Macy's CEO testifies in fight over Martha Stewart

NEW YORK Macy's (M) CEO Terry Lundgren testified on Monday that he hung up on home diva Martha Stewart after she called to inform him on Dec. 6, 2011 that the company that bears her name had inked a deal with J.C. Penney (JCP) to open shops within most of the chain's stores.

He hasn't spoken to her since, even though the two used to be good friends.

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"I was sick to my stomach," Lundgren testified on Monday in New York Supreme Court. "I can't remember hanging up on anyone in my life."

The testimony comes as Macy's and J.C. Penney duke it out over the partnership with Martha Stewart Living Omnimedia. The trial, which began Wednesday, focuses on whether Macy's has the exclusive right to sell Martha Stewart branded cookware, bedding and other products. Other key witnesses expected to take the stand this week include Penney's CEO Ron Johnson and Martha Stewart.

Lundgren testified on Monday that Macy's had built the Martha Stewart brand to be the biggest in its home business. Under Lundgren's leadership, Macy's has focused on building exclusive brands that are not carried by rivals to get shoppers to the store. In the home area, exclusivity is key: Sales last year were up 8 percent, double the rate for the entire company.

Lundgren said Macy's has spent 40 percent of its overall marketing on the Martha Stewart brand even though the home category represents 17 percent of sales. He says that having Penney have access to the brand will not be good for the business and will confuse shoppers.

"I need the Martha Stewart business to be exclusive," Lundgren said. "I don't have a substitute."

The testimony is a culmination of a legal battle between the three companies that started in 2011. Macy's sued Martha Stewart Living in January 2011, saying the company breached a long-standing contract when it penned the deal with Penney, which invested $38.5 million in a nearly 17 percent stake. In a separate lawsuit, Macy's sued Penney claiming it had no regard for the Macy's contract and that Johnson had set out to steal the business that it had worked hard to develop.

The two suits were consolidated for the bench trial, which Supreme State Court Judge Jeffrey Oing is presiding over the trial. The trial is expected to last three weeks.

At issue seems to be a loophole in the agreement with Macy's. It's a provision that allows Martha Stewart to sell goods in categories like bedding in Martha Stewart Living's own stores.

According to Martha Stewart, because the Macy's agreement doesn't say the goods under dispute can be sold "only in "stand-alone" stores, the mini shops within J.C. Penney stores do not fall under the exclusive agreement.

Macy's Inc., based in Cincinnati, disagrees. Lundgren argues that a typical definition of a store is that it has a parking lot or is part of a mall. Macy's lawyers outlined in documents that it later found that Penney "knowingly and purposely demanded and received confidential information" from Martha Stewart Living about the contract of Macy's and crafted a deal that was more lucrative than the Macy's agreement.

Macy's claims in court documents substantial damages and said the maneuver by Penney "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 it gets rid of the Martha Stewart moniker.

Last summer, Macy's won a preliminary injunction against Martha Stewart Living that would prevent it from selling housewares and other exclusive products at J.C. Penney. Judge Oing did grant Penney permission to open Martha Stewart shops, as long as the items under the exclusive contract with Macy's are not sold in them.

Penney, which is based in Plano, Texas, plans to open shops featuring designs from Martha Stewart on May 1, but Daphne Avila, a Penney spokeswoman, said that the products which include bedding and cookware have been stripped out of the home maven's moniker and instead feature the label "JCP Everyday."

According to a memo filed by Penney, Macy's rights to Martha Stewart aren't nearly as sweeping as it 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."

In court documents, Martha Stewart Living said it will prove that it was Macy's. that breached the 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. For Macy's, having another major department store sell Martha Stewart towels, pots and other merchandise could dilute its business.

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 percent of its total business. And the deal with Martha Stewart is part of Penney's plan to reinvent the struggling department store under Johnson, who became CEO of the company in November 2011.

Penney has struggled with 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. Penney began adding shops featuring new hip brands last year and plans to overhaul the home department this spring. Martha Stewart is at the center of that revamp.

The stakes are also high for the personalities involved in the suit. Lundgren said that while he used to be good friends with Stewart, he hasn't spoken to her since that 2011 after he hung up on her.

""I was completely shocked and blown away," he testified on Monday. "It was so far from anything I could imagine."