U.S. court revives Macy's claims vs JC Penney over Martha Stewart

NEW YORK (Reuters) - A New York state appeals court on Thursday revived most of Macy's Inc's lawsuit accusing JC Penney Co of interfering improperly with its exclusive merchandising contract with Martha Stewart Living Omnimedia Inc.

The decision by the Appellate Division in Manhattan restored two claims by Macy's that a lower court judge had dismissed. It also agreed that Macy's third claim against JC Penney was valid, but that Macy's did not deserve punitive damages.

Thursday's decision is the latest step in an unusual battle over the right to sell home goods from a company named for one of the most famous U.S. names in homemaking. Macy's had settled with Martha Stewart in January 2014.

At issue was a 2011 agreement in which Martha Stewart was to design bed, bath and kitchen products for sale at JC Penney stores being revamped by the retailer's since-ousted chief executive, Ron Johnson.

Macy's complained that this agreement interfered with its own 2006 contract giving it exclusive rights to sell the same kinds of products under the Martha Stewart brand.

Last June, State Supreme Court Justice Jeffrey Oing said JC Penney's "over the top" and "less than admirable" interference violated Macy's exclusivity rights under the 2006 contract.

But Oing dismissed Macy's claims that JC Penney breached confidentiality provisions of its contract with Martha Stewart, or that its actions amounted to unfair competition.

The appeals court said these dismissals were wrong because JC Penney used its "financial leverage" over Martha Stewart to learn about Macy's contract, and then began selling Martha Stewart designs to which Macy's was entitled.

"JCP misappropriated Macy's labor, skill, expenditures, and good will, all the while demonstrating bad faith in pursuing its objective," Justice John Sweeny wrote for the appeals court.

Sweeny also said that despite the "unsavory atmosphere surrounding JCP's conduct," there was no showing that the Plano, Texas-based company should pay punitive damages.

JC Penney declined to comment, except to say it was pleased that punitive damages were not warranted.

Macy's spokesman Jim Sluzewski called Thursday's decision a "resounding victory" for the Cincinnati-based company, "and an important victory for the sanctity of exclusive contracts." He said Macy's will resume its pursuit of damages.

In afternoon trading, JC Penney shares were up 9 cents at $9.08, and Macy's was down 54 cents at $63.04.

The case is Macy's Inc et al v. JC Penney Co, New York State Supreme Court, Appellate Division, 1st Department, No. 13958.

(Reporting by Jonathan Stempel in New York; Editing by Jeffrey Benkoe and Tom Brown)

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