The Macy’s, JC Penney, and Martha Stewart Love Triangle: Is Freedom of Contract Threatened?

by Maddie Davis November 16 2013, 20:36

Background

In 2011, Martha Stewart called Macy’s CEO Terry Lundgren and announced she wanted to have her cake and eat it too – she was breaking her contract with the company. [1]

The contract granted Macy’s exclusive rights to sell Stewart’s bed, bath and kitchen merchandise. [2] In exchange for these rights, Macy’s spent millions to bring Stewart (then fresh out of prison) back to the forefront as America’s homemaker extraordinaire. [3]

But after some questionable missteps from competitor JC Penney, Stewart decided exclusivity was not in her best interest.

The Macy’s contract forbid Stewart from designing products in those categories of housewares for anyone else. The contract made a very narrow exception for Martha Stewart-owned stores. [4]

Ron Johnson, JC Penney CEO at the time, knew about the Macy’s contract when he offered Stewart a competing contract. [5] As part of his plan to keep his struggling department store afloat, he prepared a revamp of its home department, with Stewart’s face front and center. [6] He and his advisors interpreted the Macy’s contract’s narrow exception for Martha Stewart-owned stores as allowing a “store within a store.” [7] This, in their minds, meant JC Penney stores were free to house Martha Stewart “shops.” [8]

And yet simultaneously, Johnson knew that this move would still constitute a conflict. [9] Johnson, in a set of rather incriminating emails, told another executive that he was urging Stewart to “talk to Macy’s about a break in a tight, exclusive agreement.” [10]

After Johnson promised Stewart $500 million, he predicted in another email that Macy’s would “simply pick up their toys and go home.” [11]

Unfortunately for Johnson, Macy’s refused to do so. Macy’s sued both JC Penney and Stewart’s company for breach of contract. [12]

 

The Legal Battle

That suit was filed in January 2013. [13] When the case made it to trial in March, the judge said he would make a ruling by August. Then, he went on vacation until September. [14] Then, he declined to issue a ruling. [15] Why? Because he didn’t want to hamper JC Penney from doing business. [16]

A month later, the judge gave JC Penney and Stewart a deadline – if they couldn’t work out this problem on their own by October 25, he claimed he would actually issue a ruling. [17]

Penney and Stewart announced a revised agreement, days before the deadline, which excluded the line of products disputed by Macy’s. [18]

The case for JC Penney is not very strong, and their concession proves they realized Johnson’s blunder. Given that the parties’ intentions are paramount in interpreting contracts, it would violate reason to think Macy’s intended “Martha Stewart-owned stores” to allow her to set up shop inside one of its main competitors. The main point of the contract was exclusivity, and Stewart taking her sales to any other company would constitute a material breach. Despite what could have been more explicit wording on Macy’s part, contractual intentions are not difficult to determine here.

What makes this case worth examining, however, was the judge’s reluctance to rule on what seems to be a clear issue.

From his statements as to why he made the choices he did, it seems he did not want to hinder an already failing business. JC Penney is an iconic name in American retail, but pity for a company that made poor choices (no matter who they are) does not belong in the legal system. Trying to prop up a failing business may be a worthy cause, because it keeps people employed – but that policy decision should be left to other branches of government. Congress has the power of the purse, and hence the power to make those financial allocations. Justice, on the other hand, is supposed to be blind.

This judge’s pro-big business stance brings to mind the recent government bailout of the automobile industry. Like the Big Three, JC Penney is going through very troublesome times. Under Johnson’s leadership, JC Penney has seen rough sales over the past few years. Shares have fallen almost 70% this year. [19] Rumors of bankruptcy, while vehemently denied, continue to circulate. [20]

In contrast to the automobile industry, however, JC Penney knowingly (one might even say maliciously) pursued a contractual breach in bad faith. The automobile industry may have made its own set of mistakes, but many agree that a contributing factor was increasing oil prices. [21] Automobile makers throughout the world felt these effects, no matter how well they were managed. [22] Here, JC Penney has only itself to blame for its legal troubles.

This, moreover, is no reason for a court to play favorites. JC Penney made a bad move when it asked Stewart to break her contract with a competitor. Assuming the contract was binding, the court had a duty to step in and enforce it.

Despite limiting their contract to terms more agreeable to Macy’s, JC Penney and Stewart still must deal with an ongoing suit for damages. [23] Given the judge’s apparent desire to pass the buck in this case, it is unlikely the action will be successful. That is not the main concern, however – as a New York Times reporter wrote, even Macy’s doesn’t necessarily want to push JC Penney into bankruptcy over this case. [24] The real take-away from this case is that judicial reluctance threatened freedom of contract by silently deferring to the breaching parties. Unfortunately, this deference may make business partners wary of entering into such exclusive agreements, lest the other party goes behind their back, and a court takes no clear stance to remedy the breach.

 

 

 

[1] http://www.reuters.com/article/2013/02/25/us-macys-jcpenney-marthastewart-idUSBRE91O14V20130225

[2] http://www.cleveland.com/business/index.ssf/2013/10/macys_is_the_only_retailer_all.html

[3] Id.

[4] http://www.nytimes.com/2013/10/19/business/without-a-verdict-fight-over-martha-stewart-languishes.html?_r=0

[5] http://www.huffingtonpost.com/2013/03/02/jc-penney-ceo-martha-stewart-macys_n_2793713.html

[6] http://www.cleveland.com/business/index.ssf/2013/10/macys_is_the_only_retailer_all.html

[7] http://www.nytimes.com/2013/08/02/business/for-penney-stewart-trials-outcome-is-just-one-pressing-concern.html

[8] Id.

[9] http://www.huffingtonpost.com/2013/03/02/jc-penney-ceo-martha-stewart-macys_n_2793713.html

[10] http://www.cleveland.com/business/index.ssf/2013/10/macys_is_the_only_retailer_all.html

[11] Id.

[12] Id.

[13] http://www.nytimes.com/2013/10/19/business/without-a-verdict-fight-over-martha-stewart-languishes.html?_r=0

[14] Id.

[15] Id.

[16] http://online.wsj.com/news/articles/SB10000872396390443618604577621770240371292

[17] http://www.nytimes.com/2013/10/19/business/without-a-verdict-fight-over-martha-stewart-languishes.html?_r=0

[18] http://www.cleveland.com/business/index.ssf/2013/10/macys_is_the_only_retailer_all.html

[19] http://money.cnn.com/2013/10/21/investing/jc-penney-stock-1/index.html?iid=EL

[20] Id.

[21] http://www.nbcnews.com/id/24896359/#.Un09r40zMy8

[22] http://www.dw.de/germanys-steinmeier-calls-for-eu-to-rescue-ailing-car-industry/a-3801809-1

[23] http://www.cleveland.com/business/index.ssf/2013/10/macys_is_the_only_retailer_all.html

 

[24] http://www.nytimes.com/2013/10/19/business/without-a-verdict-fight-over-martha-stewart-languishes.html?_r=0

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