Exclusive product or manufacturing licenses allow retailers to leverage a partnering business’s strengths, such as a strong brand name, loyal customer base, or state-of-the-art operations and supply chain management. With these benefits, retailers might be tempted to find multiple strategic partners. As long as each of the partners benefits from their respective exclusive licenses, couldn’t having multiple strategic partners be a good thing?
“Not so fast” according to one trial judge from the New York State Supreme Court. In a recent case, the court sided with Macy’s Inc. (“Macy’s”) in its lawsuit against J.C. Penney Corporation Inc. (“JC Penney”) and Martha Stewart Living Omnimedia (“Martha Stewart Living”), in relation to an exclusive licensing and promotion agreement between Macy’s and Martha Stewart Living (the “Agreement”). Macy’s sued Martha Stewart Living for breach of the Agreement by entering into a conflicting retail license with JC Penney and settled out of court. Macy’s sued JC Penney for “tortious interference with a contract” and won. The decision can be found here.
Under the Agreement, Macy’s had exclusive rights to the sale of products from certain Martha Stewart Living product categories, subject to certain carve outs. This relationship flourished.
JC Penney representatives proposed a new partnership with Martha Stewart Living in a way that Martha Stewart herself described as “very flattering”. The only obstacle preventing a new strategic partnership was Martha Stewart Living’s Agreement with Macy’s.
JC Penney and Martha Stewart Living attempted to work around the Agreement, both times without success. First, the parties opened Martha Stewart “mini-stores” within the home departments of several JC Penney retail locations in an attempt to fall within one of the exceptions to exclusivity within the Agreement. However, because the arrangement was operationally identical to that between Martha Stewart Living and Macy’s, Martha Stewart Living was in violation of the non-competition provisions of the Agreement.
Second, during the litigation, Martha Stewart Living and JC Penney tried selling the licensed products under a JC Penney store brand instead of a Martha Stewart brand. This was also a breach of the Agreement because Macy’s had exclusivity over all Martha Stewart Living designs within the exclusive product categories, not just branded products.
Ultimately, Macy’s and Martha Stewart Living settled their dispute out of court. This left Macy’s “tortious interference with a contract” claim against JC Penney to be the only matter for consideration by the Court.
The Court determined that JC Penney was liable for interfering with the Agreement. Two key findings led to this decision:
- That Martha Stewart Living breached the Agreement (despite the settlement with Macy’s of its claim the Court still had to determine whether a breach occurred in order to find JC Penney liable); and
- That JC Penney had induced Martha Stewart Living to breach the Agreement. This was established based on JC Penney’s offers of flattering comments, large financial incentives, and enticing growth opportunities towards Martha Stewart Living. Conduct that is otherwise considered normal in a courtship between potential strategic partners can become civilly actionable if one of the businesses is bound by an exclusivity agreement.
Considerations for Canadian Retailers:
- Inducing a breach of contract in Canada: While this is an American case, the decision articulates principles that are just as applicable to retailers in Canada. The Canadian analog to the American tortious interference with a contract tort is inducing breach of contract. The tests for both are similar, and in Canada, justification can be asserted as a defence. Acting in self-interest or based on an honestly held belief of a duty to act are not proper justifications, but a defendant may be justified in inducing a breach of contract if the actions were made in the public interest or pursuant to a statutory or contractual right.
- Considering partnerships: When entering into a long-term partnership, corporate decision makers should assess both the benefits and drawbacks of exclusivity and thoughtfully consider the implications of these on the company’s long-term strategy and future business opportunities, the length of such partnerships, and an exit strategy.
- Indemnification: Retailers pursuing new partners already subject to an exclusivity agreement may want to consider insisting on indemnification before engaging in activity that is likely to affect any interested third party businesses.