Starbucks 2012 Annual Report Download - page 24

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other European countries. Kraft managed the distribution, marketing, advertising and promotion of these
products.
Kraft denies it has materially breached the Agreement. On November 29, 2010, Starbucks received a notice of
arbitration from Kraft putting the commercial dispute between the parties into binding arbitration pursuant to
the terms of the Agreement. In addition to denying it materially breached the Agreement, Kraft further alleges
that if Starbucks wished to terminate the Agreement it must compensate Kraft as provided in the Agreement in
an amount equal to the fair value of the Agreement, with an additional premium of up to 35% under certain
circumstances.
On December 6, 2010, Kraft commenced a federal court action against Starbucks, entitled Kraft Foods Global,
Inc. v. Starbucks Corporation, in the U.S. District Court for the Southern District of New York (the “District
Court”) seeking injunctive relief to prevent Starbucks from terminating the distribution arrangement until the
parties' dispute is resolved through the arbitration proceeding. On January 28, 2011, the District Court denied
Kraft's request for injunctive relief. Kraft appealed the District Court's decision to the Second Circuit Court of
Appeals. On February 25, 2011, the Second Circuit Court of Appeals affirmed the District Court's decision. As
a result, Starbucks is in full control of our packaged coffee business as of March 1, 2011.
While Starbucks believes we have valid claims of material breach by Kraft under the Agreement that allowed us
to terminate the Agreement and certain other relationships with Kraft without compensation to Kraft, there
exists the possibility of material adverse outcomes to Starbucks in the arbitration or to resolve the matter.
Although Kraft disclosed to the press and in federal court filings a $750 million offer Starbucks made to Kraft
in August 2010 to avoid litigation and ensure a smooth transition of the business, the figure is not a proper basis
upon which to estimate a possible outcome of the arbitration but was based upon facts and circumstances at the
time. Kraft rejected the offer immediately and did not provide a counter-offer, effectively ending the discussions
between the parties with regard to any payment. Moreover, the offer was made prior to our investigation of
Kraft's breaches and without consideration of Kraft's continuing failure to comply with material terms of the
agreements.
On April 2, 2012, Starbucks and Kraft exchanged expert reports regarding alleged damages on their affirmative
claims. Starbucks claimed damages of up to $62.9 million from the loss of sales resulting from Kraft's failure to
use commercially reasonable efforts to market Starbucks®coffee, plus attorney fees. Kraft's expert opined that
the fair market value of the Agreement was $1.9 billion. After applying a 35% premium and 9% interest, Kraft
claimed damages of up to $2.9 billion, plus attorney fees. The arbitration hearing commenced on July 11, 2012
and was completed on August 3. Starbucks presented evidence of material breaches on Kraft's part and sought
nominal damages from Kraft for those breaches. Kraft presented evidence denying it had breached the parties'
Agreement and sought damages of $2.9 billion plus attorney fees. We expect a decision from the Arbitrator in
the first half of fiscal 2013.
At this time, Starbucks believes an unfavorable outcome with respect to the arbitration is not probable, but as
noted above is reasonably possible. As also noted above, Starbucks believes we have valid claims of material
breach by Kraft under the Agreement that allowed us to terminate the Agreement without compensation to
Kraft. In addition, Starbucks believes Kraft's damage estimates are highly inflated and based upon faulty
analysis. As a result, we cannot reasonably estimate the possible loss. Accordingly, no loss contingency has
been recorded for this matter.
Starbucks is party to various other legal proceedings arising in the ordinary course of business, including certain
employment litigation cases that have been certified as class or collective actions, but, except as noted above, is
not currently a party to any legal proceeding that management believes could have a material adverse effect on
our consolidated financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.