Starbucks 2006 Annual Report Download - page 69

2007 and 2011. As of October 1, 2006, the Company recorded $3.0 million to “Equity and other investments” and
“Other long-term liabilities” on the consolidated balance sheet for the fair value of the guarantee arrangements.
Coffee brewing and espresso equipment sold to customers through Company-operated and licensed retail stores, as well
as equipment sold to the Company’s licensees for use in retail licensing operations, are under warranty for defects in
materials and workmanship for a period ranging from 12 to 24 months. Effective fiscal 2006, the Company elected to
discontinue repairing brewing machines and instead offer an exchange to customers as a general right of return for any of
its products. As a result, Starbucks maintains a sales return allowance based on historical patterns to reduce related
revenues for estimated future product returns. Prior to fiscal 2006, the Company established an accrual for estimated
warranty costs at the time of sale, also based on historical experience. Product warranty costs and changes to the related
accrual were not significant for the fiscal years ended October 1, 2006 and October 2, 2005.
Legal Proceedings
On June 3, 2004, two then-current employees of the Company filed a lawsuit, entitled Sean Pendlebury and Laurel
Overton v. Starbucks Coffee Company, in the U.S. District Court for the Southern District of Florida claiming the
Company violated requirements of the Fair Labor Standards Act (“FLSA”). The suit alleges that the Company
misclassified its retail store managers as exempt from the overtime provisions of the FLSA, and that each manager
therefore is entitled to overtime compensation for any week in which he or she worked more than 40 hours during the
three years before joining the suit as a plaintiff, and for as long as they remain a manager thereafter. Plaintiffs seek to
represent themselves and all similarly situated U.S. current and former store managers of the Company. Plaintiffs seek
reimbursement for an unspecified amount of unpaid overtime compensation, liquidated damages, attorney’s fees and
costs. Plaintiffs also filed on June 3, 2004 a motion for conditional collective action treatment and court-supervised
notice to additional putative class members under the opt-in procedures in section 16(b) of the FLSA. On January 3,
2005, the district court entered an order authorizing nationwide notice of the lawsuit to all current and former store
managers employed by the Company during the three years before the suit was filed. The Company filed a motion for
summary judgment as to the claims of the named plaintiffs on September 24, 2004. The court denied that motion
because this case was in the early stages of discovery, but the court noted that the Company may resubmit this motion at a
later date. Starbucks believes that the plaintiffs are properly classified as exempt under the federal wage laws. The
Company cannot estimate the possible loss to the Company, if any and believes that a loss in this case is unlikely. Trial is
currently set for August 2007. The Company intends to vigorously defend the lawsuit.
On October 8, 2004, a former hourly employee of the Company filed a lawsuit in San Diego County Superior Court
entitled Jou Chau v. Starbucks Coffee Company. The lawsuit alleges that the Company violated the California Labor Code
by allowing shift supervisors to receive tips. More specifically, the lawsuit alleges that since shift supervisors direct the
work of baristas, they qualify as “agents” of the Company and are therefore excluded from receiving tips under California
Labor Code Section 351, which prohibits employers and their agents from collecting or receiving tips left by patrons for
other employees. The lawsuit further alleges that because the tipping practices violate the Labor Code, they also are unfair
practices under the California Unfair Competition Law. In addition to recovery of an unspecified amount of tips
distributed to shift supervisors, the lawsuit seeks penalties under California Labor Code Section 203 for willful failure to
pay wages due. Plaintiff also seeks attorneys’ fees and costs. On March 30, 2006, the Court issued an order certifying the
case as a class action, with the plaintiff representing a class of all persons employed as baristas in the state of California
since October 8, 2000. The size of the class has yet to be determined. The Company cannot estimate the possible loss to
the Company, if any. The Company believes its practices comply with California law, and the Company intends to
vigorously defend the lawsuit. Trial is currently set for May 2007.
On March 11, 2005, a former employee of the Company filed a lawsuit, entitled James Falcon v. Starbucks Corporation
and Does 1 through 100, in the U.S. District Court for the Southern District of Texas claiming that the Company violated
requirements of the FLSA. Specifically, the plaintiff claims that the Company misclassified its retail assistant store
managers as exempt from the overtime provisions of the FLSA and that each assistant manager therefore is entitled to
overtime compensation for any week in which he or she worked more than 40 hours during the three years before joining
the suit as a plaintiff, and for as long as they remain an assistant manager thereafter. On August 18, 2005, the plaintiff
STARBUCKS CORPORATION, FORM 10-K 65