Martha Stewart says JC. Penney designs ‘absolutely allowed’

Martha Stewart said she believed her namesake company was “absolutely allowed” to design home goods for J.C. Penney Co. in exclusive categories even though it had a contract with Macy’s Inc.

“We thought, and appropriately so, that we were absolutely allowed to do such a thing,” Stewart testified yesterday in Manhattan in a nonjury trial as Macy’s fights to block parts of Martha Stewart Living Omnimedia Inc.’s agreement with J.C. Penney.

Stewart said she “loves” Macy’s, has shopped there since she was a girl and called the store “a fixture” in her home. However, she said her company was “not always thrilled” that Macy’s wasn’t increasing its exposure in the stores. The retailer, for instance, wouldn’t allow her to offer higher-end items such as luxury-bath products, she said.

“Macy’s has been a very nice partner,” Stewart said. “We have lived up to our obligations under the contract and Macy’s has lived up to most of its obligations under our contract.”

Her testimony, which lasted more than four hours, came after that of Macy’s Chairman Terry Lundgren and J.C. Penney Chief Executive Officer Ron Johnson. Lundgren appeared in court last week and Johnson finished his testimony March 4.

Bedding, Cookware

Macy’s, which has sold Martha Stewart-branded goods since 2007, sued her company in January 2012, saying it had the exclusive right to sell the items in certain categories including bedding and cookware. Macy’s sued Plano, Texas-based J.C. Penney about three months later.

J.C. Penney in December 2011 acquired a 17 percent stake in New York-based Martha Stewart Living for $38.5 million as the department-store chain seeks to revive sales with new mini- stores dedicated to Martha Stewart and other brands.

Stewart, her company’s chief creative officer and non- executive chairman, said Johnson’s vision of creating a Martha Stewart store within J.C. Penney appealed to her. She said Johnson is a “visionary” who “had the foresight to reimagine the traditional American department store.”

Stewart said Macy’s had never offered to open a store devoted to her, although it has installed other in-store shops for brands such as Louis Vuitton.

Lawyers for Macy’s, the second-biggest U.S. department store chain, have argued that J.C. Penney is trying to “reap the rewards” of its work with the Martha Stewart brand, which the chain says it rebuilt after Stewart’s release from prison in 2005, when her products were sold at Kmart.

Limited Participation

Stewart served five months in prison and about six months of house arrest after she was convicted of obstruction of justice. Her court appearance yesterday was the first time she has testified in open court, Katherine Nash, a spokeswoman for Martha Stewart Living, said in an e-mail.

Stewart said she didn’t participate in the negotiations for the Macy’s contract because she was forbidden from being a director of a publicly held corporation as part of a settlement with the U.S. Securities and Exchange Commission, which also limited her participation as an officer or employee of a public company.

However, she said Martha Stewart Living “left open certain areas” of its contract with Macy’s, such as goods that aren’t in the exclusive categories and items sold at other stores like PetSmart Inc. or Michaels Stores Inc.

Defended Agreement

Ted Grossman, a lawyer for Macy’s, asked Stewart if she thought shoppers who bought an enamel cast-iron casserole dish or a cutlery set at a department store at “one end of the mall” were less likely to purchase the same item at another department store at “other end of the mall.”

Stewart said she didn’t think so, as shoppers are “more savvy” and have resources such as smartphones and Amazon.com to help them research potential purchases.

“They might have two houses,” she testified. “And they might have two kitchens.”

Martha Stewart Living has defended its agreement with J.C. Penney, accusing Macy’s of breach of contract and saying the retailer stocked and priced Martha Stewart products in a manner that favors private-label brands. Martha Stewart Living also said Macy’s couldn’t have exercised a five-year renewal option in January 2012 because of the breach.

Macy’s kept the Martha Stewart brand “pretty static” instead of working to grow the brand, Stewart testified. Her company had hoped its business would be “much bigger” at the end of the five-year contract, she said.

“Where we could have been bigger, they brought in other brands,” she said.

Original Contract

Martha Stewart Living has argued that its original contract with Macy’s allows Martha Stewart Living to design and sell products within the exclusive categories as long as they are sold through the Internet, television or at any retail store branded with the Martha Stewart name that’s operated by the company or its affiliates or “prominently” features the brand, according to court filings.

Stewart said she knew there might be problems with the Macy’s contract although she believed that the pact allowed her company to sell “any type of merchandise” in Martha Stewart stores within J.C. Penney.

Stewart said she didn’t ask Lundgren to renegotiate her company’s contract or for financial assistance but that he “certainly knew” Martha Stewart Living had hired Blackstone Group LP to explore strategic alternatives and didn’t come forward.

‘Blown Away’

Lundgren testified last week that he was “shocked and blown away” when Stewart called him the night before the J.C. Penney deal was announced to tell him about it, hung up on her and hasn’t spoken to her since.

Lundgren said he had considered Stewart a friend and that she never mentioned the J.C. Penney pact until her call -- even when the two flew to Haiti together in July 2011 and during a $10,000-a-plate fundraiser in October.

Stewart said she was surprised by Lundgren’s reaction to her call. “I was quite taken aback by his response and when he hung up on me I was kind of flabbergasted,” she said.

Stewart was “always positive” about her relationship with Macy’s, and Lundgren “never heard any word of concern or disappointment” from his contacts at her company about their agreement, he said. While he no longer has a personal relationship with Stewart, Macy’s is “totally committed” to its business with her company, he said.

Design Concepts

Macy’s is a $300 million business for Martha Stewart Living that “we would not like to go away,” Stewart said, adding that her company last week presented a “tremendous number” of design concepts to Macy’s for spring of 2014 and “they liked everything.”

“It’s a contract dispute,” she said to the judge. “An understanding of what’s written on the page. It boggles my mind that we are sitting before you today.”

In his testimony, J.C. Penney’s Johnson said he first considered a partnership with Stewart when he read that her company had hired Blackstone.

“I thought, ‘Martha must not be performing well and there might be an opportunity to do something together,’” Johnson said.

Johnson testified that he wouldn’t have gone forward with a sales agreement with Stewart to sell her branded items if it meant the Macy’s deal would be breached.

Johnson said he wanted his team to review parts of Macy’s contract with Martha Stewart Living to ensure J.C. Penney didn’t violate any part of the agreement.

The trial began Feb. 20 and had been scheduled to end March 8 but is likely to be adjourned until April because of scheduling conflicts.

The cases are Macy’s Inc. v. Martha Stewart Living Omnimedia Inc., 650197/2012; Macy’s Inc. v. J.C. Penney Corp., 652861/2012, New York State Supreme Court (Manhattan).