I'm not a huge fan of Martha Stewart -- her smile hurts my eyes -- but I'm not going to deny that having her name on cheap ceramic bowls makes those bowls easier to sell. For years, she's been the face of the American home, with its linens, gravy bowls, and house arrest anklets. So it's not surprising that companies like Macy's (NYSE:M) and J.C. Penney (NYSE:JCP) want to use her name on everything they can. What's also not surprising is that the Stewart Empire is going to try to milk that for all the endorsement cash that it can. Combine those two and it's easy to see how we got here -- where "here" is a place that Macy's sues Stewart and J.C. Penney for breaking an exclusive contract.
The case hinges on whether the little fake stores within JCPenney locations count as J.C. Penney's or their own brands. If they count as J.C. Penney subsidiaries, then Macy's will show that its exclusivity with Stewart has been infringed upon. If they count as tiny Martha Stewart stores, then they'll fall into the exception clause of the Macy's contract, which stipulates that Stewart can sell her wares at her own stores. The questions for investors are: Will it matter? and Who's likely to win?
The (mixed) nuts and bolts (of cloth)
In 2007, Macy's signed the exclusivity deal with Martha Stewart Living Omnimedia (NYSE:MSO). The company has filed memos as part of the suit alleging that it added Stewart to its lineup at a time when no one was interested in working with her. In 2007, she had just been released from prison and her company was only being represented in Kmart. Now, Macy's claims, J.C Penney "is trying to harvest the field planted and cultivated by Macy's."
Unsurprisingly, that's not how J.C. Penney sees things. It doesn't dispute that Macy's and Stewart have an exclusivity agreement, but it disputes the terms of that agreement. According to J.C. Penney, the contract stipulates that Stewart has every right to sell her goods through Martha Stewart Living stores. J.C. Penney then goes on to claim that the in-store stores it's setting up with Stewart count as Martha Stewart Living locations, not as parts of J.C. Penney. That would mean that Stewart has every right to sell merchandise out of the locations. The key, J.C. Penney's lawyers claim, is that the contract doesn't say that the stores have to be stand-alone -- therefore, an in-store store is a store.
On top of all the legalese, Stewart is planning on showing not only that her company has the right to sell in JCPenney, but that Macy's was a bad steward of the Martha Stewart brand. In fact, it may not matter if the contract was violated by J.C. Penney, because Stewart's lawyers plan to show that the contract was originally broken by Macy's when it failed to "use commercially reasonable efforts to maximize net sales of Martha Stewart Collection products."
The winners and losers
While I'm not a lawyer, I think J.C. Penney is probably going to win this one on a wording technicality. If there really is no stipulation saying that the Martha Stewart Living stores have to be stand-alone locations, then it seems like Stewart can open a location anywhere she darn well pleases, including in a JCPenney store. In some sense, JCPenney is turning into a mini-mall within a mall, and there's no way that the Macy's contract would preclude Stewart from opening a store in a regular mall, so it shouldn't stop her from opening locations in a mini-mall.
The odder part is that I doubt the Macy's-Stewart contract will end up having been violated by either side -- which means that it would still stand. It seems unlikely that Stewart's lawyers will be able to definitively show that Macy's didn't go to all reasonable lengths to promote Stewart's merchandise. So we may find Macy's and JCPenney locations competing to sell "exclusive" merchandise. At most, I imagine there may be some outcomes for advertising, and which company can use the term "exclusive."
If all that turns out to be true, then I think everyone loses here. Neither company will have real exclusivity, and it seems unlikely that Macy's is going to keep pumping Stewart products as hard as they could. But J.C. Penney isn't going to be able to make broad claims about being the only place to buy Martha Stewart designs, so the value of the deal will be much smaller. It just goes to show you, small words are a big deal.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.