A New York State Supreme Court judge ruled in favor of Macy's claim that J.C. Penney interfered with a merchandising contract with Martha Stewart Living Omnimedia Inc. when it cut a deal in 2011 under its previous CEO to create a collection of home goods.
But the judge, Jeffrey Oing, said Macy's failed to prove that Penney was liable for punitive damages since he says the actions weren't "malicious" or "immoral."
Macy's is still entitled to attorney's fees and other monetary damages from Penney related to the selling of a line of bath towels, pots and other products that were designed by Martha Stewart but were sold under the JCP Everyday name last year.
Such products were covered by a long-standing exclusive contract between Macy's and Martha Stewart.
Oing ordered that the issue of damages and attorney fees be addressed by a judicial hearing officer or a special referee.
The 63-page decision issued Monday came six months after Macy's and Martha Stewart resolved a legal battle to sell home furnishings at Penney. The terms of that deal were not disclosed.
The decision also followed a move last fall by Penney to scale back its merchandising partnership with Martha Stewart as pressure was looming. As part of that move, Penney said that it will no longer sell a broad range of home and bath products designed by Martha Stewart Living. But the company will continue to sell a smaller batch of Martha Stewart items, including window treatments, rugs and party supplies that is not covered in the exclusive contract.
"The preponderance of the evidence compels me to find that (Penney's) 'inducement exceeded the minimum level of ethical behavior in the marketplace,' and, as such, was improper," Oing wrote in his ruling on Monday.
But Oing said that Macy's should not be awarded punitive damages since such damages are only proper if Penney's conduct in "perpetrating the tortious interference of contract was wanton, reckless, malicious and evinced a high degree of immorality."
Oing noted the preponderance of evidence demonstrates that Penney's top executives were "less than admirable."
"At best, one can only describe such conduct as adolescent hijinks in the worst form," he added. But he said the actions were to gain "an edge in the ever-increasing competitive retail market and to revolutionize the way consumers shop for merchandise."
Penney said last fall that it will be returning to the media and merchandising company the 11 million shares it bought as part of the 2011 licensing deal and giving up two seats on Martha Stewart's board.
The revised agreement was the latest way Penney's returning CEO Mike Ullman was unraveling the botched bid by former CEO Ron Johnson to transform the retailer, which led to disastrous results. Johnson, who became Penney's CEO in November 2011, was ousted in April 2013.
Johnson had signed the 10-year merchandising deal with Martha Stewart in December 2011 and touted it as a key part of his plan to reinvent the chain. He envisioned small Martha Stewart shops filled with branded products. Penney then invested $38.5 million in Martha Stewart Living Omnimedia. But a month later, Macy's sued both companies.
"We are delighted, but certainly not surprised that the court has found tortious interference by (Penney)," said Macy's in a statement. "It is a great shame that Macy's had to expend time, money and the diversion of its resources in order to protect its rights. We look forward to the damages phase of the case."
Penney officials said that they "respectfully disagree with and are disappointed with this outcome."
"The company does not believe that money damages are warranted and will defend against any damages awarded," said Penney in a statement.
Penney said it was also considering options for appeal.