Macy’s Makes Last Bid to Halt J.C. Penney’s Stewart Sales

Macy’s Inc., the second-biggest U.S. department store chain, made a final bid to block Martha Stewart’s company from selling bedding, cookware and other merchandise at J.C. Penney Co. in a case that may change the way retailers approach licensing deals.

New York State Supreme Court Justice Jeffrey Oing in Manhattan heard closing arguments today in the nonjury trial of lawsuits filed by Cincinnati-based Macy’s seeking to block a December 2011 sales agreement between Martha Stewart Living Omnimedia Inc. and J.C. Penney.

Martha Stewart Living breached its 2006 contract with Macy’s by entering into the later deal with J.C. Penney, Ted Grossman, a lawyer for Macy’s, told the judge.

“One look at the J.C. Penney contract shows a remarkable resemblance to the Macy’s contract, and the two are incompatible,” said Grossman, a partner at Jones Day. “The contract itself banned the J.C. Penney contract.”

Oing is to decide whether Plano, Texas-based J.C. Penney has the right to sell any merchandise designed by Stewart’s company in categories where Macy’s claims exclusivity. Oing, who is scheduled to go on a break at the end of this week, said he will take “some time” to make his ruling in the case and that it won’t come tomorrow.

Blaming Macy’s

During closing arguments, Mark H. Epstein, a lawyer for J.C. Penney, blamed Macy’s for the dispute.

“What it all comes down to is a poorly written contract,” said Epstein, a partner at Munger Tolles & Olson LLP. “It’s their ambiguity that led to the problems.”

Eric Seiler of Friedman Kaplan Seiler & Adelman LLP, a lawyer for Martha Stewart Living, told the judge that Macy’s is no longer asking for a court order barring J.C. Penney from selling goods made by his client that don’t bear the Stewart brand, and is instead going to seek damages at a later trial. Macy’s shouldn’t be able to try case a second time, Seiler said.

“We want to win the case, but we want the case to be over more than anything else,” Seiler said.

Oing issued a preliminary injunction last year blocking Martha Stewart Living from selling branded goods at J.C. Penney in categories exclusive to Macy’s. He refused to block J.C. Penney from selling Martha Stewart Living goods that don’t bear Stewart’s name, saying Macy’s could be compensated if he the designs are also exclusive.

Licensing Agreements

Regardless of the outcome, the case will change the way licensing agreements are drafted, said Steven R. Gursky, a partner at Olshan Frome Wolosky in New York who focuses on contract negotiations and intellectual property.

“It may send people out who have existing agreements with Macy’s and others to say, ‘What does my agreement say? Do I really have an exclusive and can I have my cake and eat it too?’” Gursky said.

Closing arguments came more than three months after the companies sparred in a five-week trial that featured the first public court testimony from Stewart and appearances on the stand by Macy’s Chief Executive Officer Terry Lundgren and then-J.C. Penney CEO Ron Johnson, who was fired almost exactly a month later.

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

Contract Suit

Macy’s sued New York-based Martha Stewart Living for breach of contract a month later, saying it has the exclusive right to sell goods in certain categories under a 2006 agreement between the two companies. Macy’s sued J.C. Penney in the same court the next month.

Macy’s has said J.C. Penney is trying to reap the benefits of Macy’s work with Stewart, arguing that the retailer contracted with Stewart at a time when she had just been released from prison and was associated with the “significantly downscale” Sears Holdings Corp.’s K-Mart.

For Martha Stewart Living, expanding the number of retailers where its goods are sold is important to reversing declining sales. The company has posted losses and decreasing revenue for five straight years, and its stock lost 44 percent of its value last year.

The 71-year-old Stewart agreed to have her annual pay cut by 10 percent to $1.8 million last month as her namesake company has suffered from slumping magazine ad sales and declining broadcasting revenue following the cancellation of “The Martha Stewart Show.”

Private Label

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

The company’s lawyers argue that the agreement with Macy’s allows it to sell Martha Stewart-branded items in the exclusive categories as long as they are sold at shops in J.C. Penney that carry Stewart’s name -- and that there are no restrictions in the contract against Stewart’s company designers working for any other partners.

Macy’s isn’t entitled to an advisory opinion prohibiting Martha Stewart Living and J.C. Penney from “engaging in business activities with individuals or entities that aren’t parties to this case,” lawyers for Martha Stewart Living said in their post-trial brief.

‘Limited Exclusivity’

J.C. Penney’s lawyers argue that Macy’s contract with Martha Stewart Living grants it only “limited exclusivity” and doesn’t prevent the company from selling branded goods in those categories at Stewart shops in J.C. Penney stores, even if Oing didn’t initially interpret the pact that way.

“There is no language anywhere in the Macy’s agreement that supports Macy’s expansive claim that it has exclusive rights to all MSLO designs in the exclusive product categories, even for products not branded with ‘Martha Stewart’ marks,” J.C. Penney’s attorneys said in their post-trial brief.

Stewart’s merchandise was a key part of Johnson’s plan to revive J.C. Penney with separately branded in-store shops. Johnson was fired in April after 17 months on the job. He was replaced with his predecessor Myron Ullman.

The New York Post reported on April 11, citing unidentified people close to the situation, that Ullman contacted Lundgren shortly after he was hired in an attempt to settle the Stewart litigation.

Party Ware

Yet the suit remains before Oing more than four months after all three sides rested, and Macy’s lawyers continue to litigate the case, filing papers last month in support of their motion for the judge to block J.C. Penney from selling plastic party ware under the name “Martha Stewart Celebrations.”

Johnson’s departure and J.C. Penney’s financial challenges, which were cited by Oing as reasons not to block the company from selling unbranded merchandise designed by Stewart’s company, “are circumstances of JCP’s own making, and neither alters the reality that Macy’s is the victim here,” Macy’s lawyers wrote in a post-trial filing.

“Nor was Mr. Johnson acting alone,” Macy’s lawyers said. “He was acting on behalf of JCP, in an official capacity, and with the blessing of the JCP board of directors and, in particular, with the involvement and participation of JCP’s two largest shareholders. Nor has JCP changed its conduct since Mr. Johnson’s departure.”

Sales Plunge

J.C. Penney sales last year plunged 25 percent, leading to a net loss of $985 million, and the company’s shares have fallen 26 percent this year.

Macy’s shares have risen 26 percent this year, and estimates compiled by Bloomberg show the company’s profit is projected to jump 14 percent to a record in the year ending in January as Lundgren has tailored merchandise to match local tastes and extended exclusive goods to draw younger customers.

“It’s all going to be up to how the judge decides to interpret the contract,” said Michael Appel, founder and president of the retail consulting firm Appel Associates LLC in Purchase, New York. “A lot has changed in the sense that the total management of Penney’s has changed. From Macy’s perspective that’s not even relevant because they were a competitor then and they’re a competitor now.”

The cases are Macy’s Inc. 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).

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