By Karen Freifeld
(Reuters) - A lawyer for Macy's Inc
J.C. Penney looked for loopholes in Macy's contract with Martha Stewart Living Omnimedia
"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, who is presiding over the non-jury trial.
Last year, Macy's sued Martha Stewart Living Omnimedia for breach of contract, and J.C. Penney for interference and unfair competition. The cases were brought together for trial.
Macy's argues that it alone has the right to sell Martha Stewart products in certain categories, including cookware, home decor, bedding and bath textiles, under a 2006 agreement that runs until 2018 after being renewed last year. Martha Stewart is the biggest manufacturer of home goods for Macy's.
The stakes are high for Penney. The struggling retailer in December 2011 announced plans to open Martha Stewart boutiques in about 700 of its department stores in 2013. The shops are set to open in May and will anchor the overhaul of its home goods section that Penney Chief Executive Ron Johnson recently said was crucial to returning Penney to growth in 2013.
Macy's contract allows Martha Stewart to open its own stores and sell the product categories that are exclusive to Macy's. But Macy's argues the boutiques at J.C. Penney do not qualify for that exception. Macy's has asked the court to stop the Martha Stewart boutiques at Penney from going forward.
Martha Stewart Living and Penney have since argued that Penney can sell items designed by Stewart, even if they fall under categories that are exclusive under the Macy's contract, as long as they do not bear Stewart's name.
Speaking to the court, Grossman said the 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. And he showed a news clip in which Martha Stewart spoke of her "amazing, amazing relationship with Macy's" in January 2012, a month after the deal with J.C. Penney was announced.
"This is a contractual dispute. But in 70 minutes of talking they never showed the judge any term in the contract that was breached," a Martha Stewart Living representative said.
Grossman said Stewart had 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 a positive for Macy's, too, reading from a script that also said "even though you might not agree."
In making Macy's case, Grossman quoted from an email Penney's Johnson sent when the Martha Stewart deal was announced, "We put Terry in a corner."
Grossman quoted from another Johnson email, "Ultimately they think the best way to stop Macy's from renewing is to make our offensive so strong they simply pick up their toys and go home." At the time Macy's deal with Stewart was coming up for renewal.
Penney's lawyer, Mark Epstein, said in his opening statement, "J.C. Penney acted honorably and appropriately in all respects."
He said the emails Macy's lawyer cited were an attempt to paint a "sinister picture" of the J.C. Penney's deal with Martha Stewart, but that was not the case. He said the stores within stores were "Johnson's vision for JCP and it's a vision about to be realized."
Epstein said the case shouldn't be a vendetta against Martha Stewart and Ron Johnson. "It's a breach of contract dispute at its heart," he said. "This is no more than fair competition."
The trial is likely to rivet the retail industry, with Stewart, Lundgren and Johnson all potential witnesses.
Penney, which operates 1,100 department stores, about a year ago announced plans for a radical transformation of its business including a four-year transformation of its 700 largest stores into a collection of 100 chic yet affordable shops in each.
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.
(Reporting by Karen Freifeld in New York; additional reporting by Phil Wahba in New York; Editing by Kenneth Barry)