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Macy’s Inc. won an early victory in its legal battle against Martha Stewart Living Omnimedia Inc. — and delivered a setback to Ron Johnson’s reinvention of J.C. Penney Co. Inc.
This story first appeared in the July 16, 2012 issue of WWD. Subscribe Today.
A New York State judge granted Macy’s a preliminary injunction, barring the home goods firm from selling Martha Stewart-branded bedding, bath, kitchen textiles, dinnerware and cookware in Penney’s stores. That shuts Penney’s out of some of the brand’s key categories for now.
Macy’s has been exclusively carrying certain Martha Stewart products under a 2006 deal. But the chain was blindsided in December, when the brand inked deal with rival Penney’s to set up shop-in-shops.
Penney’s bought a 16.6 percent stake in the media and lifestyle brand and grabbed two seats on its board as part of the bargain. The deal was one of the first major moves by Johnson, who had just joined as chief executive officer after a very successful stint running Apple’s stores. At the time, he described establishing the brand in Penney’s as a “centerpiece” of his efforts to revive the chain.
Although the Martha Stewart shops in Penney’s weren’t set to open until February 2013, just one month after the brand’s deal with Macy’s was to expire, Macy’s sued for breach of contract in January and maintained that it had the “unilateral right” to extend its agreement with Martha Stewart. Macy’s now claims its agreement with Martha Stewart does not expire until January 2018. Martha Stewart filed counter claims in February, which asserted that Macy’s breached its contract by failing to “maximize net sales” and said that the contract with Macy’s should be deemed “invalid.”
Penney’s did not return calls for comment by press time and Martha Stewart said it would carry on and sell branded goods in Penney’s, but has to stay away from the categories in question until the legal questions are settled.
The ruling is a blow to Johnson’s dramatic reshaping of Penney’s, which includes a new pricing strategy and shop-in-shops from a range of brands. The company lost $163 million in the first quarter and its marketing has failed to date to break shopper habits and get over the elimination of coupons. President Michael Francis left Penney’s after just eight months in June and Johnson took over marketing and merchandising for the firm.
On Friday, Macy’s lawyers argued for both a preliminary injunction and for Martha Stewart’s counterclaims to be tossed out. Presiding Judge Jeffrey Oing agreed with Macy’s on the injunction, adding that “absent Macy’s consent” Martha Stewart should not have entered into other agreements.
The ruling bodes well for Macy’s case, but the verdict is not set in stone.
“The scale tilts in favor of Macy’s,” Oing said, but added that he would not dismiss Martha Stewart’s counterclaims. Instead, the judge advocated that the case go to trial in November.
“I am very happy,” said Macy’s lawyer Theodore Grossman of Jones Day, who hightailed it out of the courtroom once the verdict was delivered.
Jim Sluzewski, a spokesman for Macy’s, gave a more detailed account, offering: “We expect to continue to exclusively sell Martha Stewart-branded merchandise in categories such as cookware, kitchen utensils, bed and bath for the term of our contract, which currently extends to January 2018. Given that this case remains in active litigation, we do not have a further comment to make.”
Sarah Brown, a Martha Stewart spokeswoman, said the ruling “does not change” the company’s plan to roll out its products at Penney’s during the first quarter of 2013.
“Nothing about today’s ruling changes that,” she said. “We will comply with whatever restrictions are placed upon us at this time, but we note it’s a preliminary ruling and we will continue to defend our legal and commercial position. We continue to believe that we have not breached our agreement and that extending our brand to a wide array of retailers is beneficial to all our partners.”
Friday’s four-hour hearing did provide some insight into how both sides intend to proceed.
Arguing on Macy’s behalf, Grossman said Martha Stewart only filed counterclaims as a “knee-jerk reaction” to the initial lawsuit, and up until then the brand and Macy’s had a “trusting relationship.”
The attorney pressed on that Martha Stewart was calculating in its plan to sell products to the rival department store, going so far as to compare Martha Stewart to Yankee baseball player Derek Jeter.
“If Derek Jeter entered into a contract with the Red Sox, I don’t think we’d wait to see if he’s productive in a Red Sox uniform,” he said, implying that the contract had already been breached.
But Martha Stewart attorney Eric Seiler of Friedman Kaplan Seiler & Adelman LLP countered the Jeter analogy, explaining that Martha Stewart already sells a multitude of products to different stores.
“Derek Jeter is playing for 10 teams already,” he said, while also taking a more measured approach.
“We love Macy’s….If we can’t sell MSLO-branded goods, we’d like to fix it or stop [the situation].”
Still, Seiler added that his client has the right to sell its products in branded shop-in-shops, citing that the lawsuit never mentions the contract’s definition of a Martha Stewart store, which is “any retail store branded or operated by MSLO or an affiliate of MSLO or that otherwise prominently features Martha Stewart marks or Stewart property.”
That argument seemed too nebulous for Judge Oing, who focused more on the fact that two different retailers were making the same product, and thus, causing “confusion” among shared manufacturers, a point that Grossman brought up, which may play a larger role going forward.
“The dual relationship is unworkable,” the judge said. “Exclusivity is at the heart of the Macy’s agreement.”