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Originally published July 11, 2012 at 5:05 PM | Page modified July 12, 2012 at 10:00 AM

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Starbucks, Kraft start arbitration in dispute over coffee distribution

The two consumer-products giants have been arguing since 2010, when Starbucks fired Kraft as its distributor of package coffee to grocery stores.

Seattle Times business reporter

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Starbucks and Kraft Foods went into arbitration Wednesday in Chicago, part of a dispute that started when Starbucks fired Kraft in 2010 as distributor of its packaged coffees.

Kraft marketed and distributed the coffee to grocery chains for 12 years, and has said it increased Starbucks' packaged-coffee sales from $50 million to about $500 million annually.

The Seattle-based coffee retailer said Kraft breached a contract by not doing enough to market the coffee. Starbucks now oversees the packaged coffee distribution itself.

Kraft, whose brands include Maxwell House and Sanka, denied the accusation and is demanding compensation, citing a contract provision that says Starbucks will pay Kraft the fair value of their agreement, plus as much as 35 percent in certain circumstances.

Kraft disclosed to the media and in court filings that Starbucks offered it $750 million in 2010 to avoid litigation.

Kraft rejected the offer and did not provide a counteroffer, "effectively ending the discussions between the parties with regard to any payment," according to a Starbucks securities filing.

That offer was made before Starbucks' investigation of Kraft's breaches, the coffee chain said.

Kraft estimates the contract is worth $1.9 billion and wants damages of as much as $2.9 billion, plus attorney fees.

Starbucks says Kraft's estimates are inflated and that Starbucks' own damages due to loss of sales total as much as $62.9 million, plus attorney fees.

Arbitration is to run through July 31, and Starbucks expects a decision in August.

Melissa Allison: 206-464-3312 or On Twitter @AllisonSeattle.

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