Macy’s and Martha Stewart Head to Court Over Penney Pact

By Chris Dolmetsch & Cotten Timberlake - Feb 19, 2013 12:00 AM ET

Macy’s Inc., the second-largest U.S. department-store chain, will go to court in New York today to try to persuade a judge to permanently block Martha Stewart Living Omnimedia Inc.’s pact with J.C. Penney Co.

Macy’s sued Martha Stewart Living in New York State Supreme Court in Manhattan in January 2012 to stop it from proceeding with an agreement announced with J.C. Penney the previous month. Macy’s claims it has an exclusive right to sell Martha Stewart- branded products in categories such as bedding and cookware.

A nonjury trial in the case is set to start this morning before state Supreme Court Justice Jeffrey K. Oing in Manhattan, who in July granted Cincinnati-based Macy’s a preliminary injunction blocking Martha Stewart Living from taking any steps with J.C. Penney on products in the exclusive categories.

In August, Macy’s sued J.C. Penney in the same court, seeking to block it from proceeding with the Martha Stewart Living agreement. Oing denied Macy’s request in that case, 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.

Macy’s said 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 so it could avoid the risk of a restraining order that would bar the agreement.

‘Upscale’ Brand

“Macy’s contracted with MSLO at a time when the MSLO brand was associated with the significantly downscale Kmart and Ms. Stewart was just being released from prison,” lawyers for Macy’s said in a pre-trial memorandum. “Taking losses at first, Macy’s moved the brand in soft home goods upscale, a herculean task under the circumstances. Now defendants, in complete disregard of the Macy’s agreement, seek to reap the rewards of Macy’s work and to usurp the benefits of Macy’s contract.”

Martha Stewart Living has defended its agreement with 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.

Exclusive Categories

Martha Stewart Living has argued that its original 2006 contract with Macy’s allows Martha Stewart Living 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, according to court filings in the case.

The agreement “gives Macy’s the exclusive right, with important exceptions, to sell Martha Stewart-branded products in certain exclusive product categories,” Martha Stewart Living said in a pre-trial memorandum. “The agreement does not, however, give Macy’s any exclusivity — as to design, promotion, sale or anything else — with respect to products that are not Martha Stewart-branded.”

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.

Multiple Retailers

For Martha Stewart Living, selling its goods to multiple retailers is important to reversing declining sales. The company 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 stocklost 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.

Macy’s Chief Executive Officer Terry 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 retailer plans to proceed with the five-year deal it renewed with Martha Stewart Living in January 2012, and intends to pursue its separate legal cases against Martha Stewart and J.C. Penney to protect the exclusivity of the Martha Stewart goods at its own 800-store chain, saidJim Sluzewski, a Macy’s spokesman in Cincinnati.

Revenue Fell

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

Plano, Texas-based 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 judge has set aside three weeks for the trial, Sluzewski said. Stewart, Lundgren and Johnson may be called to testify at trial, according to lists of potential witnesses.

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). The case is Macy’s Inc. v. Martha Stewart Living Omnimedia Inc., 650197/2012, New York state Supreme Court (Manhattan).

To contact the reporters on this story: Chris Dolmetsch in New York atcdolmetsch@bloomberg.net; Cotten Timberlake in Washington at ctimberlake@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Robin Ajello at rajello@bloomberg.net