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 MACY’S, INC. and MACY’S 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.

NYI-4468376

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 Macy’s, Inc. and Macy’s Merchandising Group, Inc.

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

NYI-4468376

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

Index No. ___________ COMPLAINT

Plaintiffs Macy’s, Inc. and Macy’s Merchandising Group, Inc. (collectively “Macy’s”), 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 Macy’s 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 Macy’s to incur substantial damages, and threatens to inflict incalculable further harm on Macy’s. 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 Macy’s enjoys in the area of home products by virtue of its exclusive relationship with MSLO.

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3.

Macy’s and MSLO are parties to a License and Promotion Agreement, dated as of

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

trademarks from MSLO. At the time Macy’s negotiated and entered into the Macy’s Agreement in 2005 and early 2006, MSLO was having substantial troubles. Ms. Stewart, who was the face and name of MSLO’s 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 MSLO’s 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 Macy’s Agreement is between MSLO and Macy’s Merchandising Group, Inc. (“MMG”). MMG is a wholly-owned direct subsidiary of Macy’s, Inc., and is responsible for the design, development and marketing of Macy’s private label brands and certain licensed brands. MMG, along with other Macy’s, Inc. subsidiaries, provides support functions to Macy’s retail operations on an integrated, company-wide basis. Macy’s, Inc. (formerly known as Federated Department Stores, Inc.) is an intended third-party beneficiary of the Macy’s 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.
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5.

To improve its lot, MSLO approached Macy’s to become its partner. Macy’s, like

any department store in its niche, succeeds in significant part through the development of exclusive labels. Those labels differentiate Macy’s from competitors, and they drive foot traffic for broader sales of goods. Macy’s 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. Macy’s also believed that, through significant efforts, it could substantially reposition the “Martha Stewart” brand. MSLO agreed to Macy’s terms, including the need for exclusivity. 6. Over the term of the Macy’s Agreement, Macy’s has devoted a significant amount

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

to say, the Macy’s Agreement has been mutually profitable. Macy’s relationship with MSLO had been close and collegial. As Ms. Stewart herself has said, “[w]e love Macy’s,” “[t]hey’ve been great partners.” 7. J.C. Penney knew of the Macy’s Agreement at the time it began interfering with

that contract. Indeed, the existence of the Macy’s Agreement and its main feature – exclusivity – were public knowledge. On April 6, 2006, Macy’s had issued a press release announcing that Macy’s and MSLO had entered into “an agreement to develop an all-new line of Martha Stewart Collection home merchandise exclusively for Macy’s.” The release further described the products covered by the Macy’s 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 Macy’s customer. . . .

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Merchandise will be created by the MSLO design team under Martha Stewart’s direction and supervision. Macy’s 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 Macy’s contract, and disclosed the existence of Macy’s multiple renewal options: “The first term of the agreement between [Macy’s] 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 Macy’s Agreement is scheduled to expire on

January 31, 2013. As noted, however, Macy’s has a unilateral right to extend the term of the Agreement for one additional five-year period, after which Macy’s can opt to extend the term for five additional two-year periods, for a total of 15 additional contract years. The deadline for Macy’s to decide whether to exercise its renewal option was January 28, 2012. Macy’s 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 Macy’s to MSLO exercising the renewal option is attached hereto as Exhibit 3.) 9. The Macy’s 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 Macy’s contract, which had always been profitable to MSLO. The reason was MSLO’s media and publishing operations, which ran at losses exceeding MSLO’s 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. Penney’s board of directors as of August 1, 2011. (J.C. Penney’s 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 Macy’s. 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 Blackstone’s exploration of strategic alternatives for MSLO. The meetings were kept secret from Macy’s. 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 Macy’s exclusive licensing agreement with MSLO gave

Macy’s a competitive advantage in the marketplace. The exclusive availability of a wide variety of Martha Stewart-branded home products at Macy’s brought foot traffic into Macy’s 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 Macy’s. More importantly, J.C. Penney wanted to rob Macy’s 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 Macy’s 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 Stewart’s] that should be available broadly.’” Dana Mattioli & Russell Adams, Martha’s Deal Miffs Macy’s, Wall St. J., Dec. 8, 2011, at B3. 14. J.C. Penney also knew and appreciated that the Macy’s 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 Macy’s Agreement. J.C. Penney also offered to make an enormous investment in MSLO, conditioned upon MSLO’s 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 Macy’s – 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.” Macy’s had been kept in the dark and learned of the “alliance” only the evening before the announcement. According to J.C. Penney’s 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. Penney’s 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 Macy’s exclusive product categories. Its terms are similar to, and irreconcilable with, the Macy’s 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 Macy’s. 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 Macy’s Agreement. To the contrary, it

makes explicit reference to the Macy’s Agreement (which it calls the “2006 Agreement,” without mentioning Macy’s name), and addresses division of liability between J.C. Penney and MSLO if Macy’s sues. Further, it attempts to elude Macy’s 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 Macy’s

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

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

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

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the designs for hundreds of products within Macy’s 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 Macy’s exclusive product categories. (A copy of MSLO’s 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 Macy’s sued MSLO. J.C. Penney’s continued announcements that consumers will soon be able to purchase at J.C. Penney Martha Stewart-branded products that are, under the Macy’s Agreement, exclusive only to Macy’s, has exacerbated the damage that J.C. Penney is inflicting on Macy’s. 23. Further, after Macy’s commenced the Macy’s/MSLO Lawsuit, MSLO suddenly

took the pretextual position that Macy’s was in material breach of the Macy’s 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 Macy’s Agreement now expires in January 2013 as opposed to January 2018. As reflected in Section 3(b) of that agreement, Macy’s bargained for the unilateral right to decide whether to renew it. 24. Prior to Macy’s commencement of the Macy’s/MSLO Lawsuit, through five years

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of contractual performance, MSLO had never claimed or even hinted that Macy’s had ever breached the Macy’s Agreement. In fact, MSLO explicitly told Macy’s in December 2011 that it wanted Macy’s to renew the agreement, then afterward told Macy’s that it was delighted that Macy’s had renewed, and then touted to the public that Macy’s 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. Penney’s interference, MSLO would never have challenged Macy’s renewal option. 25. At a hearing on July 13, 2012 in the Macy’s/MSLO Lawsuit, the Court granted

Macy’s a preliminary injunction against MSLO prohibiting further performance of the JCP Agreement, as it relates to Macy’s exclusive product categories. The Court concluded that Macy’s had demonstrated a likelihood of succeeding on the merits of its claim that the JCP Agreement materially breaches the Macy’s Agreement. The Court also determined that Macy’s would suffer irreparable harm absent an injunction, and that Macy’s 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 Macy’s/MSLO Lawsuit is attached hereto as Exhibit 9.) 26. After the Court granted Macy’s motion for a preliminary injunction on July 13,

2012, MSLO’s 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 Macy’s contract rights under the Macy’s Agreement. 27. J.C. Penney’s tortious interference with the Macy’s Agreement has been knowing,

deliberate, and intentional.

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28.

Macy’s 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 Macy’s Agreement. Macy’s 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 Macy’s exclusive product categories; (2) using the designs it illegally obtained from MSLO for products within Macy’s exclusive product categories; (3) advertising or making any public statements that products within Macy’s 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 Macy’s contract rights under the Macy’s Agreement. Such a preliminary injunction is necessary to preserve the status quo and prevent irreparable injury to Macy’s during the pendency of this action. THE PARTIES 29. Plaintiff Macy’s, Inc. is a Delaware corporation with corporate offices in New

York, New York, and Cincinnati, Ohio. Plaintiff Macy’s Merchandising Group, Inc. is a whollyowned subsidiary of Macy’s, Inc., is incorporated in Delaware, and has its principal place of business in New York, New York. Macy’s 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 “Macy’s” and “Bloomingdale’s.” 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 Macy’s 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 Macy’s Agreement 33. In 2005, MSLO approached Macy’s with a proposal to collaborate on an

exclusive line of Martha Stewart products to be sold at Macy’s department stores. Macy’s and MSLO thereafter began negotiating a broad contract that was intended to make Macy’s 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 Macy’s 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 Macy’s Agreement that Macy’s had the exclusive right to manufacture and sell Martha Stewart products within the Exclusive Product Categories (as defined in the Macy’s Agreement). Indeed, MSLO’s original proposal to Macy’s was for just that. Moreover, Macy’s made it clear to MSLO that Macy’s was not interested in any arrangement with MSLO that was not exclusive. From both Macy’s and MSLO’s perspectives, the purpose of such exclusivity was to establish a “crucial connection” between Macy’s and Martha Stewart, with respect to home products, in the eyes of the consumer. 35. Such exclusive arrangements are critical to Macy’s effort to distinguish itself

from its competition. For example, Macy’s brand marketing plan over the past five years has been heavily weighted towards what Macy’s calls the “celebrity campaign” in a wide variety of lines of goods. The goal of the celebrity campaign is to associate Macy’s 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 Macy’s, and the celebrity associations help to market the products and attract consumers to Macy’s stores. This celebrity campaign is apparent in most of Macy’s brand image advertisements in which celebrity designers are strongly associated with the Macy’s products being advertised. In that way, Macy’s 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 Macy’s niche. Such a strategy is crucial to Macy’s overall success. 36. Exclusivity over the Martha Stewart brand in the home products covered by the

Macy’s Agreement was also critical because the Macy’s Agreement allowed Macy’s to leverage Martha Stewart by making her the face of the Macy’s Home Store and the iconic representative for Macy’s in the home products arena. That meant that the Martha Stewart brand would be the core of the Macy’s home product strategy, which would be reflected in a substantial promotion and marketing campaign, as well as a significant presence in Macy’s stores. 37. The Macy’s 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 Macy’s Agreement, entitled “Grant; Exclusivity,” MSLO licensed to Macy’s “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 Macy’s under the terms of the Macy’s Agreement are referred to in the Agreement as the “Licensed Property.” Section 4 of the Agreement provides that Macy’s and MSLO would collaborate on establishing the concepts and designs of certain “Exclusive Products,” and that Macy’s would manufacture those products for sale in its stores. Those products were referred to as “Macy’s Manufactured Products.” The

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Macy’s Agreement also requires collaboration between Macy’s and MSLO in marketing and promoting the Macy’s Manufactured Products. All of MSLO’s design work for Martha Stewart products within Macy’s Exclusive Product Categories was intended to be for Macy’s exclusively. 38. More broadly, the Macy’s Agreement restricts MSLO’s 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 Décor (candles & frames),” and “Cookware.” (Agreement, Ex. A.) Subsequent amendments to the Agreement added to the Exclusive Product Categories certain furniture.3 39. Pursuant to Macy’s exclusive rights under the Agreement, MSLO is forbidden

from the following, among other things:

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

3

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a.

MSLO is forbidden from designing Martha Stewart-branded products within Macy’s Exclusive Product Categories to be manufactured by, distributed by, or sold through any department store chain other than Macy’s; MSLO is prohibited from authorizing any department store chain other than Macy’s to use any Martha Stewart Mark, or Ms. Stewart’s 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 Macy’s lines, with certain exceptions, at any department store chain other than Macy’s without first giving Macy’s a right of first refusal; MSLO is forbidden from using any Martha Stewart Mark, or Ms. Stewart’s name or likeness, in connection with the sale of products within the Exclusive Product Categories through any internet site other than Macy’s site.

b.

c.

d.

40.

No provision of the Macy’s Agreement allows the sale of Martha Stewart-branded

products within the Exclusive Product Categories through any department store chain other than Macy’s. 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 [Macy’s], which [Macy’s] 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 Macy’s 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 MSLO’s 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 Macy’s for the sale of Martha Stewart products within the Exclusive Product Categories. The sale of Macy’s-exclusive goods at J.C. Penney, with 1,100 stores, is as big a breach of MSLO’s obligations as one could imagine. 43. As noted previously, the Macy’s Agreement not only gives Macy’s an exclusive

with respect to Martha Stewart products within the Exclusive Product Categories, but it also restricts MSLO’s ability to enter into any new agreement with respect to Martha Stewart products that are outside the Exclusive Product Categories. Section 2(e) grants Macy’s a right of first refusal with respect to any such products that are outside the Exclusive Product Categories but within Macy’s 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 Macy’s “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 . . . [Macy’s] 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, [Macy’s] 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 Macy’s to exercise its Extension option to renew the Agreement for an additional five-year period was January 28, 2012. Macy’s 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 Macy’s exercise of the Extension option, as set forth in Section 3(b), have been satisfied. 45. The Macy’s 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 MSLO’s material breach at issue here. As expressed in the plain language of the Macy’s Agreement, the violation of Macy’s exclusivity rights cannot adequately be remedied by money damages. The fact that J.C. Penney is a less upscale retailer compared to Macy’s compounds the injury. 46. The Macy’s Agreement contains a confidentiality clause that requires MSLO,

subject to certain exceptions, to hold in strict confidence not only the terms of the Macy’s Agreement but also any information MSLO learned from Macy’s 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 Party’s Affiliates) - 16CLI-2008153

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

licensing contract in place with Kmart. That contract was grandfathered into the Macy’s 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 Macy’s consent, so the Kmart deal expired on its own terms in January 2010. 48. When drafting the Macy’s Agreement, the parties recognized that Kmart’s

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

49.

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

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

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 Macy’s customers are accustomed, and establishing the aforementioned “crucial connection” between Martha Stewart and Macy’s home products in the eyes of the consumer. Since the Martha Stewart Collection debuted at Macy’s in the Fall of 2007, Martha Stewart has been the core of Macy’s home products strategy, the face of Macy’s Home Store, and the celebrity representing Macy’s in the home products arena. Martha Stewart-branded products are the most prominently-featured products in the Macy’s home sections of nearly all Macy’s stores. 51. Moreover, Macy’s 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, Macy’s 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 Macy’s millions of dollars (e.g., in taking mark-downs of Martha Stewart products that did not sell well), Macy’s learned, for example, which colors, shapes, patterns, price points, etc., result in the highest levels of sales. Macy’s has imparted that knowledge to MSLO for purposes of its design obligations under the Macy’s Agreement. The value of Macy’s proprietary knowledge in that area, especially to a potential Macy’s competitor, cannot be quantified. Under the strict confidentiality provisions of the Macy’s 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.) Macy’s had learned about MSLO’s 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 Company’s 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 MSLO’s 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 Macy’s 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) & App’x 4) – all of which are within Macy’s 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 Macy’s Exclusive Product Categories. (Id. § 5, 6(c), App’x 3.) 56. As with the Macy’s 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 Macy’s 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 Macy’s 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 Macy’s has delivered its prior written consent. Macy’s has never consented to the JCP Agreement. 59. Second, MSLO has breached Section 2(b)(ii) and 18(b) of the Macy’s 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 Macy’s website. J.C. Penney Intentionally Caused MSLO to Breach the Macy’s 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. Penney’s 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 Macy’s Agreement – by offering MSLO an investment of $38.5 million, and conditioning that investment on MSLO’s 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. Penney’s 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 Macy’s. As noted above, it had been public knowledge since April 2006

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that a contract existed between Macy’s 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 Macy’s with renewal options. J.C. Penney knew all of that before interfering with the Macy’s Agreement. 63. Beyond that, J.C. Penney knew that Macy’s exclusivity rights under the Macy’s

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. Penney’s 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 Macy’s exclusivity rights. Their efforts in that respect are unavailing, however, because they are based on a misconstruction of the Macy’s Agreement. The Macy’s Agreement contains no exception to Macy’s exclusive right to manufacture and sell all Martha Stewart products within the Macy’s Exclusive Product Categories. Not surprisingly, therefore, the Court in the Macy’s/MSLO Lawsuit has already concluded that Macy’s is likely to prevail on its claim that the JCP Agreement materially breaches the Macy’s Agreement. 64. J.C. Penney appreciated the flimsiness of the “MSLO Stores” artifice as an

attempt to avoid Macy’s exclusivity rights. It also recognized that the JCP Agreement constituted a material breach of the Macy’s Agreement. It therefore included a provision in the JCP Agreement that not only contemplates how to deal with a lawsuit by Macy’s, 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 Macy’s Agreement. 65. Section 16(c) of the JCP Agreement leaves no room for doubt that J.C. Penney

knew of the existence of the Macy’s Agreement, and further knew that entering into the JCP Agreement gave rise to causes of action by Macy’s 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 Macy’s 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 Macy’s of the competitive advantage it enjoyed by virtue of its bargained-for exclusive right, under the Macy’s Agreement, to manufacture and sell uniquely-inspired Martha Stewart products within the Exclusive Product Categories. J.C. Penney’s 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 that’s important, but there are certain brands that should be available broadly,” the chief executive said. He added that he’s more concerned with being “the best place to buy” Martha Stewart products. Dana Mattioli & Russell Adams, Martha’s Deal Miffs Macy’s, 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. Penney’s purpose was to acquire

market share from Macy’s, and also to benefit from the substantial work that Macy’s 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. Penney’s CEO, in reaching its deal with MSLO, “appears to have his sights set on the upmarket Macy’s,” and that “Penney can benefit from the [Martha Stewart] brand-building Macy’s already has done, hopefully drawing shoppers into other Penney store departments”); Stephanie Clifford, Macy’s 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 Penney’s take market share from Macy’s”). J.C. Penney Has Continued to Tortiously Interfere With the Macy’s Agreement, In Spite of Macy’s Assertion of Its Contract Rights. a. 68. J.C. Penney’s Promotion of the JCP Agreement

On January 25, 2012 – two days after Macy’s commenced the Macy’s/MSLO

Lawsuit – J.C. Penney’s 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 Macy’s 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. Penney’s Interference With Macy’s Renewal Rights

After Macy’s commenced the Macy’s/MSLO Lawsuit, J.C. Penney caused MSLO

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

On February 1, 2012, Macy’s received a letter from MSLO, dated January 31, 2012, asserting – for the first time ever – that “MSLO believes that [Macy’s] has breached the Agreement in a material respect.” (A copy of MSLO’s letter of January 31, 2012 is attached hereto as Exhibit 16.) MSLO nowhere stated in the letter how it “believe[d]” Macy’s breached the Macy’s Agreement. MSLO contended in its letter that, because of Macy’s supposed breach, Macy’s exercise of its unilateral option on January 23, 2012 to extend the term of the Macy’s 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. MSLO’s new assertion that Macy’s materially breached the Macy’s Agreement,

and that Macy’s exercise of its renewal option was therefore ineffective, was pretextual. Up until Macy’s commenced the Macy’s/MSLO Lawsuit, MSLO had never suggested that Macy’s had ever materially breached the agreement. To the contrary, MSLO repeatedly told Macy’s that it wanted Macy’s to renew the agreement and thereby continue the parties’ contractual relationship, which is entirely irreconcilable with its new assertion that Macy’s was in breach of the Macy’s Agreement at the time of the renewal. (Under Section 3(b) of the Macy’s Agreement, Macy’s 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 Macy’s that MSLO wanted Macy’s

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

option, and even touted Macy’s renewal to the public. On January 23, 2012, Macy’s called Lisa Gersh at MSLO to inform her that Macy’s 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 Macy’s 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 Macy’s 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 Macy’s, 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”: Macy’s extended their contract with us for another 5 years. It now runs through 2018. And we have had a very excellent working relationship with Macy’s. 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 Macy’s,” and

“[t]hey’ve 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 Macy’s exercised its

renewal option – MSLO filed counterclaims against Macy’s asserting that Macy’s had breached the Macy’s 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 Macy’s/MSLO Lawsuit on July 13, 2012 that it had “never accused [Macy’s] of being in breach” and “we’re raising it, strategically, now” – “we would not have sought to terminate the agreement or block the extension except for the fact that they [Macy’s] 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 Macy’s Agreement,

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

Notwithstanding the Macy’s/MSLO Lawsuit, J.C. Penney proceeded to

implement the JCP Agreement with full knowledge of Macy’s 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 Macy’s Exclusive Product Categories. The designs were created and received pursuant to the JCP Agreement’s requirement that the designed products would be branded with a Martha Stewart Mark. 82. MSLO materially breached the Macy’s Agreement – both the exclusivity

provisions and the confidentiality clause – by providing those designs to J.C. Penney and withholding them from Macy’s. What is more, J.C. Penney received, retained, and used those designs from MSLO with full knowledge of, and in flagrant violation of, Macy’s rights under the Macy’s Agreement. Simply put, those designs have been received, retained, and used by J.C. Penney illegally, as a product of MSLO’s material breach. d. J.C. Penney’s Expansion of the JCP Agreement to Cover Additional Martha Stewart-Branded Products Within Macy’s 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 Macy’s Exclusive Product Categories. J.C. Penney has since doubled-down on its interference with the Macy’s Agreement. On July 11, 2012 – the eve of the hearing on Macy’s 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 Macy’s 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. Penney’s willingness to exacerbate MSLO’s material breach of the Macy’s

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Agreement reflects an intentional disregard of Macy’s contract rights. e. 85. J.C. Penney’s Continued Work With MSLO Notwithstanding the Court’s Preliminary Injunction Against MSLO

On July 13, 2012, the Court in the Macy’s/MSLO Lawsuit granted from the bench

Macy’s 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, MSLO’s CEO, Lisa Gersh, conducted a conference call with

market analysts regarding MSLO’s 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 Macy’s rights under the Macy’s Agreement. As noted, the JCP Agreement is unlawful as it relates to Macy’s Exclusive Product Categories. Any further work by J.C. Penney to implement the JCP Agreement “as planned” therefore constitutes a knowing continuing interference with Macy’s contract rights. Likewise unlawful is J.C. Penney’s continued use of the designs it has received from MSLO for products within Macy’s Exclusive Product Categories. Those designs were provided in violation of Macy’s contract rights, and pursuant to J.C. Penney’s 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 Macy’s alone. J.C. Penney cannot continue to make use of them. Irreparable Harm to Macy’s Caused By the JCP Agreement and J.C. Penney’s Actions In Furtherance of That Agreement 88. Macy’s is entitled to the benefit of its agreement with MSLO, particularly the

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benefit of exclusivity. J.C. Penney’s deal with MSLO deprives Macy’s of that exclusivity, which – as MSLO acknowledged in Section 24(g) of the Macy’s Agreement – cannot be remedied with money damages. Accordingly, the Court should permanently enjoin J.C. Penney from tortiously interfering with the Macy’s Agreement and with Macy’s contract rights. 89. Macy’s 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. Penney’s continued use of designs for products within Macy’s Exclusive Product Categories that J.C. Penney obtained illegally from MSLO. Under the Agreement, MSLO was required to bring that intellectual property to Macy’s exclusively. By using those ideas for its own benefit, J.C. Penney is causing irreparable harm to Macy’s. 90. Macy’s is also being irreparably harmed to the extent J.C. Penney is benefiting

from the invaluable knowledge that MSLO acquired from Macy’s during the performance of the Macy’s Agreement. MSLO possesses Macy’s 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 Macy’s commercially valuable, proprietary information inevitably informs MSLO’s work and allows J.C. Penney to skip the trial-and-error process that marked the first years of MSLO’s partnership with Macy’s. MSLO’s provision of such information to J.C. Penney violates not only the exclusivity provisions of the Macy’s Agreement, but also the confidentiality provisions. This type of misappropriation is a wellestablished irreparable harm. 91. J.C. Penney’s announcement of its deal with MSLO also has devalued, and will

further devalue, the Martha Stewart products that Macy’s 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 Macy’s and Martha Stewart that Macy’s has devoted years and tens of millions of dollars to developing; it has destroyed the public perception that Macy’s is the only place a consumer can turn to purchase Martha Stewart home products in key categories. Also, the Martha Stewart products that Macy’s 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 Macy’s. That injury is only compounded by the fact that J.C. Penney is perceived as a less upscale retailer compared to Macy’s. 92. If J.C. Penney is permitted to continue implementing its deal with MSLO, that

would impair Macy’s sales not only of Martha Stewart products, but of other products as well. The availability of Martha Stewart products only at Macy’s attracts customers who purchase such products at Macy’s 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 Macy’s, but Macy’s would have no way of calculating the full extent of those lost sales. 93. Under these circumstances, Macy’s 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. Macy’s repeats and realleges the allegations of paragraphs 1 through 93 as if fully

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

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

Macy’s Agreement by entering into the JCP Agreement. - 33CLI-2008153

97.

J.C. Penney was aware of the Macy’s Agreement, both before it began interfering

with that contract and after Macy’s commenced the Macy’s/MSLO Lawsuit. 98. The Macy’s Agreement would not have been breached but for J.C. Penney’s

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

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

renewal options, the first of which was required to be exercised by the end of January 2012. Macy’s validly exercised its renewal option on January 23, 2012. J.C. Penney was aware of Macy’s option to renew the Macy’s Agreement. J.C. Penney has illegally induced MSLO to assert that Macy’s exercise of its renewal option was invalid. MSLO would not have challenged Macy’s exercise of its renewal option but for J.C. Penney’s tortious interference. 101. As a result of J.C. Penney’s tortious interference, Macy’s 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. Macy’s repeats and realleges the allegations of paragraphs 1 through 101 as if

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

advantages is Macy’s 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 Macy’s Exclusive Product Categories. Macy’s 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, Macy’s 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 Macy’s 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 Macy’s commercial advantage. It has

intentionally and unfairly, in breach of Macy’s contract rights, acquired the right to manufacture and sell Martha Stewart products in Macy’s Exclusive Product Categories. J.C. Penney has also misappropriated Macy’s skills, expenditures and labors in accepting from MSLO – and using – designs for Martha Stewart products within the Exclusive Product Categories that incorporate Macy’s proprietary and valuable information. 106. As a result of J.C. Penney’s unfair competition, Macy’s 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, Macy’s requests that the Court order relief, as follows: 1. Agreement; 2. A declaration that J.C. Penney has misappropriated Macy’s commercial A declaration that J.C. Penney has tortiously interfered with the Macy’s

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

Agreement by using Martha Stewart’s name or likeness in connection with the manufacture, marketing, sale, or distribution or products in Macy’s Exclusive Product Categories;

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4.

A preliminary injunction preserving the status quo and protecting Macy’s 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 Macy’s Exclusive Product Categories; (2) using the designs it illegally obtained from MSLO for products within Macy’s Exclusive Product Categories; (3) advertising or making any public statements that products within Macy’s 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 Macy’s contract rights under the Macy’s Agreement; 5. An award of money damages, in an amount to be proven at trial, in favor of

Macy’s 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. Penney’s tortious interference with the Macy’s 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 Macy’s is entitled, and

which the Court deems just and proper.

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JURY DEMAND Macy’s 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 Macy’s, Inc. and Macy’s Merchandising Group, Inc.

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