NEW YORK -- The U.S. Court of Appeals for the Second Circuit on Friday upheld a ruling that allows for Starbucks Corp. to begin distribution of its branded packaged coffee next month, a business previously operated by Kraft Foods Inc., reported Dow Jones. The ruling comes as the two consumer-products giants are on the verge of ending their 12-year partnership, where Kraft distributed Starbucks bagged coffee to supermarkets and other retailers. Starbucks will take over the business beginning Tuesday.
Kraft was appealing an earlier ruling from the U.S. District Court for [image-nocss] the Southern District of New York, which denied its request for a preliminary injunction to block Starbucks from taking over distribution of Starbucks coffee. The injunction would have stopped Starbucks from unilaterally ending its strategic partnership with Kraft before a mandatory arbitration proceeding decides the core issues in this dispute, Kraft said in a statement.
"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," a three-judge panel affirmed Friday. "We therefore hold that the district court did not abuse its discretion by denying the preliminary injunction."
In an appeals hearing earlier Friday, William Quinn, an attorney representing Kraft, argued that Kraft would suffer "irreparable harm" if its distribution deal with Starbucks ended next week. He said the company would lose the "advantageous relationships" it has cultivated with its customers, which is "harm that can't be quantifiable."
Kraft has argued it needs months of lead time to formulate a strategy to find a new premium brand to sell. Starbucks, which publicly disclosed it wanted out of the deal in November, has said Kraft violated several provisions of the pact, like properly stocking shelves with its coffee, which allows it to end the deal.
Kraft, meanwhile, argued that none of the violations is a material breach that would allow Starbucks to end the agreement without paying a breakup fee that some analysts estimate could top $1 billion.
The question over whether Starbucks must pay a breakup fee will be heard in arbitration court, and is separate from the preliminary injunction, the report said.
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Alan Hilowitz, a spokesperson for Starbucks, said in a statement obtained by Dow Jones that Starbucks looks forward "to demonstrate through the arbitration process Kraft's multiple breaches of our agreement and the harm it did to our business and our customers' business."
After the ruling, Marc Firestone, Kraft's executive vice president of corporate and legal affairs and general counsel, said: "While disappointed in the outcome, we respect the U.S. Court of Appeals' decision."
He added, "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. That question will be decided in arbitration. Having now seen Starbucks inability to substantiate its claims of material breach, we certainly intend to press our case aggressively and look forward to a favorable decision.
"We also expect to prevail in the marketplace, given the strength of our $5 billion global coffee business. Kraft is committed to competing in all coffee segments, including premium and on-demand. Our future plans are as robust as our coffee products, and we look forward to sharing them at the appropriate time."
Hilowitz said that Starbucks is "pleased that the Court of Appeals has confirmed the District Court's ruling, which made clear Kraft's failure to demonstrate any need for a preliminary injunction. 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."
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Seattle-based Starbucks Corp. is a leading roaster and retailer of specialty coffees. In addition to its Starbucks retail stores, the company produces a variety of branded consumer products globally, including ready-to-drink beverages, packaged coffees and premium ice creams. The company's brand portfolio features Starbucks Coffee, Tazo Tea, Seattle's Best Coffee and Torrefazione Italia Coffee.
Northfield, Ill.-based Kraft Foods is a global snacks company with a portfolio of brands including Cadbury, Jacobs, Kraft, LU, Maxwell House, Milka, Nabisco, Oreo, Oscar Mayer, Philadelphia and Trident, among many others.
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