Not an urban legend. I've been using it for two years. I can definitely vouch for its efficacy in my garden.
Prior to using it, I had already replanted my slug food, err, beans 3 times. I had used, with success, the ferrous sulphate granules, but I was concerned about adding those nutrients in excess as I applied them repeatedly. I stumbled across some research from the Univ. of Hawaii regarding caffeine and amphibians and extrapolated that (point of entry was the skin) to slugs and ZAPPO! ... I've seen exactly two slugs since.
One in 2002. One this past growing season (2003). The slug I saw a couple weeks ago was a good 2" long ... not the usual variety I am familiar with. I didn't test his response to caffeine and I hadn't applied any since early spring so I can't begin to form an opinion as to whether he was resistant to it. I have seen no additional damage. I am willing to tolerate modest amounts of damage in order to maintain biological diversity in my garden, but I am not interested in losing weeks of of (re)planting time to slugs.
Whilst posting as NOYDB I let rec.gardens.edible know what I had found. I also want to emphasize that I have seen no earthworm die-off. In fact, my soil is positively rife with the little squirmy things ... I can barely scoop up a handful without finding 2-3 of 'em. I think the earthworms can wait out the caffeine by staying below ground for a few days until the coast clears and then they show their well-known affinity for the spent coffee grounds. From my perspective, this is a win-win situation in that I do bad things to the slugs and good things for the earthworms.
Bill