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March 1, 2013

The legal profession seems to be recovering from its economic woes. Perhaps we (lawyers) should thank Martha Stewart for her continuing stimulus to the law business. She’s at it again with another big one.

I think we all remember Martha Stewart, the lady who did actual jail time for insider trading in IMClone stock. Warned by her broker that the founders of the company were selling their shares in the company, Martha dumped her entire holding before the news of the FDA action turning down a new cancer drug, Erbitux reached the public. She and the broker then compounded the matter by inventing a false story that the decision to sell if the stock fell below $60 a share was made long before the event of sale. As a result of her conduct, Martha was sentenced to 5 months imprisonment followed by 5 more months of home confinement.

Time and Martha marched on, however, and when she emerged from prison, she struck a deal with Kmart (Sears Holding) to handle her Martha Stewart Everyday line of household items, saving her company from a decline caused by the adverse publicity in the insider trading case and subsequent imprisonment. Of course when that deal appeared to sour, Martha was quick to move on, signing a new deal with Home Depot. In a parting shot Martha allegedly commented about Kmart, “Have you been in a Kmart lately? It is not the nicest place to shop.”

Well, the Home Depot deal didn’t work out either, so Martha signed a deal with Macy’s to handle Martha Stewart Living Omnimedia home goods, giving Macy’s the “exclusive” right to sell Martha’s products in the cookware, home decor, bedding and bath textiles lines, under an agreement that runs until 2018. Macy’s has made the Martha Stewart line its number one line. Sales growth in that line last year was 8%, double the rate of growth at Macy’s as a whole.

There is an exception to Macy’s “exclusive” right to sell the Martha Stewart lines. The contract provides that Martha may also sell her own lines from stores which she owns herself. Can you see what’s coming next?

Without warning, Martha has signed a new agreement with J.C. Penney company under which Penney’s will be opening “Martha Stewart boutiques” in 700 of its stores, and the boutiques will be selling the disputed lines of household products. Martha and Penney’s have justified this on the theory that the boutique operations are, in effect, Martha’s own stores.

It comes as no surprise that Macy’s has elected to sue both Martha Stewart Living Omnimedia and J.C. Penney Co. claiming Martha has breached her contract of exclusivity with Macy’s and Penney’s has induced her to do it. The cases are pending, and have been consolidated for trial in the Supreme Court of New York. (New York calls its trial court the Supreme Court).

Rulings in this case should be of interest to our business owner clients as well as clients who are thinking about going into business. In contract law there is a concept of “good faith and fair dealing” which requires that parties conduct themselves in regard to each other with good faith. The issue of interpretation of the “exclusive” provision in the contract is to be decided. If Martha and Penney’s prevail, it is possible that Macy’s will receive some sort of damage award, and how the court computes damages will be interesting. If the Court decides to stop the Martha Stewart Boutique concept in its tracks, will Martha open up to liability to Penney stores?

In the latest round, First Macy’s then Penney’s seemed to score points. First Macy’s received a court order restraining Penney’s from selling Martha Stewart brand soft goods, then Penney’s sought and received some relief in the appeals court, which allows them to sell Martha Stewart soft goods so long as they do not bear the Martha Stewart name. The battle rages on.

We’ll keep an eye on the case and report further. Meanwhile if you have questions, please feel free to submit them and we’ll deal with your questions in future issues.