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Club Coffee says its coffee pods work in Keurig machines, and that Keurig is asserting otherwise.

Peter Power/The Globe and Mail

Toronto-based Club Coffee LP is launching a lawsuit against Keurig Green Mountain Inc., alleging the U.S. giant uses anti-competitive tactics and misleads retailers and consumers to maintain its grip on the fast-growing single-serve coffee market.

Club Coffee says in a $600-million lawsuit filed in Ontario's Superior Court of Justice that Vermont-based Keurig spreads falsehoods about competitors' products and coerces retailers into exclusive agreements that limit consumer choices at the grocery store and drives up the price of so-called K-Cup coffee pods.

The allegations have not been proven in court. Keurig did not respond to a phone call and an e-mail on Tuesday.

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In its court filing, Club Coffee alleges Keurig has violated Canada's laws governing competition, trademarks and consumer protection by, among other things, telling retailers, coffee makers and consumers only Keurig's coffee and tea pods will work in its brewing machines. Toronto lawyer Robert Russell, who is representing Club Coffee, referred to the statement of claim which says Keurig capitalizes on the resulting "anxiety" by having retailers sign agreements that forbid them from carrying pods made by Keurig's rivals, including Club Coffee.

"In fact, some Canadian retailers were told they couldn't even talk to Club Coffee," Mr. Russell said in an interview referring to the statement of claim.

Keurig, which holds 90 per cent of the North American coffee-pod market, lost its patent in 2012 on the single-serving coffee cups that work with its home brewing machines. The company is expected to post 2014 sales of $4.7-billion, up from $4.4-billion in 2013.

Since then, Keurig's sales have slowed amid market saturation and competition from a handful of companies trying to get a piece of the segment. The company recently raised its coffee price by 9 per cent and launched a new line of brewers and pods called Keurig 2.0, claiming they contain proprietary technology that is incompatible with competitors' cups.

John Pigott, chief executive officer of Club Coffee, said Keurig's proprietary technology is simply an ink on the cup lid that is easily replicated, so Club Coffee's pods, and those of some other companies, work just fine in the new Keurig brewers.

But he said Keurig's assertions have had a "chilling effect" and Club Coffee has struggled to convince coffee makers and buyers that its pods are compatible. "Buyers said to us, 'We can't afford to have your product on the shelves if it's not going to work in the new machines,'" Mr. Pigott said.

"It's the struggle of a patent holder. Once they've lost the patent they do things outside of the law to try to hold on to their dominant or monopoly-like position," Mr. Russell said refering to the statement of claim. "Club Coffee has been damaged."

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Club Coffee was founded more than 100 years ago and is owned by Morrison Lamothe, a family-owned frozen-food company. At two factories in Toronto, it roasts and packages coffee for several brands, including well-known retailers and coffee chains. Club Coffee, which sells 40 per cent of its coffee in the United States, has seen sales of coffee pods used in Keurig machines double in the past year and a half.

Mr. Pigott said it took legal action after two events in the spring of 2014.

First, the company was told by Kroger Co., the largest U.S. grocer and a $20-million-a-year customer, that it had reached an exclusive agreement with Keurig and could no longer buy Club Coffee's products. Then a Canadian Tire representative told Club Coffee an agreement with Keurig prevented the retailer from talking to Club Coffee.

Club Coffee is a privately held company that does not disclose revenue. The company says it it is the biggest maker of packaged grocery store coffee in Canada, and makes coffee for several well-known North American brands and retailers.

According to consultant Mintel Group Ltd., consumer demand for consistent, convenient coffee brewed at home has quickly turned coffee pods into a markets that exceeds $3-billion in the United States.

In a grocery store market gripped by low margins and flat sales, coffee pods have been a rare bright spot. U.S. sales of the small cups account for 40 per cent of shoppers' coffee budgets, a massive increase from just five years when ago.

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Mr. Pigott likens his company to David in a battle with Goliath.

"My stone is this little pod," he said, holding up one of his company's compostable coffee pods, a small mesh bag of coffee capped by a plastic, paper-covered ring.

Club Coffee is the first in the world to offer coffee and tea pods that can go from the machine, to the green bin, to municipal composting programs, where they break down entirely. The company has spent $50-million over the past two years expanding its Toronto plant to make the pods, which are composed of paper and plant-based resin. It's this kind of innovation and competition Mr. Russell said Keurig is trying to stifle.

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