J.C. Penney Interfered With Macy-Stewart Deal, Judge Says

A 2 1/2-year legal brawl between three of the nation’s best-known brands ended with a whimper when a judge said J.C. Penney Co. interfered with Macy’s Inc.’s deal to sell goods from Martha Stewart Living Omnimedia Inc., yet shouldn’t be punished for its behavior.

Justice Jeffrey K. Oing of state Supreme Court in Manhattan ruled today that while J.C. Penney’s efforts to secure a deal with Stewart were unethical and improper, Macy’s failed to prove it’s entitled to punitive damages. He referred claims for damages for lost profit to a special referee.

Oing said there was no need for punitive damages as Macy’s and its chief executive officer, Terry Lundgren, have been vindicated, Penney CEO Ron Johnson lost his job as a result of “his own hubris” and directors and executives were “humiliated” as a result of the trial.

The judge said e-mails between Johnson and other officers and directors of the company joking about the Macy’s reaction to their own Stewart deal were “nothing short of sophomoric.” He cited a message in which Johnson told Penny director William Ackman that they had put Lundgren “in a corner.”

Stewart’s merchandise was a key part of Johnson’s plan to revive the company with separately branded in-store shops. Johnson oversaw a 25 percent plunge in sales after arriving at the department-store chain from Apple Inc. in 2011 with great fanfare.

After 17 months on the job Johnson was ousted as CEO and replaced with his predecessor, Myron Ullman, who undid many of the changes.

Retail Failure

“Their grand strategy was a colossal and abject retail failure,” Oing said. “The termination of JCP’s ‘strategic alliance’ with MSLO and Ms. Stewart underscored how ill-conceived it was, to the point where it placed JCP on the verge of financial collapse. I find that these significant facts are a sufficient deterrent to JCP and other companies from acting in a similar way in the future.”

J.C. Penney, based in Plano, Texas, in December 2011 acquired a 17 percent stake in Martha Stewart Living for $38.5 million as Johnson tried to revive sales with new mini-stores dedicated to brands including Stewart’s products.

Macy’s sued New York-based Martha Stewart Living for breach of contract a month later, saying that a 2006 deal gave it the exclusive right to sell Stewart-branded goods in categories including bedding, bath products, kitchen textiles, dinnerware and cookware. Cincinnati-based Macy’s sued J.C. Penney in August 2012. Oing presided over a trial of both cases in 2013.

Improper Behavior

“The uncontested facts underscore how ‘over the top’ Mr. Johnson’s and his team’s conduct and relentless efforts were in JCP’s pursuit of MSLO and Ms. Stewart -- conduct and efforts that the JCP board endorsed,” Oing wrote. “The preponderance of the evidence compels me to find that JCP’s ‘inducement exceeded the minimum level of ethical behavior in the marketplace,’ and as such was improper.”

J.C. Penney said in October that it was rolling back the agreement with Martha Stewart Living. The parties will stop making products in categories exclusive to Macy’s and end the partnership in 2017, four years earlier than planned.

J.C. Penney also gave back 11 million shares it bought for $3.50 each and the right to have board representation at Stewart’s company.

Stewart Settlement

Macy’s said in January that it had settled its case with Martha Stewart Living, without disclosing the terms. J.C. Penney said in a regulatory filing last month that it didn’t expect the final resolution of the suit to have a material adverse effect on its operations, financial position, liquidity or capital resources.

“We are delighted, but certainly not surprised, that the court has found tortious interference by JCP,” Macy’s said in a statement. “It is a great shame that Macy’s had to expend time, money and the diversion of its resources in order to protect its rights. We look forward to the damages phase of the case.”

J.C. Penney said in a statement that it’s considering its options for appeals.

“While we appreciate the court’s efforts in this multiyear litigation, we respectfully disagree with and are disappointed by this outcome,” J.C. Penney said. “The company does not believe that money damages are warranted and will defend against” any that are awarded.

Macy’s fell 18 cents to $57.22 at 4 p.m. in New York. The shares have risen 18 percent in the past 12 months. J.C. Penney rose 3 cents to $8.64. Its shares have fallen 50 percent in the past 12 months. Martha Stewart Living rose 35 cents, or 8.5 percent, to $4.47.

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).