SEATTLE (CN) - Starbucks mishandled a coffee distribution dispute with Kraft, costing the company billions of dollars when an arbitrator dealt a "crushing blow" awarding Kraft $2.8 billion in damages, shareholders claims in a class action.
Lead plaintiff Mary Davis claims Starbucks' board of directors and executive officers breached their fiduciary duties and "grossly understated the impact of the contract breach in the company's financial filings with the SEC."
Starbucks expanded its distribution agreement with Kraft in 2004, but "caused or permitted the company to blatantly breach the agreement" in 2010, according to the complaint in King County Court.
Kraft subsequently sued Starbucks in Federal Court and pursuant to arbitration. The federal lawsuit was quickly resolved, but the arbitration proceedings "dragged on for years," according to the complaint.
"On November 12, 2013, in a crushing blow which severely harmed the company, the arbitrator found in favor of Kraft and against Starbucks, awarding Kraft damages of nearly $2.8 billion ($2.23 billion in damages for terminating the Agreement, plus $527 million in prejudgment interest and attorneys ' fees). Significantly, this award represented more than the $2.6 billion in cash and cash equivalents defendants had reported on Starbucks' balance sheet on September 29, 2013." (Parentheses in complaint.)
The award "eviscerated" stellar financial results that had been announced less than two weeks earlier and dropped the 2013 profit to "a dismal" penny a share, according to the complaint.
Starbucks Chief Financial Officer Troy Alstead said in a statement: "We are pleased the arbitration has ended; however, we strongly disagree with the arbitrator's conclusion and that Kraft is entitled to $2.23 billion in damages plus $527 million in prejudgment interest and attorneys' fees. We believe Kraft did not deliver on its responsibilities to our brand under the agreement, the performance of the business suffered as a result, and that we had a right to terminate the agreement without payment to Kraft."
Alstead said Starbucks had "adequate liquidity" to pay the $2.8 billion, which would be booked as a charge to 2013 operating expenses.
Director defendants, in addition to Alstead, include former Defense Secretary Robert M. Gates and Facebook COO Sheryl Sandberg.
For the class, Davis seeks $2.8 billion in damages from the officers and directors, and Starbucks bylaws amended to strengthen oversight of operations and greater shareholder input. She also seeks disgorgement of all the defendants' compensation, profits and other benefits for the period at issue.
Davis is represented by Clifford A. Cantor of Sammamish.