Starbucks-Kraft coffee battle heats up in court

When corporate partnerships implode, it's usually ugly. But a dispute over ground coffee promises to be particularly bitter.

Starbucks Corp. and Kraft Foods Global Inc. have been snarling at each other since last month, when Starbucks announced that it was terminating the long-standing deal that has Kraft distributing its whole-bean and ground coffee in the U.S., Canada and the EU.

Starbucks complained -- in court documents and public statements -- that although coffee sales have boomed globally, Kraft?s sales of its coffee at grocery stores and other retail outlets have been less than stellar. Now the coffee giant plans to go off on its own.

So last month, Starbucks declared the agreement dead and announced that it would take over the sales and distribution of its packaged coffee as of March 1. It also has reportedly said it will pair up with privately held Acosta Inc. for future retail distribution.

Kraft, though, is fighting back. The world?s largest food manufacturer filed a preliminary injunction motion this month with the U.S. District Court for the Southern District of New York and is challenging the legality of Starbucks' ending the contract.

If Starbucks wants to get out of the contract, Kraft argued, the company needs to buy its way out -- and pay a premium for that right.

According to Kraft, the business draws an estimated $500 million in annual revenue. Analysts say the distribution deal's value is much higher.

Lately, the food fight has been heating up as both sides make their arguments in court filings and public statements. Starbucks said its chunk of the premium-coffee segment at grocers and food retailers has steadily dropped since 2004. (Starbucks also dismissed the preliminary injunction filing as a "delaying tactic" and a "self-serving and blatantly disruptive action.")

Kraft claims that Starbucks? 2010 sales are up 8% over last year. The two companies are in arbitration over the issue.

A federal judge said Thursday that Starbucks and Kraft need to submit their briefings and rebuttals to the court over whether "irreparable harm" would be caused by terminating this contract by Jan. 21.

Starbucks, which has said it will stop supplying coffee to Kraft on Jan. 29, says that terminating the contract wouldn't cause harm and that Kraft's arguments are without merit. Kraft counters that having the coffee supply cut off would result in lost sales for its grocery store customers and other retailers.

If a preliminary injunction is going to be held, Judge Cathy Seibel scheduled it to begin Jan. 27.

So what does this mean for the coffee-drinking, latte-loving consumer? So far, that?s unclear -- though the legal fight should make for quite a bit of food-related buzz in the coming months.

-- P.J. Huffstutter

Photo: Starbucks cups. Credit: Stephen Chernin / Getty Images