CoolBrands hit by lawsuit from U.S.

Still, when trading resumed moments later, the stock fell off a cliff, closing down 29 per cent in heavy volume.

The Globe and Mail
August 6, 2004

CoolBrands hit by lawsuit from U.S. firm
Richard Bloom

Weight Watchers International Inc. has slapped CoolBrands International Inc. with a lawsuit, alleging "anticipatory breach" by the Canadian frozen treats maker of a licensing agreement and asking a New York court to immediately scrap the pact.

Last week, CoolBrands' stock went into a downward spiral after the company announced that a $113-million-a-year contract with Weight Watchers that will account for a third of its profit this year had not been renewed.

Weight Watchers alleges that CoolBrands intends to stockpile the affected products before the contract expires on Sept. 28 and then aggressively market them for the next year.

None of the allegations have been proved in court and CoolBrands chief executive officer David Stein said in an interview that the company plans to "vigorously contest" the action.

CoolBrands, based in Markham, Ont., has said it has the right to sell the popular Weight Watchers Smart Ones products for a full year after Sept. 28 under terms of the agreement.

Weight Watchers argues in the lawsuit filed with the Supreme Court of the State of New York on Aug. 3 that the licence allows CoolBrands to only sell off its remaining inventory.

"Despite these limitations in the master licence agreement (MLA), CoolBrands has publicly announced its intention to breach the MLA by continuing to manufacture, promote, market and sell Weight Watchers branded ice cream products until Sept. 28, 2005, as if the MLA will not expire and as if the MLA did not impose limitations on its right to sell off inventory during that period of time," the lawsuit claims.

It alleges that CoolBrands' Mr. Stein has told Weight Watchers that his company "intends to abuse its selloff right under the MLA by stockpiling excess inventory and components prior to Sept. 28," thereby constituting "anticipatory breach" of the contract.

It also alleges that Mr. Stein sent an e-mail to retailers on July 30 promising 2005 will be "the best year ever for the [Smart Ones] brand" and setting out the company's intention to pump up its marketing campaign for the products. That, Weight Watchers claims, is a "flagrant disregard of the terms of the MLA."

After scrapping its pact with CoolBrands last week, Weight Watchers immediately announced that it had signed a contract with Iowa's Wells Dairy Inc. to make its ice cream products.

In the lawsuit, Weight Watchers alleges that by stockpiling, CoolBrands will cause "substantial injury" to both Weight Watchers and Wells as both companies will be selling different products under the same banner.

"As Stein has told Weight Watchers, he expects a 'destructive year' for Weight Watchers branded ice cream products to ensue … to take and to cause its subsidiaries to take such actions, constitute tortious conduct under the laws of the State of New York, for which Weight Watchers is entitled to recover compensatory and punitive damages."

It later claims that "unless CoolBrands is restrained from proceeding with its plan, serious and substantial commercial injury will result to both Wells and Weight Watchers."

In turn, Weight Watchers is asking the court to nullify the licensing agreement — a move that would force CoolBrands to stop selling its products immediately. It is also seeking financial compensation "to be determined at trial."

Mr. Stein disagrees with the claims, saying "we think the agreement is pretty clear" and that the company plans to defend itself. He would not comment further.

A spokeswoman for Weight Watchers said her company does not comment on litigation before the courts.

On the Toronto Stock Exchange yesterday, CoolBrands shares closed down 25 cents to $10.35 on the news, bouncing off a 14-month low of $9.75 shortly after the opening bell.

In addition to its best-selling Smart Ones line of products, CoolBrands is also the parent of the Eskimo Pie, Atkins, Skinny Cow, Chipwich and Yogen Fruz brands.

The company is the world's largest maker of low-fat ice cream products and the No. 3 maker of ice cream globally.

The lawsuit follows a tumultuous few days for CoolBrands and its stockholders last week.

On July 28, it announced that its licensing pact with Weight Watchers had not been renewed. Its stock initially plunged more than 40 per cent on the TSX only to be halted shortly after the closing bell by Market Regulation Services Inc.

The regulator then took the unusual step of cancelling every trade in the company's stock after 3:24 p.m., pointing to the company's "improper dissemination of the news."

The next day, Mr. Stein held an early morning conference call with reporters and analysts, saying it will bounce back from the contract loss and that even though it doesn't have the right to the Smart Ones name, the company has the right and every intention to make and market all of its products in the same formulation after the licensing agreement ends. "Simply put, we are staying in this business," Mr. Stein said.

He said it is "likely" that a new brand will be licensed, hinting that CoolBrands' relationship with Dreyer's Grand Ice Cream Inc.'s Skinny Cow brand could be a favourite should that occur. (CoolBrands said recently that its current agreement with Dreyers has been extended through 2011.)

Still, when trading resumed moments later, the stock fell off a cliff, closing down 29 per cent in heavy volume.

John McIlveen, an analyst with Dundee Securities Corp., said the suit is both about interpretation of the MLA and also shows that Weight Watchers might be having some problems launching its Wells-made products.

"Weight Watchers must be having difficulty gaining shelf space or why else would it be an issue?" he said.

CoolBrands acquired the rights to the Weight Watchers contract in 2000 with its purchase of Eskimo Inc. and Eskimo Pie Corp. Last July, it doubled in size when it bought a handful of divisions following the merger of Dreyers and Nestlé SA.

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