Macy's, Inc. v. J.C. Penney Corp.
45 Misc. 3d 274, 989 N.Y.S.2d 238 (2014)
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Rule of Law:
A third party that intentionally and improperly induces a breach of contract between two other parties is liable for tortious interference, even if the breaching party believed a contractual loophole permitted its actions.
Facts:
- Macy's and Martha Stewart Living Omnimedia (MSLO) entered into a long-term agreement granting Macy's the exclusive right to sell MSLO-designed products in specific categories, such as cookware, bedding, and bath items.
- Facing financial losses in its media business, MSLO's board began exploring 'strategic partnerships' to raise capital.
- J.C. Penney's (JCP) new CEO, Ron Johnson, identified a partnership with Martha Stewart as the key to his plan to revitalize JCP's stores.
- JCP and MSLO began negotiations, fully aware that Macy's had an exclusive contract covering the same product categories JCP desired.
- MSLO's general counsel developed a legal theory that a 'store within a store' at JCP would qualify for an 'MSLO Store' exception in the Macy's contract, thereby avoiding a breach of exclusivity.
- Relying on this 'loophole' theory, JCP and MSLO signed a licensing agreement for MSLO to design products for sale in JCP stores within Macy's exclusive categories, without first informing Macy's.
- Martha Stewart informed Macy's CEO of the deal the night before it was publicly announced, stating it would be 'good for Macy's'.
- Pursuant to their new agreement, MSLO developed and provided JCP with approximately 900 designs for products falling within Macy's exclusive product categories.
Procedural Posture:
- Macy's sued Martha Stewart Living Omnimedia (MSLO) and J.C. Penney (JCP) in the New York Supreme Court, which is a trial-level court.
- The court granted Macy's motion for a preliminary injunction against MSLO, prohibiting it from performing under its agreement with JCP regarding products in Macy's exclusive categories.
- The court denied Macy's motion for a similar preliminary injunction against JCP, after JCP voluntarily agreed to abide by the terms of the injunction against MSLO.
- During trial, the court denied a subsequent motion by Macy's for a preliminary injunction against JCP's sale of MSLO-designed but unbranded products.
- Macy's appealed the denial of the second preliminary injunction to the Appellate Division, First Department, which unanimously denied Macy's motion.
- Prior to the court's final decision, Macy's settled its claims with MSLO and filed a voluntary discontinuance of its action against MSLO with prejudice.
- The trial proceeded on Macy's remaining claim for tortious interference with contract against JCP, leading to the court's final decision on liability.
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Issue:
Did J.C. Penney tortiously interfere with Macy's exclusive licensing agreement with Martha Stewart Living Omnimedia by intentionally inducing Martha Stewart Living Omnimedia to breach that agreement?
Opinions:
Majority - Oing, J.
Yes, J.C. Penney is liable for tortious interference with Macy's contract with MSLO. To establish this claim, a plaintiff must prove (1) a valid contract, (2) the defendant's knowledge of the contract, (3) the defendant's intentional inducement of a breach, (4) an actual breach, (5) that the breach would not have occurred but for the defendant's conduct, and (6) damages. Here, Macy's had a valid and unambiguous exclusive contract with MSLO, which JCP was aware of. JCP intentionally induced MSLO to breach the agreement through flattery and significant financial incentives, with JCP's CEO stating his goal was to get MSLO to 'break their agreement' with Macy's. The court found MSLO breached the contract in two ways: first, the 'store within a store' concept violated the non-competition clause, and second, providing designs to JCP violated Macy's exclusive right to all MSLO designs in the covered categories. The court determined that JCP's conduct exceeded the minimum level of ethical behavior in the marketplace and was not protected by the economic interest defense, as JCP had no pre-existing financial stake in MSLO. JCP's awareness that its actions would likely be challenged, evidenced by its acceptance of an agreement where MSLO refused to indemnify JCP against claims from Macy's, demonstrated it acted with 'certainty or substantial certainty' that a breach would occur.
Analysis:
This decision serves as a significant modern application of the tortious interference with contract doctrine in a high-stakes commercial retail setting. It clarifies that a defendant cannot escape liability by relying on a clever or strained interpretation of a 'loophole' in the plaintiff's existing contract, especially when the defendant's actions are knowingly aimed at disrupting that contract. The case underscores that the 'inducement' element can be satisfied by conduct that falls short of direct threats but exceeds a 'minimum level of ethical behavior,' including a combination of financial offers and strategic pressure. The ruling reinforces the protection afforded to existing contractual relationships and serves as a cautionary tale for competitors seeking to poach business partners, demonstrating that aggressive expansion strategies can cross the line into tortious conduct.
