Macy’s, Inc. v. J.C. Penney Corporation, Inc., Index No. 652861/12, 6/16/14 (Oing, J.).

Contract; Breach; Tortious Interference; Licensing Agreement.

By Kelly Moynihan┃Managing Editor

Plaintiff sued defendant for tortious interference with plaintiff’s contract with Martha Stewart Living Omnimedia, Inc. (“MSLO”). In 2006, plaintiff contracted with MSLO to sell Martha Stewart brand products, designed by MSLO, in plaintiff’s department stores (the “M/MSLO Agreement”). Plaintiff maintained exclusive rights to sell certain product categories including soft home, housewares, home décor, cookware, and furniture (“Exclusive Product Categories”). Plaintiff also retained the unilateral right of renewal for a term up to twenty years. In 2011, defendant proposed a licensing agreement to MSLO in which defendant would create Martha Stewart brand stores within defendant’s department stores. These “stores within a store” would sell MSLO designed products, some of which overlapped with plaintiff’s Exclusive Product Categories. Defendant contracted with MSLO on December 6, 2011 (the “JCP/MSLO Agreement”), despite the concerns of representatives on both sides that the agreement may cause MSLO to breach the M/MSLO Agreement. After being notified of the JCP/MSLO Agreement, plaintiff exercised its unilateral right to renew the M/MSLO Agreement in January 2012 and commenced litigation against defendant and MSLO. During the litigation, MSLO created 900 designs for products for defendant. Defendant intended to brand the products with the Martha Stewart name and sell them within defendant’s stores. MSLO also continued to supply plaintiff with designs for its stores.

The court granted plaintiff’s preliminary injunction against MSLO, restricting MSLO from performing under the JCP/MSLO Agreement as it related to the manufacture, marketing, distribution, or sale of any Martha Stewart-branded products within the Exclusive Product Categories. In August 2012, the court denied plaintiff’s motion for preliminary injunction against defendant holding defendant’s voluntarily agreement to abide by the preliminary injunction against MSLO as sufficient safety for plaintiff. Plaintiff filed a second motion for preliminary injunction against defendant after defendant sold MSLO designed products under a brand unrelated to Martha Stewart. The motion was denied because defendant did not sell any Martha Stewart brand products within the Exclusive Product Categories. In October 2013, defendant and MSLO amended the JCP/MSLO Agreement, deciding to discontinue the manufacture and sale of Martha Stewart branded products within the Exclusive Product Categories, effectively ending their partnership. Plaintiff settled with MSLO in January 2014.

To prove tortious interference, plaintiff needed to show: (1) the M/MSLO Agreement was valid; (2) defendant had knowledge of the M/MSLO Agreement; (3) defendant intentionally induced MSLO to breach said contract; (4) MSLO breached the contract; (5) MSLO would not have breached the contract absent defendant’s conduct; and (6) plaintiff sustained damages. The court found the M/MSLO Agreement to be an unambiguous valid agreement negotiated by two sophisticated parties. Further, defendant’s representatives admitted knowledge of the M/MSLO Agreement prior to the JCP/MSLO Agreement signing.

The court rejected defendant’s foundational argument that its “store within a store” arrangement was an exception to the M/MSLO agreement. The M/MSLO Agreement permitted MSLO to develop retail stores owned or operated by MSLO or its affiliates. However, the M/MSLO Agreement prohibited MSLO from contracting with any department store that sells any items within the Exclusive Product Categories. The court opined that the MSLO “store within a store” would be effectively controlled and operated by defendant, not MSLO, as defendant would manufacture the goods, control the displays, employ sales personnel, own the space, and bear all risks of loss under the JCP/MSLO Agreement.

The court held the 900 designs MSLO created for defendant breached the M/MSLO Agreement. Defendant argued that the M/MSLO Agreement did not prohibit MSLO from designing for other companies. The court rejected this argument, holding that a plain reading of the M/MSLO Agreement establishes that plaintiff must receive “exclusive use” of the product designs and materials developed by MSLO in collaboration with plaintiff for the Exclusive Product Categories. Further, MSLO is prohibited from contracting with anyone else to use the product designs MSLO creates in collaboration with plaintiff, under the M/MSLO Agreement, regardless of how the products are branded.

The court found defendant’s offerings of flattery and a large financial inducements to MSLO proved defendant intentionally induced MSLO to breach the M/MSLO Agreement. Further, defendant knew with “certainty” or “substantial certainty” that it would cause MSLO to breach the M/MSLO Agreement by entering into the JCP/MSLO Agreement. The court found one of defendant’s lead negotiators was concerned the “store within a store” exception would not hold up against the M/MSLO Agreement. Additionally, the JCP/MSLO Agreement contained a provision in which MSLO disclaimed any representation or warranty it made related to the M/MSLO Agreement which defendant may have relied upon in the creation of the JCP/MSLO Agreement. Lastly, defendant’s “over the top” pursuit of MSLO “exceeded the minimum level of ethical behavior in the marketplace,” and, thus, was improper. The court found defendant tortiously interfered with the M/MSLO Agreement.

The court referred the damages and attorney’s fees determinations to a special referee. The court refused to grant punitive damages because defendant, seeking to gain an edge in a competitive retail market, did not act in a wanton, reckless, malicious way evincing a high degree of immorality. Defendant filed an appeal shortly after the decision was issued.

Macy’s, Inc. v. J.C. Penney Corporation, Inc., Index No. 652861/12, 6/16/14 (Oing, J.).

Authored by:

Kelly Moynihan┃Managing Editor

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