Macy's, J.C. Penney to spar over right to Martha Stewart

NEW YORK Let the pots and pans fly.

Two of the nation's biggest department stores - J.C. Penney (JCP) and Macy's (M) - are expected to duke it out in New York State Supreme Court over the right to sell Martha Stewart merchandise.

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At the heart of the case, slated to begin Wednesday, is whether Macy's has the exclusive right to sell certain Martha Stewart products like 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.

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 percent stake in Martha Stewart Living. The deal is part of J.C. Penney's plan to revive the struggling department store under Johnson's leadership.

Macy's sued Martha Stewart Living almost immediately, saying that it had exclusive rights on certain of its products until 2018. The pact goes 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 the maneuver by J.C. 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.

Supreme State Court Judge Jeffrey Oing did grant the retailer permission to open Martha Stewart shops, as long as the items under the exclusive contract with Macy's are not sold in them.

J.C. Penney plans to open the Martha Stewart shops on May 1.

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

And because, 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, the mini shops in J.C. Penney stores do not fall under the exclusivity clause.

Macy's disagrees.

According to a memo filed by J.C. 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."

"Macy's should stop competing in the courtroom and start competing in the marketplace," the company said in its memo.

In court documents, Martha Stewart Living said it will prove that it was Macy's Inc. 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.

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. The New York company is downsizing its magazines and is cutting publishing jobs as it increasingly focuses on online video and other digital content.

And the deal with Martha Stewart is part of J.C. Penney's plan to re-invent the struggling department store under Johnson, who became CEO of the Plano, Tex., company in November 2011 after helping to create the look and feel Apple Inc.'s iconic stores.

The department store 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.

J.C. Penney began adding shops featuring new hip brands last year and plans to overhaul the home department this spring with new names like 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 J.C. Penney is unable to carry Martha Stewart, it could hurt the chain tremendously.

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

Judge Oing will be deciding the outcome of the trial, rather than a jury.