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Retailers settle breach of contract suit over exclusive rights

Retailers often get into disputes over contractual matters regarding products they handle. A prominent recent case in involves a lawsuit by Macy's against J.C. Penney and Martha Stewart for breach of contract. The suit was not filed in California but the contract principles are applicable here.

Macy's claimed that both J.C. Penney and Martha Stewart breached an exclusivity contract that Macy's had with Martha Stewart covering all kitchen, bed and bath merchandise. J.C. Penney has been forging special promotions on the sale of Martha products, including those products that were exclusively promised only to Macy's by a written contract.

After months of trial in a state court, J.C. Penney and Martha Stewart scaled back their agreement. They agreed that Penney will not sell the kitchen, bed and bath products designed by Martha Stewart that were actually under contract to Macy's. When this new agreement was announced, Macy's gleefully declared victory, calling the announcement a "complete surrender" and total victory. Far-sighted counsel for J.C. Penney could have saved Penney substantial funds for legal fees and expenses if a settlement was obtained before the months-long trial had started.

The announcement actually came just days before the judge was expected to issue a ruling in the long-running legal dispute. Penney will continue to market the other Martha products that are not mentioned in the Macy's exclusivity agreement. J. C. Penney will also return 11 million common shares of Martha Stewart that it acquired as consideration for the marketing agreement.

J.C. Penney has been struggling recently under a dramatic loss in sales volume the past two years. It even had to bring its former CEO back to try and steer the company back from disaster. Getting involved in contract disputes is not a recipe for a comeback.

Among other things, the breach of contract settlement reduces the level of guaranteed minimum royalties that J.C. Penney is obligated to pay to Ms. Stewart's company. Under the original contract, the company was to receive a minimum of more than $200 million in royalties for sales nationally, including in California. Neither company would disclose the new, lower minimum, but it was stressed to be substantial.

Source: The New York Times, Ruling Near, J.C. Penney Capitulates to Macy???s, Hilary Stout, Oct. 21, 2013

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