JCPenney agrees only Macy's can sell some Martha Stewart items

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JCPenney says it will no longer sell Martha Stewart branded kitchen, dining and bedding items, after Macy's filed a lawsuit against JCPenney and Martha Stewart Living Omnimedia charging breach of contract. JCPenney can still sell Martha Stewart window treatments, lighting, rugs and holiday items, but may end up paying damages for selling items that were supposed to be exclusive to Macy's. Martha Stewart appeared at Macy's Herald Square store in this 2008 photo to sign and sell copies of her books on cookies and wedding cakes.

(Associated Press file)

CLEVELAND, Ohio -- Macy's Inc. appears to have won its battle to stop JCPenney from selling Martha Stewart branded or designed merchandise that Macy's has said was supposed to be exclusively sold at its stores.

After a nearly two-year-long legal tug-of-war, in which Cincinnati-based Macy's was represented by a Cleveland team from the Jones Day law firm, Martha Stewart Living Omnimedia and JCPenney quietly issued a joint statement about their revised licensing and design partnership.

The New York State Supreme Court is expected to issue a decision on the case as early as Friday.

"Under the amended agreement, MSLO will continue to design Martha Stewart branded products for JCPenney in the following categories: window treatments and hardware, lighting, rugs, holiday and celebrations," the two companies said.

A display of Martha Stewart Collection cups, bowls and tableware is shown in this file photo from the Macy's store at Kenwood Towne Centre in Cincinnati. Macy's signed an agreement to be the exclusive retailer for Martha Stewart branded items in the kitchen, bathroom and bedroom, and filed suit against Martha Stewart LIving Omnimedia after it signed a similar competing agreement with JCPenney.

That's a much smaller range of items than JCPenney had initially sold under an agreement that Macy's said violated its exclusivity contract with Martha Stewart Living.

It also makes no mention any of the Martha Stewart kitchen, bath, bedding, housewares and cookware products that had initially sparked Macy's lawsuits.

JCPenney is also giving back 11 million shares of MSLO, and will no longer have members on MSLO's board of directors.

JCPenney Chief Executive Myron E. Ullman III said: "We are happy to be moving forward and continuing to provide our customers with quality products from the MarthaHome collection, which includes MarthaWindow, one of our best-selling lines of window treatments."

The New York State Supreme Court has not yet addressed any financial or punitive damages in the case, but both Macy's and its attorneys will pursue that issue, Jones Day attorneys said.

Macy's spokesman Jim Sluzewski, senior vice president of corporate communications and external affairs, called the joint announcement "a tacit admission by both Penney and MSLO that Macy's is the only store that can sell Martha Stewart bed, bath, and kitchen goods and that the contract that Penney and MSLO entered into to sell Martha Stewart bed, bath, and kitchen goods at Penney was illegal."

Macy's Chairman, President and Chief Executive Terry Lundgren shows up to testify at the New York State Supreme Court trial on Feb. 25, 2013. Macy's sued Martha Stewart Living Omnimedia for breach of contract after it signed an agreement to provide products and designs to rival JCPenney, in violation of its own exclusive agreement with Macy's.

"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," he said via email.

Theodore M. Grossman, lead attorney of the Jones Day legal team that represented Macy's, put it even more bluntly: "It's a complete surrender by JCPenney and Martha Stewart Living Omnimedia. They agreed they will not sell any (Martha Stewart) goods from anything in Macy's exclusive categories."

JCPenney can still sell Martha Stewart "paper goods, blinds and shades and rugs," he said. "Macy's long ago told Martha Stewart in the contract that she could sell those kinds of goods anyplace."

"But in terms of flatware, tabletops, pots and pans, appliances for the kitchen, bathmats, towels and bedding, everything for the kitchen, bedroom and bathroom -- all the things that Martha Stewart is known for -- all of that is Macy's-exclusive."

"The only issue that remains is reimbursement for the fees and damages Macy's suffered in the period until now as a result of Penney's and MSLO's conduct," he said. Grossman's team also included Cleveland-based attorneys and Jones Day partners Robert Faxon, Michael Platt, and Louis Chaiten.

The long-running dispute stems from two conflicting contracts: Macy's and MSLO signed the first contract on April 3, 2006, giving Macy's the "exclusive rights to manufacture and sell MSLO goods in defined 'Exclusive Product Categories'" that include towels, sheets, dinnerware, cookware, candles and picture frames.

MSLO and JCPenney signed a second contract on Dec. 6, 2011, giving JCPenney intellectual property and rights in those same categories -- "in obvious violation of the Macy's agreement," according to a post-trail memorandum Macy's filed on May 31. The 77-page memorandum says "the Court has seen and heard towers of evidence that JCP explicitly asked MSLO to break its contract with Macy's."

"It was JCP's belief that Martha Stewart would be a 'game changer' for its Home store, and it sought to have MSLO 'break' the contract with Macy's and contract instead with JCP," the document said.

JCP's then-Chief Executive Ron Johnson, who was ambitiously trying to rebrand JCPenney as "America's Favorite Store," saw Stewart as a key part of that reinvention. He told Stewart that JCP would "take her to a whole new level" beyond what Macy's was doing for her. He later sweetened the deal, offering $500 million; a seat on JCP's board; and incentives to help MSLO.

Ron Johnson, former Chief Executive of JCPenney, testified to the New York State Supreme Court that Martha Stewart was a key component of his ambitious plans to rebrand JCPenney as "America's Favorite Store." He succeeded in wooing her and her company, Martha Stewart Living Omnimedia, away from an exclusive contract with rival Macy's.

Macy's lawyers unearthed emails Johnson sent to JCP senior managers and board members seeking their blessing to woo MSLO from its Macy's contract.

"I'm feeling awesome about grand strategy," Johnson told one executive. "She (Stewart) wants to do it. I need to propose a deal so she can go to (Macy's Chairman) Terry L(undgren) at Macy's and break their agreement. That is the only issue in way of success at this point."

"The ball is in her court now to talk to Macy's about a break in a tight, exclusive agreement they have with her," Johnson told another JCP officer.

Macy's said: "JCP knew that Macy's had exclusive rights in bedding, kitchen goods and bath goods; knew that Macy's exclusive agreement was 'tight'" and seemed to expect that once Macy's found out about its deal, that it would "simply pick up its toys and go home."

Instead, Macy's sued MSLO for breach of contract in January 2012, and filed another lawsuit against JCP for interfering with that contract.

Macy's said it spent millions on the "herculean task" of making Martha Stewart more of an upscale brand after Stewart's long association with discount retailer Kmart and the negative publicity from Stewart's felony conviction and incarceration.

When the brand launched in September 2007, "Macy's devoted its entire Herald Square window display to the Martha Stewart Collection, spent millions painting store walls 'Martha blue'" and featured Stewart prominently on its website and other promotions.

"Macy's treated the Martha Stewart Collection better than any other brand in the store, giving it more respective advertising dollars than any other brand, giving it prominence in display, devoting to it more of its time, and working intimately and ceaselessly with MSLO's staff" to design and create new products.

As a result, Martha Stewart now contributes more than $250 million to Macy's annual sales, outpacing the retailer's growth as a whole. Lundgren and Stewart became not only business partners, but friends. So much so that when she called him the night before the JCP agreement went public, Lundgren testified that he was so shocked, he hung up on her.

Although Macy's agreement forbid MSLO from designing products in its exclusive categories for anyone other than Macy's, MSLO developed and gave JCP 900 designs for new products between December 2011 and July 2012.

"After we got an injunction preventing JCPenney from selling Martha Stewart-labeled goods in our exclusive categories," JCP sold the MSLO-designed items as "JCP Everyday" items instead, Jones Day's Grossman said. "They're selling the goods that they have on hand. They will not manufacture or sell any more."

New York Times reporter James Stewart recently wrote that the judge should "hold off granting Macy's any punitive or other monetary damages" because "not even Macy's wants to push J.C. Penney into bankruptcy."

But Macy's memorandum notes that even though Johnson has been fired and JCP is struggling financially, "Macy's is the victim here."

"Macy's has been forced to spend millions of dollars on attorneys' fees enforcing its contract rights against MSLO," it wrote. "It has been deprived of its exclusive right to the 900 valuable designs in the Exclusive Product Categories that MSLO gave to JCP."

It cited emails among JCP senior executives expressing "gleeful pleasure in the embarrassment and injury they had caused Macy's and its CEO" that Macy's said "went well beyond healthy competition."

When Johnson emailed one executive that the JCP deal might give Lundgren a migraine, he responded: "I think Terry is more likely to race past migraine into grand mal seizure."

In its court filing, Macy's said that it will be difficult to determine the full impact of the sales it lost from Martha Stewart merchandise being sold at Penney's.

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