Judge denies move to dismiss claim that Martha Stewart breached deal with Macy's

A New York State Supreme Court judge has rejected a motion by Martha Stewart Living Omnimedia lawyers to dismiss Macy's claim that the New York-based merchandising and media company violated its pact when it developed certain products for competitor J.C. Penney even though they don't carry the home designer's name.

Lawyers for Martha Stewart argued Thursday that the exclusive contract with Macy's in certain products like bedding and bath items did not give exclusivity on design work. But Judge Jeffrey Oing ruled that Macy's has provided sufficient evidence that the contract does cover exclusivity in designs even if the items don't carry the Martha Stewart name.

Judge Oing cautioned that his decision not to dismiss the claim doesn't mean Macy's will win the lawsuit against Martha Stewart Living. The suit charges that Martha Stewart breached a long-standing contract with Macy's when it signed a deal with Penney in December 2011 to open Martha Stewart mini-shops.

Separately, Macy's has sued Penney for having no regard for the contract with the home maven and that it set out to steal the business. But Oing's decision could influence whether Penney can go ahead and sell products designed by Martha Stewart that bear the name JCP Everyday.

Those products, which were expected to be shipped to stores this spring and housed in Penney's overhauled home area, are now in limbo. Judge Oing is expected to rule Friday whether to temporarily stop Penney from selling those products.

A move to block Penney from selling the goods in the exclusive categories could be a financial blow to Penney just as the company finished a year of disastrous results that led to the ousting of its CEO, Ron Johnson. Johnson, who had been on the job for 17 months, had spearheaded a major overhaul of the company that failed to resonate with shoppers. Deborah Weinswig, an analyst at Citi Research estimated in a report earlier this week that Penney could take a hit of as much as $100 million on the JCP Everyday products.

"When given the opportunity to present our case, (Martha Stewart Living) lawyers will show that ... (the company) is a design house committed to designing beautiful, high-quality products and that our contract with Macy's permits us to license our designs to all retailers so that consumers can buy them wherever they shop," according to a statement issued Thursday by Martha Stewart Living.

Meanwhile, Judge Oing dismissed Macy's claims that Penney intentionally interfered with its contract with Martha Stewart. He also dismissed Macy's claim that Martha Stewart violated its licensing contract when it shared the contract with Penney.

Last July, Macy's won a preliminary injunction against Martha Stewart Living that prevented it from selling Martha Stewart branded houseware and other exclusive products at Penney. In August, the judge granted permission for Penney to open Martha Stewart mini-shops as long as the items covered by the exclusive contract with Macy's were not sold in them.

The stakes are high for all three companies, but particularly for Penney. The struggling department store chain is counting on the overhauled home department to help recover from a year of mounting losses and deep sales drops. Martha Stewart shops were expected to anchor the area.

Penney is going ahead with opening shops filled with goods labeled Martha Celebrations, featuring stationery and paper products for parties. Those items are not covered by the Macy's contract.