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J.C. Penney can sell certain home goods designed by Martha Stewart that were destined for shelves in May — for now, a New York State Supreme Court judge ruled Friday.
Rival department store chain Macy's Inc. had sought to temporarily block J.C. Penney Co. from selling products designed by Martha Stewart under the name JCP Everyday. Macy's argued that the products violate its exclusive contract with Martha Stewart Living Omnimedia — even if they don't carry the moniker.
Friday's ruling lets Penney sell the JCP Everyday goods, until a lawsuit that Macy's is waging against Penney and Martha Stewart Living is fully decided. Macy's said in a statement that it plans to appeal the ruling. The ruling offered a dose of good news, if only temporary, for Penney, which had a particularly bad week. It ousted its CEO Ron Johnson on Monday, after a turnaround plan he implemented has led to disastrous results.
Judge Jeffrey Oing, however, cautioned that the ruling is preliminary and Penney could still face costly damages if Macy's prevails in the case.
"This decision has not been very easy to make," said Oing, who heard arguments from both sides for nearly three hours before he made his ruling.
The two retailers are locked in a court battle over a partnership with Martha Stewart. Macy's, based in Cincinnati, is suing Martha Stewart for breaching a long-standing exclusive contract that it had with the New York-based merchandising and media company in certain goods like bedding and bath items when it made a deal in late 2011 with Penney to open Martha Stewart mini-shops in the stores. The Martha Stewart shops, which have now been shelved, were planned for this spring. It also sued Penney for having no regard for the contract.
A temporary order made last summer still bars Penney from selling Martha Stewart-branded goods in the exclusive product categories. But Macy's had argued that selling the JCP Everyday goods, which included items covered by the contract, would confuse customers and create harm to Macy's. Macy's attorneys also argued that the new JCP Everyday brand, which carries a double house logo that resembles the letter "M," would give shoppers the idea that the merchandise was from Martha Stewart.
Oing said Friday that Macy's didn't prove irreparable harm. Macy's may face some financial pressure but "it's not like a building torn down," he said.
But he warned Penney lawyers to stay away from using the Martha Stewart name in advertising or marketing when it comes to the products covered by the contract.
"You are to stay away from the Martha Stewart brand and label at all costs," he warned.
The ruling provides temporary relief for Penney, which is in a cash crunch after suffering a nearly billion dollar loss and seeing a 25 percent drop in revenue in the latest fiscal year as Johnson's plan to get rid of most discounts and bring in hip new brands failed to resonate with shoppers. Now, Penney is scrambling to shore up its cash reserves.
Penney rehired Mike Ullman as its CEO. Ullman had been at Penney's helm for seven years until November 2011 when Johnson replaced him.
In making the ruling, Oing took the opportunity to chastise Johnson, calling his conduct "less than admirable" as he pursued the deal behind Macy's back. But Oing also said he couldn't brush off the harm that an adverse ruling would have on Penney.
Penney could face a $100 million hit if it had to liquidate the JCP Everyday inventory that it already purchased, according to Deborah Weinswig, an analyst at Citi Research.
As part of his plan to reinvent Penney, Johnson pursued the Martha Stewart brand as a key element in his vision to create mini shops devoted to different brand that would replace racks of clothing. With sales in a free fall, Penney is counting even more on an overhauled home area, being rolled out this month, to help it recover from a disastrous year.
Penney is going ahead and adding Martha Celebrations areas, which will feature party accessories and stationery designed by the home maven. Those items are not covered by Macy's exclusive contract, though Macy's attorneys argued this week that some items like plastic pitchers violate the exclusive contract. They discovered those items on Penney's website last weekend.
Both companies returned to court this week after a four week court-ordered mediation that didn't lead anywhere.
The trial started in mid-February and included three weeks of testimony from a parade of witnesses, including Macy's CEO Terry Lundgren, Penney's Johnson and Martha Stewart herself.
The two suits were consolidated for the bench trial. It's expected to resume Tuesday.