As reported by The Wall Street Journal, Macy’s is embroiled in litigation with Martha Stewart Omnimedia, Inc. (“Stewart”) and J.C. Penney’s (“Penney’s”) regarding the right to sell certain “Martha Stewart” branded products, including cookware, bedding and bath items. Macy’s claims to have the exclusive contractual right, dating to 2006, to sell such products. In 2011, however, Stewart entered into a contract authorizing the opening of “Martha Stewart” shops within approximately 1,100 Penney’s stores. Notably, Stewart’s contract with Penney’s was signed after Penney’s invested $38.5 million in Stewart, which gave Penney’s a 16% stake in the company.
Macy’s subsequently commenced litigation against both Stewart and Penney’s, seeking, inter alia, an injunction prohibiting Penney’s from opening the “Martha Stewart” shops and preventing Stewart from providing any product designs to Penney’s. The dispute is currently being tried in State court in New York. The Judge recently suspended the trial and ordered the parties to mediation.
Macy’s alleges that Stewart breached its contract because products offered to Penney’s are similar to products that are supposed to be sold exclusively by Macy’s. In a separate litigation, Macy’s alleges that Penney’s interfered with its contractual relationship with Stewart. Macy’s, having supported the Martha Stewart brand after Ms. Stewart’s conviction for obstruction of justice in 2004, now seeks to capitalize on its exclusive deal. According to a Macy’s spokesperson, “[Macy’s] has, in good faith, invested significant sums, taken risks and endured a period of disappointing results in order to rebuild the Martha Stewart brand. . .”
Stewart and Penney’s allege, however, that a loophole in Macy’s contract permits the sale of “Martha Stewart” branded products in “Martha Stewart retail stores” – including those that may be located within other stores, such as Penney’s. Stewart and Penney’s contend that the “Martha Stewart” shops are merely stores within a store, which are not precluded under the contract. Ms. Stewart testified that she believed her company was allowed to take such action, which allegedly became necessary when sales of Martha Stewart products at Macy’s stalled at $300 million annually instead of the expected $400 million.
A judge will ultimately decide whether Stewart breached the terms of Macy’s contract. From a common sense perspective, the interpretation of the contract championed by Stewart and Penney’s appears strained, at best. It is frankly difficult to believe that the parties entered into an “exclusive” deal under which similar products could be sold by a direct competitor of Macy’s. The more reasonable interpretation would seem to be that Stewart was authorized to open her own freestanding retail stores, as opposed to stores located within a competitor of Macy’s.
This dispute highlights the importance of precise contract drafting and the careful consideration of potential contractual disputes that may arise in the future. When entering into a business relationship worth millions, parties are rarely focused on language that governs what will happen in the event that the relationship deteriorates. For these reasons, it is advisable to consult with an experienced intellectual property/licensing attorney when entering into a contract involving branded or licensed products.
