Macy’s Inc. v. J.C. Penney Corporation Inc., 2015 NY Slip Op 01728, (App. Div. 1st Dep’t 2/26/15).

By Kelly Moynihan | Managing Editor

For background facts, please see previous case summary: Macy’s, Inc. v. J.C. Penney Corporation, Inc., Index No. 652861/12, 6/16/14 (Oing, J.)

Contract; Breach; Tortious Interference; Licensing Agreement; Unfair Competition.

Plaintiff sued defendant for tortious interference with contract and unfair competition and asserted a claim for punitive damages for an alleged interference with plaintiff’s contract with Martha Stewart Living Omnimedia, Inc. (“MSLO”).  After a bench trial, the lower court found that defendant tortiously interfered with defendant’s contract with MSLO regarding the exclusivity provision of the agreement.  Defendant appealed.  The court granted defendant’s motion, dismissing plaintiff’s remaining causes of action and denying plaintiff’s demand for punitive damages. Plaintiff appealed the ruling.

Plaintiff argued that defendant induced MSLO to breach the exclusivity provisions of its contract with MSLO by entering into a licensing agreement in which defendant would manufacture goods and control all aspects of the MSLO “store-within-a-store.”  Here, to sustain a claim of tortious interference with contract, plaintiff had to prove: (1) that it had a valid contract with MSLO; (2) that defendant knew about Macy’s contract with MSLO; (3) that defendant intentionally induced MSLO to breach its contract with plaintiff; (4) that MSLO breached the contract; (5) that MSLO would not have breached its contract with plaintiff without defendant’s conduct; and (6) that plaintiff sustained damages.

The court found plaintiff and MSLO were both performing under a valid, binding contract.  Defendant requested and received from MSLO its contract with plaintiff, thus, defendant knew the terms and binding nature of the contract.  There was evidence that defendant’s personnel referred to finding a way to “break” the “tight” contract MSLO had with plaintiff.  The court held that defendant had a “certainty” or “substantial certainty” that its actions would result in a breach of plaintiff’s contract because the contract contained unambiguous language requiring that all MSLO goods in the Exclusive Product Categories be manufactured by plaintiff.  Under defendant’s retail partnership with MSLO, defendant would have manufactured the MSLO goods. The court determined that MSLO would not have breached the contract, but for defendant’s inducement, because even after contracting with defendant, MSLO continued to perform under its contract with plaintiff and design products for plaintiff.

The court found defendant caused MSLO to breach the confidentiality provisions of its contract with plaintiff.  Defendant induced MSLO into disclosing the terms of its contract with plaintiff and related confidential financials.  Defendant used its financial leverage over MSLO to obtain the confidential information.  Defendant acknowledged that the information disclosed was tantamount to trade secrets.  MSLO breached the confidentiality provisions by giving defendant the information after defendant insisted upon receiving the material.

The court reversed the dismissal of plaintiff’s unfair competition claim finding that defendant misappropriated plaintiff’s valuable exclusive rights to MSLO’s designs by inducing MSLO to breach its contract with plaintiff.  “The bad faith misappropriation of a commercial advantage belonging to another by exploitation of proprietary information’ can give rise to a cause of action for unfair competition.”  The court determined that defendant misappropriated plaintiff’s “labor, skill, expenditures [and] good will” by using plaintiff’s confidential information received from MSLO  and using MSLO’s designers to develop products while they were designing for plaintiff.

Lastly, the court decided plaintiff was not entitled to punitive damages because punitive damages are only available where there is egregious tortious conduct by which the private litigant is aggrieved, and which was “part of a pattern of similar conduct directed at the public generally.”  Despite defendant’s concerns that the “store-within-a-store” concept may cause a breach of contract, defendant’s actions did not constitute wanton and reckless conduct needed to award punitive damages.  The court reinstated plaintiff’s claims for tortuous interference and unfair competition.

Macy’s Inc. v. J.C. Penney Corporation Inc., 2015 NY Slip Op 01728, (App. Div. 1st Dep’t 2/26/15).

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