The Seattle-based coffee chain had earlier reported a 34 per cent rise in quarterly profit to $481.1 million, or 63 cents per share.
But that will swing to a $2.12-billion loss ($1.64 per share) after the chain was ordered to pay $2.23 billion in damages plus $527 million for interest and legal fees to settle its dispute with Kraft.
Kraft began selling Starbucks-branded coffee in grocery stores in September 1998. But Starbucks prematurely ended that deal in late 2010 and gave the contract to privately held Acosta Inc.
The original deal wasn't set to expire until 2014, meaning Starbucks broke that contract at least three years before it could have done so without penalty.
Kraft subsidiary Mondelez International will receive all the proceeds, and Starbucks can't appeal the binding arbitration it had agreed to participate in.
Starbucks said that while it is pleased the arbitration has ended, it disagrees with the conclusion.
"We believe Kraft did not deliver on the responsibilities to our brand under the agreement, the performance of the business suffered as a result and that we had a right to terminate the agreement without payment to Kraft," said Starbucks in a statement.