By  on March 5, 2013

NEW YORK — Martha was unflappable on Tuesday.

Martha Stewart, who wore a khaki knee-length skirt with a matching tunic-length vest, both by Lanvin, over a cream button-down blouse and a dark-brown suede pair of stiletto heel boots, sauntered into court to testify on behalf of her company, Martha Stewart Living Omnimedia Inc., in the trial involving Macy’s Inc. and J.C. Penney Co. Inc.

Her testimony capped off an exciting two weeks during which presiding Judge Jeffrey Oing’s courtroom welcomed Macy’s chief executive officer Terry J. Lundgren and Penney’s ceo Ron Johnson. On Tuesday, the New York State courthouse buzzed with activity, as security prepped not only for Stewart’s arrival but also for basketball star Lamar Odom, who attended a child-custody hearing next door.

Before a crowded courtroom, Macy’s lawyer Theodore Grossman asked if Stewart was comfortable, to which the home-goods maven said without a trace of a smile: “As comfortable as can be.”

Grossman then dove into a three-and-a-half-hour examination meant to prove that MSLO breached its contract with Macy’s when it inked a deal in 2011 with rival Penney’s to sell Martha Stewart-branded goods. Some of those goods, including home and kitchenware, fell under exclusive categories in MSLO’s Macy’s deal, which the company signed in 2006.

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He began by asking a host of questions that hinted at Stewart’s five-month prison term for insider trading, which made for some terse exchanges. The longest came when Grossman inquired if MSLO was “challenged” when she was released from prison in 2005.

“I did not think my brand was challenged,” Stewart said flatly. “It was as strong as when I emerged from Alderson [Federal Prison Camp], as when I went into Alderson.”

The lawyer moved on to MSLO’s relationship with Macy’s which, according to Stewart, was bittersweet.

“I love Macy’s,” she said. “I’ve shopped at Macy’s since I was a young child. Macy’s has been a fixture in our home. Macy’s has changed a lot over the years.”

While she admitted to having “enjoyed the partnership,” Stewart claimed that she “wasn’t always thrilled that Macy’s hadn’t increased its exposure in its stores” and allowed it to jump into new categories such as “luxury” bath and bedding.

“As a company, we couldn’t survive without growth,” she explained, addressing the counterclaims her lawyers filed, which alleged that Macy’s violated their 2006 agreement.

“We’ve lived up to our obligations,” Stewart said. “Macy’s has lived up to most of their obligations. It has been one of our good partners.”

Although she had not been directly asked, the businesswoman coolly slipped in a few times that she had been “rebuffed” by Macy’s Lundgren when she asked to broaden her firm’s merchandising reach.

“Macy’s is a $300 million business for MSLO,” Stewart offered. “I don’t want it to go away, but I thought our business would be much bigger than $300 million after five years.”

Stewart referred to talking points prepared for her by Macy’s for an annual board meeting, which both Grossman, and later her own counsel, flashed on an overhead projector. At the time, Macy’s had been working with MSLO for just two years and wrote that it was “thrilled” that sales topped $200 million. Stewart’s lawyer Eric Seiler later showed the entire memo, in which Macy’s proclaimed MSLO’s business with the retailer “would exceed $400 million” three years later.

“They kept us pretty static,” she said, noting that Macy’s never supported MSLO’s bridal business by way of its bridal registry, which had been promised to Stewart from the beginning.

Fast-forward to 2011, and MSLO was struggling financially. It hired advisory firm Blackstone, a move that piqued the interest of Penney’s Johnson. He had just been named ceo, was looking to reinvent the retailer’s home department, and he contacted Stewart for a meeting.

“One of the great things about Ron Johnson is that he’s a visionary,” Stewart said, conveying admiration for the former senior vice president of retail operations at Apple. “He had the foresight to reimagine the American department store. It’s awe-inspiring and as we can see it’s a very difficult thing to do still. I still think Mr. Johnson can do that.”

Stewart said her firm’s “design” vision paralleled Johnson’s for Penney’s. It was also noted in an e-mail exchange between the two, that Johnson called Stewart the “authority on American living.” Impressed by Johnson’s plans and his high opinion of her, Stewart asked J. Crew Group ceo and Apple board member Millard “Mickey” Drexler, whom she called an “informal adviser,” what he thought. In an August 10, 2011, e-mail to Stewart and MSLO’s then-ceo Lisa Gersh, Drexler wrote: “I’ve been thinking this morning about J.C. Penney — the one thing I would say is that Ron Johnson would have the best operating partner possible.”

He continued that Johnson would “be able to do Martha Stewart the right way” and that if MSLO could do that deal “along with keeping the Macy’s/Home Depot deal,” it would be great.

After a few false starts, Penney’s and MSLO finally came to an agreement in December 2011. Penney’s bought a 16.6 percent stake in the design company and said it would sell Martha Stewart-branded goods in more than 700 shops-in-shop within the department store.

Stewart, who admitted that she hadn’t reached out to Lundgren to renegotiate her deal with Macy’s or even informed him of dealings with Penney’s, cracked a smile for the first time when asked about the now-infamous phone call between her and the Macy’s ceo. On the eve of the contract deal, Stewart informed Lundgren of her new Penney’s deal, which angered the ceo, who said during his testimony last week that he was “disgusted.” He hung up on her.

Stewart, whose expressions up until this point fluctuated from a blank stare to a tense pout, chuckled embarrassingly. “I don’t know if he [Lundgren] said he was disgusted or not, but I was flabbergasted that he hung up on me,” she said, explaining that she was mid-sentence when he ended the call.

Grossman refocused the testimony on the original Macy’s contract, asking Stewart if a key element to that deal was that MSLO refrain from signing a deal with a “downscale” rival store, as Macy’s was in the process of elevating Stewart’s brand from its value-centric Kmart roots. Kmart had a licensing deal with Stewart inked in 1997, which ended about two years after she signed on with Macy’s.

“The essence was to create product for Macy’s under the Martha Stewart name under a certain trademark to design and promote and do all the other things we do for Macy’s,” she said flatly. “That was the essence.”

But the lawyer showed the court Stewart’s video deposition, in which she agreed with ex-MSLO ceo of merchandising Robin Marino, who testified that the “essence of the deal” with Macy’s was that MSLO wouldn’t compete with a “downscale” rival. Grossman moved on to the subject of the shop-in-shop, a key element of the case. In its contract with Macy’s, MSLO “left open” certain areas, so that it could one day “build freestanding stores,” Stewart testified.

Called a “loophole” by the prosecution, this detail technically allowed Stewart to open stores in Penney’s. Likening the store-within-a-store model to a “Ukrainian doll,” Grossman dared Stewart to explain how the concept was more than a mere “marketing term.”

“It’s an actual term,” she noted. “The big threat to stores...including Wal-Mart and Amazon. It’s a store without doors, without cash registers. I don’t think you need doors to be a store.”

She explained that in Macy’s, there’s a three-story Louis Vuitton store. “I don’t know if they have cash registers. I don’t know if they have employees, but boy, when the customer goes in, they think they are in a Louis Vuitton store.”

After an objection, Stewart blurted out: “It’s relevant,” to which Grossman mumbled that it wasn’t, causing her to laugh and smile at Judge Oing. She appeared to be having a bit of fun now, even admitting that time was “flying by.”

Grossman’s examination ended when he asked Stewart whether she regretted her dealings with Macy’s.

“Looking back, I probably would have changed a few things,” she said. “I valued my friendship with Mr. Lundgren very much. I did think we were getting along well. I would have certainly loved our business to have grown accordingly. We needed to do something as a company to show growth and sustainability, not only for our employees but for our shareholders.”

Slightly agitated, Stewart called the deal with Penney’s a “very earnest, honest and forthright business decision” for her company.

“I keep looking at this entire episode of this lawsuit….It’s a contract dispute....Why aren’t we looking what’s written on the page?” she implored the judge. Grossman wasn’t amused, and he showed the court an e-mail Stewart wrote to Lundgren after the Penney’s deal had been signed, informing him of Gersh’s departure and assuring him of MSLO’s “complete commitment” to the Macy’s partnership.

Moments later, Stewart’s lawyer began his examination, which lasted about an hour. Almost immediately, Stewart appeared more relaxed, making jokes and highlighting that Macy’s is “very satisfied” to-date with the product MSLO has designed for its shelves. “They [Macy’s and Penney’s] are fighting over me,” she said, “and it’s because of our ability to create amazing product.”

When asked to address Lundgren’s prior testimony claiming that Stewart said a Penney’s deal would be “good for” Macy’s, Stewart paused.

“I think that every business is unique. Every business has its challenges. Every business has its strengths,” she said, emphasizing that her brand can be “in many different places, serving many different customers.”

Stewart referred to research that said the core Martha Stewart customer has a lower income than the core Macy’s customer — a fact that attracted her to Penney’s new low-pricing scheme.

On his second cross examination, Grossman seized on that point, as it indicated to him that Stewart just admitted that her customer was inherently more “downscale” than the Macy’s shopper.

But his “aha moment” fizzled when Stewart shot back: “It didn’t occur to me that there weren’t enough customers to go around.”

With that, Stewart was free to go.

The next big name slated to testify is former MSLO chairman Charles Koppelman, who will take the stand Thursday. Macy’s will review video depositions and call expert witnesses Wednesday.

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