Macy's sued J.C. Penney's for wrongful interference with its contract with Martha Stewart Living Omnimedia.
Macy’s sued J.C. Penney’s for wrongful interference with its contract with Martha Stewart Living Omnimedia. (NYLJ/Rick Kopstein)

J.C. Penney intentionally induced Martha Stewart Living Omnimedia to breach certain terms of its exclusive licensing and promotion agreement with Macy’s when it inked a deal to sell Stewart’s branded line of household wares in its own stores, Manhattan Supreme Court Justice Jeffrey Oing (See Profile) held in a decision released Monday.

The 63-page decision in Macy’s Inc. v. J.C. Penney Corporation, 652861/2012, settles the one remaining claim in a bitter business dispute between the two retail giants and Stewart’s merchandising empire that did little to help boost the image of a floundering J.C. Penney, whose former CEO was fired last April amid poor sales and rancorous litigation.

Macy’s sued both Martha Stewart Living Omnimedia and J.C. Penney for entering into what they termed a “strategic alliance” in December 2011, which permitted the Texas-based Penney’s to sell Martha Stewart household products via a “store within a store” model. The deal also gave Penney’s a 16.6 percent equity stake in Martha Stewart Living and earned it two seats on the board in exchange for a $38.5 million investment in the company. Macy’s has had the exclusive rights to sell Martha Stewart products since September 2007.

In July 2012, Oing granted Macy’s request for a preliminary injunction against Penney’s to stop it from selling Martha Stewart products. He also held a two-month non-jury trial last year on Macy’s claims that included breach of contract, tortious interference with a contract and unfair competition.

Last October, after the close of trial, Martha Stewart Living and Penney’s narrowed their agreement to exclude any branded products within the exclusive product categories. In January this year, Macy’s settled its separate action against Martha Stewart, in Macy’s v. Martha Stewart Living Omnimedia, 650197/2012.

That left only Macy’s claim against Penney’s for tortious interference with a contract, which additionally sought punitive damages and attorney fees. The judge set aside Penney’s argument that the developments in the case should end the tort claim, since to acknowledge as much “would be to pretend that nothing ever happened, and all’s well that ends well,” he said.

Oing chronicled the origins of Macy’s relationship with Martha Stewart Living and the business considerations that propelled Penney’s to approach Martha Stewart despite the existing arrangement, under the leadership of its then-CEO Ron Johnson.

“The preponderance of trial evidence overwhelmingly establishes that JCP intentionally induced MSLO to enter into their agreement, and that MSLO would not have done so absent JCP’s conduct,” he stated.

Oing referred the issue of damages and attorney fees to a judicial hearing officer. Macy’s alleges that it suffered a loss of profits when Martha Stewart Living developed 900 product designs during its collaboration with Penney’s between December 2011 and July 2012.

Oing saved his sharpest words, however, for dressing down the financial executives at Penney’s whose emails to each other in the aftermath of the company’s announcement of its deal displayed “unabashed giddiness at the discomfort they thought the JCP/MSLO agreement would bring to Macy’s,” the judge said, including an email where Johnson wrote to a senior executive that he believed Macy’s “is in shock,” that “it must be a bit embarrassing [for them]” and that ” ‘They look asleep at the wheel.’ “

Despite such “childish behavior … unbecoming of top executives of a major corporation,” Oing said, punitive damages were not warranted.

“JCP, its board of directors, and its top executives were publicly ridiculed and humiliated as a consequence of this trial. Their grand strategy was a colossal and abject retail failure,” he said, adding that the termination of the agreement between Penney’s and Martha Stewart and its contributing to the retailer’s financial woes serves as “sufficient deterrent to JCP” and other companies.

Macy’s was represented by a team led by partners Theodore Grossman and Robert Micheletto of Jones Day.

Penney’s counsel included partners Martin Edel and Adam Safer of Miller & Wrubel.

In a statement, Penney’s said it is “considering our options for appeal.”

“While we appreciate the court’s efforts in this multi-year litigation, we respectfully disagree with and are disappointed by this outcome,” Penney’s stated. “The company does not believe that money damages are warranted and will defend against any damages awarded in the Special Master process.”