NEW YORK — Macy’s Inc. said it is already being hurt by Martha Stewart Living Ominmedia Inc.’s deal with J.C. Penney Co. Inc., and that its sales of other brands could also suffer if Penney’s is allowed to carry through with its plan to set up Martha Stewart shop-in-shops.

This story first appeared in the February 3, 2012 issue of WWD. Subscribe Today.

“MSLO’s announcement of its deal with J.C. Penney…devalued the Martha Stewart products that Macy’s is currently selling, in ways that are not calculable,” Macy’s said in its breach of contract suit, which was filed last week and just released publicly in redacted form.

“MSLO has severely damaged the ‘crucial connection’ between Macy’s and Martha Stewart that Macy’s has devoted years and tens of millions of dollars to developing; it has destroyed the public perception that Macy’s is the only place a consumer can turn to to purchase Martha Stewart home products in key categories,” the suit said.

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Macy’s said the injury is compounded by the fact that Penney’s is “perceived as a less upscale retailer” and that other lines of business could be hurt when Martha Stewart sets up shop at Penney’s since the brand attracts customers who then buy other products as well.

“The core issue is that we believe under the contract that we can do what we’re doing as of right,” a lawyer working for Martha Stewart said, explaining that his client has the right to sell its products in MSLO-branded shop-in-shops.

In December, Martha Stewart sold a 16.6 percent stake in its business to Penney’s and signed a 10-year agreement that will create outposts devoted to the brand in Penney’s, beginning in February 2013.

That’s right after the five-year deal with Macy’s expires. Macy’s, though, maintains that it has the “unilateral right” to extend its five-year agreement with Martha Stewart. It exercised that right on Jan. 23, the same day it sued Martha Stewart. Macy’s now claims its agreement with Martha Stewart does not expire until January 2018.

“Billions of dollars of sales are involved,” said Macy’s, which also complained in the suit that it was “kept in the dark and learned of the ‘alliance’ only the evening before the announcement.”

Earlier this week, Macy’s asked the New York State Supreme Court for a preliminary injunction preserving the status quo and keeping the brand from taking steps to implement its deal with Penney’s. The retailer is also seeking monetary damages to be determined at trial.

“A preliminary injunction is extraordinary relief,” the Martha Stewart attorney said. “It’s hard to find a case where the thing you are going to enjoin is a year away from being produced.”

Even when both sides met at the state courthouse Monday to discuss the confidentiality of the court papers, presiding Judge Jeffrey Oing noted that there is “a little bit of time” to decide, as Penney’s won’t be selling anything until 2013.

Macy’s is walking a fine line, taking a hard stance against Martha Stewart while seeking to continue on with the brand and fending off Penney’s, which is undergoing a massive reinvention under chief executive officer Ron Johnson.

In the lawsuit, Macy’s refers indirectly to Martha Stewart’s high-profile imprisonment and conviction, which was related to a stock sale, and paints itself as a savior of sorts. “At the time Macy’s negotiated and entered into the agreement in 2005 and early 2006, the ‘Martha Stewart’ brand was under pressure by very public proceedings and their aftermath involving Ms. Stewart,” the suit said.

The suit also described the Macy’s-Martha Stewart hook up as “highly lucrative” for the home goods and media firm, which nonetheless has posted losses in eight of the last 10 quarters.

Macy’s declined to provide additional comments on the lawsuit. MSLO must reply to the complaint by Feb. 22. Both parties are due back in court on March 8.

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