Analysis: Judge unlikely to delay Kraft, Starbucks breakup

NEW YORK (Reuters) - Kraft Foods Inc (KFT.N) CEO Irene Rosenfeld will have a hard time convincing a judge to stop Starbucks Corp (SBUX.O) CEO Howard Schultz from taking his packaged coffee business to a new distribution partner.

North America's top packaged food maker, would have to demonstrate it would suffer irreparable harm if Starbucks goes ahead with its plan to use privately held Acosta Inc to sell bagged Starbucks coffee in supermarkets and other stores from March 1.

Kraft sought an injunction in U.S. District Court in New York on December 6 to keep the status quo of the contract -- under which Kraft distributes Starbucks coffee in the United States, Canada, Britain and other countries -- while they hammer out a deal in a separate arbitration proceeding in Chicago.

Steve Calandrillo, a professor at the University of Washington School of Law in Seattle, said courts are usually "very reluctant" to grant such injunctions "because they're worried about getting involved in baby-sitting a soured relationship."

U.S. District Judge Cathy Seibel in White Plains, New York, could rule within days or weeks.

Regardless of the ruling, legal experts say the partners of 12 years each stand to be hurt by the battle over a grocery coffee business with sales of $500 million a year and robust profit margins.

Kraft's reputation could be tarnished by Starbucks' myriad accusations it breached their contract, experts say. And Starbucks, which also risks damage to its brand, may experience a greater financial impact from a loss than Kraft because Starbucks is much smaller.

Kraft told Seibel the denial of an injunction would cause it injuries beyond money damages, such as "customer confusion, loss of good will, diminished business reputation and a loss of bargained-for business opportunity for which there is no monetary compensation."

For example, Kraft said it could lose shelf space at stores since it would have no alternative premium coffee to offer.

Starbucks also claims it could lose valuable supermarket shelf space if the injunction is granted.

MOVING ON

If the injunction is denied, Starbucks would get greater control and a bigger share of revenue and profit from the grocery business, starting in the current quarter, said UBS analyst David Palmer.

Starbucks CEO Schultz announced his plan to split with Kraft in November. The world's biggest coffee chain has since criticized Kraft for its purported neglect and mismanagement of the business, which it says amounts to a breach of contract.

Legal experts said Schultz and Starbucks also faced an uphill battle convincing arbitrators of Kraft's alleged material breach. A victory in that claim would reduce or eliminate damages Starbucks would have to pay Kraft to exit.

Starbucks charged that Kraft's missteps caused its market share in the premium coffee segment of the grocery channel to fall to just over one-quarter in 2009 from nearly one-third in 2005. It said this resulted in $100 million less in grocery coffee sales in 2010.

In court records, Kraft countered the business was posting record revenue in 2010.

Starbucks argues it gave Kraft ample warning of its plans to end their partnership and the food maker is now standing in the way of an orderly transition.

Anthony Sabino, a law professor at St. John's University in New York, called this "a heavyweight battle."

"Mr. Schultz better take a look across the ring because over there is Irene Rosenfeld, the mastermind behind the Kraft/Cadbury merger," where "she faced much stiffer opposition," Sabino said. "By that I mean basically the entire population of the British Isle saying 'you Yanks keep your hands off our beloved Cadbury.' And she prevailed."

Without seeing the contract, Sabino thought Kraft had a good shot at getting the injunction.

SHOW ME THE MONEY

Kraft has already rejected a settlement with Starbucks of $750 million, according to court papers, claiming the fair market value of the business was "far greater" than that.

Kraft's stance is likely "a combination of, they want more and they think it is worth more, and they think Starbucks has more. Those are usually the three considerations," said Robyn Crowther, a trial lawyer with Caldwell Leslie & Proctor in Los Angeles, who is not involved in the dispute.

These types of business disputes usually settle, Calandrillo and other legal experts said.

Aside from the damages Starbucks may have to pay, which analysts estimate could be up to $1.5 billion, Standard & Poor's equity analyst Tom Graves said Starbucks may be hurt more.

"In addition to the financial issue, I see the overall situation being more material to Starbucks, in part because Starbucks is a smaller company than Kraft and because it involves distribution of products bearing their brand," Graves said.

But he also sees a risk to Kraft's reputation.

"If Starbucks was able to conclusively prove that Kraft did a poor job handling the distribution arrangement, that potentially could discourage other parties from going into distribution arrangements with Kraft," he said.

The judge requested all briefs by January 21 and has scheduled a tentative hearing for January 27 in case she decides to invite the parties to provide more evidence.

The judge could make her ruling based purely on the court papers before then.

The case is Kraft Foods Global Inc v. Starbucks Corp, U.S. District Court for the Southern District of New York No. 10-09085.

(Additional reporting by Lisa Baertlein in Los Angeles; editing by Andre Grenon)