Macy’s v. Martha Stewart, J.C. Penney

Just short of this Friday’s deadline, set by Judge Jeffrey Oing, the suit brought against J.C. Penney and Martha Stewart by Macy’s has settled.

Macy’s charged that both had breached an exclusivity agreement that Macy’s had with Stewart that covered a variety of bed, bath and kitchen products. See if you can tell which way the settlement went based on a statement released by Stewart:

“We are pleased to announce this revised commercial agreement. We are designing excellent products for 2014, and we look forward to seeing them in stores and online at jcp.com.”

Neither Stewart’s statement, nor the statement from J.C. Penney CEO Myron Ullman talks about kitchen, bed and bath products mentioned in the Macy’s suit.

Before I get to the settlement, I want to put forth a thoughtfully written proposal by business columnist James Stewart (no relation) that appeared in The New York Times three days ago.

“Martha Stewart came to Macy’s when she was at a career low… Terry Lundgren, Macy’s chief executive, took a big financial risk by backing Ms. Stewart, and, in return, asked for exclusive rights to her branded merchandise in categories to be sold by Macy’s. The only exception was Martha Stewart retail stores (referred to in the contract as ‘MSLO Stores’) ‘owned or operated’ by Martha Stewart’s company… Even then, there were numerous conditions on how the merchandise could be manufactured and sold…

“With benefit of hindsight,” James Stewart concludes, “the definition of ‘MSLO Store’ might have been better drafted to make clear that it meant a stand-alone store, like Ralph Lauren’s flagship store on Madison Avenue. But the law is clear that contracts are to be interpreted based on the intent of the parties. The notion that Macy’s would have granted an exception for Martha Stewart-branded boutiques located inside one of its major competitors is both fanciful and contradicted by testimony from Macy’s executives and the plain language of the contract, which repeatedly uses the word ‘exclusive’ and explicitly prohibits sales of Martha Stewart branded or designed goods in other department stores.”

“Although it was [former Penney CEO Ron] Johnson’s idea for a store-within-a-store, testimony indicates it was Martha Stewart’s general counsel, Daniel Taitz, who came up with the notion that such an enclave might qualify for the ‘MSLO Store’ exception in the contract, even though the space would be owned and operated by J.C. Penney. This clause is the linchpin of the J.C. Penney and Martha Stewart defenses.”

“Even Mr. Taitz testified that, while he didn’t expect anyone to find that Martha Stewart or J.C. Penney had ‘done anything wrong,’ there was a ‘meaningful chance’ that Macy’s would sue. Katheryn Burchett, one of J.C. Penney’s lead negotiators, isn’t a lawyer, but she, too, saw potential problems, testifying that she thought Mr. Taitz’s interpretation ‘might not hold up.’

“None of this stopped Mr. Johnson, who said he also relied on the opinion of J.C. Penney’s lawyers. Asked to produce that advice in court, the company declined, and refused to waive the attorney-client privilege. Because J.C. Penney didn’t produce any of these opinions, I’m drawing the inference that it didn’t provide the unqualified go-ahead that Mr. Johnson wanted.

“All of which leads to the inevitable conclusion,” journalist Stewart writes, “that Ms. Stewart breached her agreement with Macy’s and that J.C. Penney should be permanently barred from selling any Martha Stewart merchandise in the categories covered by the Macy’s agreement. Penney’s is free to continue its ‘Martha Stewart Celebrations’ line of paper products, if it wishes, as well as other Martha Stewart products in categories not covered in the Macy’s agreement.”

From a legal standpoint, this seems reasonable and clearly face-saving for both J.C. Penney and Stewart. From an ethical standpoint, it’s yet another example of an executive doing whatever it takes to get their way.

“Wake up and smell a fundamental business reality, Jim!” That’s what my lawyer and business friends would say. “It’s a cutthroat world out there. Doesn’t she have a right to work hard for her shareholders? At the end of the day, Stewart gained in being able to sell additional products in another store.”

“Under the revised agreement,” The New York Times reports (Oct. 22), J.C. Penney will not sell kitchen, bed and bath products designed by Martha Stewart that were sold under the label ‘JCP Everyday.’ But it will continue to market other Martha Stewart merchandise, including window treatments, lighting and rugs under the label ‘MarthaHome.’ J.C. Penney will also return 11 million common shares that it acquired in the initial agreement and it will give up its two seats on the Martha Stewart board, according to the terms announced on Monday.”

Further, the original terms of the Penney’s contract stipulated that Stewart’s company was to receive a minimum of more than $200 million in royalties. Under the new terms, it was described as “lower.”

This isn’t about sheets, pots or pillow cases. This is about winning, no matter the cost, plain and simple. There is a tendency, sometimes, for individuals to talk themselves into believing there is a moral right to get what we want – that if something is necessary, it’s ethical.

German philosopher Friedrich Nietzsche said, “Necessity is not an established fact, but an interpretation.”

Stewart may have achieved some modest gains to help herself, her company and shareholders, but after such a highly publicized tactic, who is going to trust working with her in the future, and if they do, at what cost?

 

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