When the coffee brewer drips, it pours.
Green Mountain is suing a unit of Treehouse Foods (NYSE: THS ) for making unauthorized portion packs that fit in its Keurig single-cup brewers. Reports have Treehouse's knockoffs selling for 20% below its own sanctioned K-Cups in some Wal-Mart (NYSE: WMT ) stores.
Both sides are about to enter into legal fisticuffs -- and they each actually have a pretty sound defense.
Green Mountain has patents protecting its K-Cups that are good for at least a couple of more years, and the company is battling to have the protection of its intellectual property extended. If a coffee maker wants to sell their grounded beans in the fast-growing Keurig-ready cups, they have to either pay Green Mountain a few pennies per K-Cup or sell Green Mountain the coffee itself.
There is heft and value to these consumer innovations. Polaroid would have been in trouble if everyone was selling self-developing film. Console makers in the video game industry often subsidize the hardware, because no software developer can crank out an Xbox, PS3, or Wii game without paying the respective console maker.
On the other side of the ring, Treehouse is no renegade. It generates a decent living making private-label products of popular brand items for supermarkets and department stores. It wouldn't be stupid enough to enter this niche -- and Wal-Mart wouldn't be dumb enough to be stocking these products -- if it was an obvious case of trampling over Green Mountain's patents.
There's plenty at stake here. Peet's (Nasdaq: PEET ) tried to buy Diedrich Coffee last year to gain a foothold in the K-Cup space. Starbucks (Nasdaq: SBUX ) has stayed away, despite the growing base of Keurig owners. If anyone can make Keurig-compatible refills, price wars and consistency concerns will dent this space as everyone dives in. At the very least, it will force Green Mountain into reconsidering its "razor and blades" strategy of selling the brewers at cost and making it up on the java refills.
Will Green Mountain be acquired before the investigation and patent lawsuit clears? Share your thoughts in the comment box below.