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J.C. Penney Wanted Stewart to Break Contract With Macy’s

J.C. Penney Co. (JCP) tried to persuade Martha Stewart Living Omnimedia Inc. (MSO) to break its contract with Macy’s Inc., an attorney for the second-largest U.S. department- store chain told a judge.

J.C. Penney Chief Executive Officer Ron Johnson wanted to replace Macy’s as an exclusive seller of Martha Stewart-branded products in categories such as bedding and cookware, Theodore M. Grossman, an attorney with Jones Day representing Macy’s, told New York state Supreme Court Justice Jeffrey K. Oing in Manhattan at the start of a trial yesterday.

“We weren’t coerced,” Grossman said. “We’re here to protect our rights. Rights that we paid for, rights that we worked for, rights that we took tremendous risks for.”

Macy’s sued New York-based Martha Stewart Living in January 2012 to stop it from proceeding with an agreement announced with J.C. Penney the previous month. Macy’s sued J.C. Penney in the same court eight months later, seeking to block it from proceeding with the Martha Stewart pact.

The cases have been combined and opening arguments began yesterday in a non-jury trial before Oing that is scheduled to last through March 8. Stewart, Johnson and Macy’s Chairman Terry Lundgren are expected to testify next week.

Contract Breach

Macy’s, based in Cincinnati, said in court filings that it contracted with Martha Stewart Living at a time when the brand was associated with the “significantly downscale” Kmart and she was just being released from prison, and took losses before moving the brand “upscale.”

Macy’s has argued that J.C. Penney and Martha Stewart Living “made a conscious business decision” not to disclose their talks to Macy’s until the contract was signed to avoid the risk of a court order that would bar the agreement.

“Macy’s was kept completely in the dark,” Grossman said. Stewart’s “agenda was to market to both stores. Mr. Johnson had a different agenda. He wanted to supplant Macy’s.”

Martha Stewart Living has defended its agreement with Plano, Texas-based J.C. Penney, accusing Macy’s of breach of contract and saying the retailer stocked and priced Martha Stewart products in a manner that favors private-label brands. Martha Stewart Living also said Macy’s couldn’t have exercised a five-year renewal option on the agreement because of the breach.

17 Percent

J.C. Penney in December 2011 acquired a 17 percent stake in Martha Stewart Living for $38.5 million as the U.S. department- store chain seeks to revive sales with new mini-stores dedicated to Martha Stewart and other brands.

Martha Stewart Living in July said J.C. Penney agreed to pay at least $282.9 million in sales commission over a 10-year period under an amended agreement, a $110.5 million increase from the terms disclosed in December. The amended pact also adds new products.

Martha Stewart Living has argued that its original 2006 contract with Macy’s allows it to design and sell products within the exclusive categories as long as they are sold through the Internet, television or at any retail store branded with the Martha Stewart name that’s operated by the company or its affiliates or “prominently” features the brand.

J.C. Penney has the right to sell products designed by Martha Stewart outside of the exclusive product categories, such as shades and blinds, carpet tiles and food and wine items, Mark Epstein, an attorney with Munger Tolles & Olson LLP representing J.C. Penney, said in court yesterday.

‘Everyday’ Brand

The dispute is over goods designed by Martha Stewart Living that will be sold without her name but with J.C. Penney’s “everyday” brand, which is allowed in the contract with Macy’s as long as they don’t carry Stewart’s name or likeness, Epstein said.

“There’s nothing in there that says she can’t design products for entities other than Macy’s,” Epstein said. “There are no other provisions in the contract that limit the right to design.”

Grossman said consumers will connect the products with the “Martha Stewart Everyday” line of goods that were sold at Kmart -- and pointed to a “double home” logo that will be used on the new products that he said is essentially a stylized “M.”

Epstein argued that Macy’s has known about the “double home” logo for six months and that J.C. Penney has been using the “Everyday” brand since before Johnson took over in November 2011.

‘Home Run’

“It is certainly not her likeness and it is certainly not her name,” Epstein said. “They’re hoping to hit the home run and turn the boat around and go back to China so there will be no goods on the shelves.”

Eric Seiler, an attorney with Friedman Kaplan Seiler & Adelman LLP representing Martha Stewart Living, argued that Macy’s taking credit for building the brand is like “taking credit for Thanksgiving because they sponsor the parade every year.”

Martha Stewart-branded products are available through numerous channels, such as crafts sold at Michaels Stores Inc. and groceries sold at Safeway Inc. (SWY) and there is “no suggestion” in the Macy’s contract that Martha Stewart Living can’t design non-branded products in the exclusive categories, Seiler said.

“We own all the trademarks,” Seiler said. “They get to use the trademarks. They’re licensees. There’s no question that we can design and” J.C. Penney “can sell non-branded goods.”

Preliminary Injunction

In July, Oing granted Macy’s a preliminary injunction blocking Martha Stewart Living from taking any steps with J.C. Penney on branded products in the exclusive categories.

Oing denied Macy’s request for a preliminary injunction in its suit against J.C. Penney, saying that the company hadn’t proved it was likely to succeed on claims that J.C. Penney had engaged in tortious interference and unfair competition.

For Martha Stewart Living, selling its goods to multiple retailers is important to reversing declining sales. The company, which also publishes magazines, has posted losses and decreasing revenue for four straight years, hurt by a drop in advertising demand, and analysts estimate the same for 2012. Its stock lost 44 percent of its value last year. The New York-based company announced in November that it was cutting publishing jobs as it focuses on the Web.

For Martha Stewart Living, the J.C. Penney pact gives “very high visibility” for its brand while allowing it to market products like those sold at Macy’s to different customers, Stephen Greyser, a Harvard Business School marketing professor, said in a Bloomberg Television interview Feb. 19.

Exclusive Merchandise

Macy’s Lundgren has revived the department store partly by adding more exclusive merchandise including Martha Stewart’s cookware, kitchen utensils and bed and bath items.

The Martha Stewart home and lifestyle shop-in-shops that J.C. Penney plans to open this spring are central to Johnson’s plans for reinventing that department store as a location of 100 such concepts.

J.C. Penney’s revenue fell 24 percent in the fourth quarter, analysts surveyed by Bloomberg estimate on average. That would be the fourth consecutive quarter of revenue declines of 20 percent or greater, as it sought to reduce discounting and change the store’s layout.

“The key word for Macy’s is exclusivity,” Geyser said. “They obviously want the product lines and merchandise that consumers will see that they can find only at Macy’s and not anywhere else. It’s key for Macy’s and for J.C. Penney it’s all about co-branding because their strategy as it’s been sketched out is working to try to energize their stores and one of the ways they can do it is with minishops and boutiques that have their own brand within the J.C. Penney stores. Clearly Martha Stewart is one of the brand names that would be appealing to many of J.C. Penney’s customers.”

The cases are Macy’s Inc. (M) v. Martha Stewart Living Omnimedia Inc., 650197/2012, and Macy’s Inc. v. J.C. Penney Corp., 652861/2012, New York state Supreme Court (Manhattan).

To contact the reporter on this story: Chris Dolmetsch in New York state Supreme Court in Manhattan at

cdolmetsch@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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