LV coffee shop chain seeks arbitration in House2Home dispute

Grace Leong

Friday, June 1, 2001 | 10:44 a.m.

A judge has declined to immediately rule on home improvement giant HomeBase Inc.'s request to garnish a Las Vegas coffee retailer's assets to satisfy HomeBase's claims on $1.522 million in allegedly unpaid license fees and unreimbursed costs to build coffee shops in its new House2Home stores.

HomeBase, which announced in December its plan to exit the home improvement business and reposition itself as a home furnishings retailer under the House2Home name, originally planned to have a total of 68 stores converted to House2Home stores by this November and agreed to have Jitters Gourmet Coffee Inc. develop cafes in all those stores.

Jitters opened outlets at five of the 68 House2Home stores in Las Vegas and California. But these five Jitters locations are now closed and its plans to have cafes in the 68 stores in California, Texas, Nevada, Oregon, Colorado and Washington were dashed after HomeBase, on March 27, announced it was closing 26 HomeBase stores and would have only 42 House2Home stores instead.

Jitters said it had hoped to expand in Seattle, which it said was crucial to the development of Jitters' brand name in the coffee business because the coffee cafe industry is centered in Seattle. But none of the 42 House2Home stores are located in the Northwest because of uncertainty over the viability of the concept and economic issues, Jitters said.

Both parties have taken the issue to court, each accusing the other of breaking the deal. HomeBase took legal action after Jitters allegedly terminated an agreement to operate cafes in its House2Home stores after its attempts to negotiate a better deal following HomeBase's downsizing announcement failed.

HomeBase, which alleged Jitters agreed to pay license fees and all construction costs of Jitters' cafes except for rough plumbing and electrical, sued to recover $1.522 million in alleged unpaid fees and costs.

Jitters countersued, accusing HomeBase of breaching an agreement to convert 68 HomeBase stores to the House2Home concept when it closed 26 of those stores in locations critical to Jitters' brand name development. Jitters also disputed HomeBase's claims that it is liable for the license fees and construction costs and the method HomeBase used to pursue such claims.

Clark County District Court Judge Allan Earl said last week he isn't making a ruling until he has decided on a motion Jitters filed on May 23 that claimed arbitration is the proper method to resolve a dispute over construction costs for the stores.

"There's a clause in the contract that says if there is a dispute, the dispute should be submitted to arbitration with the American Arbitration Association, and not (resolved through) a lawsuit," Bradley Booke, Jitters' attorney, said. "If the lawsuit goes forward, we would argue HomeBase is the party violating the contract, not Jitters."

"There aren't any license fees owed because the stores were never opened. We don't know what the construction costs are because HomeBase is the contractor, the architect and the builder of the cafes within the House2Home stores," he said.

Jitters said HomeBase demanded on May 18 that the coffee retailer close its operations at five House2Home stores, including two in Las Vegas and three in southern California. HomeBase then boarded up and barricaded the five Jitters locations and covered Jitters' signage and allowed it on May 21 to remove its perishable goods and cash from the cash registers but allegedly held hostage $150,000 of Jitters' equipment, the suit said.

Jitters currently has nine coffee outlets in the Las Vegas area and Boulder City and five franchisees in Las Vegas.

Jitters said HomeBase's downsizing announcement came "without any notice" after Jitters had spent more than $300,000 on restaurant equipment, store designs and other development costs and on hiring and training 17 people for management positions to oversee the first 17 cafes in the House2Home stores.

"All Jitters has is a 250 to 300 square foot space inside each store, with no clientele of its own. Its customers are basically those visiting the House2Home store," Booke said. "After HomeBase downsized, Jitters asked for other changes to make the deal profitable, for example, on how the construction costs would be reimbursed and how much to be reimbursed."

But HomeBase allegedly rejected all of Jitters' proposals and made no counterproposals, the suit said.

The coffee retailer also said HomeBase's downsizing move "materially reduced the number of revenue bases over which Jitters could amortize its capital investment, materially increased Jitters' per unit overhead, general and administrative costs and materially increased the risk that Jitters had agreed to take when it entered the licensing agreement."

William Langsdorf, HomeBase's executive vice president and chief financial officer, declined comment on Jitters' charges.