Bellevue Barista’s Antitrust Suit Against Starbucks Heading to Court

Coffee giant's leases may violate antitrust laws.

Federal court documents filed here recount how coffee giant Starbucks “cluster-bombs” neighborhoods, adding ever more stores to compete against each other and drive off the competition. Now, that saturation strategy has itself taken a surprise hit. A federal judge says Eastside coffee shop owner Penny Stafford, who pours the espresso and works her own till, can go to trial next year and attempt to prove that billionaire Chairman Howard Schultz and his 15,000-store empire thwarted her expansion plans.

Stafford has offered plausible evidence that the company’s leasing deals in Seattle and Bellevue high-rises may violate antitrust law, the court concluded. She asserts that Starbucks illegally blocked her from opening competing stores in those buildings, hurting her financially. It’s all part of the saturation strategy, Stafford claims, which includes Starbucks’ intense cannibalizing of its own stores by adding other company outlets nearby, keeping aspiring interlopers like her at bay. She is seeking unspecified damages and a federal injunction to end Starbucks’ exclusive lease deals with major landlords.

In a Nov. 9 order, U.S. District Court Judge John Coughenour didn’t decide the merits of Stafford’s claims but did turn down Starbucks’ motion to have the one-woman action dismissed. The corporation argued that Stafford lacked legal standing and was unharmed by the actions—her three-year-old Belvi Coffee & Tea Exchange continues to operate in another building in Bellevue.

Stafford argued that company documents confirm Starbucks’ “long-term strategy has been to destroy its competition by in-filling downtown Seattle and Bellevue with Starbucks stores and sealing off that market.” Coughenour said that claim and others raise a “genuine issue of material fact” that should be resolved at a trial. That includes whether she was economically injured by Starbucks’ actions and whether the company’s actions were unlawful.

At this stage, it may be a mere tempest in a designer coffee pot, and Starbucks, with its army of lawyers, usually marches over small fry like Stafford. In 2002, for example, the corporation went to court and stopped an Oregon businesswoman from using her own name on her own store—Sam Buck’s—(she also had to pay Starbucks’ legal fees), even though the corporate name is pirated from the first mate in Herman Melville’s novel Moby Dick.

But while Starbucks is again being represented by Perkins Coie, Seattle’s largest law firm, Stafford has signed on with Steve Berman of Seattle, one the country’s top class-action attorneys, whose many other current targets include Honda and Exxon. The contingency deal would give him a big chunk of any winnings, according to a person familiar with the arrangement. (Stafford filed seeking class-action status in 2006, but that effort fell short, it appears, due to a lack of willing plaintiffs. Stafford is now proceeding solo.) She says she and Starbucks have signed an agreement not to discuss the case publicly, and Starbucks did not respond to requests for comment.

Stafford has an uphill battle,thinks Seattle University law professor Jack Kirkwood. “Exclusive dealings with a landlord are not automatically illegal under antitrust law, and the law is designed to protect the consumer, not the business,” he says. “It’s hard to imagine the consumer would be significantly hurt by the exclusion of one coffee shop from one building.”

Still, UW law professor Dwight Drake says, “The oldadage that antitrust protectsthecompetitive process, not individual competitors, often leads many to wrongly conclude that individual competitors have no rights under antitrust,” but that’s not true. “It’s always refreshing to see a case where the little guy is determined to have standing to take on a big player,” he adds.

Ultimately, an agreement may bloom. Since “juries tend to be somewhat hostile to big corporate defenders,” says SU’s Kirkwood, “[the ruling] creates an incentive to settle. A trial usually means more exposure of documents as well.”

Stafford has already collected almost 44,000 pages of Starbucks’ internal papers, and revealed a few of them in court. They include notes taken from what’s described as a company “coaching” session by then-CEO Schultz in 1995, when Starbucks was first devising its plan to open at least one new store daily. Cannibalization was a popular topic, as was sales intensity. At the session, Schultz wondered if Starbucks’ workplace had become too comfortable for employees, noting that the internal culture at retailer Costco (founded by Starbucks board member Jeff Brotman) “is based on fear, a very different model than Starbucks, but we may need to move a little in that direction.”

Schultz and others engineered growth plans that paid off wildly—Starbucks, which blankets the U.S. and 41 foreign countries, is now opening new stores at the average rate of seven a day, or one every 3.4 hours. But earlier this year Schultz sent out a well-publicized e-mail suggesting that Starbucks’ retail culture had perhaps swung too far commercially, and the stamped-out franchises “no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store. Some people even call our stores sterile, cookie cutter….”

Starbucks, which has talked of doubling its current store count to 30,000 eventually, netted $672 million in fiscal 2007 on more than $9 billion in revenue. However, its stock has fallen 35 percent this year as its store traffic is down, indicating cluster-bombing might have run its course. Starbucks opened more than 2,500 new stores this year but has raised its retail prices twice in recent months and, for the first time, begun to advertise on TV.

If Schultz is the cream in the coffee world, Starbucks, in court filings, suggests Stafford is its dregs. They belittle her experience and portray her as something of a barista wanna-be. Noting that the middle-aged Stafford, a former mortgage broker, declared bankruptcy only a few years back, corporate attorneys say she belatedly started her coffee career in 2003 with “a used commercial espresso machine and invited the seller to come to her home to teach her how to use it…[and later] hosted a few tastings for her friends.” She even “conducted this ‘research,'” the attorneys say with a palpable sniff, “while continuing to work” another job.

Stafford contends she was repeatedly told by leasing agents for Class A buildings in Seattle and Bellevue where Starbucks operates that she couldn’t rent available space because, “if any space opened up, Starbucks would get the lease” under an exclusivity agreement. One major U.S. office-property firm told her it has a nationwide arrangement to rent only to Starbucks, she claims.

The coffee chain’s lawyers say Stafford’s beef is with the landlords, not Starbucks, since any injunction wouldn’t necessarily guarantee her prime space in the future. Coughenour partially agreed but said an injunction, if granted by the trial court, would give Stafford and any other competitors in the market “the opportunity to compete,” and that would remedy the harm she allegedly has suffered.

Trial has been tentatively set to begin Nov. 20, 2008.