Starbucks wins Kraft appeal over coffee deal

NEW YORK Fri Feb 25, 2011 5:04pm EST

NEW YORK (Reuters) - The final legal obstacle was removed to Starbucks Corp (SBUX.O) ending its coffee distribution agreement on March 1 with Kraft Foods Inc KFT.N by a U.S. appeals court ruling on Friday.

A three-judge panel of the U.S. Court of Appeals for the 2nd Circuit in New York affirmed a lower court ruling of January 28, denying Kraft's request to stop Starbucks from moving ahead with its plan to use a new partner to distribute packaged coffee to supermarkets in North America and Europe.

The business between the world's largest coffee chain and North America's largest packaged food maker brings in $500 million a year in revenue -- and whether or not Starbucks must pay fair market value to end the deal will be decided in arbitration in the coming months.

"We conclude that Kraft has failed to show that it faces an actual and imminent risk of injury that cannot be compensated by money damages," said the written ruling by the panel, which heard 20 minutes of oral arguments on Friday.

The panel said the U.S. District Court "did not abuse its discretion" by denying Kraft a preliminary injunction. "We have considered Kraft's remaining arguments and find them to be without merit."

Kraft said it would put up a "vigorous defense" of its rights in arbitration.

"The Second Circuit did not rule on the fundamental issue of whether Starbucks can exit our contract without paying the fair market value, plus a premium," Kraft general counsel Marc Firestone said in a statement. "That question will be decided in arbitration."

In January's ruling from the bench, Judge Cathy Seibel in White Plains, New York, had noted that Starbucks could end up owing Kraft "a boatload of money" if an arbitrator decided the coffee chain breached a 1998 agreement with Kraft.

Lawyers for Kraft argued in both courts that it would suffer "irreparable harm" if Starbucks went through with its plan to move distribution to privately held Acosta Inc on March 1.

Starbucks welcomed the appeals panel's affirmation of the lower court's decision.

"With yet another failed attempt by Kraft to use any means to further confuse our mutual customers behind us, we now look forward to the smooth transition of the business to Starbucks on March 1," spokesman Alan Hilowitz said in a statement.

The two companies are in arbitration. Starbucks said Kraft had repeatedly breached the agreement, under which Kraft distributes Starbucks coffee to an estimated 40,000 grocery stores and other retailers in all 50 U.S. states and Canada, as well as in Britain and Europe.

The cases are Kraft Foods Global Inc v Starbucks Corp, U.S. District Court, Southern District of New York, No. 10-09085 and No. 11-389-cv in the U.S. Court of Appeals for the 2nd Circuit in New York.

(Additional reporting by Lisa Baertlein and Martinne Geller; Editing by Bernard Orr and Matthew Lewis)

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