The battle between Nespresso and the Ethical Coffee Company

Pride of place in the kitchen of Jean Paul Gaillard’s home in Switzerland is given to a rather unlovely single-serve espresso machine. Known undefined

as the Pixie, it has clip-on corrugated sides and a levered handle. It is, he says, the least elegant and most plasticky of the various brewers that decorate the worktops. Then again its function in his home is not to serve coffee.

“I never liked plastic in a coffee maker. I prefer metal,” the businessman tells GCR Mag.

It is there as a reminder of an opening shots in one of most extraordinary battles in the recent history of coffee, one that has pitted Nespresso, the success story of contemporary espresso, against the man who says he is responsible for much of that success.

Gaillard, now the CEO of the Ethical Coffee Company (ECC), is involved in a titanic legal struggle with Nespresso, that he claims could cost its parent company, Swiss food giants Nestlé, as much as $2.5 billion.

The Pixie, he alleges, was one of many means his former employers used to stop his new venture from emerging as a serious competitor in the $13.5-billion market that Gaillard and others helped to create around single-serve espresso capsules. Released soon after the ECC released their own capsules in France in 2010, the Pixie would not work with the ECC capsules.

The popularity of the Pixie, along with other similarly designed Nespresso machines, together with a tangle of law suits, have seen the ECC struggle to gain a foothold in the market, with the fledgeling company spending more time in court than their product has spent on the supermarket shelf. Nespresso, who has launched its own legal actions against the ECC claiming indirect patent infringements, deny placing any irregular hurdles in the smaller company’s path. It is a David and Goliath tale with the unusual twist that David was once in charge of Goliath.

In explaining how it came to this, Gaillard, like any natural storyteller, wants to go back to the beginning.

When the Swiss businessman first encountered Nespresso, he says it was a largely unloved unit of Nestlé, that was seen primarily as an upmarket coffee machine for corporate premises. He remembers that when he took over the helm as CEO of Nespresso in 1990 he went to see how it was used at the headquarters of Schindler, the elevator manufacturers.

“The coffee was very good, everything else was wrong,” he says.

He saw the potential for an entirely different operation and set about redesigning the capsules – reducing their weight and cost – and repurposing the business as a “well-dressed mail order operation with nice accessories”.

In the 10 years that followed, Nespresso went from being a “spare tyre, to being one of the main engines of Nestlé,” says Gaillard.

In the decade after his departure from Nespresso, while he worked in the United States’ ice cream business and in various guises as an investor, he continued to watch what Americans call the coffee pod market grow, until in 2007 he spied an opportunity for a comeback.

During his time away from Nespresso, Gaillard says that he became more conscious of the environmental impact of the mass take up of coffee pods. While many of Nespresso’s end users opt to recycle their aluminium-manufactured coffee pods through various means, there is little independent research to qualify the impact of the masses of pods sold by the entire coffee industry to date. The sustainability of the energy required to transport the used product and recycle the aluminium has been questioned by environmentalists.

“My initial idea was to do a niche product for greens,” Gaillard explains. “I’m not a bearded guy in sandals going to demonstrations, but I believe every bit counts. I want my son to have a planet in good shape.”

After raising initial capital of 25 million Euro (US$28.5 million) and hiring a team of engineers including one straight from the pinnacle of yacht racing, the America’s Cup, the ECC set about making a fully biodegradable capsule.

“How did we do it?” asks Gaillard in his favoured rhetorical style. “We decided that it wasn’t impossible. It took us two years and 25 million Euro to get a polymer derived from natural products.”

The entrepreneur from the Swiss canton of Valais is not modest about the result.

“When people try our capsule they find it tastes better,” he claims.

According to Gaillard, the launch of the ECC’s pods in 2010 saw a flurry of activity at his former employers. Some 2000 ECC pods were in the Nespresso laboratories within hours of their release on the market, he claims, citing tip-offs from former friends and colleagues still working for Nespresso.

In Gaillard’s telling, what followed was a deliberate attempt to block the newcomer’s capsules via the manufacture and release of the Pixie, a machine with a “harpoon” mechanism designed to eject used capsules when the machine is opened.

Diane Duperret, a spokesperson for Nespresso, tells GCR Mag any changes to the mechanisms in its machines were part of a constant evolution designed to respond to customer feedback.

“Our machines are obviously designed to work perfectly with our capsules. The possible impact on non-Nespresso capsules has never been a driver for our decisions to improve our machines,” she says. “To suggest any other motive behind our innovations is simply false.”

So far so ordinary in commercial disputes. Except there is an unlikely twist in that the ECC claims to own the patent on the technology that it says Nespresso used to block its capsules.

This is where it gets complicated. Some 18 legal cases have been opened in the crossfire between the companies – 13 acknowledged cases brought against Nespresso by the ECC and five fired back. There are also three more cases that the ECC has alluded to in press reports but for which Nespresso insists it hasn’t received any legal notice.

Jean Paul Gaillard

Much of the furore revolves around two patents – one claimed by the ECC in 2009 and one by Nespresso in 2010.

Following feedback from consumers and its own testing, Nespresso says it developed and patented a mechanism to free its own capsules if they got stuck after being left overnight in the machine. The mechanism is a series of ribs inside the brewing chamber (also known as a capsule cage), as well as hooks outside the brewing chamber that engage with the Nespresso capsule to pull it away from the pyramid plate at the front of the machine. This feature helps to eject the used capsule.

According to the ECC patent, however, it created a “device for preparing a drink extracted from a capsule”. This includes a capsule mounting and a capsule housing feature. It is designed to prevent the use of capsules made of a deformable material. As such, it will at least partially deform the capsule when placed in contact with hot water.

After years of legal tussles, Gaillard’s company won a significant battle in January of this year when Europe’s main patent authority, the European Patent Office (EPO), threw out Nestlé’s challenge. In effect, the EPO Opposition Board upheld ECC’s patent. Although this confirms that the ECC owns the technology it claims Nespresso is using to modify its machines and close them out, Duperret denies Nespresso is using that technology.

“Our machines do not use ECC’s technology and we are confident that they do not infringe ECC’s intellectual property. We continue to defend ourselves vigorously against these claims. We have appealed to the EPO’s decision to maintain the patent,” she says.

Gaillard has eagerly expanded his fight with the larger company in light of the EPO’s ruling. He is seeking not only damages but the recall of any Nestlé machines that contain the patented technology – all Nestlé machines currently sold in Europe plus some of the machines sold in the US. An audit of the total claims, that Gaillard says was carried out by PricewaterhouseCooper, puts their value as high as $2.5 billion.

Nestlé says it’s unaware of any such audits and dismisses the figure as unrealistic. Duperret says: “These amounts are unsubstantiated and inconsistent with the realities in the market. The legal documents we have received in relation to current open cases do not even mention amounts that could get close to the $2.5 billion.”

If the ECC sees its battle with Nespresso as existential, Nestlé would prefer that it’s seen as a sideshow.

“It is important to note that, as the competitive situation in the portioned coffee category continues to evolve, litigation has taken on a less prominent role and doesn’t have any impact on the current competitive situation,” says Duperret.

Nestlé, which has seen its share of the growing market slip from one-third a decade ago, to 13 per cent in 2011, and 11 per cent in 2015, already faces powerful challengers in JAB Holdings, which controls both Jacobs Douwe Egberts and Keurig Green Mountain Inc.

For his part, Gaillard sounds somewhere between wistful and cheeky when asked what he would do differently after eight years of near constant litigation. “Our biggest mistake was to make too good a capsule,” he says. “If we’d had a worse capsule we wouldn’t have had these battles.”

As for his former employer, he is keen to avoid any accusation of seeking revenge: “We want Nestlé to pay part of what it’s cost us. I’m not emotional about it, I think Nestlé played dirty but that’s life. They’ll pay for it and that’s justice.” GCR

Leave a Reply

Send this to a friend