Inside the Courtroom During Macy's, JC Penney Battle Over Martha Stewart

Witness List Reads Like Who's Who of Retail Marketing

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The trial between Macy's, J.C. Penney and Martha Stewart Living Omnimedia kicked off today – and the stakes couldn't be higher. Both retailers believe Martha Stewart is key to their businesses and MSLO is trying to return to "sustainable profitability," recently restructuring its media business and laying off more than 10% of its workforce.

Nearly 50 people -- many of them lawyers -- gathered in New York State Supreme Court in downtown Manhattan for opening arguments in the Macy's vs. JC Penney and Macy's vs. MSLO cases. No jury will be present for the trial, which will be decided by Justice Jeffrey Oing.

Martha Stewart Macy's ad
Martha Stewart Macy's ad

Macy's continues to feature the home-goods guru in its advertising and has renewed its contract through January 2018. Meanwhile, JC Penney, which is already struggling amid falling sales and a lukewarm reception to its reinvention efforts, has positioned Martha Stewart as the anchor for a 20,000-square-foot neighborhood dedicated to home items.

The witness list in the dispute reads like a who's who of the retail and media world -- from JC Penney CEO Ron Johnson and Former JCP President Michael Francis to Macy's Chairman-CEO Terry Lundgren, Ms. Stewart and Former Martha Stewart Living Omnimedia CEO Lisa Gersh. Many of those execs will be called to testify during what is expected to be at least a three-week trial.

In the course of nearly three hours, lawyers for each company presented their version of the facts. At issue: whether Martha Stewart may partner with JC Penney to produce a line of products to be showcased within shop-in-shop concepts.

Lawyers for Macy's provided a timeline dating to the late 1980s and highlighted Ms. Stewart's association with "downscale" retailer Kmart, as well as her prison sentence for conspiracy. Theodore Grossman, Macy's lawyer, painted a picture of a hesitant partner in Macy's, given Ms. Stewart's baggage, saying that when Macy's did eventually decide to work with the home-goods guru, it required absolute exclusivity as it sought to take the brand "upmarket."

Lawyers for Macy's argued that the retailer then successfully built the Martha Stewart brand, noting same-store sales increases for Martha Stewart products exceeded same-store sales at Macy's and its competitors by a wide margin. Mr. Grossman said Martine Reardon, Macy's chief marketer, would testify that more money was spent on advertising as a percentage of sales on Martha Stewart products than any other brand in the store. Martha Stewart products were also given prime real estate in stores.

Mr. Grossman showed clips of depositions from Ms. Stewart and Mr. Francis, now an exec at DreamWorks Animation, in addition to a number of internal emails. The emails, several of them from JC Penney CEO Mr. Johnson, were anything but flattering. In one email, JC Penney execs joked that Macy's CEO Mr. Lundgren likely had a headache that was destined to become a full-blown migraine.

"The court will assess their candor, truthfulness, concern for employees, competitive ethics, respect for the law and whether their testimony in public matches statements and conduct in private," Mr. Grossman said of Mr. Johnson, Mr. Lundgren and Ms. Stewart, the three executives at the center of the lawsuit.

JC Penney's lawyer, Mark Epstein, sought to focus the court on the contract between Macy's and MSLO and discussed at length various aspects of the contract that allowed MSLO to work with JC Penney. "It's unfortunate, but perhaps not unexpected, that Macy's has taken a contract dispute and made it a personal vendetta," he said.

Mr. Epstein, along with MSLO's lawyers, are seeking to portray Ms. Stewart as simply trying to grow her business -- a small company that is trying to increase revenues and avoid layoffs. Mr. Epstein also insisted that if Macy's wins the court cases, the consumer will lose on choice and competitive pricing.

JC Penney's lawyers focused on the fact that the contract limits use of Ms. Stewart's name, likeness and marks, but does not restrict her ability to design products for other companies or retailers. Macy's is taking issue with products that will bear the brand name JCP Everyday, as well as products featuring a double house logo, which resembles the letter M.

Products are already en route to the U.S. from overseas manufacturing facilities, Mr. Epstein said. He said that asking the court to order those boats to turn around, so there will be no products on shelves in the coming months, is a "harsh litigation tactic."

Both lawyers for JC Penney and MSLO are also seeking to prove that plans for JC Penney shop-in-shops should be allowed to open as planned. The contract, they argued, simply isn't what Macy's hoped or believed it was, but the retailer "must live with it."

"This is no more than fair competition," Mr. Epstein said. "Macy's should compete in the marketplace, not the courtroom. JC Penney acted honorably and appropriately in all instances."

Over the summer, Justice Oing granted a preliminary injunction to Macy's, noting "the scales tilt in favor of Macy's.

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