By Matthew Bigg

ATLANTA (Reuters) - Prosecutors failed to follow the correct process when they indicted Kuwait logistics company Agility for alleged fraud over multibillion dollar contracts, a U.S. magistrate judge said.

Magistrate Alan Baverman released a 91-page report on pretrial motions on Thursday and both sides have 14 days to file objections before a U.S. District Judge rules on the issues.

Agility, the main food supplier to the U.S. army in Kuwait and Iraq, welcomed the report on Friday.

"In asking the court to rule on the issue of 'service of process,' Agility asserted a right extended to all litigants under the U.S. Constitution," the company said in a statement.

"In his ruling ... the Magistrate Judge called the company's decision to assert its due process rights 'legitimate' and a 'valid response' to the Justice Department's conduct in the case."

But a ruling appears unlikely to dissuade the government from pursuing its overall case, according to observers.

Prosecutors indicted Agility, formerly the Public Warehousing Co KSC, in November for attempts to defraud the U.S. military over supply contracts in a case that is politically sensitive in both the United States and Kuwait.

Agility overcharged the U.S. Army over 41 months on $8.5 billion in contracts first signed at the start of the Gulf War in 2003, according to the indictment.

If convicted, the company would face a fine of twice the gains it realized, or twice the loss to the United States.

Pretrial motions have revolved in part around "service of process." Agility has subsidiaries in both the U.S. and Kuwait and prosecutors originally served only the U.S. subsidiary, Agility DGS Holdings Inc, rather than the parent company.

INTENT TO FLEE

Baverman also rejected the government's charge that Agility is a "fugitive" from U.S. justice. Prosecutors argued that, by seeking to avoid being served with the indictment, the company deserved the legal status of a fugitive.

"The court concludes Public Warehousing is not a fugitive, so the fugitive disentitlement doctrine does not apply," the ruling said. "The problem with the government's argument relates to the intent to flee requirement.

"The undersigned agrees with Public Warehousing that the government has provided no evidence of this intent to flee."

In April, the government said it was close to reaching a tentative negotiated settlement with Agility, but since then no word on the status of any talks has emerged.

Agility regards the entire case as a contract dispute that should not be seen as a criminal matter.

The case is United States of America v. The Public Warehousing Company, K.S.C., a/k/a Agility, U.S. District Court, Northern District of Georgia, Atlanta Division, No. 1:09-CR-0490-AJB-TWT.

(Reporting by Matthew Bigg; editing by Andre Grenon)