By  on February 26, 2013

NEW YORK — The knives came out Tuesday.

Just a day after Macy’s Inc. chairman, president and chief executive officer Terry J. Lundgren testified that he was “sick to his stomach” over Martha Stewart Living Omnimedia Inc.’s deal with rival J.C. Penney Co. Inc., Macy’s pulled the plug on its relationship with the MSLO-owned Emeril Lagasse brand — although it insisted the decision to drop the collection was due to its performance, not the court case.

The dropping of Lagasse was revealed in court by MSLO lawyer Eric Seiler, who questioned Leonard Marcus, president of Macy’s Merchandising Group, and it caused quite a stir among the Macy’s legal team, which was caught flat-footed.

During a brief break, the team was overheard confirming among themselves that they had “no idea” Macy’s severed ties with Lagasse and that they couldn’t believe the retailer would do that only a day after Lundgren appeared on the stand.

Why the termination of that deal matters, according to Seiler, is related to the fact that MSLO’s Emeril brand sold cookware to Macy’s. In MSLO’s exclusive deal with Macy’s, which it inked in 2007, the retailer would have the right to sell certain Martha Stewart-branded wares, including kitchenware and cookware, an exclusive category. Although Emeril product only bears the Emeril trademark, it does not adhere to other tenets under the Macy’s-MSLO contract, the lawyer said. For example, MSLO makes and designs Emeril goods, but the Macy’s contract says Macy’s must make MSLO goods. There’s also the detail of selling the wares to its competitor — Emeril’s line was carried by both Penney’s and Macy’s. The Emeril collection is produced under license by All-Clad and will continue to be sold on, although not in Macy's stores.

Marcus said he didn’t know Emeril had been dropped, but he did speak to the issue of minimum sales. In his cross-examination, Seiler made the case that Macy’s and its subsidiary MMG didn’t care whether MSLO made its minimums. In its counterclaims, MSLO argued that Macy’s has “uncanny success in consistently matching the minimum level” of sales to meet minimum agreed-upon royalties. Seiler said MSLO missed the mark in 2011 and 2012, and got Marcus to acknowledge that financially it doesn’t make a difference if MSLO makes minimums under the sales and purchase agreement.

The lawyer furthered the argument by showing an e-mail from Marcus to Macy’s executives Laurene Gandolfo, Jeff Kantor, Tim Adams and Jody Weintraub that read, “We should revisit our 2010 plan and going forward strategy. When this deal was signed — everyone believed that these numbers were so low, that they would never be an issue.”

Shirking culpability, Marcus called the e-mail a “love note,” which is saying, “get on the stick because I told you so.”

Earlier in the day, Michael Francis, former Penney’s president, squirmed a bit while trying explain the meaning behind a few racy e-mails in a video deposition that was played on a large projection screen. His note to Penney’s ceo Ron Johnson, in which he said Lundgren would “race past migraine into grand mal seizure” once he learned of Martha Stewart’s business venture with Penney’s, was under scrutiny.

Macy’s lawyer Theodore Grossman, who read that e-mail aloud last week during opening statements, now squared off with Francis. When asked what the “grand mal” line could possibly mean, Francis said it was a “bad choice of words,” adding that he would “typify” the use of the word “Terry” as “proxy for the retail industry.”

When pressed further, Francis said the e-mail referred to the “cumulative impact of the plans we intended to share on the 24th.”

On Jan. 24, Penney’s revealed its new retail strategy, incorporating in-store boutiques, as well as a slate of new partners, one of whom was Martha Stewart. A day earlier, Macy’s had filed suit against Stewart, and according to Francis, he was told to forge ahead with the MSLO strategy.

Following the lawsuit, in an e-mail to Francis from Johnson, it became clear what the ceo was focused on.

“Ultimately, they think the best way to stop Macy’s from renewing [the contract] is to make our offensive so strong that they pick up their toys and go home,” Johnson wrote, referring to counsel he received. Macy’s had until Jan. 31 to renew its deal, and it did so that month for another five years.

Leonhard Dreimann, a former ceo of Salton Inc. and marketing expert witness for Macy’s, wrapped up the day testifying to the strength of the MSLO brand at Macy’s.

Dreimann called MSLO’s Macy’s business “remarkable” considering the difficulty home brands have had during the recession.

“This isn’t a growing category. There are so many towels that are sold in the United States. There are so many sheets that are sold in the United States,” he said. “You are going to have cannibalization.”

He added that if Stewart sold goods under the JCP Everyday brand — Penney’s Stewart line — in shops-in-shop and continued to sell branded wares at Macy’s, it would “bring pricing down,” deteriorating the Macy’s Stewart brand and causing “consumer confusion.”

Dreimann, whose claim to fame includes marketing and selling the George Foreman Grill, offered his views on what constitutes a store, a key element to the lawsuit. While Penney’s contends that a shop-in-shop is a stand-alone store, Dreimann and Macy’s disagreed.

But all this may be irrelevant.

“Regarding the store-in-store concept, I’m going to let the cat out of the bag — I’m not so sure there’s any ambiguity in this contract,” said Presiding Judge Jeffrey Oing, who seemed to tire of the back-and-forth between the two sides. His statement may not be great news for the defense, but there’s still time for Penney’s and MSLO to make their case, since the trial is slated to run until March 8.

The financial impact of the deal and the case was partially revealed Tuesday when MSLO reported its results. The company revealed a 29.5 percent gain in fourth-quarter adjusted earnings before interest, taxes, depreciation and amortization of $11.4 million and credited improved royalty revenues from Macy’s as well as design fees from Penney’s, plus the Martha Stewart Home office line with Avery. The home goods firm, which logged a 23.5 percent rise in sales to $16.2 million, said it incurred a $800,000 legal expense during the quarter related to the lawsuit with Macy’s.

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