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Macy’s-Martha-Penney’s Trial Resumes

It's unclear what impact the departure of J.C. Penney chief Ron Johnson may have on the case since he was the architect of the retailer's deal with MSLO.

NEW YORK — It was a lot like the first day back from summer vacation.

This story first appeared in the April 9, 2013 issue of WWD.  Subscribe Today.

Lawyers from Macy’s Inc., Martha Stewart Living Omnimedia Inc. and J.C. Penney Co. Inc. practically skipped into the courtroom Monday to resume the well-publicized contract dispute, but little did they know that by the end of the day, Penney’s chief executive officer Ron Johnson would be out. It’s unclear what impact his departure may have on the case since he was the architect of Penney’s deal with MSLO. Penney’s did not return calls seeking comment, and MSLO’s legal team declined to comment.

The case, which just came off a monthlong recess in which New York state court Judge Jeffrey Oing ordered the parties to enter into mediation, is scheduled to continue as planned Tuesday.

“Welcome back, folks,” Oing mumbled Monday as he resumed what has already amounted to a grueling and contentious three-week trial over whether Martha Stewart can sell her branded goods in both Macy’s and Penney’s stores.

Stewart inked a deal in 2007 to sell certain branded goods to Macy’s exclusively. That agreement was allegedly breached when she signed a competing contract with Penney’s at the end of 2011 to sell her branded wares in shops-in-shop this spring, according to Macy’s. As part of that contract, MSLO also sold a 16.6 percent stake to Penney’s. The bold moves were central to Johnson’s vision to reinvent the struggling Penney’s, and those aggressive advances attracted Stewart to jump aboard.

Before the recess, the judge had been mulling over broadening the preliminary injunction he issued last summer. The injunction barred Penney’s from selling Stewart-branded goods in stores beginning this month. Most recently, the judge contemplated whether the ruling should include product designed by Stewart but rebranded with the “JCP Everyday” and “double-house” logo.

The judge said Monday he would hear arguments on this topic Thursday, a day after Macy’s is expected to rest its case.

“Rest means rest,” urged an exasperated Mark Epstein, lawyer for Penney’s, after Macy’s counsel indicated it may have rebuttals after Wednesday. Epstein said “his blood boils” every time Macy’s brings up last minute issues.

“Even after three weeks?” said the judge.

Eric Seiler, MSLO’s lawyer, said once Macy’s rests its case Wednesday morning, he will argue to dismiss “large portions” of the plaintiff’s case that afternoon.

One issue the judge was keen to wrap up sooner concerns Stewart-branded stemware being sold on Penney’s Web site.

According to Macy’s, the sale of the plastic glasses violated the court’s injunction, but lawyers for the defendants said they were under the impression that the glasses didn’t fall under the exclusive categories deemed by Macy’s. According to the defense, plastic glasses could fall under the “celebrations” category, a non-exclusive category. But counsel for MSLO and Penney’s said they would consult with their clients and get back to the judge Tuesday, which is when this minor issue is expected to be resolved by Oing.

Meanwhile, the trial moved forward when Macy’s called John Tighe to the stand. Tighe, Penney’s men’s division general merchandising manager and ex-senior vice president of its home business, gave a thorough three-and-a-half hour testimony about his involvement in the MSLO/JCP deal.

After establishing that Penney’s had identified Martha Stewart as one of the “most powerful” home brands, Macy’s lawyer Theodore Grossman asked Tighe about his dealings with Stewart.

One of Tighe’s more illuminating insights came when he described a conversation with Stewart during which the domestic goods guru expressed unhappiness with her Macy’s contract.

“She believed she should be doing more business,” Tighe said, adding that Stewart also “believed” the private label brands at Macy’s “competed with” her brand, and ultimately detracted from its sales.

Tighe said Stewart thought that she should “almost be getting a percentage of the [Macy’s private label] business,” as her wares, stocked in adjacent shelves, drove private label sales.

She believed they were “feeding off” her brand, the Penney’s executive said of the private label business.

He added that Stewart was excited at the prospect of having a store within Penney’s that would sell her kitchenwares, and that he was told that Stewart’s “ability” to sell her goods within shops-in-shop “dovetailed perfectly” with Johnson’s “vision.”

When he came aboard as ceo in 2011, Johnson began mapping out a strategy to reinvent the midtier department store. He settled on developing shops-in-shop, which offered “everyday” competitive pricing. He began aggressively courting Stewart, who claimed to be somewhat frustrated with the slowing growth of her brand at Macy’s. Stewart had wanted to branch out and not only sell other categories such as luxury bath, but also she wanted her own stand-alone store. The latter was an option, according to her deal with Macy’s. Penney’s seized on that “loophole,” according to Macy’s, and found a way to offer Stewart-branded goods in shops-in-shop in Penney’s.

For the lawsuit, the definition of a store has become vital, but so, too, has the question of confidentiality and suppliers.

Grossman spent a fair amount of time rehashing the issue of suppliers, intimating that perhaps confidential information could be shared if the same supplier was used by MSLO to make goods for both Macy’s and Penney’s.

Tighe said many retailers share “the best suppliers,” and that it’s not a secret that many competitors use the same suppliers. It’s the designs that are proprietary, he argued, noting that MSLO put two separate design teams in place for Penney’s and Macy’s accounts. He added that when it came to store design, MSLO and Penney’s formed a “joint-oversight committee” to monitor MSLO/JCP store designs.

“It was not a typical licensing agreement,” Tighe said, referring to the MSLO/JCP deal. “It was more detailed. It was more collaborative.”

Nicole Post, a senior brand director at Penney’s, took the stand after Tighe. Post, who will resume her testimony Tuesday morning, spoke briefly about the design process and her work as a liaison between Penney’s and the Martha Stewart team. Following the conclusion of Post’s testimony, Katheryn Burchett, Penney’s senior vice president of merchandising and marketing integration, is expected to testify.