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Macy’s Wins Case Against J.C. Penney

Manhattan state court judge Jeffrey Oing handed down a ruling that Penney's "tortiously" interfered with Macy's agreement with MSLO.

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NEW YORK — One of retail’s biggest recent legal battles has sputtered to an end.

The two-year saga that pitted Macy’s Inc. against J.C. Penney Co. Inc. and Martha Stewart Living Omnimedia Inc. came to a close Monday with Macy’s emerging victorious in its claim that Penney’s interfered with its contract with MSLO.

New York State Court Judge Jeffrey Oing ruled that Penney’s “tortiously” interfered with Macy’s agreement with MSLO and ordered that a hearing be scheduled to determine how much Penney’s owes Macy’s in damages and attorneys’ fees. The judge did not award Macy’s punitive damages, however, which is undoubtedly the source of some relief for Penney’s.

The legal battle began in early 2012 when the three companies squared off over Martha Stewart-branded shops-in-shop at Penney’s stores. That arrangement had been developed by Penney’s former chief executive officer Ron Johnson, an executive hired from Apple who set out on an aggressive strategy to shake up mass department store retailing. Penney’s signed the deal even though Stewart already had a 2006 contract with Macy’s for her own line of exclusive branded home goods. Under the Penney’s deal, which closed in 2011, the retailer would sell Stewart-branded goods. It also bought 11 million MSLO shares for $38.5 million and received two seats on the board.

Fast-forward to Jan. 2, 2014. Following nearly two years of legal wrangling — nearly a year of which was spent in court where Macy’s ceo Terry J. Lundgren, MSLO’s Martha Stewart and Penney’s Johnson all testified at trial — and a settlement was reached. Macy’s settled its breach-of-contract lawsuit against MSLO, an undertaking that had been characterized as a no-brainer by legal sources since MSLO revised its deal with Penney’s months earlier. A major element of the revision included the fact that Penney’s would no longer own its 16.6 percent of MSLO and would lose representation on the board. The retailer wouldn’t sell disputed Stewart-branded goods either.

With the case pretty much settled out of court, what remained for Oing was a decision on damages and attorneys’ fees. But during the trial — before any settlement arrangements had been crafted — the judge noted numerous times that determining damages would be difficult, seeing as how the bulk of the Stewart-branded goods for Penney’s never made it to market.

In his ruling Monday, Oing reemphasized that, while taking jabs at the premise of the case.

“This deliberation is not undertaken lightly,” he said. “Clearly the preponderance of the trial evidence demonstrates that the behavior exhibited by JCP’s top executives, with JCP board ratification, has been less than admirable. At best, one can only describe such conduct as adolescent high jinks in the worst form.”

The judge continued that Johnson’s “only motivation” was to “gain an edge” on the competition. He denied Macy’s its request for punitive damages, which are normally granted to punish a defendant for misconduct and to deter others from similar behavior in the future. Oing said Penney’s firing of Johnson in April, combined with the fact it was “on the verge of financial collapse,” amounted to “abject retail failure,” which proved to be a sufficient deterrent to the company and its rivals.

Still, Oing noted that a judicial hearing officer or special referee would determine damages and attorneys’ fees at a later date.

“We are delighted, but certainly not surprised, that the court has found tortious interference by JCP,” said Jim Sluzewski, senior vice president, corporate communications, Macy’s Inc. “It is a great shame that Macy’s had to expend time, money and the diversion of its resources in order to protect its rights. We look forward to the damages phase of the case.”

“While we appreciate the court’s efforts in this multiyear litigation, we respectfully disagree with and are disappointed by this outcome,” Penney’s said in response to Monday’s ruling. “The company does not believe that money damages are warranted and will defend against any damages awarded. We are also considering our options for appeal.”

Although it is not an indication of how the court will rule on the amount of damages awarded to Macy’s, MSLO ceo Daniel Dienst did reveal in February that his firm burned through between $7 million and $8 million in legal costs in what he called a “costly, highly visible, distracting and candidly embarrassing” case.

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