Exhibit 10.31




AGREEMENT




This Agreement (this “Agreement”) is made by and between Diedrich

Coffee, Inc. (the “Company”) and

Philp G. Hirsch (“Employee”).  The Company and Employee desire to enter

into this Agreement to establish the terms of Employee’s resignation of

employment from the Company.




1.                                       Effectiveness.  This Agreement and the benefits and payments

described herein are conditioned upon Employee complying with the terms and

conditions set forth in this Agreement, including Employee’s execution and delivery

to the Company of this Agreement and the release contained herein.




2.                                       Employment

Status.  Employee’s resignation will

become effective and his employment with the Company will terminate on the

close of business on January 3, 2003 (the “Resignation

Date”).  At such time,

Employee agrees to relinquish the title and duties of Chief Executive Officer,

as well as any other positions he has held within the Company and any of its

subsidiaries or affiliates.




3.                                       Earned Amounts.  Upon his resignation, Employee shall receive

all compensation (including vacation pay) earned through the Resignation Date.




4.                                       Payments.




(a)                                  Although it is

not obligated to do so, the Company, in consideration of this Agreement, will,

subject to the terms and conditions of this Agreement (including the expiration

of the revocation period set forth in paragraph 24), provide Employee with

severance pay in the lump sum amount of $77,465.67 (less all legally required

deductions and withholdings).




(b)                                 except as

provided in paragraphs 3 and 11 hereof, the foregoing payments shall be the

only amounts which the Company shall pay to Employee, and all other payments,

wages, bonuses, incentive compensation, promises of future compensation, claims

for payments or any other forms of compensation whatsoever are hereby waived.




5.                                       Stock Options.




(a)                                  Employee

currently holds options to purchase 25,000 shares of the Company’s common stock

issued pursuant to the Diedrich Coffee, Inc. 2000 Equity Incentive Plan (the “Equity Incentive Plan”), all of which options

are currently vested (the “Original Options”).  Pursuant to the terms of Employee’s option

grant, the Original Options will terminate and no longer be exercisable on the

two year anniversary of the Resignation Date.




(b)                                 Pursuant to the

terms of that certain Employment Agreement, dated effective as of September 1,

2002 (the “Employment Agreement”),

the Company granted Employee 120,000 options (the “Current Options”) under the Equity Incentive Plan.  None of the Current Options have vested, and

pursuant to the terms of the option grant, all of the Current Options would

terminate on the Resignation Date. 

Notwithstanding the foregoing, in consideration of this Agreement, the

Company agrees to amend the terms of the option grant:  (i) to accelerate the vesting of 35,000 of

the Current Options to cause them to be fully vested and immediately

exercisable; and (ii) to provide that such 35,000




 





























 




options shall be exercisable

after the Resignation Date until the two year anniversary thereof.  The exercise price of the Current Options

shall remain unchanged.




6.                                       Healthcare

Coverage.  Employee

shall be afforded the right to continue his medical benefits in accordance with

the provisions of COBRA.  Assuming

Employee exercises his right to continued medical benefits in accordance with

COBRA, the Company will pay the Employee portion of the premiums for Employee’s

COBRA coverage (including the premiums for any dependent coverage he elects),

until the earlier of:  (i) the date Employee

accepts full time

employment; (ii) the date he is otherwise no longer eligible for COBRA coverage;

or (iii) 12 months after the effective date of this Agreement.  Employee agrees to advise the Company

promptly upon his becoming reemployed.




7.                                       Other

Perquisites and Benefits.  All

other perquisites and employee benefits and Employee’s participation in all

other employee benefit programs of the Company which are not described herein

shall be terminated on the Resignation Date.




8.                                       Withholding and

Taxes.  All payments required to be

made by the Company hereunder shall be subject to any and all applicable

withholdings, including any withholdings for any related federal, state or

local taxes.  Employee shall be

responsible for any and all income taxes or other taxes incurred by him as a

result of his receipt of any payments from the Company pursuant to the terms of

this Agreement.




9.                                       Terms of

Employment Agreement. 

Employee agrees that he is bound and will continue to be bound by the

provisions of Section 4.02 of his Employment Agreement.  Employee specifically acknowledges that

except as stated in this paragraph 10, the Employment Agreement is of no

further force and effect.




10.                                 Business

Expenses.  Employee

will be reimbursed for all reasonable business expenses incurred by Employee

prior to the Resignation Date.  Employee

shall submit all such business expenses to the Company within 30 days of the

Resignation Date.




11.                                 Company

Property.  Employee

agrees to return to the Company all property of the Company, including without

limitation any documents, books, records, reports, contracts, lists, computer

disks (or other computer-generated files or data), or copies thereof, created

on any medium, prepared or obtained by Employee or the Company in the course of

or incident to Employee’s employment with the Company.




12.                                 Confidentiality.  Employee agrees to keep the terms of this

Agreement strictly confidential and agrees that he will not disclose its terms

to anyone other than his spouse or legal or financial advisors.  To the extent that information contained in

this Agreement is disclosed to any of the foregoing, Employee agrees to

condition such disclosure on receiving a promise form them not to disclose this

information unless required to do so by law.




13.                                 Company

Information.




(a)                                  Employee

acknowledges that in the course of his employment with the Company, certain

factual and strategic information specifically related to the Company and its

subsidiaries (such as personnel information, financial information, proprietary

computer systems or programs, pricing information, planned projects, marketing

strategies and information concerning pending or potential products and

transactions) has been disclosed to Employee in confidence which was for the

use of the Company or any or all of its




 




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subsidiaries

(“Company Information”).  Employee understands and agrees that he (i)

will keep such Company Information confidential at all times during and after

his employment with the Company, (ii) will not disclose or communicate Company

Information to any third party, and (iii) will not make use of Company

Information on his own behalf, or on behalf of any third party; provided that

this Agreement does not apply to information that becomes publicly available.




(b)                                 In view of the

nature of Employee’s employment and the nature of Company Information that

Employee received during the course of his employment, Employee agrees that any

unauthorized disclosure to third parties of Company Information or other

violation, or threatened violation, of this Agreement would cause irreparable

damage to the confidential status of Company Information and to the Company or

any and all of its subsidiaries, and that therefore, the Company shall be

entitled to an injunction prohibiting Employee from any such disclosure,

attempted disclosure, violation or threatened violation.  When specific Company Information becomes

generally available to the public other than by Employee’s acts or omissions,

it is no longer subject to restrictions in this paragraph.  However, Company Information shall not be

deemed to come under the exception merely because it is embraced by more

general information which is or becomes generally available to the public.




14.                                 No Claims.  Employee represents and warrants that he has

not instituted any complaints, charges, lawsuits or other proceedings against

the Company (including any of its subsidiaries, affiliates or current or former

employees) with any governmental agency, court, arbitration agency or tribunal,

and that Employee will not file any complaint, charge, lawsuit or other

proceeding against the Company or any subsidiary, affiliate or current or

former employee at any time hereafter for any act or event occurring prior to

the date of this Agreement.  Should any

agency or court assume jurisdiction of any complaint, charge, or lawsuit

against the Company, its subsidiaries or current or former employees on

Employee’s behalf, Employee agrees to request that such agency or court dismiss

the matter with prejudice.  Employee

further agrees not to encourage or induce any person or employee of the Company

to assert any claim or cause of action against the Company.




15.                                 Release.  As consideration for the payments and

benefits hereunder, Employee, on behalf of himself, his successors, executors,

and heirs, hereby forever releases and discharges the Company and any and all

present and former subsidiaries, divisions, affiliates, owners, successors in

interest, shareholders, directors, officers, heirs, predecessors in interest,

assigns, agents, employees, attorneys and representatives of the Company, from

any and all causes of action, lawsuits, actions, judgments, liens,

indebtedness, damages, losses, claims, complaints (including, but not limited

to, those arising under the Age Discrimination in Employment Act and the Older

Workers Benefit Protection Act), liabilities, and demands arising on or before

the date of this Agreement, including without limitation those arising from or

attributable in any way to Employee’s employment with the Company, the

termination or resignation of Employee’s employment, or any other event

occurring prior to the date of this Agreement, and including without limitation

any claim for salary, severance pay, or other compensation (as set forth in the

Employment Agreement or otherwise) or any claim for non-vested benefits under

any employee benefit plan, whether or not heretofore brought before any state

or federal court or before any state or federal agency or other governmental

entity.  However, Employee does not release

the Company from any of its obligations pursuant to the terms of this

Agreement.




Employee

further agrees that this release applies to any claims for damages incurred at

any time after the date of this Agreement because of alleged acts or omissions

(which occurred on or




 




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before

the date of this Agreement) of the Company or any and all present and former

subsidiaries, divisions and affiliated companies, successors in interest,

shareholders, officers, directors, heirs, predecessors in interest, assigns,

agents, employees, attorneys and representatives of the Company.




16.                                 Additional

Waiver for California. 

Employee expressly waives and relinquishes all rights and benefits he

may be afforded by California Civil Code Section 1542 (or any comparable

provisions of state and federal law), and does so understanding and

acknowledging the significance of such specific waiver of Section 1542, which

states as follows:




“A general release does not

extend to claims which the creditor does not know or suspect to exist in his

favor at the time of executing the release, which if known by him must have

materially affected his settlement with the debtor.”




Thus,

notwithstanding the provisions of Section 1542 and for the purpose of

implementing a full and complete release and discharge, Employee acknowledges

that this Agreement is intended to include in its effect, without limitation,

all claims which Employee does not know or suspect to exist in his favor at the

time of execution of this Agreement, and this Agreement contemplates the

extinguishment of any such claim or claims.




17.                                 Advice of

Counsel.  Employee

represents and agrees that he fully understands his rights to discuss, and that

the Company has advised him to discuss, all aspects of this Agreement with his

private attorney, that Employee has carefully read and fully understands all

the provisions of the Agreement, that Employee understands its final and

binding effect, that Employee is competent to sign this Agreement, and that

Employee is voluntarily entering into this Agreement.




18.                                 Acknowledgment.  Employee represents and agrees that in

executing this Agreement he is relying solely upon his own judgment, belief and

knowledge, and the advice and recommendations of any independently selected

counsel, concerning the nature, extent and duration of Employee’s rights and

claims.  Employee acknowledges that no

other individual has made any promise, representation or warranty, express or

implied, not contained in this Agreement, to induce Employee to execute this

Agreement.  Employee further

acknowledges that he is not executing this Agreement in reliance on any

promise, representation, or warranty not contained in this Agreement.




19.                                 Binding on

Successors and Assigns.  This Agreement and the

releases contained herein shall be binding on the parties, their

representatives, heirs, executors, successors, assigns and creditors, and shall

inure to the benefit of each of the parties and all of the persons and entities

covered by the releases.




20.                                 Arbitration.  Employee acknowledges and agrees that any

dispute regarding the application, interpretation or breach of this Agreement

will be subject to final and binding arbitration before JAMS/Endispute of

Orange County, which will be the exclusive remedy for such claim or

dispute.  Attorneys’ fees, costs and

damages (where appropriate) shall be awarded to the prevailing party in any

dispute, and any resolution, opinion or order of JAMS/Endispute may be entered

as a judgment of a court of competent jurisdiction.  This Agreement shall be admissible in any proceeding to enforce

its terms.




21.                                 Severability.  Should any provision of this Agreement be

found, held, declared, determined, or deemed by any court of competent

jurisdiction to be void, illegal, invalid or unenforceable under




 




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any

applicable statute or controlling law, the legality, validity, and

enforceability of the remaining provisions will not be affected and the

illegal, invalid, or unenforceable provision will be deemed not to be a part of

the Agreement.




22.                                 Governing Law.  This Agreement shall be construed and

interpreted in accordance with California law.




23.                                 Entire

Agreement.  This

Agreement, and the provisions of the Employment Agreement incorporated herein,

contains the entire agreement and understanding between Employee and the

Company regarding the matters set forth herein and replaces all prior

agreements, arrangements and understandings, written or oral.  Neither Employee nor the Company shall be

bound or liable for any representation, promise or inducement not contained in

this Agreement.  This Agreement cannot

be amended, modified, supplemented, or altered, except by written amendment or

supplement signed by Employee and the Company.




24.                                 Revocation Period.  Employee acknowledges that he has been given

21 days from receipt of this Agreement to consider signing it (although

Employee may, by his own choice, execute this Agreement earlier).  Employee understands that he has 7 days

following the signing of this Agreement to revoke it in writing and that this

Agreement is not effective or enforceable until the revocation period has

expired.  To be effective, any such

written revocation shall be personally delivered to Paul C. Heeschen or may be

faxed to Mr. Heeschen at (949) 721-7500.




 




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IN WITNESS WHEREOF, the parties have caused

this Agreement to be executed on this 3rd day of January 2003.




 




	

   


  	

   


  	 

	

   


  	

  DIEDRICH COFFEE, INC.


  	 

	

   


  	

   


  	 

	

   


  	

  By:


  	

  /s/ Paul C. Heeschen


  	 

	

   


  	

   


  	

  Paul C. Heeschen


  	 

	

   


  	

   


  	

  Chairman of the Board of

  Directors


  	 

	

   


  	

   


  
	

   


  	

   


  
	

   


  	

   


  
	

   


  	

  /s/ Philip G. Hirsch


  
	

   


  	

  Philip G. Hirsch


  





 




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