**Exhibit 10.31**

**AGREEMENT**

This Agreement (this “**Agreement**”) is made by and between DiedrichCoffee, Inc. (the “**Company**”) andPhilp G. Hirsch (“**Employee**”).  The Company and Employee desire to enterinto this Agreement to establish the terms of Employee’s resignation ofemployment from the Company.

1.                                       Effectiveness.  This Agreement and the benefits and paymentsdescribed herein are conditioned upon Employee complying with the terms andconditions set forth in this Agreement, including Employee’s execution and deliveryto the Company of this Agreement and the release contained herein.

2.                                       EmploymentStatus.  Employee’s resignation willbecome effective and his employment with the Company will terminate on theclose of business on January 3, 2003 (the “**ResignationDate**”).  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 itssubsidiaries or affiliates.

3.                                       Earned Amounts.  Upon his resignation, Employee shall receiveall compensation (including vacation pay) earned through the Resignation Date.

4.                                       Payments.

(a)                                  Although it isnot obligated to do so, the Company, in consideration of this Agreement, will,subject to the terms and conditions of this Agreement (including the expirationof the revocation period set forth in paragraph 24), provide Employee withseverance pay in the lump sum amount of $77,465.67 (less all legally requireddeductions and withholdings).

(b)                                 except asprovided in paragraphs 3 and 11 hereof, the foregoing payments shall be theonly amounts which the Company shall pay to Employee, and all other payments,wages, bonuses, incentive compensation, promises of future compensation, claimsfor payments or any other forms of compensation whatsoever are hereby waived.

5.                                       Stock Options.

(a)                                  Employeecurrently holds options to purchase 25,000 shares of the Company’s common stockissued pursuant to the Diedrich Coffee, Inc. 2000 Equity Incentive Plan (the “**Equity Incentive Plan**”), all of which optionsare currently vested (the “**Original Options**”).  Pursuant to the terms of Employee’s optiongrant, the Original Options will terminate and no longer be exercisable on thetwo year anniversary of the Resignation Date.

(b)                                 Pursuant to theterms 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, andpursuant to the terms of the option grant, all of the Current Options wouldterminate on the Resignation Date. Notwithstanding the foregoing, in consideration of this Agreement, theCompany agrees to amend the terms of the option grant:  (i) to accelerate the vesting of 35,000 ofthe Current Options to cause them to be fully vested and immediatelyexercisable; and (ii) to provide that such 35,000

 

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options shall be exercisableafter the Resignation Date until the two year anniversary thereof.  The exercise price of the Current Optionsshall remain unchanged.

6.                                       HealthcareCoverage.  Employeeshall be afforded the right to continue his medical benefits in accordance withthe provisions of COBRA.  AssumingEmployee exercises his right to continued medical benefits in accordance withCOBRA, the Company will pay the Employee portion of the premiums for Employee’sCOBRA coverage (including the premiums for any dependent coverage he elects),until the earlier of:  (i) the date Employeeaccepts full timeemployment; (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 Companypromptly upon his becoming reemployed.

7.                                       OtherPerquisites and Benefits.  Allother perquisites and employee benefits and Employee’s participation in allother employee benefit programs of the Company which are not described hereinshall be terminated on the Resignation Date.

8.                                       Withholding andTaxes.  All payments required to bemade by the Company hereunder shall be subject to any and all applicablewithholdings, including any withholdings for any related federal, state orlocal taxes.  Employee shall beresponsible for any and all income taxes or other taxes incurred by him as aresult of his receipt of any payments from the Company pursuant to the terms ofthis Agreement.

9.                                       Terms ofEmployment Agreement. Employee agrees that he is bound and will continue to be bound by theprovisions of Section 4.02 of his Employment Agreement.  Employee specifically acknowledges thatexcept as stated in this paragraph 10, the Employment Agreement is of nofurther force and effect.

10.                                 BusinessExpenses.  Employeewill be reimbursed for all reasonable business expenses incurred by Employeeprior to the Resignation Date.  Employeeshall submit all such business expenses to the Company within 30 days of theResignation Date.

11.                                 CompanyProperty.  Employeeagrees to return to the Company all property of the Company, including withoutlimitation any documents, books, records, reports, contracts, lists, computerdisks (or other computer-generated files or data), or copies thereof, createdon any medium, prepared or obtained by Employee or the Company in the course ofor incident to Employee’s employment with the Company.

12.                                 Confidentiality.  Employee agrees to keep the terms of thisAgreement strictly confidential and agrees that he will not disclose its termsto anyone other than his spouse or legal or financial advisors.  To the extent that information contained inthis Agreement is disclosed to any of the foregoing, Employee agrees tocondition such disclosure on receiving a promise form them not to disclose thisinformation unless required to do so by law.

13.                                 CompanyInformation.

(a)                                  Employeeacknowledges that in the course of his employment with the Company, certainfactual and strategic information specifically related to the Company and itssubsidiaries (such as personnel information, financial information, proprietarycomputer systems or programs, pricing information, planned projects, marketingstrategies and information concerning pending or potential products andtransactions) has been disclosed to Employee in confidence which was for theuse 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 afterhis employment with the Company, (ii) will not disclose or communicate CompanyInformation to any third party, and (iii) will not make use of CompanyInformation on his own behalf, or on behalf of any third party; provided thatthis Agreement does not apply to information that becomes publicly available.

(b)                                 In view of thenature of Employee’s employment and the nature of Company Information thatEmployee received during the course of his employment, Employee agrees that anyunauthorized disclosure to third parties of Company Information or otherviolation, or threatened violation, of this Agreement would cause irreparabledamage to the confidential status of Company Information and to the Company orany and all of its subsidiaries, and that therefore, the Company shall beentitled to an injunction prohibiting Employee from any such disclosure,attempted disclosure, violation or threatened violation.  When specific Company Information becomesgenerally 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 bedeemed to come under the exception merely because it is embraced by moregeneral information which is or becomes generally available to the public.

14.                                 No Claims.  Employee represents and warrants that he hasnot instituted any complaints, charges, lawsuits or other proceedings againstthe Company (including any of its subsidiaries, affiliates or current or formeremployees) with any governmental agency, court, arbitration agency or tribunal,and that Employee will not file any complaint, charge, lawsuit or otherproceeding against the Company or any subsidiary, affiliate or current orformer employee at any time hereafter for any act or event occurring prior tothe date of this Agreement.  Should anyagency or court assume jurisdiction of any complaint, charge, or lawsuitagainst the Company, its subsidiaries or current or former employees onEmployee’s behalf, Employee agrees to request that such agency or court dismissthe matter with prejudice.  Employeefurther agrees not to encourage or induce any person or employee of the Companyto assert any claim or cause of action against the Company.

15.                                 Release.  As consideration for the payments andbenefits hereunder, Employee, on behalf of himself, his successors, executors,and heirs, hereby forever releases and discharges the Company and any and allpresent and former subsidiaries, divisions, affiliates, owners, successors ininterest, shareholders, directors, officers, heirs, predecessors in interest,assigns, agents, employees, attorneys and representatives of the Company, fromany and all causes of action, lawsuits, actions, judgments, liens,indebtedness, damages, losses, claims, complaints (including, but not limitedto, those arising under the Age Discrimination in Employment Act and the OlderWorkers Benefit Protection Act), liabilities, and demands arising on or beforethe date of this Agreement, including without limitation those arising from orattributable in any way to Employee’s employment with the Company, thetermination or resignation of Employee’s employment, or any other eventoccurring prior to the date of this Agreement, and including without limitationany claim for salary, severance pay, or other compensation (as set forth in theEmployment Agreement or otherwise) or any claim for non-vested benefits underany employee benefit plan, whether or not heretofore brought before any stateor federal court or before any state or federal agency or other governmentalentity.  However, Employee does not releasethe Company from any of its obligations pursuant to the terms of thisAgreement.

Employeefurther agrees that this release applies to any claims for damages incurred atany time after the date of this Agreement because of alleged acts or omissions(which occurred on or

 

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beforethe date of this Agreement) of the Company or any and all present and formersubsidiaries, divisions and affiliated companies, successors in interest,shareholders, officers, directors, heirs, predecessors in interest, assigns,agents, employees, attorneys and representatives of the Company.

16.                                 AdditionalWaiver for California. Employee expressly waives and relinquishes all rights and benefits hemay be afforded by California Civil Code Section 1542 (or any comparableprovisions of state and federal law), and does so understanding andacknowledging the significance of such specific waiver of Section 1542, whichstates as follows:

“A general release does notextend to claims which the creditor does not know or suspect to exist in hisfavor at the time of executing the release, which if known by him must havematerially affected his settlement with the debtor.”

Thus,notwithstanding the provisions of Section 1542 and for the purpose ofimplementing a full and complete release and discharge, Employee acknowledgesthat 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 thetime of execution of this Agreement, and this Agreement contemplates theextinguishment of any such claim or claims.

17.                                 Advice ofCounsel.  Employeerepresents and agrees that he fully understands his rights to discuss, and thatthe Company has advised him to discuss, all aspects of this Agreement with hisprivate attorney, that Employee has carefully read and fully understands allthe provisions of the Agreement, that Employee understands its final andbinding effect, that Employee is competent to sign this Agreement, and thatEmployee is voluntarily entering into this Agreement.

18.                                 Acknowledgment.  Employee represents and agrees that inexecuting this Agreement he is relying solely upon his own judgment, belief andknowledge, and the advice and recommendations of any independently selectedcounsel, concerning the nature, extent and duration of Employee’s rights andclaims.  Employee acknowledges that noother individual has made any promise, representation or warranty, express orimplied, not contained in this Agreement, to induce Employee to execute thisAgreement.  Employee furtheracknowledges that he is not executing this Agreement in reliance on anypromise, representation, or warranty not contained in this Agreement.

19.                                 Binding onSuccessors and Assigns.* *This Agreement and thereleases contained herein shall be binding on the parties, theirrepresentatives, heirs, executors, successors, assigns and creditors, and shallinure to the benefit of each of the parties and all of the persons and entitiescovered by the releases.

20.                                 Arbitration.  Employee acknowledges and agrees that anydispute regarding the application, interpretation or breach of this Agreementwill be subject to final and binding arbitration before JAMS/Endispute ofOrange County, which will be the exclusive remedy for such claim ordispute.  Attorneys’ fees, costs anddamages (where appropriate) shall be awarded to the prevailing party in anydispute, and any resolution, opinion or order of JAMS/Endispute may be enteredas a judgment of a court of competent jurisdiction.  This Agreement shall be admissible in any proceeding to enforceits terms.

21.                                 Severability.  Should any provision of this Agreement befound, held, declared, determined, or deemed by any court of competentjurisdiction to be void, illegal, invalid or unenforceable under

 

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anyapplicable statute or controlling law, the legality, validity, andenforceability of the remaining provisions will not be affected and theillegal, invalid, or unenforceable provision will be deemed not to be a part ofthe Agreement.

22.                                 Governing Law.  This Agreement shall be construed andinterpreted in accordance with California law.

23.                                 EntireAgreement.  ThisAgreement, and the provisions of the Employment Agreement incorporated herein,contains the entire agreement and understanding between Employee and theCompany regarding the matters set forth herein and replaces all prioragreements, arrangements and understandings, written or oral.  Neither Employee nor the Company shall bebound or liable for any representation, promise or inducement not contained inthis Agreement.  This Agreement cannotbe amended, modified, supplemented, or altered, except by written amendment orsupplement signed by Employee and the Company.

24.                                 **Revocation Period.****  Employee acknowledges that he has been given21 days from receipt of this Agreement to consider signing it (althoughEmployee may, by his own choice, execute this Agreement earlier).  Employee understands that he has 7 daysfollowing the signing of this Agreement to revoke it in writing and that thisAgreement is not effective or enforceable until the revocation period hasexpired.  To be effective, any suchwritten revocation shall be personally delivered to Paul C. Heeschen or may befaxed to Mr. Heeschen at (949) 721-7500.**

 

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IN WITNESS WHEREOF, the parties have causedthis 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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