FILED: NEW YORK COUNTY CLERK 08/16/2012

NYSCEF DOC. NO. 1

INDEX NO. 652861/2012 RECEIVED NYSCEF: 08/16/2012

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK MACYS, INC. and MACYS MERCHANDISING GROUP, INC., Plaintiffs, vs. J.C. PENNEY CORPORATION, INC., Defendant. : : : : : : : : : : : : : Index No. ___________ SUMMONS Date Index No. Purchased: August 16, 2012

TO THE ABOVE-NAMED DEFENDANT: YOU ARE HEREBY SUMMONED to answer the complaint in this action and to serve a copy of your answer on the Plaintiffs attorneys within 20 days after the service of this Summons (not counting the day of service itself), or within 30 days after service is complete if the Summons is not delivered personally to you within the State of New York. YOU ARE HEREBY NOTIFIED THAT should you fail to appear or answer, judgment will be taken against you by default for the relief demanded in the complaint. VENUE: Plaintiffs designate New York County as the place of trial. The basis of this designation is Plaintiffs residence in New York County at 151 West 34th Street, New York, New York 10001.

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Dated: New York, New York August 16, 2012

Respectfully submitted, s/ Robert C. Micheletto Theodore M. Grossman Robert C. Micheletto JONES DAY 222 East 41st Street New York, New York 10017 Telephone: (212) 326-3939 Facsimile: (212) 755-7306 E-mail: tgrossman@jonesday.com rmicheletto@jonesday.com Michael A. Platt JONES DAY North Point 901 Lakeside Avenue Cleveland, Ohio 44114 Telephone: (216) 586-3939 Facsimile: (216) 579-0212 E-mail: maplatt@jonesday.com Attorneys for Plaintiffs Macys, Inc. and Macys Merchandising Group, Inc.

To: J.C. PENNEY CORPORATION, INC. c/o C T Corporation System 111 Eighth Avenue New York, New York 10011

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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK MACYS, INC. and MACYS MERCHANDISING GROUP, INC., Plaintiffs, vs. J.C. PENNEY CORPORATION, INC., Defendant. : : : : : : : : : : : : :

Index No. ___________ COMPLAINT

Plaintiffs Macys, Inc. and Macys Merchandising Group, Inc. (collectively Macys), by their undersigned counsel, allege upon knowledge as to themselves and upon information and belief as to other matters, as follows: NATURE OF THE CLAIM 1. This case seeks an injunction, damages, and other relief against Defendant J.C.

Penney Corporation, Inc. ( J.C. Penney). 2. J.C. Penney has tortiously interfered, and continues to tortiously interfere, with a

contract that Macys validly entered into with Martha Stewart Living Omnimedia, Inc. (MSLO). J.C. Penney knew that such a contract existed, and nonetheless induced MSLO to materially breach that contract. In doing so, J.C. Penney has caused Macys to incur substantial damages, and threatens to inflict incalculable further harm on Macys. Billions of dollars of sales are involved. J.C. Penney has no justification for its unlawful conduct, which is transparently designed to eliminate the competitive advantage that Macys enjoys in the area of home products by virtue of its exclusive relationship with MSLO.

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3.

Macys and MSLO are parties to a License and Promotion Agreement, dated as of

April 3, 2006 (the Macys Agreement), under which MSLO agreed, among other things, to grant Macys an exclusive license to manufacture and sell Martha Stewart products in certain exclusive product categories.1 The Macys Agreement specifically prohibits MSLO from entering into any agreement with any third party, including any other retailer, pursuant to which Martha Stewarts name or likeness is used in connection with the manufacture, marketing, distribution, or sale of any product within Macys exclusive product categories.2 (A copy of the Macys Agreement is attached hereto as Exhibit 1.) 4. Macys took a risk in agreeing to an exclusive license of Martha Stewart

trademarks from MSLO. At the time Macys negotiated and entered into the Macys Agreement in 2005 and early 2006, MSLO was having substantial troubles. Ms. Stewart, who was the face and name of MSLOs lines of business media and licensing had recently been released from prison following very public proceedings and was under additional, long-term constraints from the SEC. In addition, Kmart, which was MSLOs principal merchandising partner, and which had made its name synonymous with Ms. Stewart through extensive advertising, promotions, and in-store signage, had gone through painful bankruptcy reorganization and had become an undesirable partner to MSLO. More specifically, the Macys Agreement is between MSLO and Macys Merchandising Group, Inc. (MMG). MMG is a wholly-owned direct subsidiary of Macys, Inc., and is responsible for the design, development and marketing of Macys private label brands and certain licensed brands. MMG, along with other Macys, Inc. subsidiaries, provides support functions to Macys retail operations on an integrated, company-wide basis. Macys, Inc. (formerly known as Federated Department Stores, Inc.) is an intended third-party beneficiary of the Macys Agreement. MSLO does not itself manufacture or sell any Martha Stewart-branded products. Rather, it is a media and merchandising company, founded by Martha Stewart, that handles the licensing of the Martha Stewart brand and assists in the design and development of Martha Stewart products.
2 1

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5.

To improve its lot, MSLO approached Macys to become its partner. Macys, like

any department store in its niche, succeeds in significant part through the development of exclusive labels. Those labels differentiate Macys from competitors, and they drive foot traffic for broader sales of goods. Macys told MSLO that it would be willing to negotiate, but only on terms of absolute exclusivity for the central categories of home goods sold at department stores. Macys also believed that, through significant efforts, it could substantially reposition the Martha Stewart brand. MSLO agreed to Macys terms, including the need for exclusivity. 6. Over the term of the Macys Agreement, Macys has devoted a significant amount

of marketing and promotion resources to building the Martha Stewart brand. Not only has Macys performed all of its obligations under the Macys Agreement, but, in just a few short years, it has turned its Martha Stewart Collection, which launched at Macys in the Fall of 2007, into a product line that generates in excess of $ per year in net sales. Needless

to say, the Macys Agreement has been mutually profitable. Macys relationship with MSLO had been close and collegial. As Ms. Stewart herself has said, [w]e love Macys, [t]heyve been great partners. 7. J.C. Penney knew of the Macys Agreement at the time it began interfering with

that contract. Indeed, the existence of the Macys Agreement and its main feature exclusivity were public knowledge. On April 6, 2006, Macys had issued a press release announcing that Macys and MSLO had entered into an agreement to develop an all-new line of Martha Stewart Collection home merchandise exclusively for Macys. The release further described the products covered by the Macys Agreement and other primary features of the deal: The Martha Stewart Collection line will encompass a broad range of home goods including bed and bath textiles, housewares, casual dinnerware, flatware and glassware, cookware, holiday decorating and trim-a-tree items developed especially for the more upscale, traditional Macys customer. . . .

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Merchandise will be created by the MSLO design team under Martha Stewarts direction and supervision. Macys will coordinate manufacturing and distribution to its stores and directto-customer channels, as well as marketing to consumers. The release even set forth the term of the Macys contract, and disclosed the existence of Macys multiple renewal options: The first term of the agreement between [Macys] and MSLO will extend for five years, beginning in 2007, with options for renewal. (A copy of the April 6, 2006 press release is attached hereto as Exhibit 2.) 8. The initial five-year term of the Macys Agreement is scheduled to expire on

January 31, 2013. As noted, however, Macys has a unilateral right to extend the term of the Agreement for one additional five-year period, after which Macys can opt to extend the term for five additional two-year periods, for a total of 15 additional contract years. The deadline for Macys to decide whether to exercise its renewal option was January 28, 2012. Macys validly exercised its renewal option on January 23, 2012, while reserving all of its rights under the Agreement. (A copy of the January 23, 2012 letter from Macys to MSLO exercising the renewal option is attached hereto as Exhibit 3.) 9. The Macys Agreement notwithstanding, by the middle of 2011, MSLO was

again challenged. Its shares of stock, which once traded for $40, were trading at around $4. It needed to renegotiate and extend the terms of its bank loans. It had operated at a net loss in five of the preceding six years. The reason was not the Macys contract, which had always been profitable to MSLO. The reason was MSLOs media and publishing operations, which ran at losses exceeding MSLOs considerable profits from retail licensing fees. MSLO began looking for a cash infusion. In May 2011, it engaged Blackstone Advisory Partners to begin the exploration of strategic partnerships and other opportunities. (An MSLO press release of May 25, 2011 announcing the retention of Blackstone is attached hereto as Exhibit 4.) 10. At around the same time, June 14, 2011, J.C. Penney announced that it was - 4CLI-2008153

naming Ron Johnson, a former executive at Apple and Target, as its new chief executive officer effective November 1, 2011. J.C. Penney also announced that Mr. Johnson would be joining J.C. Penneys board of directors as of August 1, 2011. (J.C. Penneys press release dated June 14, 2011 is attached hereto as Exhibit 5.) 11. As of June 2011, J.C. Penney was facing its own troubles. Based on its public

filings, its costs were surging, and its 2010 sales had been up by only 1.2% year-over-year after three straight years of declining sales and were still more than 10% below its 2007 sales. Its recovery from the Great Recession was lagging well behind its competitors, especially Macys. Faced with such enormous pressure to succeed, J.C. Penney turned to illegitimate means to accomplish its goals. 12. During the Summer of 2011, J.C. Penney met with Martha Stewart and other

MSLO executives, as part of Blackstones exploration of strategic alternatives for MSLO. The meetings were kept secret from Macys. It soon became clear that J.C. Penney was looking to do more than simply make an investment in MSLO. Rather, J.C. Penney was interested in reaching a merchandising arrangement with MSLO that would allow J.C. Penney to sell Martha Stewartbranded home products. 13. J.C. Penney knew that Macys exclusive licensing agreement with MSLO gave

Macys a competitive advantage in the marketplace. The exclusive availability of a wide variety of Martha Stewart-branded home products at Macys brought foot traffic into Macys stores, where customers would then shop for other items as well. J.C. Penney wanted the Martha Stewart name to do for it what that name does, and has done, for Macys. More importantly, J.C. Penney wanted to rob Macys of market share and destroy the competitive advantage that it enjoys as a result of its existing exclusive arrangement with MSLO. Indeed, after causing MSLO to breach the Macys Agreement, J.C. Penney admitted its tortious intent to the Wall

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Street Journal; its new CEO stated that chains just need to share, and that, although [a] lot of retailers through the years have fought for exclusivity, there are certain brands [like Martha Stewarts] that should be available broadly. Dana Mattioli & Russell Adams, Marthas Deal Miffs Macys, Wall St. J., Dec. 8, 2011, at B3. 14. J.C. Penney also knew and appreciated that the Macys Agreement presented an

obstacle to the merchandising agreement it was contemplating with MSLO. J.C. Penney nonetheless pressed forward. It offered MSLO terms that were more lucrative than those contained in the Macys Agreement. J.C. Penney also offered to make an enormous investment in MSLO, conditioned upon MSLOs agreement to the merchandising deal. Those inducements succeeded. MSLO agreed to a deal with J.C. Penney, and the two parties negotiated a merchandising contract without informing Macys throughout the second half of 2011. 15. On December 7, 2011, J.C. Penney and MSLO issued a public announcement that

they were entering into what they described as a strategic alliance. Macys had been kept in the dark and learned of the alliance only the evening before the announcement. According to J.C. Penneys press release, MSLO and J.C. Penney agreed that, in February 2013, J.C. Penney would begin to sell Martha Stewart products, including home and lifestyle products, in J.C. Penney department stores and on an e-commerce site that MSLO and J.C. Penney would jointly develop. (A copy of J.C. Penneys press release is attached hereto as Exhibit 6.) J.C. Penney has since stated publicly that the sale of Martha Stewart-branded products at J.C. Penney is to be the cornerstone of its effort to transform the company. 16. The agreement between J.C. Penney and MSLO dated December 6, 2011 (the

JCP Agreement) authorizes the manufacture, marketing, distribution, and sale of Martha Stewart-branded products within Macys exclusive product categories. Its terms are similar to, and irreconcilable with, the Macys Agreement. J.C. Penney will manufacture the goods, own

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the goods until sale, decide on their sale price, hire the workers who sell the goods, and sell the goods out of stores owned or leased by J.C. Penney. MSLO will receive a licensing fee, the same arrangement as with Macys. In addition to the JCP Agreement, J.C. Penney also provided MSLO with the cash infusion it needed: a $38.5 million investment. 17. The JCP Agreement is not oblivious to the Macys Agreement. To the contrary, it

makes explicit reference to the Macys Agreement (which it calls the 2006 Agreement, without mentioning Macys name), and addresses division of liability between J.C. Penney and MSLO if Macys sues. Further, it attempts to elude Macys exclusivity rights by trying to squeeze J.C. Penney into a narrow (and inapplicable) exception from exclusivity for sales at so-called MSLO stores. To do so, it christens sections of the J.C. Penney stores where MSLO products would be sold as MSLO Stores. (A copy of the JCP Agreement is attached hereto as Exhibit 7.) 18. The JCP Agreement is unlawful. It is expressly prohibited by the Macys

Agreement. In entering into such a deal, MSLO materially breached the plain language of the Macys Agreement, as set forth in more detail below. 19. On January 23, 2012, Macys commenced a lawsuit against MSLO, seeking

preliminary and permanent injunctive relief (as well as any other appropriate relief) to put a stop to MSLOs breaches of the Macys Agreement (the Macys/MSLO Lawsuit . In the course of the lawsuit, Macys and MSLO publicly disclosed a copy of the Macys Agreement (except for certain sensitive terms, which were redacted), and Macys made clear which provisions of that agreement were being breached by the JCP Agreement. 20. Despite having full knowledge of the Macys Agreement as well as Macys legal

claims against MSLO, J.C. Penney continued to work with MSLO to implement the JCP Agreement, inducing substantial additional breaches of the Macys Agreement. For example, in violation of the Macys Agreement, MSLO provided to J.C. Penney (and withheld from Macys)

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the designs for hundreds of products within Macys exclusive product categories, with the intent of having those products manufactured, marketed, sold, and distributed by J.C. Penney under the Martha Stewart brand. J.C. Penney accepted those illegally-obtained designs and continues to use them. 21. As another egregious example, J.C. Penney doubled down on its tortious conduct

on July 11, 2012, by agreeing with MSLO to an amendment of the JCP Agreement that expands the categories of Martha Stewart-branded products to be sold at J.C. Penney. While the original JCP Agreement provided that J.C. Penney would sell kitchen products, the amendment added to the mix a variety of Martha Stewart-branded bedding, bath, and home decor products. All of those products are explicitly within Macys exclusive product categories. (A copy of MSLOs Form 8-K filing of July 12, 2012 disclosing the amendment is attached hereto as Exhibit 8.) 22. What is more, J.C. Penney has publicly promoted its merchandising deal with

MSLO on numerous occasions since December 2011, including at a widely-publicized presentation to the press on January 25, 2012 just two days after Macys sued MSLO. J.C. Penneys continued announcements that consumers will soon be able to purchase at J.C. Penney Martha Stewart-branded products that are, under the Macys Agreement, exclusive only to Macys, has exacerbated the damage that J.C. Penney is inflicting on Macys. 23. Further, after Macys commenced the Macys/MSLO Lawsuit, MSLO suddenly

took the pretextual position that Macys was in material breach of the Macys Agreement at the time it exercised its renewal option, and that its exercise of that option was therefore ineffective. According to MSLO, that means that the Macys Agreement now expires in January 2013 as opposed to January 2018. As reflected in Section 3(b) of that agreement, Macys bargained for the unilateral right to decide whether to renew it. 24. Prior to Macys commencement of the Macys/MSLO Lawsuit, through five years

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of contractual performance, MSLO had never claimed or even hinted that Macys had ever breached the Macys Agreement. In fact, MSLO explicitly told Macys in December 2011 that it wanted Macys to renew the agreement, then afterward told Macys that it was delighted that Macys had renewed, and then touted to the public that Macys renewal was a testament to the Martha Stewart brand. MSLO has conceded that its claim of breach was strategic and never would have been made if MSLO had not contracted with J.C. Penney. Absent J.C. Penneys interference, MSLO would never have challenged Macys renewal option. 25. At a hearing on July 13, 2012 in the Macys/MSLO Lawsuit, the Court granted

Macys a preliminary injunction against MSLO prohibiting further performance of the JCP Agreement, as it relates to Macys exclusive product categories. The Court concluded that Macys had demonstrated a likelihood of succeeding on the merits of its claim that the JCP Agreement materially breaches the Macys Agreement. The Court also determined that Macys would suffer irreparable harm absent an injunction, and that Macys had demonstrated that the balance of the equities favor an injunction. The Court entered its preliminary injunction order on July 31, 2012. (A copy of the preliminary injunction order in the Macys/MSLO Lawsuit is attached hereto as Exhibit 9.) 26. After the Court granted Macys motion for a preliminary injunction on July 13,

2012, MSLOs chief executive officer, Lisa Gersh, publicly stated that MSLO will be launching our products both in-store and online with J.C. Penney in the first quarter of 2013 as planned. Nothing about this ruling changes that. Based on those comments, J.C. Penney appears to be continuing to work with MSLO in a manner that violates Macys contract rights under the Macys Agreement. 27. J.C. Penneys tortious interference with the Macys Agreement has been knowing,

deliberate, and intentional.

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28.

Macys by this action seeks, in addition to compensatory and punitive damages

and all other appropriate relief, an order permanently enjoining J.C. Penney from, among other things, taking any further action with MSLO that violates the Macys Agreement. Macys is also entitled to a preliminary injunction enjoining J.C. Penney, during the pendency of this action, from (1) taking any further action to implement the JCP Agreement as it relates to products in Macys exclusive product categories; (2) using the designs it illegally obtained from MSLO for products within Macys exclusive product categories; (3) advertising or making any public statements that products within Macys exclusive product categories that are covered by the JCP Agreement will be available for purchase through J.C. Penney; and (4) taking any further steps to interfere with Macys contract rights under the Macys Agreement. Such a preliminary injunction is necessary to preserve the status quo and prevent irreparable injury to Macys during the pendency of this action. THE PARTIES 29. Plaintiff Macys, Inc. is a Delaware corporation with corporate offices in New

York, New York, and Cincinnati, Ohio. Plaintiff Macys Merchandising Group, Inc. is a whollyowned subsidiary of Macys, Inc., is incorporated in Delaware, and has its principal place of business in New York, New York. Macys is one of the largest department store operators in the United States. It operates more than 850 department stores in 45 states and has a significant Internet presence, operating under the names Macys and Bloomingdales. 30. Defendant J.C. Penney Corporation, Inc. is a Delaware corporation with its

principal place of business in Plano, Texas. According to its website, J.C. Penney operates over 1,100 jcpenney department stores throughout the United States and Puerto Rico, as well as one of the largest apparel and home furnishing sites on the Internet, jcp.com. J.C. Penney is one of Macys main competitors.

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JURISDICTION AND VENUE 31. 32. This Court has jurisdiction over this case pursuant to New York CPLR 301. Venue is proper in this Court pursuant to New York CPLR 503. FACTUAL ALLEGATIONS The Macys Agreement 33. In 2005, MSLO approached Macys with a proposal to collaborate on an

exclusive line of Martha Stewart products to be sold at Macys department stores. Macys and MSLO thereafter began negotiating a broad contract that was intended to make Macys the only retailer in the United States with the right to use the Martha Stewart name or likeness in connection with the manufacture and sale of certain categories of products. The result of those negotiations was the Macys Agreement, which was effective as of April 3, 2006. 34. One of the parties main priorities in the negotiations was to clearly establish in

the Macys Agreement that Macys had the exclusive right to manufacture and sell Martha Stewart products within the Exclusive Product Categories (as defined in the Macys Agreement). Indeed, MSLOs original proposal to Macys was for just that. Moreover, Macys made it clear to MSLO that Macys was not interested in any arrangement with MSLO that was not exclusive. From both Macys and MSLOs perspectives, the purpose of such exclusivity was to establish a crucial connection between Macys and Martha Stewart, with respect to home products, in the eyes of the consumer. 35. Such exclusive arrangements are critical to Macys effort to distinguish itself

from its competition. For example, Macys brand marketing plan over the past five years has been heavily weighted towards what Macys calls the celebrity campaign in a wide variety of lines of goods. The goal of the celebrity campaign is to associate Macys departments with celebrity designer product lines that are clearly distinctive, so that consumers come to associate

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certain celebrities and their products with Macys, and the celebrity associations help to market the products and attract consumers to Macys stores. This celebrity campaign is apparent in most of Macys brand image advertisements in which celebrity designers are strongly associated with the Macys products being advertised. In that way, Macys distinguishes itself from its competition, which is the primary goal of any successful exclusive brand program, and the central goal of any successful department store operating in Macys niche. Such a strategy is crucial to Macys overall success. 36. Exclusivity over the Martha Stewart brand in the home products covered by the

Macys Agreement was also critical because the Macys Agreement allowed Macys to leverage Martha Stewart by making her the face of the Macys Home Store and the iconic representative for Macys in the home products arena. That meant that the Martha Stewart brand would be the core of the Macys home product strategy, which would be reflected in a substantial promotion and marketing campaign, as well as a significant presence in Macys stores. 37. The Macys Agreement therefore contains a variety of exclusivity provisions,

some dealing with a specific trademark, Martha Stewart Collection, and others dealing with the use of the name or likeness of Martha Stewart. Under Section 2(a) of the Macys Agreement, entitled Grant; Exclusivity, MSLO licensed to Macys the exclusive use of the Martha Stewart Collection trademark (which the parties agreed would be the Trademark referred to in the Agreement). The Trademark, together with the product designs, trade dress, and other materials developed by MSLO in collaboration with Macys under the terms of the Macys Agreement are referred to in the Agreement as the Licensed Property. Section 4 of the Agreement provides that Macys and MSLO would collaborate on establishing the concepts and designs of certain Exclusive Products, and that Macys would manufacture those products for sale in its stores. Those products were referred to as Macys Manufactured Products. The

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Macys Agreement also requires collaboration between Macys and MSLO in marketing and promoting the Macys Manufactured Products. All of MSLOs design work for Martha Stewart products within Macys Exclusive Product Categories was intended to be for Macys exclusively. 38. More broadly, the Macys Agreement restricts MSLOs ability to authorize any

third party to use any other Martha Stewart Mark which is defined as any existing or future MSLO mark that features the phrase Martha Stewart or any derivation thereof other than the Trademark or Stewart Property defined as the name, likeness and signature of Martha Stewart in connection with products in the Exclusive Product Categories. Specifically, Section 2(b)(ii) states, in relevant part, that: MSLO . . . subject to Section 8(c)(iii), for the entire Term, shall not enter into any new agreement . . . pursuant to which it uses for its own account the Licensed Property, the Stewart Property or any other Martha Stewart Mark, or licenses the Licensed Property, the Stewart Property or any Martha Stewart Mark to any third party, in each case, in connection with the manufacture, marketing, distribution or sale in the Territory of items within the Exclusive Product Categories or authorizes the distribution or sale of any items within the Exclusive Product Categories that include the Licensed Property, the Stewart Property or any Martha Stewart Mark in the Territory, except as provided in this Agreement. (Emphasis added.) The Exclusive Product Categories are defined as the following types of products: Soft Home (bedding, bath & kitchen textiles), Housewares (dinnerware, tabletop & gadgets), Home Dcor (candles & frames), and Cookware. (Agreement, Ex. A.) Subsequent amendments to the Agreement added to the Exclusive Product Categories certain furniture.3 39. Pursuant to Macys exclusive rights under the Agreement, MSLO is forbidden

from the following, among other things:

The Macys Agreement has been amended on four occasions since April 2006. Copies of the amendments are attached hereto as Exhibit 10.

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a.

MSLO is forbidden from designing Martha Stewart-branded products within Macys Exclusive Product Categories to be manufactured by, distributed by, or sold through any department store chain other than Macys; MSLO is prohibited from authorizing any department store chain other than Macys to use any Martha Stewart Mark, or Ms. Stewarts name or likeness, in connection with the manufacture, distribution or sale of items within the Exclusive Product Categories; MSLO is forbidden from entering into any licensing arrangement for goods in any other product categories in Macys lines, with certain exceptions, at any department store chain other than Macys without first giving Macys a right of first refusal; MSLO is forbidden from using any Martha Stewart Mark, or Ms. Stewarts name or likeness, in connection with the sale of products within the Exclusive Product Categories through any internet site other than Macys site.

b.

c.

d.

40.

No provision of the Macys Agreement allows the sale of Martha Stewart-branded

products within the Exclusive Product Categories through any department store chain other than Macys. To the contrary, such sales are expressly and specifically banned by the non-compete covenant contained in Section 18(b), which provides as follows: Without the prior written consent of [Macys], which [Macys] may withhold in its absolute discretion, during the Term, MSLO shall not itself enter into any new agreement or extend (or take any action that has the effect of extending) any existing agreement, and shall prevent its Affiliates (including Martha Stewart) from entering into any new agreement or extending . . . any existing agreement with any department store or manufacturer or other retailer of department store merchandise that promotes the sale of any items included . . . within the Exclusive Product Categories that are branded with the Trademark or any Martha Stewart Mark; provided however, that the foregoing restriction shall not prohibit performance pursuant to . . . (iii) any agreements relating to the marketing or promotion of . . . items included in the Exclusive Product Categories through any MSLO DTC Channel, MSLO Store or the activities of MSLO or its Affiliates (including Martha Stewart) thereunder. (Emphasis added.) 41. Among other things, MSLO confirmed in its Form 8-K of December 12, 2011 and

in a meeting with Macys on December 15, 2011 that it planned that sales of MSLO goods at J.C. - 14CLI-2008153

Penney would be made by J.C. Penney employees, from inventory purchased by J.C. Penney, with sales proceeds going to J.C. Penney, on items sourced by J.C. Penney, with sales further supported on the J.C. Penney internet site, and with a commission in sales being paid to MSLO. As stated in MSLOs 8-K: J.C. Penney will sell certain Martha Stewart-designed and branded home products (the Products) through www.jcp.com and in J.C. Penney stores throughout the United States[.] Such a deal is expressly prohibited by Sections 2(b)(ii) and 18(b) of the Agreement. 42. The qualification in Section 18(b)(iii) allowing MSLO to enter into agreements

relating to the marketing or promotion of products within the Exclusive Product Categories through any MSLO Store does not permit MSLO to enter into an agreement with a department store other than Macys for the sale of Martha Stewart products within the Exclusive Product Categories. The sale of Macys-exclusive goods at J.C. Penney, with 1,100 stores, is as big a breach of MSLOs obligations as one could imagine. 43. As noted previously, the Macys Agreement not only gives Macys an exclusive

with respect to Martha Stewart products within the Exclusive Product Categories, but it also restricts MSLOs ability to enter into any new agreement with respect to Martha Stewart products that are outside the Exclusive Product Categories. Section 2(e) grants Macys a right of first refusal with respect to any such products that are outside the Exclusive Product Categories but within Macys Product Line. 44. As noted above, Section 3(a) provides that the Agreement expires at the end of

the fifth Agreement Year, which is January 31, 2013. Section 3(b) provides that Macys shall have the option to extend the Term for one (1) additional five (5) year period followed by five (5) additional two (2) year periods (each, an Extension), provided that . . . [Macys] has not breached th[e] Agreement in any material respect. Section 3(b) further states that, [i]n order to

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exercise each Extension option, [Macys] shall notify MSLO of its intent to exercise its option to extend the Term in writing at least twelve (12) months prior to the end of the initial term or any Extension. The deadline for Macys to exercise its Extension option to renew the Agreement for an additional five-year period was January 28, 2012. Macys validly exercised its Extension option by letter to MSLO dated January 23, 2012, without prejudice to any claims it had against MSLO (see Exhibit 3). All of the conditions precedent to Macys exercise of the Extension option, as set forth in Section 3(b), have been satisfied. 45. The Macys Agreement also explicitly provides that the rights granted thereunder

are of such special, unique and intellectual character that a breach of any material term, condition or covenant of th[e] Agreement will cause irreparable injury to the non-breaching party and, consequently, that remedies at law for breach of a material term, condition or covenant of th[e] Agreement (other than payment obligations) will be inadequate. That acknowledgement is particularly applicable with respect to MSLOs material breach at issue here. As expressed in the plain language of the Macys Agreement, the violation of Macys exclusivity rights cannot adequately be remedied by money damages. The fact that J.C. Penney is a less upscale retailer compared to Macys compounds the injury. 46. The Macys Agreement contains a confidentiality clause that requires MSLO,

subject to certain exceptions, to hold in strict confidence not only the terms of the Macys Agreement but also any information MSLO learned from Macys during the performance of the agreement: [E]ach of Licensee and MSLO . . . [s]hall hold and shall cause its officers, Affiliates, directors, employees, agents, accountants, representatives and advisors (Representatives) to hold in strict confidence all the terms of this Agreement and all information furnished to such Party or its Representatives in connection with the transactions contemplated by this Agreement as well as information concerning the other Party (or such Partys Affiliates) - 16CLI-2008153

contained in analyses, compilations, studies or other documents prepared by or on behalf of such Party (or such Partys Affiliates). (Macys Agreement 22(a).) MSLOs Licensing Contracts With Other Retailers 47. At the time Macys entered into the Macys Agreement, MSLO also had a

licensing contract in place with Kmart. That contract was grandfathered into the Macys Agreement under Sections 2(b) and 18(b)(i). Both Sections 2(b) and 18(b), however, prohibited MSLO from renewing or extending any existing licensing contracts covering the Exclusive Product Categories without Macys consent, so the Kmart deal expired on its own terms in January 2010. 48. When drafting the Macys Agreement, the parties recognized that Kmarts

continued sales of Martha Stewart products, like sales of Martha Stewart goods at any other department store, would impact sales at Macys. Accordingly, Section 10(c) provides that,

49.

MSLO currently has licensing arrangements with a number of retailers other than

Macys, including Home Depot, Michaels, PetSmart, and Staples. All of those arrangements are permissible under the Macys Agreement either because the Martha Stewart products at issue in those arrangements are outside the Macys Product Line or because Macys affirmatively consented to those arrangements. MSLOs Breach of the Macys Agreement 50. During the term of the Macys Agreement, Macys has satisfied all of its of dollars to MSLO in royalties. Macys

contractual obligations, and has paid

also has spent tens of millions of dollars and devoted thousands of man-hours re-establishing and

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substantially enhancing the Martha Stewart brand, elevating it to the quality and style to which Macys customers are accustomed, and establishing the aforementioned crucial connection between Martha Stewart and Macys home products in the eyes of the consumer. Since the Martha Stewart Collection debuted at Macys in the Fall of 2007, Martha Stewart has been the core of Macys home products strategy, the face of Macys Home Store, and the celebrity representing Macys in the home products arena. Martha Stewart-branded products are the most prominently-featured products in the Macys home sections of nearly all Macys stores. 51. Moreover, Macys has invested significant resources into developing valuable and

proprietary knowledge regarding the process for developing and designing home products and especially Martha Stewart home products for department store consumers. In particular, Macys has developed a substantial body of knowledge regarding how to design Martha Stewart home products that are most successful with consumers. Through a process of trial and error that cost Macys millions of dollars (e.g., in taking mark-downs of Martha Stewart products that did not sell well), Macys learned, for example, which colors, shapes, patterns, price points, etc., result in the highest levels of sales. Macys has imparted that knowledge to MSLO for purposes of its design obligations under the Macys Agreement. The value of Macys proprietary knowledge in that area, especially to a potential Macys competitor, cannot be quantified. Under the strict confidentiality provisions of the Macys Agreement, MSLO is absolutely prohibited from sharing that information. 52. On December 7, 2011, J.C. Penney issued a press release announcing that it had

entered into a strategic alliance with MSLO, which it described as follows: Beginning in February 2013, customers will be able to visit distinct Martha Stewart retail stores inside the majority of jcpenney department stores. These Martha Stewart stores are intended to be destinations where consumers can experience an engaging and inspiring environment and buy a variety of affordable, high-quality home and lifestyle merchandise designed - 18CLI-2008153

and curated by Martha Stewart and her team. . . . J.C. Penney will market and source the products. Under the terms of this 10-year commercial agreement, the two companies will also jointly develop an e-commerce site, expected to launch in 2013. The site will offer Martha Stewart expertise and enable consumers to purchase a wide range of home and lifestyle products, including those sold in the Martha Stewart stores inside jcpenney, and other merchandise designed or selected by Martha Stewart. MSLO is expected to receive in excess of $200 million from J. C. Penney over the initial 10-year contract period. (Emphasis added.) (Exhibit 6.) Macys had learned about MSLOs deal with J.C. Penney only the evening before the announcement. 53. Five days later, on December 12, 2011, MSLO filed with the SEC a Form 8-K

disclosing that it had entered into a Commercial Agreement with J.C. Penney on December 6. MSLO described the agreement as follows: The Commercial Agreement became effective upon execution, and provides for an initial term that will expire on January 28, 2023, unless earlier terminated in accordance with its terms. Pursuant to the Commercial Agreement, J.C. Penney will sell certain Martha Stewart-designed and branded home products (the Products) through www.jcp.com and in J.C. Penney stores throughout the United States, with the initial Product launch scheduled for February 2013. In addition, by February 2013, J.C. Penney is obligated to build (and thereafter support throughout the term) (i) dedicated Martha Stewart stores in approximately 600 J.C. Penney stores, which stores will be designed in accordance with the Companys specifications, will feature trained sales associates and will sell certain Products; and (ii) a Company ecommerce site that is expected to sell certain Products, Martha Stewart-branded products sourced from other Company licensees and other products. . . . The Commercial Agreement includes a list of Product categories for the initial launch, with the possibility that additional Product categories may be added during the term of the Commercial Agreement. J.C. Penney is required to pay a commission on all Product sales. For the Product categories covered by the initial launch, J.C. Penney is obligated to make minimum guaranteed payments against commissions generated on sales of the Products through the Martha Stewart stores as well as the J.C. Penney stores - 19CLI-2008153

and www.jcp.com in an aggregate amount of $113.5 million. The Commercial Agreement also requires J.C. Penney to pay an annual design fee to the Company and to commit to an annual marketing spend to promote the Products, some of which must be spent to advertise in Company properties. The minimum guaranteed payments for sales commissions, when combined with the design fee and the annual marketing spend, will require J.C. Penney to make at least $172.4 million in payments, in the aggregate, during the term of the Commercial Agreement. (Emphasis added.) (A true and copy of MSLOs Form 8-K is attached hereto as Exhibit 11.) 54. On March 6, 2011, MSLO filed a copy of the JCP Agreement with the Securities

and Exchange Commission. (See Exhibit 7.) As noted, the JCP Agreement is very similar to the Macys Agreement. Under the contract, MSLO authorizes J.C. Penney to manufacture and sell Martha Stewart-branded Kitchen Products within areas that it refers to as MSLO Stores. (JCP Agreement 1(a), 4(d)(iii).) Kitchen Products are defined as: those products in the Kitchen Categories (i) manufactured and distributed in MSLO Stores pursuant to this Agreement, (ii) approved and authorized by MSLO pursuant to this Agreement, and (iii) bearing one or more [Martha Stewart] [t]rademarks on the product itself or on a hang-tag label and/or other means of packaging. (Id. Definitions (hh).) Kitchen Products include, among other things, cookware, bakeware, kitchen textiles, table linens, dinnerware, glassware, and gadgets (id. Definitions (gg) & Appx 4) all of which are within Macys Exclusive Product Categories. 55. Section 4 of the JCP Agreement further provides that J.C. Penney will pay for the

design and construction of what it refers to as MSLO Stores, which will be a focal point for the JCP Home Store within approximately 600 J.C. Penney department stores. (JCP Agreement 4(b)(i), (iii), (v), 6(a).) In addition to building MSLO Stores, the agreement also requires J.C. Penney to develop a website for MSLO, through which J.C. Penney also will sell Martha Stewart products within the Macys Exclusive Product Categories. (Id. 5, 6(c), Appx 3.) 56. As with the Macys Agreement, the JCP Agreement provides that MSLO and J.C. - 20CLI-2008153

Penney would collaborate on the assortment of products to be developed, and then MSLO would design the products to be manufactured and sold by J.C. Penney. (Id. 7.) Unlike the Macys Agreement, J.C. Penney agreed to pay MSLO a design fee for designing the products, and to devote a specific percentage of its marketing budget to purchasing advertisements in MSLO media properties. (Id. 9(e), (g).) In exchange for the authority to use the Martha Stewart trademark, J.C. Penney agreed to pay a commission fee to MSLO, calculated as a percentage of net sales made by J.C. Penney in its department stores and through the internet. (Id. 9(b).) 57. In entering into its deal with J.C. Penney, MSLO materially breached the

Agreement in at least two important ways. 58. First, in agreeing to allow J.C. Penney department stores to manufacture and sell

Martha Stewart-branded products that are within the Macys Exclusive Product Categories, MSLO has breached the express terms of Sections 2(b)(ii) and 18(b) of the Agreement. Section 2(b)(ii) forbids MSLO from enter[ing] into any new agreement . . . pursuant to which it uses for its own account the Licensed Property, the Stewart Property or any other Martha Stewart Mark, or licenses the Licensed Property, the Stewart Property or any Martha Stewart Mark to any third party, in each case, in connection with the manufacture, marketing, distribution or sale in the Territory of items within the Exclusive Product Categories. Moreover, Section 18(b) specifically prohibits MSLO from enter[ing] into any new agreement . . . with any department store or manufacturer or other retailer of department store merchandise that promotes the sale of any items included . . . within the Exclusive Product Categories that are branded with . . . any Martha Stewart Mark, unless Macys has delivered its prior written consent. Macys has never consented to the JCP Agreement. 59. Second, MSLO has breached Section 2(b)(ii) and 18(b) of the Macys Agreement

by agreeing with J.C. Penney to develop an e-commerce site for MSLO that would sell Martha

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Stewart-branded products within the Exclusive Product Categories through the internet. MSLO is not permitted to allow J.C. Penney to manufacture and sell Martha Stewart-branded products that are in the Exclusive Product Categories through any website other than Macys website. J.C. Penney Intentionally Caused MSLO to Breach the Macys Agreement. 60. As discussed above, by 2011, MSLO was in dire straits. In May, MSLO engaged

Blackstone to explore potential strategic alliances. (Exhibit 4.) Blackstone identified several potential suitors that might be able to provide MSLO with a cash infusion. One of those potential suitors, J.C. Penney, offered MSLO not only a large investment but also hundreds of millions of dollars to partner with a U.S. retailer in a merchandising deal. MSLO first met with J.C. Penney in late July 2011, and J.C. Penney soon convinced MSLO to discuss a merchandising deal. 61. J.C. Penney and its incoming CEO, as noted above, faced high expectations that

the company would be able to turn itself around. In its effort to accomplish that, J.C. Penney developed a plan that it believed would transform the department store experience. The cornerstone of that plan, in J.C. Penneys own words, was a merchandising deal with MSLO. J.C. Penney set out to induce MSLO to enter into a deal with it and thereby breach the Macys Agreement by offering MSLO an investment of $38.5 million, and conditioning that investment on MSLOs entering into a merchandising deal. (Section 5.4 of the Securities Purchase Agreement, dated December 6, 2011, between J.C. Penney and MSLO (attached hereto as Exhibit 12) makes the execution of the JCP Agreement a condition precedent to J.C. Penneys obligation to make the $38.5 million investment.) J.C. Penney further sweetened the pot for MSLO by offering a merchandising deal worth hundreds of millions of dollars. 62. At the time J.C. Penney began discussions with MSLO, it knew that MSLO

already had a deal with Macys. As noted above, it had been public knowledge since April 2006

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that a contract existed between Macys and MSLO, and that such contract involved exclusivity. (See Exhibit 2.) Likewise public were the types of Martha Stewart-branded products covered by that contract, and even that it lasted for five years and provided Macys with renewal options. J.C. Penney knew all of that before interfering with the Macys Agreement. 63. Beyond that, J.C. Penney knew that Macys exclusivity rights under the Macys

Agreement presented an issue that J.C. Penney would need to try to overcome if it were to enter into a merchandising deal with MSLO. In J.C. Penneys initial discussions with MSLO, there was no mention of the concept of MSLO Stores. J.C. Penney and MSLO developed that artifice later to try to avoid Macys exclusivity rights. Their efforts in that respect are unavailing, however, because they are based on a misconstruction of the Macys Agreement. The Macys Agreement contains no exception to Macys exclusive right to manufacture and sell all Martha Stewart products within the Macys Exclusive Product Categories. Not surprisingly, therefore, the Court in the Macys/MSLO Lawsuit has already concluded that Macys is likely to prevail on its claim that the JCP Agreement materially breaches the Macys Agreement. 64. J.C. Penney appreciated the flimsiness of the MSLO Stores artifice as an

attempt to avoid Macys exclusivity rights. It also recognized that the JCP Agreement constituted a material breach of the Macys Agreement. It therefore included a provision in the JCP Agreement that not only contemplates how to deal with a lawsuit by Macys, but also provided financial cover and further inducement for MSLO to enter into the JCP Agreement. Section 16(c) of the JCP Agreement provides, in relevant part, that: Notwithstanding anything to the contrary in this Agreement, including any representations, warranties and covenants, as to any Claims based on the 2006 Agreement, JCP agrees that it will not seek and is not entitled to indemnification for monetary damages or attorneys' fees or otherwise, nor will it seek to cancel or terminate this Agreement due to any such Claims or the resolution or settlement thereof, nor seek any other damages or remedies at law or in equity or other relief against MSLO or any - 23CLI-2008153

of its Affiliates under this section or otherwise. Also notwithstanding anything to the contrary in this Agreement, JCP further agrees that: (i) such Claims based on the 2006 Agreement will not constitute a breach of this Agreement; and (ii) JCP will not have a cause of action against MSLO or any of its Affiliates for any breach of a representation, warranty or covenant set forth in this Agreement as such representation, warranty or covenant relates to the 2006 Agreement. (JCP Agreement 16(c) (emphasis added).) The 2006 Agreement is defined as that certain MSLO license agreement dated April 3, 2006, including all amendments thereto and extensions and renewals thereof (id. Definitions (www)) an unmistakable reference to the Macys Agreement. 65. Section 16(c) of the JCP Agreement leaves no room for doubt that J.C. Penney

knew of the existence of the Macys Agreement, and further knew that entering into the JCP Agreement gave rise to causes of action by Macys against both MSLO and J.C. Penney. By agreeing that it would not seek indemnification from MSLO, or sue MSLO, or terminate the JCP Agreement in the event that Macys sued, J.C. Penney was seeking to further entice MSLO to enter into the JCP Agreement. 66. By inducing MSLO to enter into the JCP Agreement, J.C. Penney was motivated

by a desire to strip Macys of the competitive advantage it enjoyed by virtue of its bargained-for exclusive right, under the Macys Agreement, to manufacture and sell uniquely-inspired Martha Stewart products within the Exclusive Product Categories. J.C. Penneys new CEO said so to the Wall Street Journal immediately after announcing the JCP Agreement: [Ron] Johnson, who used to run Apple Inc.s retail operations, said chains just need to share. A lot of retailers through the years have fought for exclusivity, and at times thats important, but there are certain brands that should be available broadly, the chief executive said. He added that hes more concerned with being the best place to buy Martha Stewart products. Dana Mattioli & Russell Adams, Marthas Deal Miffs Macys, Wall St. J., Dec. 8, 2011, at B3

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(emphasis added) (attached hereto as Exhibit 13). 67. By entering into its contract with MSLO, J.C. Penneys purpose was to acquire

market share from Macys, and also to benefit from the substantial work that Macys has done over many years to build the Martha Stewart brand. See, e.g., John Jannarone, Penney Needs More Than Martha to Shine, Wall St. J., Dec. 8, 2011, at C12 (reporting that J.C. Penneys CEO, in reaching its deal with MSLO, appears to have his sights set on the upmarket Macys, and that Penney can benefit from the [Martha Stewart] brand-building Macys already has done, hopefully drawing shoppers into other Penney store departments); Stephanie Clifford, Macys to Review Martha Stewart Relationship, N.Y. Times, Dec. 7, 2011, at http://dealbook.nytimes.com/2011/12/07/macys-to-review-martha-stewart-relationship/ ([i]n a note to clients, Paul Lejuez, an analyst with Nomura, said the new [Martha Stewart] line, to be introduced in February 2013, should help Penneys take market share from Macys). J.C. Penney Has Continued to Tortiously Interfere With the Macys Agreement, In Spite of Macys Assertion of Its Contract Rights. a. 68. J.C. Penneys Promotion of the JCP Agreement

On January 25, 2012 two days after Macys commenced the Macys/MSLO

Lawsuit J.C. Penneys new CEO very publicly promoted the JCP Agreement at a press presentation. A video of that portion of the presentation is available at http://www.jcpmediaroom.com/media/210/Launch-Event-Presentation-(.wmv)-Part-3. A DVD containing a copy of that video clip is attached hereto as Exhibit 14. 69. At the presentation, J.C. Penney displayed two pictures of Martha Stewart,

including one framed within the J.C. Penney logo, surrounded by products that are within the Macys Exclusive Product Categories, including bedding, cookware, dinnerware, tablecloths, and napkins. Copies of those pictures are below.

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70.

J.C. Penney has continued to promote the JCP Agreement to the public. For

example, during a conference call on May 15, 2012 regarding its earnings for the first quarter of

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2012, J.C. Penney claimed that the planned Martha Stewart areas within its department stores would be the cornerstone of a complete transformation of our Home World. (A copy of the transcript of the May 15 earnings call is attached hereto as Exhibit 15.) b. 71. J.C. Penneys Interference With Macys Renewal Rights

After Macys commenced the Macys/MSLO Lawsuit, J.C. Penney caused MSLO

to attempt to defeat Macys right to renew the Macys Agreement. 72. As noted above, Macys validly exercised its renewal option on January 23, 2012.

On February 1, 2012, Macys received a letter from MSLO, dated January 31, 2012, asserting for the first time ever that MSLO believes that [Macys] has breached the Agreement in a material respect. (A copy of MSLOs letter of January 31, 2012 is attached hereto as Exhibit 16.) MSLO nowhere stated in the letter how it believe[d] Macys breached the Macys Agreement. MSLO contended in its letter that, because of Macys supposed breach, Macys exercise of its unilateral option on January 23, 2012 to extend the term of the Macys Agreement for an additional five years was ineffective and, accordingly, MSLO hereby confirms that the Term will expire at the end of the Initial Term in January 2013. 73. MSLOs new assertion that Macys materially breached the Macys Agreement,

and that Macys exercise of its renewal option was therefore ineffective, was pretextual. Up until Macys commenced the Macys/MSLO Lawsuit, MSLO had never suggested that Macys had ever materially breached the agreement. To the contrary, MSLO repeatedly told Macys that it wanted Macys to renew the agreement and thereby continue the parties contractual relationship, which is entirely irreconcilable with its new assertion that Macys was in breach of the Macys Agreement at the time of the renewal. (Under Section 3(b) of the Macys Agreement, Macys was not entitled to exercise its renewal option if it had been in breach of any material provision.) Prior to January 23, 2012, MSLO explicitly told Macys that MSLO wanted Macys

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to exercise its option to renew the Agreement. Specifically, Lisa Gersh told Macys that the purpose of a December 15, 2011 face-to-face meeting with Macys would be to explore ways to alleviate Macys concerns about the J.C. Penney deal so that Macys would feel comfortable exercising the renewal option. 74. Moreover, MSLO acknowledged and accepted Macys exercise of the renewal

option, and even touted Macys renewal to the public. On January 23, 2012, Macys called Lisa Gersh at MSLO to inform her that Macys had exercised its renewal option that day. Ms. Gersh responded that she was delighted to hear that news. The next day, January 24, the Wall Street Journal reported that MSLO issued a statement that acknowledged receiving notice that Macys would extend the contract, and said the decision is a testament to the strength of the Martha Stewart brand among consumers. The next day after that, on January 25, 2012, Martha Stewart herself utterly contradicted any later suggestion that Macys had somehow been in breach when it exercised its renewal option two days earlier; Ms. Stewart said on camera to a CNBC reporter: We have had an amazing, amazing relationship with Macys, and I certainly hope all of that can continue and to build the Martha brand. A video clip of Ms. Stewart making that statement is available at http://video.cnbc.com/gallery/?video=3000069384. (A digital copy of this video clip is included on the DVD attached hereto as Exhibit 14.) 75. Nearly two weeks later, on February 7, 2012, Ms. Stewart publicly stated during

an interview on CNBC that the Agreement now runs through 2018: Macys extended their contract with us for another 5 years. It now runs through 2018. And we have had a very excellent working relationship with Macys. We value our partnership there tremendously. We love working with their buyers and with their different departments. And I think that this should continue[.] A video clip of this statement is available at http://video.cnbc.com/gallery/?video=3000071882.

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(A digital copy of this video clip is included on the DVD attached hereto as Exhibit 14.) 76. Also on February 7, Ms. Stewart stated at an event that [w]e love Macys, and

[t]heyve been great partners. (A Bloomberg news article containing that statement is attached hereto as Exhibit 17.) 77. Then, on February 10, 2012 nearly three weeks after Macys exercised its

renewal option MSLO filed counterclaims against Macys asserting that Macys had breached the Macys Agreement, and that its exercise of the renewal option therefore was ineffective. 78. MSLO itself has admitted that those counterclaims are pretextual. Its counsel

stated during a hearing in the Macys/MSLO Lawsuit on July 13, 2012 that it had never accused [Macys] of being in breach and were raising it, strategically, now we would not have sought to terminate the agreement or block the extension except for the fact that they [Macys] ha[s] tried to stop us from doing what we think we can do [with J.C. Penney]. 79. At the time J.C. Penney began tortiously interfering with the Macys Agreement,

MSLO had never before claimed a material breach by Macys and had no intention of making such a claim. MSLOs newly-asserted strategic counterclaim was induced by J.C. Penney. The sole purpose of that counterclaim is to deprive Macys of its bargained-for rights under the Macys Agreement, so that J.C. Penney and MSLO can proceed unabated with the implementation of their JCP Agreement. c. 80. J.C. Penneys Unlawful Acceptance From MSLO of Designs for Martha Stewart-Branded Products In Macys Exclusive Product Categories

Notwithstanding the Macys/MSLO Lawsuit, J.C. Penney proceeded to

implement the JCP Agreement with full knowledge of Macys contract claims. J.C. Penney and MSLO collaborated on developing a merchandising plan pursuant to Section 7(a) of the JCP Agreement. MSLO then began preparing product designs, pursuant to Section 7(b), for Martha Stewart-branded products to be sold by J.C. Penney. - 29CLI-2008153

81.

Since the beginning of 2012, MSLO has provided J.C. Penney with hundreds of

designs for products in Macys Exclusive Product Categories. The designs were created and received pursuant to the JCP Agreements requirement that the designed products would be branded with a Martha Stewart Mark. 82. MSLO materially breached the Macys Agreement both the exclusivity

provisions and the confidentiality clause by providing those designs to J.C. Penney and withholding them from Macys. What is more, J.C. Penney received, retained, and used those designs from MSLO with full knowledge of, and in flagrant violation of, Macys rights under the Macys Agreement. Simply put, those designs have been received, retained, and used by J.C. Penney illegally, as a product of MSLOs material breach. d. J.C. Penneys Expansion of the JCP Agreement to Cover Additional Martha Stewart-Branded Products Within Macys Exclusive Product Categories

83.

As noted above, the original JCP Agreement authorized J.C. Penney to

manufacture and sell Martha Stewart-branded Kitchen Products, all of which fall within Macys Exclusive Product Categories. J.C. Penney has since doubled-down on its interference with the Macys Agreement. On July 11, 2012 the eve of the hearing on Macys motion for a preliminary injunction against MSLO J.C. Penney agreed to an amendment of the JCP Agreement. (See MSLO Form 8-K, dated July 12, 2012, attached hereto as Exhibit 8.) Whereas the original agreement identified Kitchen Products as a line to be sold at J.C. Penney, the amendment expanded the lines to be sold to include all of Macys other Exclusive Product Categories bedding, bath, and home decor products as well. To induce MSLO to enter into that amendment, J.C. Penney agreed to guarantee it an additional $110.5 million over the term of the JCP Agreement. (Id.) 84. J.C. Penneys willingness to exacerbate MSLOs material breach of the Macys

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Agreement reflects an intentional disregard of Macys contract rights. e. 85. J.C. Penneys Continued Work With MSLO Notwithstanding the Courts Preliminary Injunction Against MSLO

On July 13, 2012, the Court in the Macys/MSLO Lawsuit granted from the bench

Macys motion for a preliminary injunction against MSLO. It then entered its preliminary injunction order on July 31, 2012. (See Exhibit 9 hereto.) 86. On July 30, 2012, MSLOs CEO, Lisa Gersh, conducted a conference call with

market analysts regarding MSLOs quarterly earnings. During the call, Ms. Gersh reaffirmed, notwithstanding the preliminary injunction, that: MSLO will be launching our products both in-store and online with J.C. Penney in the first quarter of 2013 as planned. Nothing about this ruling changes that. (A copy of the July 30, 2012 transcript is attached hereto as Exhibit 18.) 87. J.C. Penney is continuing to proceed with MSLO in a manner that knowingly

violates Macys rights under the Macys Agreement. As noted, the JCP Agreement is unlawful as it relates to Macys Exclusive Product Categories. Any further work by J.C. Penney to implement the JCP Agreement as planned therefore constitutes a knowing continuing interference with Macys contract rights. Likewise unlawful is J.C. Penneys continued use of the designs it has received from MSLO for products within Macys Exclusive Product Categories. Those designs were provided in violation of Macys contract rights, and pursuant to J.C. Penneys illegal contract with MSLO. Such designs were intended to be for products branded with a Martha Stewart Mark, and rightfully should have been provided to Macys alone. J.C. Penney cannot continue to make use of them. Irreparable Harm to Macys Caused By the JCP Agreement and J.C. Penneys Actions In Furtherance of That Agreement 88. Macys is entitled to the benefit of its agreement with MSLO, particularly the

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benefit of exclusivity. J.C. Penneys deal with MSLO deprives Macys of that exclusivity, which as MSLO acknowledged in Section 24(g) of the Macys Agreement cannot be remedied with money damages. Accordingly, the Court should permanently enjoin J.C. Penney from tortiously interfering with the Macys Agreement and with Macys contract rights. 89. Macys is currently being harmed by J.C. Penney in ways that cannot be

quantified. J.C. Penney is continuing to take steps to implement its deal with J.C. Penney, so as to meet the announced March 2013 launch of Martha Stewart products at J.C. Penney. Such steps include J.C. Penneys continued use of designs for products within Macys Exclusive Product Categories that J.C. Penney obtained illegally from MSLO. Under the Agreement, MSLO was required to bring that intellectual property to Macys exclusively. By using those ideas for its own benefit, J.C. Penney is causing irreparable harm to Macys. 90. Macys is also being irreparably harmed to the extent J.C. Penney is benefiting

from the invaluable knowledge that MSLO acquired from Macys during the performance of the Macys Agreement. MSLO possesses Macys proprietary and valuable information regarding which products, colors, shapes, sizes, designs, and price points sell the best among consumers. The information that MSLO learned from Macys commercially valuable, proprietary information inevitably informs MSLOs work and allows J.C. Penney to skip the trial-and-error process that marked the first years of MSLOs partnership with Macys. MSLOs provision of such information to J.C. Penney violates not only the exclusivity provisions of the Macys Agreement, but also the confidentiality provisions. This type of misappropriation is a wellestablished irreparable harm. 91. J.C. Penneys announcement of its deal with MSLO also has devalued, and will

further devalue, the Martha Stewart products that Macys is currently selling, in ways that are not calculable. For starters, J.C. Penney and MSLO have severely damaged the crucial connection

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between Macys and Martha Stewart that Macys has devoted years and tens of millions of dollars to developing; it has destroyed the public perception that Macys is the only place a consumer can turn to purchase Martha Stewart home products in key categories. Also, the Martha Stewart products that Macys sells have potentially lost some of their cachet now that J.C. Penney has told the public that they will no longer be exclusive to Macys. That injury is only compounded by the fact that J.C. Penney is perceived as a less upscale retailer compared to Macys. 92. If J.C. Penney is permitted to continue implementing its deal with MSLO, that

would impair Macys sales not only of Martha Stewart products, but of other products as well. The availability of Martha Stewart products only at Macys attracts customers who purchase such products at Macys when they come in to buy Martha Stewart products. Accordingly, the loss of exclusivity with respect to the Martha Stewart brand would definitely impact negatively the sales of other products at Macys, but Macys would have no way of calculating the full extent of those lost sales. 93. Under these circumstances, Macys is obviously suffering, and in the absence of

an injunction will continue to suffer, irreparable harm. CAUSES OF ACTION FIRST CAUSE OF ACTION (TORTIOUS INTERFERENCE) 94. Macys repeats and realleges the allegations of paragraphs 1 through 93 as if fully

set forth herein. 95. Macys and MSLO are parties to the Macys Agreement, which is a valid and

binding contract. 96. As set forth above, MSLO has materially breached multiple provisions of the

Macys Agreement by entering into the JCP Agreement. - 33CLI-2008153

97.

J.C. Penney was aware of the Macys Agreement, both before it began interfering

with that contract and after Macys commenced the Macys/MSLO Lawsuit. 98. The Macys Agreement would not have been breached but for J.C. Penneys

conduct. J.C. Penney induced MSLO, without justification, to materially breach the Macys Agreement. 99. J.C. Penneys interference with the Macys Agreement was intentional and

deliberate, with malice or conscious disregard of Macys contract rights. 100. Furthermore, as set forth above, the Macys Agreement grants to Macys multiple

renewal options, the first of which was required to be exercised by the end of January 2012. Macys validly exercised its renewal option on January 23, 2012. J.C. Penney was aware of Macys option to renew the Macys Agreement. J.C. Penney has illegally induced MSLO to assert that Macys exercise of its renewal option was invalid. MSLO would not have challenged Macys exercise of its renewal option but for J.C. Penneys tortious interference. 101. As a result of J.C. Penneys tortious interference, Macys is suffering and will

suffer irreparable harm for which a remedy at law would be inadequate, as well as other damages to be determined at trial. SECOND CAUSE OF ACTION (UNFAIR COMPETITION) 102. Macys repeats and realleges the allegations of paragraphs 1 through 101 as if

fully set forth herein. 103. 104. Macys and J.C. Penney are in direct competition for retail customers. Macys possesses several commercial advantages over J.C. Penney. One of those

advantages is Macys bargained-for exclusive contract right to use the Martha Stewart name or likeness in connection with the manufacture, sale, and distribution of products in the Macys Exclusive Product Categories. Macys is the only retailer with the right to obtain from MSLO its - 34CLI-2008153

uniquely-inspired designs for Martha Stewart products within those categories. Moreover, Macys possesses proprietary and valuable information regarding the design and sale of Martha Stewart products that it developed over the course of many years and through the investment of substantial resources. Through a trial-and-error process that has cost Macys millions of dollars, it has developed skills and knowledge as to the aspects of Martha Stewart products that are most successful among consumers. 105. J.C. Penney has misappropriated Macys commercial advantage. It has

intentionally and unfairly, in breach of Macys contract rights, acquired the right to manufacture and sell Martha Stewart products in Macys Exclusive Product Categories. J.C. Penney has also misappropriated Macys skills, expenditures and labors in accepting from MSLO and using designs for Martha Stewart products within the Exclusive Product Categories that incorporate Macys proprietary and valuable information. 106. As a result of J.C. Penneys unfair competition, Macys is suffering and will

suffer irreparable harm for which a remedy at law would be inadequate, and has incurred, and will incur, other damages to be determined at trial. PRAYER FOR RELIEF WHEREFORE, Macys requests that the Court order relief, as follows: 1. Agreement; 2. A declaration that J.C. Penney has misappropriated Macys commercial A declaration that J.C. Penney has tortiously interfered with the Macys

advantages relating to Martha Stewart products; 3. A permanent injunction enjoining J.C. Penney from violating the Macys

Agreement by using Martha Stewarts name or likeness in connection with the manufacture, marketing, sale, or distribution or products in Macys Exclusive Product Categories;

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4.

A preliminary injunction preserving the status quo and protecting Macys from

further irreparable harm by enjoining J.C. Penney from (1) taking any further action to implement the JCP Agreement as it relates to products in Macys Exclusive Product Categories; (2) using the designs it illegally obtained from MSLO for products within Macys Exclusive Product Categories; (3) advertising or making any public statements that products within Macys Exclusive Product Categories that are covered by the JCP Agreement will be available for purchase through J.C. Penney; and (4) taking any further steps to interfere with Macys contract rights under the Macys Agreement; 5. An award of money damages, in an amount to be proven at trial, in favor of

Macys sufficient to compensate it for all forms of loss, without limitation, actual damages, incidental damages, consequential damages, lost profits, lost goodwill, and other costs and damages it incurred by reason of J.C. Penneys tortious interference with the Macys Agreement and unfair competition; 6. 7. 8. An award of punitive damages; An award of prejudgment interest at the statutory rate; and All other and additional legal or equitable relief to which Macys is entitled, and

which the Court deems just and proper.

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JURY DEMAND Macys demands a trial by jury for all issues so triable as a matter of right. Dated: New York, New York August 16, 2012 Respectfully submitted, s/ Robert C. Micheletto Theodore M. Grossman Robert C. Micheletto JONES DAY 222 East 41st Street New York, New York 10017 Telephone: (212) 326-3939 Facsimile: (212) 755-7306 E-mail: tgrossman@jonesday.com rmicheletto@jonesday.com Michael A. Platt JONES DAY North Point 901 Lakeside Avenue Cleveland, Ohio 44114 Telephone: (216) 586-3939 Facsimile: (216) 579-0212 E-mail: maplatt@jonesday.com Attorneys for Plaintiffs Macys, Inc. and Macys Merchandising Group, Inc.

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