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Starbucks Breach of Distribution Agreement Results in $2.7 Billion in Damages

November 22, 2013

Posted in Business Litigation

Case Management ConferenceStarbucks’ deviation from its distribution agreement for its brand of bagged coffee has cost the company $2.7 billion. Starbucks and Kraft Foods entered into an agreement to distribute Starbucks coffee in 1998. However, the Seattle based corporation alleged that Kraft had mismanaged the brand and violated the terms of its agreement.

The contract was set to expire in March 2014, but, Starbucks prematurely ended the deal on March 2011. Kraft’s Parent company, Mondelez International, Inc. rejected Starbucks settlement offer of $750 million. The company chose to arbitrate the dispute instead, claiming that they did not mismanage the brand and that they were entitled to the lost profits they expected to receive from the deal.

The arbitrator decided in favor of Kraft’s lost profits measure of recovery. The arbitrator found that these damages totaled $2.23 billion over the time of the breach until the time that the contract was set to expire. Kraft showed that its sales of Starbucks’ bagged coffee netted the company roughly $500 million each year. The arbitrator also awarded Kraft an additional $527 million in interest and legal fees.

Although Starbucks’ representatives have said that they disagree with the outcome of the arbitration, Starbucks’ officials maintain that the decision to end the agreement was the right decision for the company.

Starbucks’ take on the outcome of the case probably would have been different if the dispute were in a trial court, where appeals are always possible. The arbitration rules of this dispute did not include an option to appeal. Nevertheless, Starbucks claimed that it had enough cash to cover the award.

Distribution Deal Contracts

This story demonstrates an important reminder about how expensive a breach of contract can be when you factor in lost profits.

A party can elect lost profits as the measure of damages in many types of commercial contractual disputes case. However, there are some limitations. Lost profits, a type of consequential damages, must be reasonably ascertainable. This means that the non-breaching party must show that the claimed damages would have been earned if the wrongdoer had not breached their contract. Lost profits can be proven with data from past transactions and does not have to be mathematically perfect. Failure to perfectly ascertain lost profits will not bar recovery in California, so long as the damages can be shown to be reasonably certain.

However, in some cases lost profits may not be an available remedy. Lost profits are generally not available as a measure of damages when a business is new and has little or no history of profits. Because lost profits are so speculative in this situation, other measures of damages are more likely to be used.

Arbitration Clauses in Commercial Disputes

Arbitration clauses are a feature in a large percentage of commercial contracts because of the perceived value that arbitration has in reducing costs and saving time. However, in some situations arbitration can greatly prejudice the rights of a party in terms of hidden costs, inability to appeal, and conflicts with the arbitrator, this is especially true where one party in the arbitration is a regular customer of the arbitration panel.

If you are currently facing the threat of business litigation or arbitration contact the Law Offices of Tony T. Liu at (714) 415-2007.