Dec. 22, 2010
Manufacturer-Distributor Agreements Call for Precise Language
Specifics are crucial in making agreements with companies
Q: Earlier this month, Kraft Foods Inc. sued Starbucks Corp. for a preliminary injunction to stop Starbucks from ending its longtime arrangement with Kraft for distributing Starbucks packaged coffee products in grocery stores. Kraft complains that if this distribution arrangement is ended then it should receive compensation, which some sources estimate could be as much as $1.5 billion. How can a manufacturer and a distributor protect themselves from these types of disputes when entering into a product distribution agreement?
A: The best protection is a written contract that spells out the expectations and responsibilities of each company. The written contract also should include details about how long their distribution arrangement is supposed to last and what happens if either company wants to terminate the arrangement. Kraft and Starbucks appear to have had a written distributorship agreement with a termination provision, but that provision and other key parts of the agreement may have been too vague. Kraft claims that Starbucks was required to give notice of termination with “sufficient time” to “execute an orderly transition” and to pay Kraft “the fair market value of the business” plus a “premium of 35 percent of that value.” A termination provision should have simple, direct language about how much advance notice must be given before ending the relationship and how any compensation for early termination will be calculated.
Q: Kraft and Starbucks have described their distribution arrangement as a “strategic partnership.”How can business partners just walk away from such a relationship?
A: For promotional and emotional purposes, businesses like to describe their distributorship arrangements as "strategic partnerships," but businesses rarely want to form a true legal partnership, which carries with it many more duties and responsibilities than a normal contractual arrangement. Even if the manufacturer and distributor have no written agreement, or if the written agreement in place is too vague, it's not too late to formalize the arrangement in writing. In some respects it is advantageous to draw up or revise the written agreement later, because the two companies usually end up conducting business differently than what was initially anticipated.
Q: Could this case set a precedent for similar cases in the future?
A: The underlying facts can vary greatly in business arrangements, so this case is not likely to establish a significant legal precedent. The Kraft/Starbucks distributorship arrangement has lasted 13 years, which is a lengthy period in today's commercial environment and which indicates the arrangement had been very advantageous to both companies, at least in the past. The fact that this sort of conflict can develop in even the most successful relationships illustrates the importance of having a clear termination provision in a written distributorship agreement.