Kraft Foods Inc escalated its battle with Starbucks Corp , asking a federal court to stop Starbucks from trying to sell its packaged coffee through a different distributor.

Kraft's request, made on Monday, is the latest salvo in a fight over Starbucks' desire to end their 12-year-old partnership selling bags of Starbucks coffee at supermarkets and other retailers.

Kraft, North America's largest packaged food maker, filed a preliminary injunction in U.S. District Court in New York on Monday to stop Starbucks from proceeding as if the agreement has been terminated, when, in fact, the contract is still in force.

Starbucks is proceeding with flagrant indifference to the terms of the contract and customary business practices, Kraft General Counsel Marc Firestone said in a statement.

Shares of both companies were down slightly on Monday afternoon.

It's likely that there won't be any solution in the near term and that this could be in litigation for some time, said Morningstar analyst Erin Swanson. She said the uncertainty did not change her view on Kraft shares, which she rates Hold.

Starbucks called Kraft's move a delaying tactic, saying it risked creating unnecessary confusion for their shared customers and, in turn, consumers.

Starbucks will vigorously oppose any action on Kraft's part that would prevent Starbucks from rightfully assuming full control of our brand and business, the company said in a statement.

Diane Geissler, an analyst with the CLSA arm of Credit Agricole Securities, said a granting of the injunction could help Kraft at the negotiating table.

If they (Starbucks) are enjoined, my guess is they come back to the bargaining table rather than go through the arbitration process, which, who knows how long that could take, Geissler said.

A Kraft spokesman said the injunction timeframe will be set by the court, but that the company anticipates that the process could take several months.


Starbucks said late last month that it wanted to end its relationship with Kraft as the world's largest coffee shop chain seeks to boost sales outside its own stores through having a greater role in the distribution of its packaged goods.

Starbucks has argued that Kraft breached their contract, including not always meeting minimum advertising budgets. [ID:nN29193436] The coffee company says the pact is due to expire in 2014. Kraft says the contract renews automatically for 10-year periods, unless terminated by one of the parties.

The business generates $500 million in annual sales for Kraft and has high profit margins. Kraft pays Starbucks a royalty fee based in part on the performance of the business.

Kraft denies any breach and says that to scuttle the partnership, Starbucks must pay it the fair market value of the business plus a premium of as much as 35 percent.

In its filing on Monday, Kraft said that in August, Starbucks had offered it $750 million -- an amount it said was far less than the business' fair market value and the amount Starbucks would be required to pay Kraft under the terms of their agreement. Kraft said it rejected the offer.

Kraft said arbitration proceedings it initiated last week in the matter are separate from Monday's court action and will continue.

It also said Starbucks accused Kraft of not assisting in its transition plan that includes a new business partner.

We would cooperate in a transition, if there were a valid termination. But that's the point; there hasn't been, Kraft said.

Geissler said losing the Starbucks business could reduce Kraft's annual earnings by a few cents per share, but declined to give specifics, since the terms of the breakup remain unknown, as do Kraft's intended use of any proceeds.

It's a question of, do they pay down debt with it, or do they acquire something else, she said. That also has an impact.

Kraft shares were down 3 cents at $30.29 on the New York Stock Exchange, while Starbucks' shares were flat at $32.72 on the Nasdaq.

(Reporting by Martine Geller. Additional reporting by Martha Graybow; Editing by Dave Zimmerman, Lisa Von Ahn, Richard Chang and Robert MacMillan)