Weight Watchers' Food Fight

Food fights are always messy, but this one could be the king of them all. Yesterday, Coolbrands International, a Canadian dessert maker publicly traded on the Toronto stock exchange, sued Weight Watchers (NYSE: WTW  ) and Iowa-based Wells' Dairy, claiming the diet center unlawfully terminated an exclusive licensing deal. The suit asks for $360 million in damages.

Coolbrands sells a variety of desserts, including Smart Ones ice cream bars and Eskimo Pies. (Cue Homer Simpson voice: Mmmmm, ice cream.) Since 1995, when Weight Watchers was still a unit of ketchup maker H.J. Heinz (NYSE: HNZ  ) , Eskimo Pies have worn the Weight Watchers name. When Coolbrands acquired Eskimo, Inc., in 2000, it inherited the licensing agreement.

But it's the exclusive nature of the deal that is the proverbial cherry atop this ice-creamy brouhaha. Coolbrands' contract with Weight Watchers was due to expire next month, but a new deal couldn't be reached. Apparently not wanting to be without a partner to share dessert, Weight Watchers struck a deal with Wells' Dairy and then filed suit last week against Coolbrands, claiming a so-called "anticipatory breach" of its contract. Frankly, I have no idea what that means, but it's probably enough to say that Weight Watchers wanted out of the Coolbrands deal and petitioned to be free of it. Naturally, the dessert maker responded by flinging the legal equivalent of a bucket of chocolate sauce, claiming Weight Watchers' contract with Wells breaks the pledge of exclusivity it made.

I'm no lawyer, so I can't say which side is correct, but Coolbrands may have a case. After all, Weight Watchers agreed not to license its brand to another dessert maker till after the current agreement expires. But it did anyway. It also has given Coolbrands no other option except to fight. The dessert maker says more than a third of its earnings come from Weight Watchers-branded products.

The bottom line here is that Weight Watchers has opened itself up to legal action when it needs cash to pay down debt and fund growth. Maybe management had no choice, but litigation is almost never a winning business strategy. I just don't believe there wasn't a better way to do this, and I can't see myself committing investment dollars till the suit is resolved. For now, I'm still waiting for Weight Watchers.

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Fool contributor Tim Beyers loves ice cream, but it's his wife who really digs the Smart Ones ice cream bars. Tim owns none of the stocks mentioned in this story, and you can view his Fool profile here.

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