Martha Stewart Rights Lead To Court Fight Between JCPenney, Macy's

2:09 PM, Feb 20, 2013   |    comments
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NEW YORK-- Two of the nation's biggest department store chains J.C. Penney and Macy's are set to duke it out in New York State Supreme Court over the right to sell Martha Stewart merchandise.

At the heart of the case, slated to begin Wednesday, is whether Macy's (M) has the exclusive right to sell certain Martha Stewart products, such as some of its cookware, bedding, and bath items.

Company founder Martha Stewart, J.C. Penney's CEO Ron Johnson and Macy's CEO Terry J. Lundgren could be called to testify during the trial, which could last three weeks.

Shares of Macy were modestly lower Wednesday, while Penney shares jumped 4.7%, and the stock price of Martha Stewart Living Omnimedia was up 3.4%.

In December 2011, J.C. Penney announced a partnership in which it would open Martha Stewart mini shops in most of its stores, beginning this spring. It also announced that it had acquired a 16.6% stake in Martha Stewart's company.

Martha Stewart's deal with J.C. Penney's is part of the struggling retailer's plan to revive under Johnson's leadership. He became CEO of the Plano, Tex.-based company in November 2011 and is known for helping create the iconic look and feel of Apple's retail stores.

Macy's sued Martha Stewart's company almost immediately, arguing that Macy's had exclusive rights on certain Martha Stewart products until 2018 under the terms of pact dating back to 2007.

"J.C. Penney wanted to rob Macy's of market share and destroy the competitive advantage that it enjoys as a result of its existing exclusive agreement with (Martha Stewart Living)," Macy's said in its lawsuit.

Macy's, based in Cincinnati, Ohio, has claimed substantial damages and said J.C. Penny's marketing maneuver "threatens to inflict incalculable further harm on Macy's. Billions of dollars of sales are involved."

Macy's is also trying to stop Martha Stewart from providing designs to J.C. Penney even if J.C. Penney doesn't use the Martha Stewart moniker on products made by her company that it sells. Penney has said it plans to open its Martha Stewart mini shops May 1.

Last summer, Macy's won a preliminary injunction against Martha Stewart's company, preventing the sale of her housewares and other exclusive products at J.C. Penney.

Supreme State Court Judge Jeffrey Oing said J.C. Penney could open its Martha Stewart mini shops, as long as the items under exclusive contract with Macy's are not sold in them. Judge Oing, not a jury, will decide the trial's outcome.

One of the big issues in the lawsuit is whether the mini shops meet a stipulation that allows the home maven to sell her goods in Martha Stewart Living stores.

According to Martha Stewart, the Macy's agreement doesn't say that goods under dispute can be sold only in "stand-alone" Martha Stewart stores.

She and J.C. Penney argue that the mini shops do not fall under the exclusivity clause in the Macy's-Martha Stewart contract.

Macy's disagrees.

According to a memo J.C. Penney filed with the court, Macy's rights to Martha Stewart aren't nearly as sweeping as Macy's suggests. Under Macy's interpretation of the contract, according to J.C. Penney, Martha Stewart Living is "little more than an in-house designer for Macy's."

"Macy's should stop competing in the courtroom and start competing in the marketplace," says Penney's memo.

In court documents, Martha Stewart Living said it will prove that it was Macy's that breached their contract because it didn't "use commercially reasonable efforts to maximize net sales of Martha Stewart Collection products."

The stakes are high for both retailers as well as for Martha Stewart.

Martha Stewart Living is trying to fatten merchandising revenue as it struggles to offset declines in its broadcast and publishing business, a segment that accounts for more than 60% of its business. The New York company is downsizing its magazines and cutting publishing jobs as it increasingly focuses on online video and other digital content.

Penney's continues to combat mounting losses and sharp sales declines since early last year after shoppers were turned off by a new strategy that eliminated most sales in favor of lower prices every day.

The retailer began adding mini shops featuring new hip brands last year and plans to overhaul the home department this spring with well known designers, such as Jonathan Adler and Michael Graves.

Martha Stewart, however, is at the center of the retailer's home products revamp.

As for Macy's, having another major department store sell Martha Stewart towels, pots and other merchandise could dilute its business.

Burt Flickinger, III, president of retail consultancy Strategic Resource Group, says that if Penney's doesn't prevail legally, it could hurt the chain tremendously.

"It leaves Penney with one less power brand," Flickinger said.

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