to execute an orderly transition, and compensation is paid to Kraft for the business, plus a premium in certain circumstances.

The two companies have been publically sparring since then.

Kraft initiated arbitration proceedings at the end of November, and in early December said it was seeking a court injunction to prevent Starbucks from ending the agreement.

Kraft claimed that Starbucks made an offer of $750m for the business in August 2010 to buy Kraft out of the agreement, but Kraft rejected the offer as inadequate. Starbucks then sent a letter alleging breach of contract in October, Kraft said, a claim that Kraft denies.

The Starbucks CPG Products business has grown from about $50m a year in 1998 to $500m in 2010, Kraft said in court papers.

Kraft has also alleged in the documents that Starbucks continually praised it for its handling of the coffee business.

"Starbucks denies that it has repeatedly praised Kraft for the quality and effectiveness of its performance under the agreement," the coffee giant said in response to Kraft’s court filing.

It said: “The distribution relationship between Starbucks and Kraft is ending because Kraft’s performance as a distributor of Starbucks products has been unacceptably poor — falling below the standard of commercially reasonable efforts that the parties’ agreement requires.”

The case is Kraft Foods Global Inc. v. Starbucks Corp., 10- cv-09085, U.S. District Court, Southern District of New York (White Plains).

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