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Starbucks Accused of Abusing Monopoly Power in Violation of Sherman Act

Seattle Coffee-House Files Suit Which Could Have Impact Nationally

An independent specialty coffeehouse owner filed a proposed class action lawsuit today against Starbucks Corporation, claiming the company, from its monopoly position in the specialty coffee market, engages in a range of anti-competitive activities aimed at eliminating competition.

Filed in U.S. District Court, the suit alleges that Starbucks has exploited its monopoly power in the specialty coffee retail market to stifle competition through a series of predatory practices including exclusive lease agreements, “cluster bombing” of stores and competitor buy-outs.

Among the allegations leveled in the complaint, Penny Stafford — an independent coffee-shop operator — claims that Starbucks locks out competition through a series of exclusive lease agreements with property managers of Class A high-rises, preventing other specialty coffee shops from operating in the same building.

In this practice, Starbucks frequently offers to make lease payments higher than fair market value in exchange for a property owner’s agreement to prevent competitors from leasing space in the same building, the complaint says.

In the Seattle and Bellevue markets, the majority of Class A space is controlled by a handful of Real Estate Investment Trusts (REITs), making such agreements with Starbucks possible, the suit claims.

“We believe Starbucks has become such a dominating force in the coffee- house segment, it has become a monopolist,” said Steve Berman, managing partner of Hagens Berman Sobol Shapiro and attorney for Stafford. “We intend to show that as a monopolist, Starbucks is abusing their market power to the detriment of its competitors, and to consumers.”

“We contend that Starbucks’ market practices are more about destroying competition than pouring a good cup of coffee,” Berman added.

According to published reports, Starbucks controls 73 percent of the specialty coffeehouse market.

“Fair, even bare-knuckle competition is one thing, but we believe Starbucks has repeatedly crossed the line in denying competition the chance to go toe-to-toe with them,” said Berman.

Stafford, owner of Belvi Coffee and Tea Exchange Inc., tried to enter the specialty coffeehouse business by seeking retail spaces located in Seattle and Bellevue’s Class A high-rise office buildings, but her entry was repeatedly blocked despite consumer demand in these locations, the suit claims.

Berman says the lease agreement tactic is just one of a myriad of anti- competitive steps Starbucks uses to avoid fair competition.

According to the complaint, Starbucks also participated in predatory actions when Stafford was finally able to obtain Class A retail space in May 2005.

“Once I found a way into a Class A building, it was obvious to me that Starbucks decided I had to go,” said Stafford. “The nearest Starbucks was around the corner, but they continually sent employees loaded with free drink samples to stand in front of my shop, drawing away customers.”

Starbucks’ campaign lasted for months, and eventually led to the store’s closing, according to Stafford.

The complaint cites a number of other predatory tactics used by Starbucks, including reports in which Starbucks offers to buy out competitors at below- market prices, and threatens to open stores nearby if the offer is rejected.

The complaint also cites instances in which Starbucks uses its huge financial power to purchase other independent providers in an effort to squash any presence of independent coffee purveyors.

For example in 2003 Starbucks purchased Seattle Coffee Company acquiring Seattle’s Best Coffee and Torrefazione Italia for $72 million, which boasted 22 Seattle’s Best Coffee and five Torrefazione Italia stores in the greater Seattle area.

Starbucks then closed all the Torrefazione stores, and more than half of the SBC stores.

“It is clear to us that Starbucks’ game plan is to completely dominate a market by forcing out competition, something they’ve done quite well in the Seattle area,” Berman added. “We also believe that this scorched-earth approach is happening in many other major markets across the U.S.”

The suit is asking the court to end what it claims are anti-competitive activities and seeks to represent coffee shop owners who seek to occupy retail space in commercial office buildings in Seattle or Bellevue.

According to Berman, he has heard from other coffeehouse owners across the country who are experiencing the same treatment, and could expand the suit to include them sometime in the near future.

Starbucks currently sells approximately four million coffee drinks daily in the U.S. alone. With more than 1,200 stores expected to open this year, the company continues to grow into a global empire. Its long-term goal is to have over 15,000 U.S. stores and 30,000 stores worldwide.

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