Macy’s seeks to block Martha Stewart Living’s pact with Penney

Macy’s Inc., the second-largest U.S. department store chain, will go to court in New York on Wednesday to try to persuade a judge to permanently block Martha Stewart Living Omnimedia Inc.’s pact with J.C. Penney Co.

Macy’s sued Martha Stewart Living in New York State Supreme Court in Manhattan in January 2012 to stop it from proceeding with an agreement announced with J.C. Penney the previous month. Macy’s claims that it has an exclusive right to sell Martha Stewart-branded products in categories such as bedding and cookware.

Opening statements in the nonjury trial will be before state Supreme Court Justice Jeffrey K. Oing.

J.C. Penney Chief Executive Ron Johnson and Macy’s CEO Terry Lundgren probably will testify next week, as will Martha Stewart, her company’s nonexecutive chairwoman, Macy’s spokesman Jim Sluzewski said Tuesday.

In July, Oing granted Cincinnati-based Macy’s a preliminary injunction blocking Martha Stewart Living from taking any steps with J.C. Penney on products in the exclusive categories.

In August, Macy’s sued J.C. Penney in the same court, seeking to block it from proceeding with the Martha Stewart Living agreement. Oing denied Macy’s request in that case.

Macy’s said J.C. Penney and Martha Stewart Living “made a conscious business decision” not to disclose their talks to Macy’s until the contract was signed to avoid the risk of a restraining order that would bar the agreement.

“Macy’s contracted with [Martha Stewart Living Omnimedia] at a time when the MSLO brand was associated with the significantly downscale Kmart and Ms. Stewart was just being released from prison,” lawyers for Macy’s said in a pretrial memorandum. “Taking losses at first, Macy’s moved the brand in soft home goods upscale, a herculean task under the circumstances.

“Now defendants, in complete disregard of the Macy’s agreement, seek to reap the rewards of Macy’s work and to usurp the benefits of Macy’s contract.”

Martha Stewart Living has defended its agreement with J.C. Penney, accusing Macy’s of breach of contract and saying the retailer stocked and priced Martha Stewart products in a manner that favors private-label brands. Martha Stewart Living also said Macy’s couldn’t have exercised a five-year renewal option on the agreement because of the breach.

Martha Stewart Living has argued that its original 2006 contract with Macy’s allows Martha Stewart Living to design and sell products within the exclusive categories as long as they are sold through the Internet, television or at any retail store branded with the Martha Stewart name that’s operated by the company or its affiliates or “prominently” features the brand, according to court filings in the case.

The agreement “gives Macy’s the exclusive right, with important exceptions, to sell Martha Stewart-branded products in certain exclusive product categories,” Martha Stewart Living said in a pretrial memorandum. “The agreement does not, however, give Macy’s any exclusivity — as to design, promotion, sale or anything else — with respect to products that are not Martha Stewart-branded.”

J.C. Penney acquired a 17% stake in Martha Stewart Living for $38.5 million in December 2011. The Plano, Texas, department store chain is seeking to revive sales with new mini-stores dedicated to Martha Stewart and other brands.

Martha Stewart Living said in July that J.C. Penney agreed to pay at least $282.9 million in sales commissions over a 10-year period under an amended agreement, a $110.5-million increase from the terms disclosed in December. The amended pact also adds new products.

For Martha Stewart Living, selling its goods to multiple retailers is important to reversing declining sales. The company, which also publishes magazines, has posted losses and decreasing revenue for four straight years, hurt by a drop in advertising demand, and analysts estimate the same for 2012. Its stock lost 44% of its value last year. The New York company announced in November that it was cutting publishing jobs as it focuses on the Web.

Macy’s Lundgren has revived the department store partly by adding more exclusive merchandise including Martha Stewart’s cookware, kitchen utensils and bed and bath items.

The judge said he has scheduled the trial to run through March 8.