By  on February 21, 2013

NEW YORK — The battle begins.

Lawyers from Macy’s Inc., Martha Stewart Living Omnimedia Inc. and J.C. Penney Co. Inc. filed into Judge Jeffrey Oing’s rickety, dimly lit courtroom Wednesday to begin the first day of what has become one of fashion’s most watched legal contract cases. The bench trial in New York Supreme Court is expected to last until March 8.

In the days to come, the wood-paneled room will likely welcome a trio of retail power players — Terry J. Lundgren, chief executive officer of Macy’s, Ron Johnson, ceo of Penney’s and MSLO founder Martha Stewart. On Wednesday, the packed courtroom played host to legal stars only. For Macy’s, Theodore Grossman, of Jones Day, kicked off Day One with opening statements, in which he outlined his client’s contract with Martha Stewart. Citing e-mails gathered from discovery, the lawyer mapped out the events leading up to Stewart’s second deal with rival Penney’s, in addition to what he deemed a kind of conspiracy by Johnson and his cohorts to have Stewart breach her contract with Macy’s.

“Ron Johnson’s goal was to get Macy’s to step away,” Grossman said in his 70-minute opening statement.
Last year, Macy’s sued Stewart and Penney’s after the two inked a deal that would allow Stewart to sell her branded goods in shops-in-shop within Penney’s stores this spring. The retailer claimed the deal breached its original contract signed in 2006, in which it had the exclusive right to sell certain Martha Stewart-branded goods. Penney’s, which bought a 16.6 percent stake in MSLO when it signed its deal, lost a preliminary injunction over the summer that barred the retailer from selling certain home goods, including branded kitchen wares and bedding. Penney’s is permitted to move forward with its agreement with Stewart in other products, however, and plans to sell the goods under its “JCP Everyday” brand.

“Martha Stewart’s agenda was to market to both stores [Penney’s and Macy’s],” Grossman said, explaining that MSLO had been searching for a “loophole” so it could enter into a deal with Penney’s.

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Stewart hired Peter J. Soloman to search for that loophole, Grossman said, and the advisory firm identified the “shop-in-shop” concept. In her original deal with Macy’s, Stewart had a provision that would allow her to open her own stores one day, as long as they didn’t compete with Macy’s. Grossman said MSLO pointed to the proviso as a justification to ink the Penney’s contract deal. The lawyer, who periodically referred to two large display boards depicting timelines of key MSLO dealings with Macy’s from 1987 to the present, read aloud Johnson’s e-mails documenting the agreement.

In one e-mail, the Penney’s ceo said if they could “break the renewal right” of Macy’s MSLO contract, thus gaining exclusivity to Martha Stewart-branded goods, it could translate to sales of “a billion a year, perhaps $2 billion.” Macy’s renewed its contract with MSLO, despite filing this lawsuit.

Once the newly anointed ceo, who is in the process of revamping Penney’s retail strategy, learned of the shop-in-shop “loophole,” he estimated that with partial exclusivity, Penney’s could earn $250 million in incremental profits from a Martha Stewart deal, Grossman said.

As soon as MSLO and Penney’s worked out an agreement, Stewart sent an e-mail to Lundgren telling the Macy’s ceo that MSLO would be “announcing a very important deal” the next morning that is “positive” for both companies — “although you might not think so at first,” she added.

Grossman then read several e-mails in which Penney’s executives imagined Lundgren’s reaction. One proclaimed the ceo would have to “start” working again, while another said Lundgren would have a migraine. Michael Francis, then president of Penney’s, said in an e-mail: “I think Terry is more likely to race past migraine to grand mal seizure.”

Before ceding the floor to the defense, Grossman warned Judge Oing that in the days to come Lundgren, Johnson and Stewart should be regarded with caution. “All of them are charming, but charm can come from sincerity or it can come from something else,” he said. “The court will have the ability to assess their candor…respect for their employees, respect for the law.”

Mark Epstein, lawyer for Penney’s, rerouted the focus to MSLO’s original deal with Macy’s, noting that his rival never discussed the contract in his remarks.

“The contract is where this case lives,” Epstein said. “If Macy’s wins, the consumer loses competitive choices and competitive pricing.”

The attorney tackled issues regarding design and Martha Stewart trademarks. First, he said Macy’s asserts that there is a limitation on MSLO’s design capacity on product. Delving into the contract, he noted that it never says Stewart can’t design for other entities.

Epstein moved on to Macy’s claims that the “JCP Everyday” brand and the double-house logo used by Penney’s on Stewart wares refers to Martha Stewart trademarks. Earlier, Grossman argued that “Everyday” was synonymous with Martha Stewart, dating back to her deal with Kmart in the Eighties. The alleged trademark infringement claims, if valid, would violate the preliminary injunction granted by Oing over the summer, Epstein offered.

“They bring it now not because it’s a violation of the injunction,” Epstein said. “They do this because they’ve already hit a home run.” He explained the court could order to “turn the boat around” with all the Stewart for Penney’s merchandise and “go back to China, leaving the shelves empty.”

Epstein also addressed the e-mails, which “paint a sinister picture.”

“Ron Johnson didn’t want Martha Stewart to breach the contract,” he said, noting that, when read in detail, Johnson believed the deal would benefit all parties and increase competition.

“This is not unfair competition. It’s just competition and there’s nothing wrong with that,” Epstein added. “This didn’t have to be and shouldn’t have been a blown-up claim about personalities and a vendetta against J.C. Penney and Ron Johnson. It’s a contract dispute at it’s heart.”

Eric Seiler, MSLO’s attorney, echoed Epstein, but said his client is “the little guy” in this case, just trying to “survive.”

Seiler reminded the court that Stewart was a well-known brand before it got involved with Macy’s.
“We own all trademarks. We own all the designs,” he said, noting that Macy’s is trying to take “credit” for Martha Stewart’s success as a brand.

“This would be like Macy’s taking credit for Thanksgiving because they supported the parade,” he said with a thinly veiled layer of sarcasm.

Jokes aside, the lawyer brought the focus back on the Macy’s contract, a document both defendants have pored over, as they prepared for trial.

“There’s this effort to transform the contract to something it’s not,” Seiler said. “Terry Lundgren didn’t read the contract or write the contract, and now we’re being sued for what he hoped was in the contract. We’re being sued for the ‘hoped for contract.’”

The trial continues today at 10:30 a.m.

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