Nov. 2 (Bloomberg) -- Martha Stewart Living Omnimedia Inc., whose founder owns a home in Katonah, New York, trimmed back a plan to use the hamlet's name as a brand on company products as part of a settlement with town business owners who challenged her trademark application.

The accord with the Katonah Village Improvement Society and local shops allows the company to seek exclusive use of ``Katonah'' on furniture and related items, according to papers filed Oct. 31 with the U.S. Patent and Trademark Office. The firm dropped three trademark bids for ``Katonah'' paint, lighting, drapes and dozens of other items.

The Katonah name will ``cover a very limited range of products, as opposed to the very broad range of products the company originally sought,'' said Lydia Landesberg, president of the Katonah society.

Martha Stewart shares fell as much as 5.6 percent on news of the accord, falling 78 cents to $12.35 in New York Stock Exchange composite trading.

A coalition of opponents who started the ``Nobody Owns Katonah'' campaign filed papers with the patent office in Alexandria, Virginia, in April, claiming the company's ownership of the name would threaten their commercial use of ``Katonah'' in the town, located 40 miles north of Manhattan.

The group dropped its challenge ``in recognition of Martha Stewart Living Omnimedia's legitimate need to protect its intellectual property and business interests,'' both parties said today in a statement.

Wouldn't Interfere

Martha Stewart Living's use of ``Katonah'' on furniture wouldn't interfere with the rights of businesses like Katonah Paint and Hardware and Katonah Architectural Hardware, according to the statement.

The company's remaining trademark application, which must be approved by the trademark office, includes only furniture, mirrors, pillows and chair-pads. If granted, New York-based Martha Stewart would be able to sue any company, including those in Katonah, if they sell such items under the ``Katonah'' brand.

``My definition of a settlement is one where no one is really happy,'' Michael Brown, a lawyer for the coalition, said. ``The parties came to a situation they both can live with.''

The group was joined in May by the Ramapough Lenape Indian Nation because ``Katonah'' is the name of a chief who led the Ramapough in the New York-New Jersey area during the 17th century. The Indian group argued that a trademark on the name would be disrespectful.

153 Acres

Stewart owns a home on 153-acres of land in Katonah, where she served five months' home confinement after being convicted of lying to federal authorities about a 2001 sale of ImClone Systems Inc. stock. She serves as creative director of the company.

Martha Stewart Living Omnimedia, the publisher of Everyday Food magazine and the producer of the ``Martha'' television show, reported a narrower third-quarter loss today on rising advertising revenue from its publications and sales of bed, bath and kitchen products.

The case is Katonah Village Improvement Society v. Martha Stewart Living Omnimedia Inc., 91176691, U.S. Patent and Trademark Office Trademark Trial and Appeal Board (Washington).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.

Last Updated: November 2, 2007 17:34 EDT