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Macy's stakes claim to Martha Stewart products in Penney fight

Shoppers enter a Macy's store in Arlington, VA, February 21, 2012. REUTERS/Kevin Lamarque
Shoppers enter a Macy's store in Arlington, VA, February 21, 2012. REUTERS/Kevin Lamarque

By Karen Freifeld and Phil Wahba

(Reuters) - A lawyer for Macy's Inc told a judge on Wednesday that rival J.C. Penney Co Inc and Martha Stewart schemed to develop a partnership that ran afoul of Macy's contract with the home goods doyenne.

Penney looked for loopholes in Macy's contract with Martha Stewart Living Omnimedia so it could sell home goods under her name within its stores, the lawyer said at the start of the trial over whether Stewart's deal with Penney breaches her company's agreement with Macy's.

"We're here to protect our rights. Rights that we paid for. Rights that we worked on. Rights that we took tremendous risks for," attorney Theodore Grossman told Justice Jeffrey Oing of New York State Supreme Court in Manhattan.

Penney in December 2011 announced it would launch Martha Stewart boutiques in about 700 of its department stores in 2013 and sell her products. It also bought 17 percent of her company.

The shops, set to open this May, are the centerpiece of an improved home goods section that Penney Chief Executive Ron Johnson has called crucial to returning Penney to growth.

Macy's sued Martha Stewart Living Omnimedia over the Penney deal. It also sued Penney for interference and unfair competition and is seeking unspecified damages. The cases were consolidated for the non-jury trial.

Penney's lawyer, Mark Epstein, denied the company had done anything untoward.

"J.C. Penney acted honorably and appropriately in all respects," Epstein said in his opening statement.

Macy's wants the court to stop Penney from selling any products designed by Stewart or carrying her name in categories for which Macy's argues it has exclusive rights, including cookware, home decor, and bedding.

Under the terms of Macy's contract, Martha Stewart Living Omnimedia can open its own stores and sell any of the product categories that are exclusive to Macy's. Macy's argued the proposed boutiques at Penney are not the same as stand-alone stores.

Martha Stewart Living and Penney claim Penney can also sell items designed by Stewart within the exclusive categories as long as they do not bear Stewart's name.

A lawyer for Martha Stewart Living, Eric Seiler, told the judge to focus on the Macy's agreement. "There's been an effort here to transform the contract into something it is not," Seiler said in his opening remarks.

In court, Grossman said that Macy's had taken a risk on Stewart, helping her resurrect her image after she left prison in 2005. Martha Stewart was found guilty in 2004 of lying about a stock sale. Grossman also told the judge how Macy's took the Martha Stewart brand upscale after its association with Kmart.

Grossman said Stewart left Macy's in the dark about her Penney partnership until the eve of the announcement when she informed Macy's Chief Executive Terry Lundgren of the deal and said it would be good for Macy's, too.

Macy's lawyer also quoted from an email from Penney's Ron Johnson when the Martha Stewart deal was announced: "We put Terry in a corner."

Penney lawyer Epstein said the emails Macy's lawyer cited wrongly paint a "sinister picture" of Penney's dealings.

Epstein said the case shouldn't be a vendetta against Stewart and Johnson. "This is no more than fair competition," he said.

Stewart, Lundgren and Johnson are all likely to take the stand during the trial that is expected to last at least two weeks.

The cases are Macy's Inc. v. Martha Stewart Living Omnimedia Inc., 650197/2012, and Macy's Inc. v. J.C. Penney Corp., 652861/2012, New York State Supreme Court, New York County.

(Editing by Kenneth Barry and Edwina Gibbs)

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