Intellectual Property Attorney

$2.75 Billion Award Against Starbucks Highlights Importance Of Exit Strategy In Contracts

As reported by The New York Times, Starbucks Corp. (“Starbucks”) was recently ordered to pay $2.75 billion to Kraft Foods Group (“Kraft”) in an arbitration regarding the termination of a distribution agreement. The award included $2.23 billion in damages and another $527 million in interest and attorneys’ fees.

Since 1998, Kraft had the contractual right to distribute STARBUCKS packaged coffee in grocery stores. In 2011, Starbucks terminated the agreement and transitioned the business to another company. The agreement was scheduled to run through March 2014 and would have automatically renewed for another ten years unless terminated.

In the arbitration, Starbucks contended that it had the right to terminate because Kraft was in breach of contract for failing to properly market its packaged coffee products. Starbucks alleged, for example, that Kraft failed to maintain proper displays inside grocery stores and failed to involve Starbucks in planning conversations with retailers. Cutting against this argument, however, was the fact that Kraft had grown the business from $50 million per year in 1998 to $500 million per year in 2010.

Sales of single-serve coffee pods were beginning to boom in 2010, but the agreement between Starbucks and Kraft limited Starbucks to selling coffee pods that were compatible with the particular coffee maker sold by Kraft (not the popular “Keurig K-cup” system). Starbucks initially offered to repurchase the distribution rights from Kraft for $750 million, an offer that Kraft rejected. Starbucks’ ultimate decision to terminate the agreement with Kraft may have arisen simply from a desire not to be left behind in a booming market. Since terminating, Starbucks has sold more than one billion K-cup packs.

This case highlights the importance of negotiating the “exit” in any license agreement or distribution agreement. It is often said that the most important clause in these agreements is the termination clause. It is the termination clause, after all, which provides the mechanism and procedure by which a party may extract itself from an underperforming license. The termination clause provides the parties with the right to terminate the agreement upon the occurrence of specific circumstances (e.g., changes in technology or market conditions that cause the agreement to be underperforming).

Parties to license and distribution agreements should carefully consider their ability to terminate and make certain that such rights are clearly set forth in their agreements. When in doubt, parties should consult with a knowledgeable licensing attorney who understands the importance of negotiating not just the deal, but also the “exit.”

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