By  on February 25, 2013

NEW YORK — Terry J. Lundgren felt wronged by Martha.

Taking the stand Monday in Macy’s Inc.’s ongoing case against Martha Stewart Living Omnimedia Inc. and J.C. Penney Co. Inc., the retailer’s chairman, president and chief executive officer used words like “shocked,” “appalled” and “disgusted” to describe how he felt when he learned that Martha Stewart inked a deal with rival Penney’s last year.

Dressed in a black pin-striped suit with a white dress shirt and gray tie, Lundgren at times looked pained when his lawyer asked him about his relationship with Stewart and her company. The two parties signed a pact in 2007 for the exclusive sale of certain Martha Stewart-branded goods and, according to Lundgren, Stewart violated that contract, as well as their friendship, when she signed on with Penney’s in 2011.

“We were, we were, we were friends,” stuttered Lundgren, in response to whether he still had a friendship with Stewart. “I told my team to prioritize her business.”

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Lundgren’s lawyer, Theodore Grossman, helped create a narrative that MSLO intentionally breached their contract, but Penney’s and MSLO contested that Stewart did nothing illegal.

Central to the Penney’s deal is that Stewart can sell her goods in stand-alone stores, a caveat Macy’s agreed to when it inked its original contract in 2007. MSLO had envisioned a handful of upscale stores for the brand, à la Ralph Lauren’s boutique on Madison Avenue or Tommy Hilfiger’s store on Fifth Avenue, according to Grossman. As long as that “elevated” the MSLO brand, that was “fine,” Lundgren admitted in his testimony. But Penney’s claims it is that provision which allows MSLO to set up shops-in-shop in its stores.

On Monday, Lundgren disagreed, defining a retail store as a “store that is either accessed by the mall or by the parking lot or by the sidewalk in front of Times Square or Madison Avenue, something like that.”

He explained that opening a shop-in-shop was the same thing as opening a “business within a business,” even if the shop in question is a leased business, as is the case with a Starbucks inside a Macy’s. The dapper ceo went through the details of the contract, underscoring repeatedly that Martha Stewart’s “exclusivity” pact was of the utmost importance to Macy’s, as was the ability to “renew” the contract.

Lundgren said that, overall, about 30 percent of what Macy’s sells is exclusive to the department store.

“Martha Stewart is our single largest vendor in the home part of our business,” Lundgren said, crediting the exclusivity angle of the partnership. “We built it from scratch since 2007. It’s been successful.”

Stewart and her team knew the ground rules, contended Grossman, who cited an example in which Stewart corrected a near-breach of her Macy’s deal. Before the Macy’s deal, Stewart had appeared in advertising for Wal-Mart Stores Inc. in 2008 with home goods and bridal apparel prior to the Penney’s deal. When Lundgren was made aware of the Wal-Mart ad, the ceo said the ad would cause “tremendous problems” because it would “violate our contract.”

Lundgren spoke to Charles Koppelman, MSLO’s then-ceo, who agreed. MSLO asked Wal-Mart to pull the ads and they did.

But as MSLO’s financials began to weaken, Stewart started looking elsewhere, and found Penney’s, Lundgren claimed.

The Macy’s ceo became flustered when Grossman asked him to talk about a phone call he received from Stewart on Dec. 6, 2011, the eve of the announcement of the Penney’s agreement. The ceo was put on speakerphone as he listened to Stewart and then-MSLO ceo Lisa Gersh inform him of the deal inked with Penney’s.

“I was completely shocked and blown away by what she was saying to me,” he said. “It was so far from anything I could have imagined. I was so shocked. I said to her, ‘Why wouldn’t you bring this to me?’ I said to Martha, ‘We are friends and business partners.’”

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On the call, Lundgren said, Stewart explained she couldn’t tell him about the deal due to confidentiality issues. Lundgren said it “seemed” Stewart was “reading a document” that sounded like it was “prepared by lawyers.”

When Stewart told him the deal “would be good for Macy’s,” that was it, Lundgren said, explaining he had never hung up the phone on anyone before that.

“That’s when I hung up,” the ceo said. “The thought that it would be good for Macy’s is so far from anything I could comprehend. I’m upset right now talking about it.”

Still, Macy’s renewed its agreement with Stewart months later — even after filing suit against MSLO. “This is a very important business to us,” the ceo explained. “I don’t have an answer of what to do if I don’t have Martha Stewart brands in our home [division]. I don’t have a substitute.” When asked about his relationship with Stewart now, Lundgren said: “I don’t have a personal relationship with Martha Stewart. I haven’t responded to her since that phone call and I don’t intend to.”

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During cross-examination, Eric Seiler, MSLO’s attorney, said Lundgren wasn’t told anything particularly inflammatory by Stewart on that phone call.

“You were shocked, appalled and disgusted…not because she breached the contract, but because she didn’t come to you first,” Seiler said, noting that all Stewart told Lundgren was that Penney’s took a 16.6 percent stake in her company and that it would sell “crafts.”

Crafts do not fall under the Macy’s exclusivity contract, the lawyer noted.

“I was upset that she didn’t come and talk to me first,” Lundgren admitted.

Moments later, Seiler and Mark Epstein, counsel for Penney’s, pressed the ceo on his definition of “confidential.”

Macy’s had claimed that MSLO gave Penney’s confidential information on its best-selling items. Macy’s alleged that MSLO revealed to Penney’s the thread count in Martha Stewart-branded sheets. After showing the court that this information is publicly available on, Epstein asked the ceo: “You take that to be a secret?”

“Anything between Macy’s and Martha Stewart should be considered confidential,” he replied.

After roughly five hours of testimony, Lundgren left the courtroom, and the lawyers began showing a video deposition taken of former J.C. Penney president Michael Francis. The court will continue reviewing that testimony Tuesday in lieu of Stewart’s testimony. Initially, Stewart had been slated to testify Tuesday, but she had a scheduling conflict. She will likely testify later this week or early next week. Ron Johnson, ceo of Penney’s, will take the stand Friday.

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